Deck 5: Applying Consumer Theory

Question 1

Three individuals have $1000 and identical preferences for gum, g, and cigarettes, s, as measured by the utility function U(g,s)= 10g^0.9s^0.1. The price of gum is $9 and the price of cigarettes is $12. What is the market surplus/shortage at a price of $12 when the supply of cigarettes is 5?

A)There will be a shortage of 3 cigarettes.
B)There will be a surplus of 3 cigarettes.
C)There will be a shortage of 2/3 cigarettes.
D)There will be a surplus of 2/3 cigarettes.

Answer 1

There will be a shortage of 3 cigarettes.

Question 2

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, Bobby's utility

A)stays the same.
B)increases.
C)decreases.
D)might change, but there is not enough information to determine.

Answer 2

decreases.

Question 3

The above figure shows Bobby's indifference map for juice and snacks. It also shows three budget lines resulting from different prices for snacks. Juice and snacks are

A)complement goods.
B)substitute goods.
C)unrelated goods.
D)capital goods.

Answer 3

complement goods.

Question 4

What is the slope of the price consumption curve for two goods, x and y, when preferences are measured by the utility function U(x,y)= x^0.5y^0.5, the price of good y is $10, income equals $100, and the price of good x increases from $5 to $10?

A)Slope equals zero.
B)Slope is infinite.
C)Slope is - .
D)Slope is .

Question 5

As the price of a Giffen good falls, the consumer will

A)purchase more units.
B)purchase fewer units.
C)not change the amount purchased.
D)There is not enough information to answer this question.

Question 6

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's demand curve for snacks?

A)p = 2, q = 10
B)p = 2, q = 13
C)p = 2, q = 5
D)p = 1, q = 20

Question 7

Draw two graphs, one directly above the other. On the upper graph, label the vertical axis Good X and label the horizontal axis Good Y. On the lower graph, label the vertical axis the Price of good Y and label the horizontal axis Good Y. In the upper graph, show the income and substitution effects of a decrease in the Price of good Y when Y is a Giffen good. Draw the corresponding demand curve for Good Y in the lower graph.

Question 8

Suppose a graph is drawn to show a consumer's preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontal when the price of football tickets changes, then

A)football tickets are an inferior good.
B)the demand for football tickets is perfectly elastic.
C)the demand for football tickets is unit elastic.
D)the demand curve for football tickets will be horizontal.

Question 9

Ten individuals have $100 and identical preferences for picnics, p, and kayak trips, k, where U(p, k)= k^0.5p^0.5. The price of picnics is $5 and the price per kayak trip is $ 10. What is the shortage/surplus in the market when the supply of picnics totals 120?

A)There is a surplus of 20.
B)There is a shortage of 20.
C)The market is in equilibrium. Therefore, there is no surplus/shortage.
D)There is not enough information to answer this question.

Question 10

An increase in the price of a good causes

A)a change in the slope of the budget line.
B)an increase in the consumption of that good.
C)a rightward shift of the demand curve for that good.
D)a parallel rightward shift of the budget line.

Question 11

A demand curve for a Giffen good would be

A)upward sloping.
B)downward sloping.
C)horizontal.
D)vertical.

Question 12

Sandy derives utility from consuming "all other goods," g, and clean air (measured by particulate matter removed per m³), a, as measured by the utility function U(g,a)= g^0.6a^0.4. The price of "all other goods" is $20 and the price of clean air (abatement)equals $10. Brian is the only other consumer in the market for clean air and demands 10 units of clean air. What is the market demand for clean air?

A)Total market demand is 14 units of clean air.
B)Total market demand is 12 units of clean air.
C)Total market demand is 10 units of clean air.
D)Total market demand is 16 units of clean air.

Question 13

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. This information could be used to determine

A)the slope of Bobby's demand curve for juice.
B)the amount by which Bobby's demand curve for juice shifts when his income rises.
C)the amount by which Bobby's demand curve for juice shifts when the price of snacks rises.
D)All of the above.

Question 14

Suppose the quantity of x is measured on the horizontal axis. If the price consumption curve is vertical when the price of x changes, then the demand for x is

A)perfectly elastic.
B)perfectly inelastic.
C)unit elastic.
D)There is not enough information to determine the price elasticity of demand for x.

Question 15

As the price of a good rises, the consumer will experience

A)a desire to consume a different bundle.
B)a decrease in utility.
C)a southern or western movement on the indifference map.
D)All of the above.

Question 16

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's price-consumption curve?

A)10 snacks and 20 juices
B)10 snacks and 0 juices
C)10 snacks and 5 juices
D)10 snacks and 15 juices

Question 17

An individual's demand curve for a good can be derived by measuring the quantities selected as

A)the price of the good changes.
B)the price of substitute goods changes.
C)income changes.
D)All of the above.

Question 18

If the price-consumption curve is upward sloping when the price of the good measured on the horizontal axis changes, then the demand curve for that good will be upward sloping.

Question 19

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, the price for juice

A)stays the same.
B)increases.
C)decreases
D)might change, but there is not enough information to determine.

Question 20

The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. Bobby's demand for snacks is

A)unit elastic.
B)elastic.
C)inelastic.
D)perfectly elastic.

Question 21

An increase in income (all else equal)will ALWAYS lead to a parallel shift of the budget line.

Question 22

The above figure shows a consumer's indifference curves for soda and all other goods. Assuming a budget of $100, derive the consumer's demand for soda for prices of $4 and $10 per case of soda. Estimate the price elasticity of demand for soda.

Question 23

When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in the above figure best represents John's Engel curve for frozen dinners?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 24

An individual derives utility from games, g (y-axis), and toy airplanes, a (x-axis), described by the utility function U(g,a)= g^0.6a^0.4. The price per game is $20 and the price of toy airplanes is $10. Using the slope of the income consumption curve (ICC), determine whether games and toy airplanes are normal or inferior goods when income increases from $100 to $200.

A)Both goods are normal goods with an ICC slope of .
B)Both goods are normal goods with an ICC slope of .
C)Both goods are inferior goods with an ICC slope of - .
D)Both goods are inferior goods with an ICC slope of - .

Question 25

When John was in college and his income was low, he drank "Red Ribbon" beer. As his income increased, he purchased better-quality beer and less "Red Ribbon." Which graph in the above figure best represents John's Engel curve for "Red Ribbon" beer?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 26

A movement upward along an upward sloping Engel curve corresponds to

A)upward sloping indifference curves.
B)crossing indifference curves.
C)a rotation in the budget constraint.
D)a parallel shift in the budget constraint.

Question 27

Even though Mary's income is very low, she makes sure that she purchases enough milk for her family to drink. As her income rises, she does buy more milk. Which graph in the above figure best represents Mary's Engel curve for milk?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 28

Which graph in the above figure best represents a good that is an inferior good at some income levels, and a normal good at other income levels?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 29

The above figure shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?

A)Larry's demand curve for pork shifts rightward when his income increases.
B)Larry's income elasticity of demand for pork is greater than zero.
C)Pork is a normal good.
D)All of the above.

Question 30

If consumer income and prices increase by the same percentage,

A)the consumer will buy more of both goods.
B)the consumer will buy more of both goods if they are both normal goods.
C)the consumer will buy less of both goods if they are both inferior goods.
D)the consumer's utility maximizing bundle stays the same.

Question 31

The above figure shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?

A)Larry's Engel curve for pork will be upward sloping.
B)Larry's Engel curve for pork will be downward sloping.
C)Larry's Engel curve for pork will be backward bending.
D)Larry's Engel curve for pork cannot be derived from the information provided.

Question 32

Suppose the quantity of x is measured on the horizontal axis. If the income consumption curve is vertical, then the income elasticity of demand for x is

A)0.
B)1.
C)-1.
D)There is not enough information to determine the income elasticity of demand for x.

Question 33

Explain what the slope of the income consumption curve shows about the income elasticity of demand.

Question 34

An individual derives utility from consuming "all other goods," g, and clean air (measured by the reduction in particulate matter per m³), a, as measured by the utility function U(g,a)= g^0.6a^0.4. The price of consumer goods equals $20 and the price of clean air (abatement)equals $10. What is the slope of the Engel curve when income increases from $100 to $200?

A)The slope is 25.
B)The slope is -25.
C)The slope is zero.
D)The slope is infinite.

Question 35

When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in the above figure best represents John's Engel curve for dining out?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 36

When deriving an Engel curve, the prices of both goods

A)are held constant.
B)increase by the same percentage as income.
C)decrease by the same percentage as income.
D)can either decrease, increase or stay the same.

Question 37

The above figure shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?

A)Pork is an inferior good.
B)Ham is an inferior good.
C)Neither pork nor ham is an inferior good.
D)Both ham and pork are inferior goods.

Question 38

An inferior good exhibits

A)a negative income elasticity.
B)a downward sloping Engel curve.
C)a decline in the quantity demanded as income rises.
D)All of the above.

Question 39

Both Sally and Sam receive a 10% raise in a single year. Sally increases her demand for ground beef whereas Sam decreases his demand for ground beef.

A)This is impossible.
B)This is only possible if Sally considers ground beef an inferior good, and Sam views it as a normal good.
C)This is only possible if Sally has lower income than Sam.
D)This is only possible if Sally considers ground beef a normal good and Sam views it as an inferior good.

Question 40

After Joyce and Larry purchased their first house, they made additional home improvements in response to increases in income. After a while, their income rose so much that they could afford a larger home. Once they realized they would be moving, they reduced the amount of home improvements. Their Engel curve for home improvements on their current home is

A)negatively sloped.
B)flat.
C)positively sloped.
D)backward bending.

Question 41

The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from an increase in the price of soda. From the graph, one can conclude that

A)Bobby views soda as an inferior good.
B)Bobby's demand for soda is perfectly inelastic.
C)Bobby views soda as a normal good.
D)the income elasticity of demand for soda is 1.

Question 42

The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his income effect?

A)3
B)10
C)15
D)7

Question 43

When the price of a good changes, the income effect can be found by comparing the equilibrium quantities purchased

A)on the old budget line and the new budget line.
B)on the original indifference curve when faced with the original prices and when faced with the new prices.
C)on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line.
D)on the new indifference curve.

Question 44

When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased

A)on the old budget line and the new budget line.
B)on the original indifference curve when faced with the original prices and when faced with the new prices.
C)on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line.
D)on the new indifference curve.

Question 45

Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that

A)milk is a luxury.
B)milk is a Giffen good.
C)the income effect from a change in the price of milk is very large.
D)the income effect from a change in the price of milk is very small.

Question 46

If a good is an inferior good, then its

A)demand curve will be upward sloping.
B)income effect reinforces the substitution effect.
C)income elasticity is negative.
D)Engel curve cannot be drawn.

Question 47

In the case of a normal good,

A)demand curves always slope downward.
B)the income effect and substitution effect are in the same direction.
C)the Engel curve slopes upward.
D)All of the above.

Question 48

When income increases by 1%, the quantity demanded of a good decreases by 2%. What is the income elasticity of the good? Is the good normal or inferior? Why?

Question 49

The substitution effect can be measured holding ________ constant.

A)income
B)utility
C)the price of one good
D)the price of all goods

Question 50

Why can't all goods be inferior?

Question 51

The Slutsky equation shows that, holding the total effect constant, the income effect will be larger for goods that

A)have a smaller substitution effect.
B)make up a larger percentage of a household's budget.
C)have perfectly inelastic demand curves.
D)All of the above.

Question 52

When measuring the substitution effect, one uses the change along

A)the old indifference curve.
B)the new indifference curve.
C)either the old or the new indifference curve.
D)the budget constraint.

Question 53

A Giffen good has

A)a positive substitution effect.
B)a negative income effect.
C)a larger income effect than substitution effect.
D)All of the above.

Question 54

Why would you expect the demand for diamond jewelry to fall faster than plastic, costume jewelry when all incomes fall?

Question 55

Suppose Lisa spends all of her money on books and coffee. When the price of coffee decreases, the

A)substitution effect on coffee is positive, and the income effect on coffee is positive.
B)substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous.
C)substitution effect on coffee is positive, and the income effect on coffee is ambiguous.
D)substitution effect on coffee is ambiguous, and the income effect on coffee is positive.

Question 56

The above figure shows three different Engel curves. Rank them in terms of income elasticity.

Question 57

Draw budget constraints, indifference curves, and the income consumption curve for a good that has an income elasticity that is perfectly inelastic.

Question 58

One characteristic of a Giffen good is that it

A)is a luxury good.
B)is an inferior good.
C)has an upward-sloping Engel curve.
D)All of the above.

Question 59

Suppose that frozen dinners were once a normal good for John, but now frozen dinners are an inferior good for him. John's demand curve for frozen dinners

A)has become steeper as a result.
B)has become flatter as a result.
C)has not changed as a result.
D)has disappeared as a result.

Question 60

The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?

A)3
B)10
C)15
D)7

Question 61

Suppose Joe earns $1,000 in Year 1 and $0 in Year 2. Any amount he saves will earn interest at a rate of 10%. Draw Joe's budget line.

Question 62

The Affordable Care Act is intended to reduce the price of health care. A decrease in the price of health care may

A)increase the number of doctors office visits if office visits are considered an inferior good and the substitution effect dominates the income effect.
B)decrease the number of doctors office visits if office visits are considered an inferior good and the substitution effect dominates the income effect.
C)increase the number of doctors office visits if office visits are a normal good.
D)Both A and C.

Question 63

Due to inflation, nominal prices are usually

A)equal to real prices.
B)smaller than real prices.
C)larger than real prices.
D)a constant proportion different from real prices.

Question 64

If the Engel curve for a good is upward sloping, the demand curve for that good must be downward sloping.

Question 65

The amount of money one would have to give to a consumer to offset the harm from a price increase is called

A)compensating variation.
B)structured settlement.
C)equivalent variation.
D)consumer surplus.

Question 66

Suppose that the interest rate paid to savers increases. As a result, Tom wishes to save less. This suggests that, for Tom,

A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)utility maximization is not occurring.
D)future consumption is a luxury.

Question 67

Suppose that the interest rate paid to savers increases. As a result, Tom wishes to save more. This suggests that, for Tom,

A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)utility maximization is not occurring.
D)future consumption is a luxury.

Question 68

Employing a fixed-weight index like the Consumer Price Index to adjust a person's salary in response to inflation will overcompensate this person because doing so will allow this person to

A)buy the same bundle of goods as he did before the inflation.
B)achieve a higher level of utility than he did before the inflation.
C)achieve the same level of utility as before the inflation.
D)buy more of all goods.

Question 69

If a consumer is compensated for the income effect that occurs when the price of a good increases, then his demand curves can never slope upward.

Question 70

For an inferior good, if the income effect more than offsets the substitution effect, we call that good

A)a Giffen good.
B)a normal good.
C)an inferior good.
D)a neutral good.

Question 71

A Consumer Price Index (CPI)adjustment overcompensates for inflation because it ignores

A)the income effect when relative prices change.
B)the substitution effect when relative prices change.
C)that some goods are inferior.
D)that the substitution effect may offset the income effect.

Question 72

In the above figure point A is the original consumption point. The movement from point A to point C is due to a fall in the price of good Y. Note that B¹, B², and B³ are budget constraint lines with incomes M¹, M², and M³ respectively. Also note that B² and B³ are parallel. Calculate the compensating variation (CV).

A)CV = M³ - M¹.
B)CV = M³ - M².
C)CV = M¹ - M².
D)CV = M¹ - M³.

Question 73

The amount of money one would have to take from a consumer to harm her by as much as the price increase is called

A)compensating variation.
B)structured settlement.
C)equivalent variation.
D)consumer surplus.

Question 74

Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets. Why?

Question 75

What is the benefit of understanding the income and the substitution effects?

A)The income effect might run in the opposite direction of the substitution effect.
B)The income effect always runs in the opposite direction of the substitution effect.
C)The income and substitution effects just offset each other, which explains a lot.
D)The income and substitution effects are proportional to each other.

Question 76

What is the primary difference between the substitution and the income effect of a price change?

A)The substitution effect holds income constant and the income effect holds utility constant.
B)The substitution effect is always positive and the income effect is always negative.
C)The substitution effect holds utility constant and the income effect holds prices constant.
D)The substitution effect is always negative and the income effect is always positive.

Question 77

If a good is considered a normal good, the demand curve will shift ________ when income increases because ________.

A)right; the income and substitution effects move in the same direction.
B)right; the income and substitution effects move in the opposite direction.
C)left; the income and substitution effects move in the same direction.
D)left; the income and substitution effects move in the opposite direction.

Question 78

Under which of the following conditions will there be no substitution bias in the CPI?

A)Lower-priced goods increase in price by a greater percentage than do higher-priced goods.
B)Higher-price goods increase in price by a greater percentage than do lower-priced goods.
C)All goods change in price by the same amount.
D)All goods change in price by the same percentage.

Question 79

A good may be inferior at some income levels and normal at others.

Question 80

Under which of the following conditions will there be no substitution bias in the CPI?

A)Indifference curves are convex.
B)Indifference curves are L-shaped.
C)Indifference curves are linear.
D)Indifference curves are downward sloping.