Deck 21: The Theory of Consumer Choice

Question 1

The indifference curves for perfect substitutes are right angles.

Answer 1

False

Question 2

For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.

Answer 2

False

Question 3

The indifference curves for left gloves and right gloves are straight lines.

Answer 3

False

Question 4

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Question 5

For a typical consumer, most indifference curves are downward sloping.

Question 6

A typical indifference curve is upward sloping.

Question 7

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Question 8

The indifference curves for nickels and dimes are straight lines.

Question 9

The slope of a consumer's budget constraint is unaffected by a change in income.

Question 10

The indifference curves for left shoes and right shoes are right angles.

Question 11

The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.

Question 12

For a typical consumer, most indifference curves are bowed inward.

Question 13

If a consumer experiences a decrease in income, the new budget constraint will have the same slope as the old budget constraint.

Question 14

A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles that are equally affordable to a consumer.

Question 15

The indifference curves for perfect substitutes are straight lines.

Question 16

The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of Economics.

Question 17

When two goods are perfect complements, the indifference curves are right angles.

Question 18

If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant.

Question 19

The marginal rate of substitution is the slope of the budget constraint.

Question 20

The slope of the budget constraint reveals the relative price of good X compared to good Y.

Question 21

The marginal rate of substitution is the slope of the indifference curve.

Question 22

Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of Hunan.

Question 23

At a consumer's optimal choice, the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.

Question 24

The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Question 25

At a consumer's optimal choice, the consumer chooses the combination of goods such that the ratio of the marginal utilities equals the ratio of the prices.

Question 26

When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference curve.

Question 27

Giffen goods are inferior goods for which the income effect dominates the substitution effect.

Question 28

A consumer's optimal choice is affected by income, prices of goods, and preferences.

Question 29

A typical consumer consumes both coffee and donuts. After the consumer's income decreases, the consumer consumes more coffee but fewer donuts than before. For this consumer, donuts are a normal good, but coffee is an inferior good.

Question 30

Giffen goods violate the law of demand.

Question 31

The income effect of a price change is unaffected by whether the good is a normal or inferior good.

Question 32

If a consumer purchases more of good X and good Y after her income increases, then neither good X nor good Y is an inferior good for her.

Question 33

If a consumer purchases more of good A when her income falls, good A is an inferior good.

Question 34

A typical consumer consumes both coffee and donuts. After the consumer's income decreases, the consumer consumes more coffee but fewer donuts than before. For this consumer, coffee is a normal good, but donuts are an inferior good.

Question 35

If a consumer purchases more of good B when his income rises, good B is an inferior good.

Question 36

The direction of the substitution effect is not influenced by whether the good is normal or inferior.

Question 37

If consumers purchase more of a good when their income rises, the good is a normal good.

Question 38

When indifference curves are downward sloping, the marginal rate of substitution is usually constant.

Question 39

All points on a demand curve are optimal consumption points.

Question 40

The income effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Question 41

Consumers face tradeoffs except at the point where the indifference curve is tangent to the budget line.

Question 42

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.

Question 43

A rational person can have a negatively-sloped labor supply curve.

Question 44

The theory of consumer choice is representative of how consumers make decisions but is not intended to be a literal account of the process.

Question 45

An increase in the interest rate today leading to a decrease in consumption today violates the law of demand.​

Question 46

We can use the theory of consumer choice to analyze

A)why most demand curves slope downward.
B)the tradeoff between work and leisure
C)how interest rates affect household saving.
D)All of the above are correct.

Question 47

The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward.

Question 48

A worker with a backward-bending labor supply curve responds to an increase in wages by working more hours.

Question 49

Consumer will always consume more of a good if their income increases.

Question 50

Suppose the price of good X falls and the consumption of good X increases. From this we can infer that X is a(n) (i)
Normal good.(ii)
Inferior good.(iii)
Giffen good.

A)(i) only
B)(i) or (ii) only
C)(iii) only
D)(ii) or (iii) only

Question 51

Katie wins $3 million in her state's lottery. If Katie drastically reduces the number of hours she works after she wins the money, we can infer that the income effect is larger than the substitution effect for her.

Question 52

​A decrease in the price of the good on the horizontal axis rotates the budget constraint counterclockwise.

Question 53

A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect.

Question 54

The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope upward.

Question 55

When Adam's income increases, he purchases more tickets to Broadway musicals than he did before his income increased. For Adam, Broadway musicals are a(n)

A)normal good.
B)inferior good that is not a Giffen good.
C)Giffen good.
D)optimal good.

Question 56

A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect.

Question 57

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 X is a(n)

A)normal good.
B)inferior good.
C)Giffen good.
D)luxury good.

Question 58

Shelley wins $1 million in her state's lottery. If Shelley keeps working after she wins the money, we can infer that the substitution effect must exactly offset the income effect for her.

Question 59

Susie wins $2 million in her state's lottery. If Susie keeps working after she wins the money, we can infer that the income effect is larger than the substitution effect for her.

Question 60

A consumer maximizes utility at a point where multiple indifference curves intersect the budget line.

Question 61

When a consumer experiences a price decrease for an inferior good, if the income effect is

A)less than the substitution effect, the demand curve will be downward sloping.
B)greater than the substitution effect, the demand curve will be upward sloping.
C)less than the substitution effect, the demand curve will be upward sloping.
D)both a) and b) are correct.

Question 62

Violations of the law of demand are assumed to occur

A)regularly.
B)only when goods are Giffen goods.
C)only when the substitution effect dominates the income effect.
D)All of the above are correct.

Question 63

Giffen goods have positively-sloped demand curves because they are

A)normal goods for which the income effect outweighs the substitution effect.
B)normal goods for which the substitution effect outweighs the income effect.
C)inferior goods for which the income effect outweighs the substitution effect.
D)inferior goods for which the substitution effect outweighs the income effect.

Question 64

Which of the following is an example of a Giffen good?

A)fish in Japan
B)rice in the Chinese province of Hunan
C)pork in India
D)Both a and b are correct.

Question 65

Which of the following statements is not correct?

A)Reducing taxes on interest income might encourage people to save more.
B)Reducing taxes on interest income might reduce saving.
C)A price increase will create income and substitution effects that will both always work to reduce consumption of the good.
D)Utility is maximized when the marginal rate of substitution between any two goods equals the relative prices of the two goods.

Question 66

Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

A)an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is less than the income effect.
B)a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is greater than the income effect.
C)an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is greater than the income effect.
D)a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.

Question 67

Giffen goods have positively-sloped demand curves because they are

A)inferior goods with no substitution effect.
B)normal goods with no substitution effect.
C)inferior goods for which the substitution effect outweighs the income effect.
D)inferior goods for which the income effect outweighs the substitution effect.

Question 68

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point illustrating the new marginal rate of substitution is called the

A)income effect.
B)substitution effect.
C)Giffen good effect.
D)inferior good effect.

Question 69

Which of the following is an example of a Giffen good?

A)potatoes during the Irish potato famine
B)rice in the Chinese province of Hunan
C)fish in Japan
D)Both a and b are correct.

Question 70

A Giffen good is one for which the quantity demanded rises as the price rises because the income effect

A)reinforces the substitution effect.
B)reinforces and is greater than the substitution effect.
C)counteracts but is smaller than the substitution effect.
D)counteracts and is greater than the substitution effect.

Question 71

If a good is a Giffen good, then

A)the supply curve is downward sloping.
B)the demand curve is upward sloping.
C)the demand curve is horizontal.
D)there is no optimal level of consumption for the consumer.

Question 72

A Giffen good is a good for which

A)a decrease in the price decreases the quantity demanded.
B)the income effect outweighs the substitution effect.
C)an increase in the price decreases the quantity demanded.
D)Both a) and b) are correct.

Question 73

Good X is 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.

Question 74

A Giffen good is a good for which

A)an increase in the price raises the quantity demanded.
B)the income effect outweighs the substitution effect.
C)an increase in the price decreases the quantity demanded.
D)Both a) and b) are correct.

Question 75

A Giffen good is a good for which

A)a decrease in the price decreases the quantity demanded.
B)the substitution effect outweighs the income effect.
C)an increase in the price decreases the quantity demanded.
D)Both a) and b) are correct.

Question 76

When Joshua's income increases, he purchases more prime-rib dinners than he did before his income increased. For Joshua, prime-rib dinners are a(n)

A)normal good.
B)inferior good.
C)optimal good.
D)Giffen good.

Question 77

A Giffen good is a good for which an increase in the price

A)decreases the quantity supplied.
B)increases the quantity supplied.
C)decreases the quantity demanded.
D)increases the quantity demanded.

Question 78

When a consumer experiences a price increase for an inferior good, if the income effect is

A)greater than the substitution effect, the demand curve will be downward sloping.
B)greater than the substitution effect, the demand curve will be upward sloping.
C)less than the substitution effect, the demand curve will be upward sloping.
D)less than the substitution effect but the substitution effect is positive, the demand curve will be upward sloping.

Question 79

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 positive.
D)higher education will be a Giffen good.

Question 80

All Giffen goods are

A)inferior goods, and all inferior goods are Giffen goods.
B)inferior goods, but not all inferior goods are Giffen goods.
C)normal goods, but not all normal goods are Giffen goods.
D)normal goods, and all normal goods are Giffen goods.