Deck 3: Rational Consumer Choice

Question 1

The marginal rate of substitution is the

A)absolute value of the indifference curve.
B)tradeoff rate between the two goods under consideration at any particular point.
C)total utility derived at any point.
D)rate at which the consumer increases utility.

Answer 1

B

Question 2

Perfect substitutes will have indifference curves which are

A)concave.
B)convex.
C)linear (a straight line).
D)L-shaped.

Answer 2

C

Question 3

If the consumer's budget constraint is given by 10F + 5S = 100 where F is food and S is shelter, how much food can he buy if he purchases 2 units of shelter?

A)10
B)5
C)20
D)9

Answer 3

D

Question 4

An increase in income with no changes in the price of either good will cause

A)an inward shift of the budget curve.
B)an outward shift of the budget curve.
C)no change in the budget curve.
D)an inward rotation of the budget curve.

Question 5

The "composite good" refers to

A)large purchases that cannot be incrementally divided.
B)an abstraction requiring more than a three dimensional graph.
C)income not spent on good X in a two-dimensional graphical presentation.
D)the notion that consumer pleasure cannot be modeled graphically.

Question 6

If the consumer's budget constraint is given by 10F + 5S = 100 where F is food and S is shelter, what is the opportunity cost of food in terms of shelter?

A)5
B)2
C)15
D)10

Question 7

Suppose you are choosing between milk and cookies. If the opportunity cost of cookies in terms of milk increases, then the budget curve will

A)shift inward.
B)rotate inward.
C)shift outward.
D)rotate outward.

Question 8

What assumptions are necessary to prevent indifference curves from crossing?

A)Transitivity
B)Completeness
C)More is better
D)Transitivity and more is better

Question 9

Which is true of the two budget lines drawn below?

A)Line a has a higher nominal income than line b.
B)Line b and line a have the same nominal income.
C)The absolute price of good Y is greater with budget line a than with budget line b.
D)The price of good X is larger with budget line a.

Question 10

A diminishing marginal rate of substitution implies that indifference curves are

A)convex.
B)concave.
C)straight lines.
D)positively sloped.

Question 11

Bundles that lie above the indifference curve are preferred to bundles that lie below. This is an example of

A)transitivity.
B)completeness.
C)more is better.
D)convexity.

Question 12

I prefer 10 apples and 6 oranges to 9 apples and 3 oranges. This is an example of

A)transitivity.
B)completeness.
C)more is better.
D)convexity.

Question 13

If the price of a good shown on the vertical axis of a budget graph is cut in half and the price of the good on the horizontal axis is cut by 75%, then the budget constraint shifts

A)left and becomes steeper.
B)right and becomes steeper.
C)left and becomes flatter.
D)right and becomes flatter.

Question 14

An increase in the price of one good will cause

A)an inward rotation of the budget curve.
B)an outward rotation of the budget curve.
C)a parallel shift in the budget curve.
D)an inside shift of the budget curve.

Question 15

Which of the following are most likely to have indifference curves that are L-shaped?

A)Ice cream and frozen yogurt
B)Your textbook and its study guide
C)Coke and Pepsi
D)A white shirt and a blue shirt

Question 16

Diminishing marginal rate of substitution implies that the marginal rate of substitution

A)falls as one travels down (eastward) on an indifference curve.
B)rises as one travels down (eastward) on an indifference curve.
C)stays the same as one travels down (eastward) on a typical indifference curve.
D)falls as one move to higher (northeast) in the indifference curve map.

Question 17

On a typical budget constraint, the opportunity cost of food in terms of shelter is

A)Pf/Ps.
B)Ps/Pf.
C)the inverse of the opportunity cost of shelter in terms of food.
D)zero.

Question 18

The budget constraint shown below is consistent with a pricing strategy that involves a

A)price reduction of X for large quantities purchased.
B)price increase of X for large quantities.
C)constant price of X for all quantities purchased.
D)price change of X and a nominal income increase for the consumer.

Question 19

Your college has three meal plans. One is for 21 meals a week, another for 14 and a third offers only 7. You don't know the price yet but you are certain the 21 would be best. However, your second choice would be to take only the 7 meal plan and if you had to pick a third choice it would be the 14 meal plan. This preference pattern doesn't fit the indifference curve assumption of

A)completeness.
B)transitivity.
C)convexity.
D)none of these because it does not violate any of the assumptions.

Question 20

If the consumer's budget constraint is given by 4P + 2B = 50 where P is pizza and B is burgers, the following bundles of pizza and burger would be on the budget constraint:

A)P = 2; B = 21
B)P = 5; B = 10
C)P = 2; B = 24
D)P = 10; B = 20

Question 21

Which statement is true?

A)The further down a food and shelter budget line a consumer moves, the more of his budget he is spending.
B)When the price of good X (on the horizontal axis) falls and the price of good Y rises, the budget line gets steeper.
C)When Pete adopts a corner solution he is definitely not maximizing utility.
D)The "composite good" shows the amount of money the consumer has spent on good X in the two good optimizing model.

Question 22

If food is on the vertical axis and shelter on the horizontal axis, then the equation for the budget line can be expressed as

A)PsS + PfF = M.
B)PsF + PfS = M.
C)PsS + PfM = S.
D)M/Ps = S.

Question 23

If a corner solution exists,

A)marginal rate of substitution will always be equal to the slope of the budget constraint.
B)marginal rate of substitution will always be less than the slope of the budget constraint.
C)marginal rate of substitution will always be greater than the slope of the budget constraint.
D)none of the answer choices is correct.

Question 24

According to the text, gift giving in kind

A)should happen more often if people were rational.
B)cannot be easily explained by the rational choice model.
C)happens only because people expect to get gifts in return.
D)always increase consumer welfare.

Question 25

Say Anna chooses between partying and studying. Supposed her indifference curves satisfied all the assumptions about consumer theory, but she also liked studying a lot more than partying. If the price of studying increased, then Anna would consume

A)more studying and less partying.
B)less studying and more partying.
C)the same as before.
D)no partying at all, in order to consumer more studying.

Question 26

Say a consumer always consumed peanut butter and jelly in fixed proportions (for a perfect peanut and jelly sandwich). Then the indifference curves for peanut butter and jelly for this consumer would be

A)L-shaped.
B)a straight line with positive slope.
C)a straight line with negative slope.
D)convex.

Question 27

Economists usually do not favor subsidies on specific products or in-kind payments to help low income people. This is because

A)a subsidy means that the recipient does not face a budget line anymore and therefore can not maximize his welfare efficiently.
B)economists are individualists who believe that helping the needy makes them dependent.
C)the poor person could have increased utility if the same money used to subsidize a product would be given to them to use as they choose.
D)in-kind payments suggest that the poor person does not have an indifference curve pattern from which to make choices.

Question 28

If food is on the vertical axis and shelter on the horizontal axis, then the equation for the budget line can be expressed as

A)PsS + Pf = M.
B)F = Pf - (Ps/Pf)S.
C)S = M/Ps - (Pf/Ps)F.
D)S = M/Ps.

Question 29

The indifference curves for nickels and dimes will be

A)L-shaped.
B)a straight line with positive slope.
C)a straight line with negative slope.
D)concave.

Question 30

If the consumer is willing to give up 3 units of food (vertical axis) in exchange for one unit of shelter (horizontal axis) and food is priced at 10 and shelter at 20, then the consumer is purchasing

A)too much food for utility maximization.
B)too much shelter for utility maximization.
C)just the right amount of each good for utility maximization.
D)less than the budget would allow.

Question 31

Which statement is true within the framework of rational choice economics?

A)When the relative prices change a rational consumer's preference pattern will be altered.
B)The budget line and the indifference curves are interdependent in the maximizing models.
C)Indifference curves are empirically determined functions that are identical for all persons who are truly rational choice operators.
D)When the relative prices change a rational consumer's preference will not be altered.

Question 32

Say a consumer considered soy milk and skim milk perfect substitutes of each other at a ratio of 1:1. If the skim milk is cheaper than soy milk this consumer would buy

A)some of both goods, but more skim milk.
B)just skim milk.
C)some of both goods but more soy milk.
D)we can't really say with the information given.

Question 33

If all consumers are perfectly rational according to microeconomic models they should

A)all have the same marginal rate of substitution.
B)always buy more of the least expensive good.
C)all end up with the same bundle of goods.
D)all have the same level of satisfaction.

Question 34

According to the rational choice model, cash grants are preferred to food stamps because

A)they enhance consumer choice.
B)cash grants allow consumers to reach lower indifference curves.
C)food is the most essential commodity.
D)food would be cheaper to buy with cash.

Question 35

If food is on the vertical axis and shelter on the horizontal axis, the slope of the budget line is given by

A)Pf/Ps.
B)Ps/Pf.
C)-Ps/Pf.
D)-Pf/Ps.

Question 36

The graph of the budget line below has dollars on the vertical axis and food on the horizontal axis. Which statement is false?

A)The vertical intercept represents all money available for purchasing.
B)The distance OA shows the amount of money spent on OD amount of food.
C)If the amount of money available is known in this graph, then the absolute and relative price of food is known also.
D)The horizontal intercept represents all the food the consumer could purchase with the budget available.

Question 37

According to the rational choice model developed in this chapter, which statement below is false?

A)People would be less happy if they exchanged money rather than things at Christmas.
B)Individual preference patterns do not change because prices change.
C)Consumers behave as if they did cost-benefit analysis on every purchase.
D)Cash grants are always better than in-kind gifts.

Question 38

Suppose the budget constraint is given by 200P + 50S = 400, where P is pizza and S is spinach. If the prices of S and P increase by 10% each then the budget curve will shift to the

A)right with the same slope.
B)left with the same slope.
C)right but the slope will be different than before.
D)left but the slope will be different than before.

Question 39

The indifference curves for right shoes and left shoes will be:

A)L-shaped.
B)a straight line with positive slope.
C)a straight line with negative slope.
D)convex.

Question 40

Excluding corner solutions, in consumer equilibrium, which of the following is true?

A)The marginal rate of substitution equals the slope of the budget constraint.
B)The indifference curve is steeper than the budget constraint.
C)The consumer is minimizing utility given the constraints.
D)The consumer can improve his/her situation by consuming more of both goods.

Question 41

Say a consumer is choosing between wine and cheese. The price of wine is 10 and the price of cheese is 5. If the marginal rate of substitution is 4, and if wine is on the horizontal axis and cheese is on the vertical axis then the consumer is purchasing

A)too much cheese.
B)too much wine.
C)just the right amount of both goods.
D)purchasing more than what her income would allow.

Question 42

Suppose your parents are thinking of buying you a brand new car as a graduation present. Economists would argue that it would be better if:

A)They gave you a cash gift equal to the value of the car regardless of how much you need a car right now
B)They gave you a cash gift equal to the value of the car long as you really don't have much use for a car right now
C)You sell the car to someone else right away in exchange for the cash
D)They ask you for what kind of car you want first and then buy it for you

Question 43

You go to a carnival in town intending to purchase rides for your children. When you get there they have an offer where everyone's first two rides are free. They obviously hope that the free rides will end up making them more money in the long run than if they charged for all rides. First, show on an indifference curve and budget line graph a solution that would make the free rides a bad idea for the company. Then, on a second graph, show a possible situation that would make the giveaway a success that should be repeated.

Question 44

Say a consumer is choosing between red wine and white wine. The price of red wine is 20 and the price of white wine is 10. If the marginal rate of substitution is 1, and if red wine is on the horizontal axis then the consumer is purchasing:

A)Too much red wine
B)Too much white wine
C)Just the right amount of both goods
D)Purchasing more than what her income would allow

Question 45

A student buys only two goods, pizza and books. The price of pizza is $5 and the price of books is $10. At the student's present level of consumption, her marginal utility of pizza is 4 and her marginal utility of books is 2. Currently, the student is spending all her income.
A.Is this student currently in consumer equilibrium (maximizing utility)? Explain using a graph.
B.What would this student have to do in order to increase her utility? Use the diagram from part (a) to explain your answer.

Question 46

Draw a graph with food on the horizontal axis and shelter on the vertical axis.
A. Now sketch in a budget line such that the relative price of food to shelter is 2, the absolute price of shelter is 10, and the nominal income level is $100. Label the budget line A.
B. Next, the nominal income stays the same, the absolute price of shelter is cut in half, and the absolute price of food is unchanged. Sketch in the new budget line and label it B.
C. Next, the absolute prices are where they were when the problem started and the nominal income increases to 150. Draw a new budget line for this data and label it C.
D. Next, the nominal income is again $100, the relative prices are as they were at the beginning and the absolute prices are cut in half. Draw a new budget line on the graph and label it D.
E. Next, the absolute price of shelter falls to $5 and the absolute price of food and the income stay where it was at the beginning. The relative price of food to shelter also stays at 2. Explain why this is a logical contradiction.

Question 47

If the price of train rides is 1 and the price of food is 10, and the MRS of food for train rides expressed by Karl is 5, is Karl a utility maximizer? How do you know? If Karl is not maximizing, what should he do to improve his situation?

Question 48

Given the following budget line, (M = PfF + PsS) show the following by reformulating the equation. Assume F (food) is on the horizontal axis and S (shelter) is on the vertical axis.
A. The vertical intercept is _________.
B. The horizontal intercept is _________.
C. The slope of the budget line is __________.

Question 49

Carl is stranded in the forest and must survive on coconuts and quail. His utility function for those items is U = f(C,Q) = 10C - C² + 4Q - Q².
A.By taking the derivative of the utility function with respect to each commodity and setting the result equal to zero it is clear that Carl should get 5 coconuts and 2 quail.
A.If Carl maximizes his utility and has no constraints on how many he can get, what will he do?
B.If Carl is able to get only some combination of 5 coconuts and quail, how many will he get of each if he is doing the best he can?
B.Substituting the constraint into the utility function yields results of 4 coconuts and 1 quail.