Question 1

Which of the following would cause a consumer to purchase less of a good when the price of the good rises?

Accepted Answer

Both the income effect and substitution effect would cause a consumer to purchase less of a good when the price of the good rises. The income effect occurs because when the price of a good rises, the purchasing power of consumers' income decreases, so they are not able to afford as much of the good as before. The substitution effect occurs because when the price of a good rises, consumers may switch to purchasing a substitute good that is cheaper, leading to a decrease in demand for the original good.

Question 2

JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls. According to the income effect, which of the following is most likely to occur?

Accepted Answer

When the price of sugar falls, the cost of producing cola decreases, leading to a potential decrease in the price of cola. This effectively increases JoAnn's real income, allowing her to purchase more of most goods, including cola and other items, due to the income effect.

Question 3

When the price of a good falls, consumers buy more of the good because it is cheaper relative to competing goods. This statement describes the:

Accepted Answer

This is known as the substitution effect. When a good becomes cheaper, consumers will substitute it for other goods that are relatively more expensive.

Question 4

Assume the price of Coca-Cola increases. As a result, your real income decreases and you decrease the quantity of Coca-Cola purchased each month. This is an example of the:

Accepted Answer

This scenario describes the income effect, which occurs when a change in price leads to a change in consumer purchasing power and, thus, a change in the quantity consumed. In this case, the increase in price leads to a decrease in the consumer's real income (assuming income is held constant), making Coca-Cola relatively more expensive compared to other goods. As a result, the consumer decreases the quantity of Coca-Cola purchased each month.

Question 5

Utils are used by economists to measure the satisfaction a person obtains from consuming a good.

Accepted Answer

This statement is true. Utils are a hypothetical unit of measurement used by economists to represent the subjective satisfaction or happiness that a consumer derives from consuming a good or service.

Question 6

Assume the price of pizza decreases. As a result, your real income increases and you increase the quantity of pizza purchased each month. This is an example of the:

Accepted Answer

The decrease in price causes an increase in real income, leading to an increase in the quantity of pizza purchased. This is the income effect, as the change in price is affecting the consumer's real income and subsequent purchasing power.

Question 7

Assume the price of good X increases. As a result, your real income decreases and you decrease the quantity of good X purchased each month. This is an example of the:

Accepted Answer

The decrease in quantity purchased due to a price increase is an example of the substitution effect, but the decrease in real income and resulting decrease in quantity purchased is the income effect. Therefore, the correct choice is A.

Question 8

JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls. According to the substitution effect, which of the following is most likely to occur?

Accepted Answer

The substitution effect suggests that when the price of cola decreases (due to the fall in sugar prices), cola becomes cheaper relative to sparkling water, leading JoAnn to substitute cola for sparkling water, hence buying more cola and less sparkling water.

Question 9

An increase in the consumption of a good resulting from a reduction in price that makes the good cheaper in relation to other goods is called the:

Accepted Answer

The substitution effect states that as the price of a good decreases, consumers will substitute that good for similar goods that are relatively more expensive. Therefore, an increase in consumption resulting from a reduction in price is called the substitution effect. The income effect refers to the increase or decrease in purchasing power as a result of a change in price and is not applicable in this scenario. The real balance effect refers to the change in purchasing power resulting from changes in the overall level of prices and is also not applicable in this scenario. The inelasticity effect is not a commonly used term in economics.

Question 10

The utility of a good measures its satisfaction rather than its usefulness.

Accepted Answer

Utility refers to the level of satisfaction or happiness that a good brings to its consumer, not its usefulness in practical terms.

Question 11

Assume the price of Nikes decreases. As a result, consumers increase the quantity of Nikes purchased each year and purchase fewer Reeboks. This is an example of the:

Accepted Answer

The decrease in the price of Nikes causes consumers to view them as now more affordable relative to Reeboks, leading to substitution of the two products. This is the textbook definition of the substitution effect. The income effect refers to changes in purchasing behavior due to changes in overall income levels, while the utility effect and consumption effect are not commonly used economic terms.

Question 12

When Pepsi becomes more expensive relative to other beverages, people will purchase less Pepsi. This observation is known as the:

Accepted Answer

The observation described in the question is known as the substitution effect. As the relative price of Pepsi increases, people will seek out other beverages that provide similar satisfaction at a lower price. This is the basic principle of the substitution effect.

Question 13

When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect is called the:

Accepted Answer

The income effect occurs when a change in price allows a consumer to purchase more or less of a good, thereby affecting the consumer's overall purchasing power or "income." In this case, if the price of a good decreases and the consumer is able to purchase more of all goods, their overall income must have increased, allowing them to make more purchases in general. The substitution effect, elasticity effect, and monetary effect do not refer to this specific scenario.

Question 14

Which of the following is the best example of the substitution effect?

Accepted Answer

The substitution effect occurs when the price of one good increases and consumers switch to purchasing a substitute good instead. In this scenario, Joe is buying fewer apples and more oranges, indicating that he is substituting apples for oranges due to the increase in the price of apples. The other options do not reflect the substitution effect.

Question 15

Assume the price of Levi jeans increases. As a result, you decrease the quantity of Levi jeans purchased each month and purchase more Lee jeans. This is an example of the:

Accepted Answer

The situation described is an example of the substitution effect. This effect refers to the change in consumption choices due to a change in the relative prices of goods. In this case, the increase in the price of Levi jeans led to a decrease in the quantity demanded, and consumers switched to a substitute good (Lee jeans) that had become relatively cheaper. The other options (consumption effect, utility effect, income effect) are not appropriate in this particular scenario.

Question 16

When the price of a normal good falls, then:

Accepted Answer

When the price of a normal good falls, both the substitution effect (making the good relatively cheaper compared to others) and the income effect (increasing purchasing power) lead to an increase in quantity demanded.

Question 17

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity demanded because buyers:

Accepted Answer

The substitution effect occurs when consumers react to a price decrease by purchasing more of the cheaper product and less of its substitutes, reflecting a shift in consumption patterns due to the relative price change, not a change in real income.

Question 18

According to the income effect, when the price of automobiles rises, people buy fewer automobiles because:

Accepted Answer

The income effect states that as the price of a good rises, the purchasing power of an individual's income decreases. This means that although the individual's nominal paycheck remains the same, they are effectively able to buy less as prices increase. Therefore, when the price of automobiles rises, people buy fewer automobiles due to the reduced purchasing power of their income.

Question 19

The utility of a good measures its usefulness.

Accepted Answer

The answer of The utility of a good measures its...

Question 20

Assume the price of Advil increases. As a result, you decrease the quantity of Advil purchased each month and purchase more Tylenol. This is an example of the:

Accepted Answer

This is an example of the substitution effect, as you are substituting a more expensive product (Advil) for a cheaper alternative (Tylenol).

Quiz 6: Consumer Choice Theory