Question 1

Assume that a college student purchases only coffee and almonds.If coffee is an inferior good and almonds are a normal good,what will the income effect associated with an increase in the price of almonds result in

Accepted Answer

Since almonds are a normal good, an increase in their price will reduce the purchasing power of the student, leading to a decrease in the consumption of almonds (income effect). At the same time, since coffee is an inferior good, the decrease in purchasing power will lead to an increase in the consumption of coffee (substitution effect). Therefore, the overall effect will be a decrease in the consumption of almonds and an increase in the consumption of coffee.

Question 2

Assume that a college student purchases only coffee and almonds.If both coffee and almonds are normal goods,what will the income effect associated with a decrease in the price of almonds result in

Accepted Answer

When the price of almonds decreases, the student effectively has more income to spend, leading to an increase in the consumption of both normal goods, almonds and coffee.

Question 3

What are the two effects a consumer experiences from a change in the price

Accepted Answer

A consumer experiences the income effect, which is the change in purchasing power due to a change in price, and the substitution effect, which is the change in quantity demanded due to a change in relative prices of two goods. Therefore, the best choice is D.

Question 4

If the price of a good increases,what do consumers perceive,all else being equal

Accepted Answer

If the price of a good increases, consumers perceive a decrease in their purchasing power as they can buy less of the good with their given income. This is true for both normal goods and inferior goods. Option A is incorrect as an increase in price of an inferior good would lead to a decrease in demand and hence, no increase in purchasing power. Option B is incorrect as an increase in price does not necessarily result in an increase in income. Option D is also incorrect as there is no net gain in income when the price of a good increases.

Question 5

When a consumer experiences a price increase for an inferior good,which situation is possible

Accepted Answer

For an inferior good, if the income effect is greater than the substitution effect, the consumer may buy more of the good as its price increases, leading to an upward sloping demand curve.

Question 6

When the price of a good increases,the higher price has what result,all else being equal

Accepted Answer

When the price of a good increases, it becomes relatively more expensive compared to other goods. This contraction in the set of buying opportunities is known as a decrease in purchasing power. Consumers may switch to substitute goods or reduce their overall consumption of the good that experienced the price increase.

Question 7

Figure 21-8
 
-Refer to Figure 21-8.If point B is the consumer's optimum and the price of chocolate chips is $4 per bag,what is the price of a bag of marshmallows

Accepted Answer

At the consumer's optimum, the slope of the budget line should be equal to the slope of the indifference curve.

Slope of the budget line = Price of chocolate chips / Price of marshmallows = 4/x

Slope of the indifference curve at point B = Marginal rate of substitution (MRS) = MU of chocolate chips / MU of marshmallows = 2/1 = 2

Equating the two slopes, we get:

4/x = 2
x = 2

Therefore, the price of a bag of marshmallows is $2.00.

The best choice for the consumer is to buy 3 bags of chocolate chips and 6 bags of marshmallows, as this combination lies on the highest possible indifference curve that is attainable within the consumer's budget constraint.

Question 8

Assume that a college student purchases only coffee and almonds.What will the substitution effect associated with a decrease in the price of almonds result in

Accepted Answer

The substitution effect occurs when a decrease in the price of almonds makes them relatively cheaper compared to coffee, leading the student to substitute almonds for coffee, increasing almond consumption and decreasing coffee consumption.

Question 9

What will a consumer buy if there is a shift outward in the budget constraint

Accepted Answer

An outward shift in the budget constraint means the consumer now has more purchasing power. Therefore, they are likely to buy more of normal goods and less of inferior goods. This is because normal goods are of better quality and as the consumer's income increases, they tend to buy more of such goods. Inferior goods, on the other hand, are of inferior quality and as the consumer's income increases, they tend to buy less of such goods.

Question 10

Figure 21-8
 
-Refer to Figure 21-8.Assume that the consumer depicted has an income of $120 and the price of a bag of marshmallows is $6.Which bundle of marshmallows and chocolate chips will the optimizing consumer choose to purchase

Accepted Answer

The consumer will choose the bundle that maximizes utility within their budget constraint. Given the income of $120 and the price of marshmallows at $6 per bag, the consumer will select the bundle that provides the highest utility without exceeding the budget.

Question 11

For normal goods like cola and pizza,what is a likely result of the substitution effect when the price of pizza rises

Accepted Answer

When the price of pizza rises, cola becomes relatively less expensive, leading consumers to substitute pizza with cola, thus buying more cola.

Question 12

Uta consumes two normal goods,X and Y,and is currently at an optimum.If the price of good X falls,what can we predict with certainty will occur,(aside from Uta's real income rising)

Accepted Answer

When the price of good X falls, the substitution effect will lead Uta to consume more of good X. However, the effect on good Y is uncertain because it depends on the relative strength of the substitution and income effects.

Question 13

If goods X and Y are perfect complements,and the price of good Y falls,what are changes in the amount of goods X and Y purchased due to

Accepted Answer

The answer of If goods X and Y are perfect...

Question 14

For normal goods like cola and pizza,what is a likely result of the substitution effect when the price of pizza falls

Accepted Answer

When the price of pizza falls, pizza becomes cheaper relative to cola, leading the consumer to substitute pizza for cola, thus buying less cola.

Question 15

What effect is due to a price change that moves the consumer along the same indifference curve to a point with a new marginal rate of substitution

Accepted Answer

This situation is described as the substitution effect, as the price change has led to the consumer substituting one good for another while still maintaining the same level of utility, resulting in a new marginal rate of substitution on the same indifference curve. The budget, preference, and income effects all refer to different reasons for changes in consumer behavior in response to a price change, but they do not directly apply to this particular scenario.

Question 16

Goods X and Y are perfect complements.If the price of good Y falls,what will the substitution effect acting by itself do

Accepted Answer

For perfect complements, goods are consumed in fixed proportions, so a change in the price of one good does not lead to a substitution effect.

Question 17

For normal goods like cola and pizza,what is a likely result of the income effect when the price of pizza falls

Accepted Answer

The answer of For normal goods like cola and pizza,what...

Question 18

For normal goods like cola and pizza,what happens due to the substitution effect when the price of pizza falls

Accepted Answer

When the price of pizza falls, the substitution effect causes the consumer to buy more pizza and less cola, moving along the same indifference curve.

Question 19

For normal goods like cola and pizza,what happens due to the income effect when the price of pizza falls

Accepted Answer

When the price of pizza falls, the consumer's real income effectively increases, allowing them to reach a higher indifference curve, which can lead to buying more of both goods, including cola.

Question 20

If goods are perfect substitutes,what is the income effect of a price change on the other good

Accepted Answer

The answer of If goods are perfect substitutes,what is the...

Quiz 21: The Theory of Consumer Choice