Question 1

Using the graph shown, construct a demand curve for M&M's given an income of $10.

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Question 2

Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.

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Question 3

Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. Carefully label all curves and axes. What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates.)

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Question 4

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

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Question 5

Janet knows that she will ultimately face retirement. Assume that Janet will experience two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income. Janet can earn $250,000 during her working period and nothing in her retirement period. She must both save and consume in her work period and can earn 10 percent interest on her savings.
a.Use a graph to demonstrate Janet's budget constraint.
b.On your graph, show Janet at an optimal level of consumption in the work period equal to $150,000. What is the implied optimal level of consumption in her retirement period?
c.Now, using your graph from part b above, demonstrate how Janet will be affected by an increase in the interest rate on savings to 14 percent. Discuss the role of income and substitution effects in determining whether Janet will increase, or decrease her savings in the work period.

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Question 6

Draw indifference curves that reflect the following preferences.
a.pencils with white erasers and pencils with pink erasers
b.left shoes and right shoes
c.potatoes and rice
d.income and polluted water

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Question 7

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good.

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Question 8

Explain the difference between inferior and normal goods. As a developing economy experiences increases in income (measured by GDP), what would you predict to happen to demand for inferior goods?

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Quiz 21: The Theory of Consumer Choice

Using the graph shown, construct a demand curve for M&M's given an income of $10.

Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

Draw indifference curves that reflect the following preferences. a.pencils with white erasers and pencils with pink erasers b.left shoes and right shoes c.potatoes and rice d.income and polluted water

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good.

Explain the difference between inferior and normal goods. As a developing economy experiences increases in income (measured by GDP), what would you predict to happen to demand for inferior goods?