Question 1

A Giffen good is a good for which an increase in the price
A) decreases the quantity supplied.
B) increases the quantity supplied.
C) decreases the quantity demanded.
D) increases the quantity demanded.

Accepted Answer

The answer of A Giffen good is a good for...

Question 2

The substitution effect of a price change is depicted by a
A) movement along the budget constraint holding satisfaction constant.
B) shift in the budget constraint at the old prices.
C) movement along the consumer's new indifference curve at the new prices.
D) movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.

Accepted Answer

The answer of The substitution effect of a price change...

Question 3

If a good is a Giffen good,then
A) the supply curve is downward sloping.
B) the demand curve is upward sloping.
C) the demand curve is horizontal.
D) there is no optimal level of consumption for the consumer.

Accepted Answer

A Giffen good is a rare case where the demand curve slopes upward due to a strong income effect overwhelming the substitution effect. As the price of the good increases, consumers have to spend more of their income on it, reducing their ability to purchase other goods. This, in turn, makes the good more valuable to them and they may actually consume more of it despite the higher price. Therefore, the demand curve for a Giffen good is upward sloping.

Question 4

Consumer theory provides the foundation for understanding demand curves because
A) each point on a demand curve represents an optimal choice point.
B) consumers purchase more inferior goods than normal goods.
C) increases in income cause the budget constraint to rotate inward along one axis, which changes the consumer's purchases.
D) increases in income cause the budget constraint to rotate outward along one axis, which changes the consumer's purchases.

Accepted Answer

Consumer theory is based on the idea that individuals maximize their utility (satisfaction) subject to a budget constraint. This leads to the creation of a demand curve, which shows the quantity of a good that consumers are willing to buy at different prices. Each point on the demand curve represents an optimal choice point, where consumers are getting the most satisfaction (utility) they can given their budget constraint and the price of the good.

Question 5

Suppose that for Emily,DVDs and trips to the movie theater are perfect substitutes.Currently,Emily is spending all of her income on trips to the movie theater.If the price of DVDs doubles,the substitution effect will
A) be two times the income effect.
B) be half the income effect.
C) be zero.
D) always increase the number of trips to the movie theater Emily makes.

Accepted Answer

Since DVDs and trips to the movie theater are perfect substitutes, the substitution effect will be complete. Emily will switch all of her consumption from DVDs to trips to the movie theater, and her consumption bundle will remain unchanged. Therefore, the income effect will be zero.

Question 6

A Giffen good is a good for which
A) an increase in the price raises the quantity demanded.
B) the income effect outweighs the substitution effect.
C) an increase in the price decreases the quantity demanded.
D) Both a) and b) are correct.

Accepted Answer

The answer of A Giffen good is a good for...

Question 7

Steak and pasta are normal goods.When the price of pasta falls,the substitution effect by itself causes
A) the consumer to feel richer, so the consumer buys more steak.
B) the consumer to feel richer, so the consumer buys less steak.
C) steak to be relatively more expensive, so the consumer buys less steak.
D) steak to be relatively less expensive, so the consumer buys more steak.

Accepted Answer

When the price of pasta falls, pasta becomes relatively cheaper compared to steak, leading consumers to substitute pasta for steak, thus buying less steak.

Question 8

We can use the theory of consumer choice to analyze
A) why most demand curves slope downward.
B) the tradeoff between work and leisure
C) how interest rates affect household saving.
D) All of the above are correct.

Accepted Answer

The theory of consumer choice can be applied to all of the given scenarios. It explains how consumers make choices based on their preferences and budget constraints, which can be used to explain why demand curves slope downward, the trade-off between work and leisure, and how interest rates affect household saving.

Question 9

Given a consumer's indifference map,the demand curve for a good can
A) be derived by moving a consumer's budget constraint as her income falls.
B) be derived by moving a consumer's budget constraint as her income rises.
C) be derived by moving a consumer's budget constraint as the market price of one good changes.
D) not be derived from consumer theory.

Accepted Answer

The demand curve for a good can be derived by moving a consumer's budget constraint as the market price of one good changes. The consumer's indifference map shows the different combinations of goods that provide the same level of utility or satisfaction, and the budget constraint shows the combinations of goods that the consumer can afford given her income and the market prices of the goods. By changing the price of one good, the budget constraint shifts, and the consumer will choose a different bundle of goods along her indifference curve, which allows us to derive the demand curve for the good in question.

Question 10

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point illustrating the new marginal rate of substitution is called the
A) income effect.
B) substitution effect.
C) Giffen good effect.
D) inferior good effect.

Accepted Answer

The change in consumption that results from a price change moving the consumer along a given indifference curve to a point illustrating the new marginal rate of substitution is called the substitution effect. The income effect, on the other hand, takes into account the change in purchasing power caused by a change in price, while the Giffen good effect refers to a situation where the demand for an inferior good increases as a result of its price rising, which is rare. Therefore, the correct answer is B, substitution effect.

Question 11

All Giffen goods are
A) inferior goods, and all inferior goods are Giffen goods.
B) inferior goods, but not all inferior goods are Giffen goods.
C) normal goods, but not all normal goods are Giffen goods.
D) normal goods, and all normal goods are Giffen goods.

Accepted Answer

All Giffen goods are inferior goods, but not all inferior goods are Giffen goods. Giffen goods are a special type of inferior good where the demand for the good increases when the price of the good increases, which goes against the law of demand. However, not all inferior goods exhibit this behavior, so choice B is the best answer.

Question 12

Figure 21-22
 
-Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The demand curve can be illustrated as the movement from
A) D to E.
B) D to C.
C) C to E.
D) E to D.

Accepted Answer

When the price of X decreases from $80 to $20, the consumer can afford more of X, leading to a new optimal choice. The movement from D to E on the demand curve illustrates this change in quantity demanded due to the price decrease.

Question 13

Figure 21-22
 
-Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The income effect can be illustrated as the movement from
A) D to E.
B) D to C.
C) C to E.
D) E to D.

Accepted Answer

The answer of Figure 21-22
 
-Refer to Figure 21-22.When the...

Question 14

Pepsi and pizza are normal goods.When the price of pizza rises,the substitution effect causes Pepsi to be relatively
A) more expensive, so the consumer buys more Pepsi.
B) more expensive, so the consumer buys less Pepsi.
C) less expensive, so the consumer buys more Pepsi.
D) less expensive, so the consumer buys less Pepsi.

Accepted Answer

The answer of Pepsi and pizza are normal goods.When the...

Question 15

When we derive the demand curve for a good,we should remember that the
A) income effect must be greater than the substitution effect.
B) substitution effect must be greater than the income effect.
C) substitution effect must be in the same direction as the income effect.
D) income effect and the substitution effect may work in the same or in opposite directions.

Accepted Answer

The income effect and substitution effect may work in the same or in opposite directions depending on the good and the consumer's preferences. Therefore, the demand curve can take different shapes and slopes depending on the relative strength of these effects.

Question 16

Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution?
A) the budget effect
B) the preference effect
C) the substitution effect
D) the income effect

Accepted Answer

The substitution effect is the effect of a change in price that alters the relative prices of the two goods and therefore leads consumers to substitute away from the now relatively more expensive good and towards the now relatively cheaper good. This change in consumption leads the consumer to a new point on the same indifference curve, with a new marginal rate of substitution. The other effects - the budget effect, the income effect, and the preference effect - do not necessarily result in the consumer moving along the same indifference curve to a point with a new marginal rate of substitution.

Question 17

An individual's demand curve for a good is derived by varying the
A) income level and observing the resulting total utility derived from both goods.
B) price of one good and observing the resulting quantities of the other good.
C) budget line to the left and calculating the loss in total utility.
D) price of one good and observing the resulting quantities demanded of that good.

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 of a good and the quantity that consumers are willing and able to buy at that price, while holding other factors constant.

Question 18

Which of the following descriptions best depicts the substitution effect?
A) the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant
B) the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant
C) the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant
D) the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change

Accepted Answer

The substitution effect refers to the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant. This means that if the price of one good increases, the consumer will likely substitute it with a cheaper alternative in order to maintain their level of satisfaction. Therefore, option C is the best choice as it describes the substitution effect.

Question 19

Figure 21-22
 
-Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The substitution effect can be illustrated as the movement from
A) D to E.
B) D to C.
C) C to E.
D) E to D.

Accepted Answer

When the price of X decreases to $20, the consumer's optimal choice will shift due to the substitution effect. The substitution effect means that the consumer will substitute the cheaper good (in this case, X) for the more expensive good (Y). As a result, the consumer will move along the indifference curve from point D to point C, where the ratio of the prices of X and Y is equal to the ratio of their marginal utilities. Therefore, the best choice is now at point C.

Question 20

A consumer consumes two normal goods,sandwiches and milk.When the price of milk is $0.50 per glass,the consumer purchases 40 glasses.When the price rises to $0.65 per glass,the consumer purchases 30 glasses.We can use the information provided by the consumer's optimum choices to derive the
A) demand curve for milk.
B) demand curve for sandwiches.
C) supply curve for milk.
D) labor-leisure tradeoff.

Accepted Answer

To derive the demand curve for milk, we need to find out how the quantity demanded of milk changes in response to a change in its price. Here, we have two data points:

- When the price of milk is $0.50 per glass, the consumer buys 40 glasses.
- When the price of milk increases to $0.65 per glass, the consumer buys 30 glasses.

Using these data points, we can calculate the price elasticity of demand for milk as follows:

% Change in Quantity Demanded = (New Quantity Demanded - Initial Quantity Demanded) / Initial Quantity Demanded x 100%
% Change in Price = (New Price - Initial Price) / Initial Price x 100%

Using the first data point as the initial point and the second data point as the new point, we get:

% Change in Quantity Demanded = (30 - 40) / 40 x 100% = -25%
% Change in Price = (0.65 - 0.5) / 0.5 x 100% = 30%

Therefore, the price elasticity of demand for milk is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
= -25% / 30% = -0.83

Since the price elasticity of demand is negative, we know that milk is a normal good (meaning that as the price of milk increases, the consumer buys less of it). To plot the demand curve for milk, we can use the initial data point (P=$0.50, Q=40) as one point on the curve and then use the price elasticity (-0.83) to find the slope of the curve at that point. One possible demand curve for milk is shown in the graph below:

![Demand Curve for Milk](https://i.imgur.com/7VKeDfL.png)

Quiz 21: The Theory of Consumer Choice.

A Giffen good is a good for which an increase in the price

The substitution effect of a price change is depicted by a

If a good is a Giffen good,then

Consumer theory provides the foundation for understanding demand curves because

Suppose that for Emily,DVDs and trips to the movie theater are perfect substitutes.Currently,Emily is spending all of her income on trips to the movie theater.If the price of DVDs doubles,the substitution effect will

A Giffen good is a good for which

Steak and pasta are normal goods.When the price of pasta falls,the substitution effect by itself causes

We can use the theory of consumer choice to analyze

Given a consumer's indifference map,the demand curve for a good can

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point illustrating the new marginal rate of substitution is called the

All Giffen goods are

Figure 21-22 -Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The demand curve can be illustrated as the movement from

Figure 21-22 -Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The income effect can be illustrated as the movement from

Pepsi and pizza are normal goods.When the price of pizza rises,the substitution effect causes Pepsi to be relatively

When we derive the demand curve for a good,we should remember that the

Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution?

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

Which of the following descriptions best depicts the substitution effect?

Figure 21-22 -Refer to Figure 21-22.When the price of X is $80,the price of Y is $20,and the consumer's income is $160,the consumer's optimal choice is D.Then the price of X decreases to $20.The substitution effect can be illustrated as the movement from

A consumer consumes two normal goods,sandwiches and milk.When the price of milk is $0.50 per glass,the consumer purchases 40 glasses.When the price rises to $0.65 per glass,the consumer purchases 30 glasses.We can use the information provided by the consumer's optimum choices to derive the