Question 1

Suppose a consumer must choose between the consumption of sandwiches and pizza. If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the vertical axis, and if the price of a pizza is R100 and the price of a sandwich is R50, then the slope of the budget constraint is:

Accepted Answer

The answer of Suppose a consumer must choose between the...

Question 2

If a good is a Giffen good, then

Accepted Answer

A Giffen good is a product that people consume more of as the price rises, which goes against the law of demand. As such, the demand curve slopes upward for Giffen goods.

Question 3

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

Accepted Answer

Since right shoes and left shoes are perfect substitutes and have no real differentiation, changing the relative price of one over the other will not significantly affect consumer behavior. Therefore, the substitution effect will be negligible.

Question 4

An individual's demand curve for a good is derived by

Accepted Answer

An individual's demand curve for a good is derived by varying the price of that good and observing the resulting quantities demanded of that good. This is because the demand curve shows the relationship between the price and quantity demanded of a good, holding all other factors constant. By observing the different quantities demanded at different prices, we can plot the demand curve.

Question 5

The slope at any point on an indifference curve is known as the

Accepted Answer

The slope at any point on an indifference curve is known as the marginal rate of substitution. This is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of utility.

Question 6

Last week, the reserve bank took steps to lower interest rates by one percentage point. This means that

Accepted Answer

Lowering interest rates reduces the return on savings, making current consumption relatively cheaper compared to saving for future consumption, thus lowering the opportunity cost of current consumption.

Question 7

Higher education is a normal good. If its price falls

Accepted Answer

The answer of Higher education is a normal good. If...

Question 8

Suppose that Mfundo gets an increase in his wage and he decides to work fewer hours. For him, the substitution effect of the wage change is

Accepted Answer

The substitution effect of the wage change is the change in labor leisure choice due solely to the change in the relative wage rate. In this case, the increase in wage leads to an increase in the opportunity cost of leisure, making work more attractive relative to leisure. Therefore, the substitution effect leads to an increase in labor supply. However, since Mfundo chose to work fewer hours, the income effect must have dominated the substitution effect. The income effect is the change in labor-leisure choice due solely to the change in income. In Mfundo's case, the increase in wage leads to an increase in income, which could make leisure more attractive relative to work. Therefore, the income effect leads to a decrease in labor supply. The magnitude of the income effect is greater than that of the substitution effect, leading to a decrease in labor supply in total. Thus, the substitution effect is less than the income effect.

Question 9

Bongiwe spends all of her income on warm-up suits and running shoes, and the price of a warm-up suit is four times as large as the price of a pair of shoes. Then, in order to maximise total utility, Bongiwe should

Accepted Answer

In order to maximize total utility, Bongiwe should allocate her income between warm-up suits and running shoes in such a way that the marginal utility per unit of money spent on each item is equal. 
Assuming that Bongiwe spends her entire income on these two items, let P be the price of a pair of shoes. Then the price of a warm-up suit is 4P. 
Let MUshoes be the marginal utility of a pair of shoes and MUwups be the marginal utility of a warm-up suit. Bongiwe should continue to buy both items until the marginal utility per dollar spent on each item is equal. 
In other words, 
MUshoes / P = MUwups / 4P 
Simplifying this equation, we get: 
MUshoes = MUwups / 4 
This means that the marginal satisfaction of a warm-up suit is four times the marginal satisfaction of a pair of shoes. 
Therefore, Bongiwe should buy both items until the marginal satisfaction of a warm-up suit is four times the marginal satisfaction of a pair of running shoes. So, the best choice is D.

Question 10

Suppose Roberto always consumes two packets of sugar with his tea. Roberto's indifference curves for sugar and tea are

Accepted Answer

The answer of Suppose Roberto always consumes two packets of...

Question 11

Indifference curves tend to be bowed inward because of diminishing

Accepted Answer

Indifference curves show the different combinations of two goods that give a consumer the same level of satisfaction. The slope of the indifference curve represents the marginal rate of substitution (MRS), which is the rate at which a consumer is willing to give up one good in exchange for more of the other. As a consumer consumes more of one good, the MRS decreases (diminishing marginal utility) and the indifference curve becomes more bowed inward. Therefore, the correct answer is A, as indifference curves are bowed inward because of diminishing marginal rates of substitution.

Question 12

The marginal rate of substitution between two goods equals the

Accepted Answer

The marginal rate of substitution (MRS) measures the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility. It is calculated as the ratio of the marginal utility of one good to the marginal utility of the other good. Therefore, the correct answer is A, which states that the MRS equals the marginal utility of one good divided by the marginal utility of the other good.

Question 13

If the substitution effect of a lowered price is partly or fully offset by the income effect, we know that the good in question is

Accepted Answer

When the income effect partly or fully offsets the substitution effect, it means that as the price of the good decreases, the consumer's purchasing power increases, leading them to purchase more of a higher-quality good, resulting in increased consumption. This happens with inferior goods, which are goods for which demand decreases as income increases. As a result, a decrease in price increases demand, but the increase in purchasing power also leads to consumers buying higher-quality goods, counteracting the price decrease.

Question 14

In the upward-sloping portion of the individual labour supply curve, the substitution effect is __________ the income effect.

Accepted Answer

The answer of In the upward-sloping portion of the individual...

Question 15

Which of the following statements is not true with regard to the standard properties of indifference curves?

Accepted Answer

Indifference curves are typically bowed inward (convex to the origin) due to the assumption of diminishing marginal rates of substitution, so this statement is true, not false.

Question 16

For dessert, Pranisha has the choice between cheesecake and apple pie. Pranisha would gain marginal utility of 50 from a piece of cheesecake, while the price of cheesecake is R50 per slice. Pranisha would gain marginal utility of 30 from a piece of apple pie, and the price of apple pie is R30 per slice. Given this information, Ingrid should buy

Accepted Answer

The marginal utility per unit of currency is the same for both desserts (1 utility per R1), so Pranisha is indifferent between the two options.

Question 17

Nathalie is maximising total utility while consuming food and clothing. Her marginal utility from food and clothing is 50 and 25, respectively. If clothing is priced at R100 per unit, the price of food must

Accepted Answer

To maximize utility, the ratio of marginal utility to price should be equal for all goods. Therefore, MU_food/Price_food = MU_clothing/Price_clothing. Given MU_food = 50, MU_clothing = 25, and Price_clothing = R100, Price_food must be R200 to satisfy 50/Price_food = 25/100.

Question 18

Indifference curves for perfect substitutes are

Accepted Answer

Indifference curves for perfect substitutes are straight lines because the consumer is willing to substitute one good for another at a constant rate. The marginal rate of substitution (MRS) is constant along a straight line, indicating that the consumer is willing to give up a fixed amount of one good to get one more unit of the other good.

Question 19

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

Accepted Answer

The change in consumption that results from a price change moving the consumer along a given indifference curve is known as the substitution effect. The income effect refers to the change in consumption resulting from a change in income, while the normal effect describes the change in consumption for a normal good as income changes, and the inferior effect describes the change in consumption for an inferior good as income changes.

Question 20

If the price of hamburgers increases, the substitution effect works to

Accepted Answer

When the price of hamburgers increases, consumers will likely choose to consume less hamburgers and opt for substitutes such as hot dogs or chicken sandwiches. This results in a decrease in the quantity of hamburgers demanded.

Quiz 5: Background to Demand: Consumer Choices