Question 1

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

Accepted Answer

Right shoes and left shoes are essentially identical goods, so the substitution effect is likely to be very small.

Question 2

For dessert, Ingrid has the choice between cheesecake and apple pie. Ingrid would gain marginal utility of 50 from a piece of cheesecake, while the price of cheesecake is €5 per slice., Ingrid would gain marginal utility of 30 from a piece of apple pie, and the price of apple pie is €3 per slice. Given this information, Ingrid should buy

Accepted Answer

The answer of For dessert, Ingrid has the choice between...

Question 3

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 €10 and the price of a sandwich is €5, then the slope of the budget constraint is

Accepted Answer

The slope of the budget constraint is the negative of the price ratio of the two goods. Here, it is - (price of pizza / price of sandwich) = - (10/5) = -2. The slope is typically expressed as a positive number, so the answer is 2.

Question 4

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

Accepted Answer

If the substitution effect of a lowered price is partly or fully offset by the income effect, it means that as the price of the good decreases, the consumer buys more of that good, but they also buy less of other goods because their income has decreased. This is the case for inferior goods, which are goods that people buy less of as they have more income. Therefore, the answer is B, an inferior good.

Question 5

Higher education is a normal good. If its price falls

Accepted Answer

When the price of a normal good like higher education falls, the quantity demanded increases, satisfying the law of demand.

Question 6

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

Accepted Answer

The change in consumption that results from a price change moving the consumer along a given indifference curve is known as the substitution effect. This effect shows how consumers will switch to the cheaper alternative when the price of a product increases, holding the utility constant. It is important to note that the substitution effect and the income effect (which shows how the change in price affects purchasing power and therefore the quantity demanded) together make up the total price effect. The normal/inferior effect is not relevant to this scenario as they refer to changes in demand for a product due to changes in income.

Question 7

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

Accepted Answer

The slope at any point on an indifference curve represents the rate at which a consumer is willing to substitute one good for another while remaining on the same level of utility. This is known as the marginal rate of substitution. Choice A is not correct because "indifference" is not a term used in economics to describe the rate of substitution. Choice B is incorrect because it is not a commonly used term in economics. Choice C is not the correct term used for this concept.

Question 8

Claudia 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 maximize total utility, Claudia should

Accepted Answer

To maximize utility, Claudia should equate the marginal utility per dollar spent on each item. Since the price of a warm-up suit is four times that of a pair of shoes, the marginal utility of a warm-up suit should be four times that of a pair of shoes.

Question 9

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

Accepted Answer

Roberto's indifference curves are L-shaped because he always consumes sugar and tea in fixed proportions, indicating perfect complements.

Question 10

The marginal rate of substitution between two goods equals the

Accepted Answer

The marginal rate of substitution (MRS) is the amount of one good a consumer is willing to give up in exchange for another good, while still maintaining the same level of satisfaction. It is represented by the ratio of the marginal utility of one good to the marginal utility of the other. Therefore, the correct choice is A, as it represents the correct calculation of MRS.

Question 11

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

Accepted Answer

An individual's demand curve for a good is derived by varying the price of that good and observing the resulting quantities demanded of that good. This relationship reflects the inverse nature of price and quantity demanded, which is graphically represented as a downward sloping demand curve.

Question 12

Last week, the central bank took steps to lower the discount rate by one percentage point. This means that

Accepted Answer

Lowering the discount rate reduces the cost of borrowing, making it cheaper to consume now rather than save, thus lowering the opportunity cost of current consumption.

Question 13

Indifference curves tend to be bowed inward because of diminishing

Accepted Answer

Indifference curves are bowed inward due to diminishing marginal rates of substitution, meaning that as more of one good is consumed relative to another, the marginal utility of that good decreases while the marginal utility of the other good increases. This causes the slope of the indifference curve to become flatter as one moves down the curve to higher quantities of the same good, resulting in a bowed inward shape.

Question 14

Nathalie is maximizing total utility while consuming food and clothing. Her marginal utility from food and clothing is 50 and 25, respectively. If clothing is priced at €10 per unit, the price of food must

Accepted Answer

To maximize total utility, Nathalie should allocate her spending in a way that the marginal utility per euro spent is equal across goods. Since the marginal utility per unit of clothing is 25 and the price is €10, the marginal utility per euro spent on clothing is 2.5. To allocate spending in a way that the marginal utility per euro spent on food is equal to 2.5, the price of food must be €20 (50/20=2.5). Therefore, the answer is D, the price of food must be €20.

Question 15

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

Accepted Answer

When the price of hamburgers increases, consumers will likely switch to substitute goods such as hot dogs or chicken sandwiches. This decrease in demand for hamburgers is known as the substitution effect. Therefore, the quantity of hamburgers demanded will decrease.

Question 16

Indifference curves for perfect substitutes are

Accepted Answer

Indifference curves for perfect substitutes are straight lines. This is because the consumer is willing to substitute one good for another at a constant rate, meaning they value each good equally. Therefore, every combination of the two goods that gives the same level of satisfaction (or utility) lies along a straight line.

Question 17

If a good is a Giffen good, then

Accepted Answer

A Giffen good is a product for which an increase in its price leads to a higher quantity demanded. This is because the product is seen as a status symbol and, as such, as the price rises, it becomes more desirable. As a result, the demand curve slopes upward.

Question 18

Suppose that Annette gets an increase in her wage and she decides to work fewer hours. For her, the substitution effect of the wage change is

Accepted Answer

The substitution effect occurs when Annette increases her wage and decides to work fewer hours because leisure time has become relatively more valuable. This effect is likely to be less than the income effect, which occurs because the increase in her wage has resulted in an increase in her income, allowing her to purchase more goods and services, including leisure time. Therefore, Annette may choose to work fewer hours and consume more leisure time, resulting in the income effect being greater than the substitution effect.

Question 19

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

Accepted Answer

The answer of In the upward-sloping portion of the individual...

Question 20

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

Accepted Answer

Marginal satisfaction, or marginal utility, typically decreases as more of a good is consumed, but the rate of decrease can vary among individuals due to differences in preferences and consumption patterns.

Quiz 5: Background to Demand: Consumer Choices