Question 1

Suppose the price of good x falls and the consumption of good x increases.From this we can infer that
A)x is a normal good.
B)x is an inferior good.
C)x is a Giffen good.
D)None of the above

Accepted Answer

The increase in consumption of good x when its price falls is consistent with the law of demand, which applies to both normal and inferior goods. However, without additional information about income effects, we cannot definitively classify x as normal, inferior, or Giffen based solely on this observation.

Question 2

The substitution effect of a price change is depicted by
A)a movement along the budget constraint holding satisfaction constant.
B)a shift in the budget constraint at the old prices.
C)a movement along the consumer's new indifference curve at the new prices.
D)a movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.

Accepted Answer

The substitution effect is shown by a movement along the original indifference curve to a point where the marginal rate of substitution equals the new price ratio, reflecting the consumer's adjustment to the change in relative prices while maintaining the same level of utility.

Question 3

Suppose a consumer has preferences over two goods,x and y,which are perfect substitutes.In particular,two units of x is equivalent to one unit of y.If the price of x is $1,the price of y is $3,and the consumer has $30 of income to allocate to these two goods,how much of each good should the consumer purchase to maximize satisfaction?
A)Thirty units of x and zero units of y.
B)Zero units of x and ten units of y.
C)Fifteen units of x and five units of y.
D)Twelve units of x and six units of y.

Accepted Answer

Since two units of x are equivalent to one unit of y, and x is cheaper, the consumer should spend all income on x to maximize satisfaction.

Question 4

Good x is an inferior good,but not a Giffen good.When the price of x increases,the consumer will consume
A)more x.
B)the same amount of x.
C)less x.
D)more or less x depending on the size of the income effect relative to the size of the substitution effect.

Accepted Answer

Since good x is an inferior good, as its price increases, consumers tend to consume less of it. However, it is not a Giffen good because the income effect dominates the substitution effect, which means that the decrease in quantity demanded due to the price increase is less than the increase due to the income effect. Therefore, the consumer will consume less of good x.

Question 5

Which of the following statements best describes the substitution effect?
A)The change in consumption resulting from a change in the consumer's income holding the prices of the goods constant.
B)The change in consumption resulting from a change in the consumer's income holding the consumer's level of satisfaction constant.
C)The change in consumption resulting from a change in the price of one good holding the consumer's level of satisfaction constant.
D)The change in consumption resulting from a change in the price of one good allowing the consumer's level of satisfaction to change.

Accepted Answer

The substitution effect is the change in consumption resulting from a change in the price of one good holding the consumer's level of satisfaction constant. This effect occurs because consumers will switch to the substitute good that has become relatively cheaper due to the price change. This change in relative prices leads to a change in the ratio of marginal utilities of the two goods, which in turn leads to a change in the quantity demanded of each good.

Question 6

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted the figure has an income of $50.Which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $2.50?
A)$2.50, 6
B)$2.50, 10
C)$5.00, 3
D)$5.00, 5

Accepted Answer

At a price of $2.50 for chocolate chips, the consumer's budget line intersects the quantity demanded of marshmallows at 10. However, the highest point on the budget line that also intersects the demand curve for marshmallows is at a quantity of 6 marshmallows, which would be the optimal choice for the consumer. Therefore, the price-quantity combination on the demand curve for marshmallows at a price of $2.50 would be ($2.50, 6). Option B is the only one that includes this combination.

Question 7

Suppose the price of good x falls.As a result,the quantity demanded for good x increases for a particular consumer.For this consumer,the substitution effect induced the consumer to purchase more x while the income effect induced the consumer to purchase less x.We can infer that
A)x is a normal good.
B)x is an inferior good.
C)x is a Giffen good.
D)x is a luxury good.

Accepted Answer

The substitution effect leads to an increase in the quantity demanded of good x, while the income effect leads to a decrease in the quantity demanded of good x. This implies that good x is an inferior good for this consumer. When the price falls, the consumer substitutes away from other, relatively more expensive goods (the substitution effect) in favor of the now relatively cheaper good x, but also gains purchasing power given the budget constraint, and so will purchase less of good x (income effect).

Question 8

Jeffrey spends all of his income on warm-up suits and running shoes,and the price of a warm-up suit is four times the price of a pair of shoes.In order to maximize total utility,Jeffrey 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)buy both items until the marginal utility of a pair of running shoes is four times the marginal utility of a warm-up suit.
D)buy both items until the marginal utility of a warm-up suit is four times the marginal utility of a pair of running shoes.

Accepted Answer

The optimal choice for Jeffrey is to continue buying both items until the marginal utility of a warm-up suit is four times the marginal utility of a pair of running shoes. This is because the price ratio of warm-up suits to running shoes is 4:1, meaning that if Jeffrey were to only buy one type of item, he would be sacrificing the potential utility he could derive from the other item. By maximizing the marginal utility of each item relative to their respective prices, Jeffrey can achieve the highest total utility from his income.

Question 9

A consumer has preferences over two goods: x and y.Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves)and budget constraint on a diagram with x on the horizontal axis and y on the vertical axis.At the consumer's current consumption bundle,the consumer is spending all available income,and the marginal rate of substitution is less than the slope of the budget constraint.We can conclude that
A)the consumer is currently maximizing satisfaction.
B)the consumer could increase satisfaction by consuming more x and less y.
C)the consumer could increase satisfaction by consuming less x and more y.
D)the consumer could purchase more x and more y and increase total satisfaction.

Accepted Answer

The answer of A consumer has preferences over two goods:...

Question 10

Given a consumer's indifference map,the demand curve for a good can
A)be derived by moving a consumer's budget constraint as her income rises.
B)be derived by moving a consumer's budget constraint as her income rises and she makes choices.
C)be derived by moving a consumer's budget constraint as the market price changes.
D)not be derived from consumer theory.

Accepted Answer

The demand curve for a good can be derived by moving a consumer's budget constraint as the market price changes. The shape of the indifference map shows the consumer's preferences, but the budget constraint determines the feasible consumption choices. As the market price changes, the budget constraint will shift, leading to a different combination of goods that the consumer can afford. This will result in a different quantity demanded at different prices, which gives us the demand curve.

Question 11

Ken consumes two goods,beer and pretzels.A beer costs $1 per bottle and he consumes it to the point where the marginal utility he receives from his last beer is 3.Pretzels cost $2 per bag,and the relationship between the marginal utility he gets from eating a bag of pretzels and the number of bags he eats per month is as follows: 
If Ken is maximizing his utility,how much does he spend on pretzels each month?
A)$2
B)$6
C)$8
D)$12

Accepted Answer

The answer of Ken consumes two goods,beer and pretzels.A beer...

Question 12

A consumer has preferences over two goods,x and y.Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves)and budget constraint on a diagram with x on the horizontal axis and y on the vertical axis.At the consumer's current consumption bundle,the consumer is spending all available income,and the marginal rate of substitution is greater than the slope of the budget constraint.We can conclude that
A)the consumer is currently maximizing satisfaction.
B)the consumer could increase satisfaction by consuming more x and less y.
C)the consumer could increase satisfaction by consuming less x and more y.
D)the consumer could purchase more x and more y and increase total satisfaction.

Accepted Answer

The marginal rate of substitution being greater than the slope of the budget constraint indicates that the consumer values good x more than the market does, suggesting they could increase satisfaction by consuming more x and less y.

Question 13

The following diagram shows two budget lines: A and B. 
Which of the following could explain the change in the budget line from A to B?
A)A simultaneous decrease in the price of x and the price of y.
B)An increase in income.
C)An increase in income and a decrease in the price of y.
D)Both a and b

Accepted Answer

The answer of The following diagram shows two budget lines:...

Question 14

The following diagram shows two budget lines: A and B. 
Which of the following could explain the change in the budget line from A to B?
A)A decrease in the price of x.
B)An increase in the price of y.
C)A decrease in the price of y.
D)More than one of the above could explain this change.

Accepted Answer

A decrease in the price of y would cause the budget line to shift outward, allowing for more of both x and y to be purchased at the same budget constraint.

Question 15

A good is an inferior good if the consumer buys less of it when
A)his income rises.
B)the price of the good rises.
C)he feels less well off.
D)his income falls.

Accepted Answer

An inferior good is a type of good for which demand decreases as the level of income or real purchasing power of the consumer increases. Therefore, when the consumer's income rises, they would buy less of the inferior good, making option A the correct answer.

Question 16

A consumer has preferences over two goods,books and movies.The consumer is currently spending all available income on these two goods and maximizes satisfaction by purchasing ten books and five movies.The price of a movie falls and the consumer optimally chooses to consume eleven books and four movies.From this information we can infer that
A)movies are a normal good for this consumer.
B)movies are an inferior good for this consumer.
C)movies are a Giffen good for this consumer.
D)movies are either an inferior good or a Giffen good for this consumer; we would need information on prices and income to be certain.

Accepted Answer

The answer of A consumer has preferences over two goods,books...

Question 17

A way to describe the consumer's optimum other than "the marginal rate of substitution for two goods is equal to their relative price ratio",is
A)MUₓ/MUᵧ = Pᵧ/Pₓ.
B)MUₓ/Pᵧ = MUᵧ/Pₓ.
C)MUₓ/Pₓ = MUᵧ/Pᵧ.
D)MUᵧ/MUₓ = Pₓ/Pᵧ.

Accepted Answer

The consumer's optimum occurs where the marginal utility per dollar spent on one good is equal to the marginal utility per dollar spent on the other good. This can be expressed as MUₓ/Pₓ = MUᵧ/Pᵧ. Option C is the only choice that matches this description.

Question 18

Jane is maximizing total utility while consuming food and clothing.Her marginal utility from food and clothing are 50 utils and 25 utils,respectively.If clothing is priced at $10 per unit,the price of food must
A)be rising.
B)be falling.
C)equal $5.
D)equal $20.

Accepted Answer

The answer of Jane is maximizing total utility while consuming...

Question 19

The following diagram shows two budget lines: A and B. 
Which of the following could explain the change in the budget line from A to B?
A)A decrease in income and a decrease in the price of x.
B)A decrease in income and an increase in the price of x.
C)An increase in income and a decrease in the price of x.
D)An increase in income and an increase in the price of x.

Accepted Answer

The answer of The following diagram shows two budget lines:...

Question 20

The income effect of a price change is depicted by
A)a parallel shift of the budget constraint at the old set of prices.
B)a parallel shift of the budget constraint at the new set of prices.
C)a movement along the budget constraint holding the level of satisfaction constant.
D)not observable and is therefore neither a shift nor a change in the slope of the budget constraint.

Accepted Answer

The answer of The income effect of a price change...

Quiz 21: The Theory of Consumer Choice

Suppose the price of good x falls and the consumption of good x increases.From this we can infer that

The substitution effect of a price change is depicted by

Good x is an inferior good,but not a Giffen good.When the price of x increases,the consumer will consume

Which of the following statements best describes the substitution effect?

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted the figure has an income of $50.Which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $2.50?

Suppose the price of good x falls.As a result,the quantity demanded for good x increases for a particular consumer.For this consumer,the substitution effect induced the consumer to purchase more x while the income effect induced the consumer to purchase less x.We can infer that

Jeffrey spends all of his income on warm-up suits and running shoes,and the price of a warm-up suit is four times the price of a pair of shoes.In order to maximize total utility,Jeffrey should

Given a consumer's indifference map,the demand curve for a good can

The following diagram shows two budget lines: A and B. Which of the following could explain the change in the budget line from A to B?

The following diagram shows two budget lines: A and B. Which of the following could explain the change in the budget line from A to B?

A good is an inferior good if the consumer buys less of it when

A way to describe the consumer's optimum other than "the marginal rate of substitution for two goods is equal to their relative price ratio",is

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

The following diagram shows two budget lines: A and B. Which of the following could explain the change in the budget line from A to B?

The income effect of a price change is depicted by