Deck 5: Background to Demand: Consumer Choices

Question 1

The more difficult it is to substitute one good for another, the more bowed inward indifference curves become.

Answer 1

True

Question 2

If the price of a good falls and the good is an inferior good, the income effect causes a decrease in the quantity demanded of that good.

Answer 2

True

Question 3

Suppose the price of a pizza is R80, the price of a milk shake is R20, and the consumer's weekly income is R320. Suppose we have constructed the consumer's budget line with pizzas on the vertical axis and milk shakes on the horizontal axis. Given this information, if the price of a milk shake doubles to R40, then what will happen to the budget line?

A) It will move so that it intersects the horizontal axis at 16 milk shakes per week.
B) Its slope rises to -1/2.
C) It will move so that it intersects the horizontal axis at 8 milk shakes per week.
D) It will shift inward but remain parallel to its original position.

Answer 3

It will move so that it intersects the horizontal axis at 8 milk shakes per week.

Question 4

If income were to double and prices were to double, the budget line would

A) stay the same.
B) rotate inward.
C) shift outward in a parallel fashion.
D) rotate outward.
E) shift inward in a parallel fashion.

Question 5

Suppose the price of a pizza is R80, the price of a milk shake is R20, and the consumer's weekly income is R320. Suppose we have constructed the consumer's budget line with pizzas on the vertical axis and milk shakes on the horizontal axis. Given this information, if the consumer's income rises to R480, then what will happen to the consumer's budget line?

A) It move outwards so that it now intersects the vertical axis at 6 pizzas per week and the horizontal axis at 24 milk shakes per week.
B) It would not change.
C) It would move inwards so that it now intersects the vertical axis at 3 pizzas per week and the horizontal axis at 8 milk shakes per week.
D) It would rotate in a clockwise direction around the point at which it intersects the horizontal axis.

Question 6

Budget constraints exist for consumers because

A) their utility from consuming goods eventually reaches a maximum level.
B) even with unlimited incomes they have to pay for each good they consume.
C) they have to pay for goods and they have limited incomes.
D) prices and incomes are inversely related.

Question 7

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

Question 8

Indifference curves tend to be bowed inward because a consumer is willing to trade a greater amount of a good for another if they have an abundance of the good they are trading away.

Question 9

If the price of a good falls, the substitution effect always causes an increase in the quantity demanded of that good.

Question 10

The limit on the consumption bundles that a consumer can afford is known as

A) an indifference curve.
B) the budget constraint.
C) the marginal rate of substitution.
D) the consumption limit.

Question 11

A Giffen good is an extremely inferior good.

Question 12

As more hours of Internet access are purchased, everything else remaining unchanged, marginal satisfaction from consuming additional hours will tend to

A) decrease at the same rate for all consumers.
B) decrease but at different rates for different people.
C) increase at the same rate for all consumers.
D) increase but at a decreasing rate for all consumers.

Question 13

When drawn on a graph that measures the quantity of a good on each axis, indifference curves are usually straight lines that slope downward (negatively).

Question 14

A family on a trip budgets R8 000 for restaurant meals and fast food. If the price of a fast food meal for the family is R200, how many such meals can the family buy if they do not eat at restaurants?

A) 8
B) 15
C) 20
D) 40

Question 15

If the price of a good falls and the good is a normal good, the income effect causes a decrease in the quantity demanded of that good.

Question 16

An indifference curve is a curve that shows consumption bundles that give the consumer

A) increasing levels of satisfaction.
B) decreasing levels of satisfaction.
C) the same level of satisfaction.
D) perfect substitutes.

Question 17

At the consumer's optimum point, the marginal rate of substitution of apples for oranges is equal to the ratio of the price of oranges to the price of apples.

Question 18

All of the following are characteristics of an indifference map except

A) moving northeast to a new, higher indifference curve will increase utility.
B) points on the same indifference curve yield equal utility.
C) the axes represent levels of utility for each of the goods.
D) indifference curves cannot cross.

Question 19

If a consumer spent their entire income on chips and cola, what would happen if the consumer's income were to double and the prices of chips and cola were also to double?

A) The consumer's budget line would remain unchanged.
B) The consumer's budget line would shift outward, but remain parallel to the original budget line.
C) The consumer's budget line would shift inward, but remain parallel to the original budget line.
D) The consumer's budget line would shift in an unpredictable way.

Question 20

A budget constraint is a set of commodity bundles that provide the consumer with the same level of satisfaction.

Question 21

Suppose a consumer must choose between the consumption of sandwiches and pizza. If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the vertical axis, and if the price of a pizza is R100 and the price of a sandwich is R50, then the slope of the budget constraint is:

A) 2
B) 10
C) ½
D) 5

Question 22

If a good is a Giffen good, then

A) the supply curve slopes down.
B) the demand curve slopes up.
C) the demand curve is horizontal.
D) there is no optimal level of consumption for the consumer.

Question 23

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

A) Right shoes and left shoes.
B) Petrol from BP and petrol from Shell.
C) Kit-Kat chocolate snacks and Twix chocolate snacks.
D) Coke and Pepsi.

Question 24

An individual's demand curve for a good is derived by

A) varying the income level and observing the resulting total utility derived from both goods.
B) varying the price of one good and observing the resulting quantities of the other good.
C) shifting the budget line to the left and calculating the loss in total utility.
D) varying the price of one good and observing the resulting quantities demanded of that good.

Question 25

The slope at any point on an indifference curve is known as the

A) marginal rate of indifference.
B) marginal rate of trade-off.
C) trade-off rate.
D) marginal rate of substitution.

Question 26

Last week, the reserve bank took steps to lower interest rates by one percentage point. This means that

A) the opportunity cost of current consumption has fallen.
B) the opportunity cost of future consumption has fallen.
C) the cost of borrowing has risen.
D) households will save more money to make up for lost interest earnings.

Question 27

Higher education is a normal good. If its price falls

A) the quantity demanded of higher education will fall.
B) the substitution and income effects work in opposite directions.
C) the income effect is negative.
D) higher education will satisfy the law of demand.

Question 28

Suppose that Mfundo gets an increase in his wage and he decides to work fewer hours. For him, the substitution effect of the wage change is

A) greater than the income effect.
B) less than the income effect.
C) exactly offset by the income effect.
D) zero.

Question 29

Bongiwe spends all of her income on warm-up suits and running shoes, and the price of a warm-up suit is four times as large as the price of a pair of shoes. Then, in order to maximise total utility, Bongiwe should

A) buy four times as many warm-up suits as pairs of running shoes.
B) buy four times as many pairs of running shoes as warm-up suits.
C) divide her income equally between warm-up suits and running shoes.
D) buy both items until the marginal satisfaction of a warm-up suit is four times the marginal satisfaction of a pair of running shoes.

Question 30

Suppose Roberto always consumes two packets of sugar with his tea. Roberto's indifference curves for sugar and tea are

A) bowed inward.
B) bowed outward.
C) straight lines.
D) L shaped.

Question 31

Indifference curves tend to be bowed inward because of diminishing

A) marginal rates of substitution.
B) demand for the good as prices rise.
C) income.
D) supply of the good being consumed.

Question 32

The marginal rate of substitution between two goods equals the

A) marginal utility of one divided by the marginal utility of the other.
B) marginal utility of one times the marginal utility of the other.
C) marginal cost of one times the marginal cost of the other.
D) price of one good divided by the price of the other.

Question 33

If the substitution effect of a lowered price is partly or fully offset by the income effect, we know that the good in question is

A) a complementary good.
B) an inferior good.
C) a luxury good.
D) a normal good.

Question 34

In the upward-sloping portion of the individual labour supply curve, the substitution effect is __________ the income effect.

A) greater than
B) less than
C) equal to
D) exactly offset by

Question 35

Which of the following statements is not true with regard to the standard properties of indifference curves?

A) Indifference curves are downward sloping.
B) Indifference curves are bowed inward.
C) Indifference curves do not cross each other.
D) Higher indifference curves are preferred to lower ones.

Question 36

For dessert, Pranisha has the choice between cheesecake and apple pie. Pranisha would gain marginal utility of 50 from a piece of cheesecake, while the price of cheesecake is R50 per slice. Pranisha would gain marginal utility of 30 from a piece of apple pie, and the price of apple pie is R30 per slice. Given this information, Ingrid should buy

A) the cheesecake.
B) the apple pie.
C) two servings of the apple pie and no cheesecake.
D) either the apple pie or the cheesecake; it makes no difference to Pranisha at this point.

Question 37

Nathalie is maximising total utility while consuming food and clothing. Her marginal utility from food and clothing is 50 and 25, respectively. If clothing is priced at R100 per unit, the price of food must

A) be rising.
B) be falling.
C) equal R100 as well.
D) equal R200.

Question 38

Indifference curves for perfect substitutes are

A) right angles.
B) bowed outward.
C) straight lines.
D) non-existent.
E) bowed inward.

Question 39

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

A) income effect.
B) normal effect.
C) inferior effect.
D) substitution effect.

Question 40

If the price of hamburgers increases, the substitution effect works to

A) decrease the quantity of hamburgers supplied.
B) increase the number of hamburger buns demanded.
C) decrease the quantity of hamburgers demanded.
D) increase the number of hamburger buns supplied.

Question 41

Which of the following is the best example of rational behaviour?

A) People are overconfident.
B) People carefully consider all options.
C) People are reluctant to change their mind.
D) People give weight to a small number of vivid observations.
E) People use rules of thumb or shortcuts in making decisions.

Question 42

Exhibit A

Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. Suppose that the price of a pair of socks has falls from R50 to R20. The income effect is represented by the movement from point?

A) Y to point X.
B) X to point Z.
C) X to point Y.
D) Z to point X.

Question 43

Suppose we measure the quantity of good X on the horizontal axis and the quantity of good Y on the vertical axis. If indifference curves are bowed inward, as we move from having an abundance of good X to having an abundance of good Y, the marginal rate of substitution of good Y for good X (the slope of the indifference curve)

A) rises.
B) stays the same.
C) could rise or fall depending on the relative prices of the two goods.
D) falls.

Question 44

If an increase in a consumer's income causes the consumer to decrease her quantity demanded of a good, then the good is

A) a substitute good.
B) a normal good.
C) a complementary good.
D) an inferior good.

Question 45

Why do people face trade-offs?

Question 46

The consumer's optimal purchase of any two goods is the point where the

A) budget constraint crosses the indifference curve.
B) two highest indifference curves cross.
C) consumer reaches the highest indifference curve subject to remaining on the budget constraint.
D) consumer has reached the highest indifference curve.

Question 47

If an increase in a consumer's income causes the consumer to increase his quantity demanded of a good, then the good is

A) a complementary good.
B) an inferior good.
C) a normal good.
D) a substitute good.

Question 48

Outline the four key properties of indifference curves.

Question 49

Evaluate the following statement, "Warren Buffet is the second richest person in the world. He does not face any constraint on his ability to purchase commodities he wants."

Question 50

Explain the income and substitution effects.

Question 51

Why are many purchase decisions irrational?

Question 52

Exhibit A

Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. Suppose that the price of a pair of socks falls from R50 to R20. The substitution effect is represented by the movement from point?

A) Z to point X.
B) X to point Y.
C) X to point Z.
D) Y to point X.

Question 53

Stefan consumes only cheese and crackers.
a) Could these both be inferior goods for Stefan? Explain.
b) Suppose that cheese is a normal good for Stefan while crackers is inferior. If the price of cheese falls, explain what happens to Stefan's consumption of both cheese and crackers.

Question 54

What is the budget constraint?

Question 55

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

Question 56

Briefly explain heuristics using two examples.

Question 57

Exhibit A

Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. If the price of a belt is R100 and the price of a pair of socks is R50, the consumer will choose to buy the commodity bundle represented by point?

A) Z
B) X
C) Y
D) the optimal point cannot be determined from this graph.

Question 58

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

A) inferior effect.
B) normal effect.
C) substitution effect.
D) complementary effect.
E) income effect.