Question 1

Which of the following is most likely an inferior good?
A)an antique car
B)gasoline
C)a bus ticket
D)an airline ticket

Accepted Answer

A bus ticket is most likely an inferior good because as income increases, individuals are more likely to purchase their own mode of transportation (i.e. a car), leading to a decrease in demand for bus tickets.

Question 2

Figure 21-8
 
-Refer to Figure 21-8.If the consumer is currently at point A in the figure,a movement to point B as a result of a decrease in the price of potato chips represents the
A)substitution effect.
B)income effect.
C)budget effect.
D)price effect.

Accepted Answer

A movement from point A to point B due to a decrease in price of potato chips represents the substitution effect, as the consumer switches from a relatively expensive alternative (alternative Y) to a relatively cheaper alternative (potato chips). The income effect relates to the change in purchasing power of the consumer due to a change in income, while the budget effect and price effect are not relevant in this scenario.

Question 3

If the price of a good increases,all else equal,consumers perceive
A)an increase in purchasing power if the good is an inferior good.
B)an increase in income if the price increase occurs for a normal good.
C)a decrease in purchasing power.
D)a net gain in purchasing power if they decrease consumption of some goods.

Accepted Answer

If the price of a good increases, all else equal, consumers will have less purchasing power because they will have to spend more money to purchase the same quantity of the good. This is true regardless of whether the good is an inferior or normal good, and whether or not they decrease consumption of some goods. Therefore, the correct answer is C - consumers perceive a decrease in purchasing power.

Question 4

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)Budget effect
B)Preference effect
C)Substitution effect
D)Income effect

Accepted Answer

The substitution effect occurs when a change in price causes a consumer to switch from one good to another along the same indifference curve. As the consumer moves along the indifference curve to a new bundle of goods with a new marginal rate of substitution, the substitution effect is taking place. The budget effect concerns changes in the consumer's purchasing power due to the change in price, while the income effect reflects changes in the consumer's income due to the change in price. The preference effect is not a recognized economic concept.

Question 5

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $100 and currently optimizes at point A.When the price of marshmallows decreases to $5,which point will the optimizing consumer choose?
A)Point A
B)Point B
C)Point C
D)Point D

Accepted Answer

When the price of marshmallows decreases to $5, the budget constraint will shift outwards, allowing the consumer to purchase more marshmallows at the same level of income. Point B is the new optimal point since it lies on the new budget constraint and provides the consumer with the highest level of utility at the new prices.

Question 6

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40.If the price of chocolate chips is $4.00 and the price of marshmallows is $4.00,the optimizing consumer would choose to purchase
A)9 marshmallows and 6 chocolate chips.
B)10 marshmallows and 10 chocolate chips.
C)5 marshmallows and 5 chocolate chips.
D)3 marshmallows and 9 chocolate chips.

Accepted Answer

The consumer's budget constraint is $40, and both goods cost $4 each. Therefore, the consumer can purchase a combination of goods that total $40. Option C, with 5 marshmallows and 5 chocolate chips, costs $20 for each, totaling $40, which fits the budget constraint.

Question 7

Assume that a college student purchases only coffee and Snickers.If coffee is an inferior good and Snickers is a normal good,then the income effect associated with an increase in the price of a Snickers will result in
A)a decrease in the consumption of Snickers and a decrease in the consumption of coffee.
B)a decrease in the consumption of Snickers and an increase in the consumption of coffee.
C)an increase in the consumption of Snickers and an increase in the consumption of coffee.
D)an increase in the consumption of Snickers and a decrease in the consumption of coffee.

Accepted Answer

When the price of Snickers increases, the real income of the student effectively decreases. Since Snickers is a normal good, the student will consume less of it. Coffee, being an inferior good, will see an increase in consumption as the student substitutes away from the more expensive Snickers.

Question 8

Figure 21-7
 
-Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $4.This consumer will choose a consumption bundle where the marginal rate of substitution is
A)2.
B)2/3.
C)1/2.
D)1/3.

Accepted Answer

The marginal rate of substitution (MRS) is the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility. It is equal to the ratio of the prices of the two goods. Here, the price of Skittles is $2 and the price of M&M's is $4, so the MRS is 2/4, which simplifies to 1/2.

Question 9

The consumer's optimum is where
A)MUₓ/MUᵧ = Pᵧ/Pₓ
B)MUₓ/Pᵧ = MUᵧ/Pₓ
C)Pₓ/MUₓ = Pᵧ/MUᵧ
D)MUₓ/MUᵧ = Pₓ/Pᵧ

Accepted Answer

The consumer's optimum is achieved when the marginal rate of substitution (MUₓ/MUᵧ) equals the price ratio (Pₓ/Pᵧ), indicating that the consumer is maximizing utility given their budget constraint.

Question 10

Figure 21-7
 
-Refer to Figure 21-7.Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B.According to the graph,what change forces the consumer to move to point A?
A)a decrease in the price of Skittles
B)a decrease in the price of M&M's
C)an increase in the price of Skittles
D)an increase in the price of M&M's

Accepted Answer

An increase in the price of M&M's would cause the budget line to pivot inward, leading the consumer to move from point B to point A, where fewer M&M's are consumed.

Question 11

Figure 21-8
 
-Refer to Figure 21-8.The shift from point B to point C in the figure is due to the
A)substitution effect of an increase in the price of potato chips.
B)income effect of an increase in the price of potato chips.
C)substitution effect of a decrease in the price of potato chips.
D)income effect of a decrease in the price of potato chips.

Accepted Answer

The answer of Figure 21-8
 
-Refer to Figure 21-8.The shift...

Question 12

Assume that a college student purchases only coffee and Snickers.The substitution effect associated with a decrease in the price of a Snickers will result in
A)an increase in the consumption of coffee only.
B)a decrease in the consumption of coffee only.
C)an increase in the consumption of Snickers and a decrease in the consumption of coffee.
D)a decrease in the consumption of Snickers and an increase in the consumption of coffee.

Accepted Answer

The answer of Assume that a college student purchases only...

Question 13

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $80.If the price of chocolate chips is $4.00 and the price of marshmallows is $4.00,the optimizing consumer would choose to purchase
A)9 marshmallows and 6 chocolate chips.
B)10 marshmallows and 10 chocolate chips.
C)5 marshmallows and 5 chocolate chips.
D)3 marshmallows and 9 chocolate chips.

Accepted Answer

The consumer has $80 and both goods cost $4 each. Buying 10 marshmallows and 10 chocolate chips uses the entire budget ($4 x 10 + $4 x 10 = $80), optimizing the consumer's utility.

Question 14

Assume that a college student purchases only coffee and Snickers.If both coffee and Snickers are normal goods,then the income effect associated with a decrease in the price of a Snickers will result in
A)a decrease in the consumption of Snickers and an increase in the consumption of coffee.
B)a decrease in the consumption of Snickers and a decrease in the consumption of coffee.
C)an increase in the consumption of Snickers and a decrease in the consumption of coffee.
D)an increase in the consumption of Snickers and an increase in the consumption of coffee.

Accepted Answer

When the price of Snickers decreases, the student effectively has more income to spend, leading to an increase in the consumption of both normal goods, Snickers and coffee.

Question 15

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40.Which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $4?
A)$2.00, 3
B)$2.00, 9
C)$4.00, 3
D)$4.00, 9

Accepted Answer

According to the diagram, at a chocolate chips price of $4, the consumer's marginal utility of marshmallows is equal to the price of $2, and she demands 9 marshmallows. This combination of price and quantity is on her demand curve for marshmallows. Therefore, the correct choice is B.

Question 16

When the price of a good increases,all else equal,the higher price
A)reduces the consumer's set of buying opportunities.
B)leads to a parallel shift of the linear budget constraint.
C)will necessarily lead to an increase in the consumption of goods whose price did not change.
D)generally discourages the consumption of inferior goods.

Accepted Answer

When the price of a good increases, it reduces the purchasing power of the consumer, leading to a decrease in the set of buying opportunities. The consumer will have to spend more money on the same quantity of the good, leaving less money to spend on other goods. Therefore, the answer is A. B is incorrect because a parallel shift of the linear budget constraint would occur only with a change in income or a change in the price of another good. C is incorrect because the consumption of goods whose price did not change would be unaffected unless they are complements or substitutes of the good whose price increased or the consumer's income changes. D is incorrect because the consumption of inferior goods increases when the consumer's income decreases, not when the price of the good increases.

Question 17

Figure 21-7
 
-Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $2.This consumer will choose to optimize by consuming
A)bundle a.
B)bundle B.
C)bundle C.
D)bundle D.

Accepted Answer

The answer of Figure 21-7
 
-Refer to Figure 21-7.Assume that...

Question 18

What are the two effects of a change in a price that a consumer experiences?
A)the income effect and the budget effect
B)the complement effect and the substitute effect
C)the price effect and the preference effect
D)the income effect and the substitution effect

Accepted Answer

When the price of a product changes, a consumer experiences two effects: the income effect and the substitution effect. The income effect refers to the change in purchasing behavior caused by the change in the consumer's purchasing power due to the change in price. The substitution effect refers to the change in purchasing behavior caused by the change in relative prices between different goods, leading the consumer to substitute one product for another. Choice D (the income effect and the substitution effect) describes these two effects accurately.

Question 19

Figure 21-8
 
-Refer to Figure 21-8.If the consumer was initially at point A in the figure,a movement from point B to point C as a result of a decrease in the price of potato chips represents the
A)substitution effect.
B)income effect.
C)budget effect.
D)price effect.

Accepted Answer

The answer of Figure 21-8
 
-Refer to Figure 21-8.If the...

Question 20

Figure 21-9
 
-Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40,the price of a bag of marshmallows is $2,and the price of a bag of chocolate chips is $2.The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate chips?
A)bundle A
B)bundle B
C)bundle C
D)bundle D

Accepted Answer

The consumer's budget allows for 20 units (40/2) of either good. Bundle C is on the budget line, maximizing utility within the budget constraint.

Quiz 21: The Theory of Consumer Choice

Which of the following is most likely an inferior good?

Figure 21-8 -Refer to Figure 21-8.If the consumer is currently at point A in the figure,a movement to point B as a result of a decrease in the price of potato chips represents the

If the price of a good increases,all else equal,consumers perceive

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

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $100 and currently optimizes at point A.When the price of marshmallows decreases to $5,which point will the optimizing consumer choose?

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40.If the price of chocolate chips is $4.00 and the price of marshmallows is $4.00,the optimizing consumer would choose to purchase

Assume that a college student purchases only coffee and Snickers.If coffee is an inferior good and Snickers is a normal good,then the income effect associated with an increase in the price of a Snickers will result in

Figure 21-7 -Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $4.This consumer will choose a consumption bundle where the marginal rate of substitution is

The consumer's optimum is where

Figure 21-7 -Refer to Figure 21-7.Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B.According to the graph,what change forces the consumer to move to point A?

Figure 21-8 -Refer to Figure 21-8.The shift from point B to point C in the figure is due to the

Assume that a college student purchases only coffee and Snickers.The substitution effect associated with a decrease in the price of a Snickers will result in

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $80.If the price of chocolate chips is $4.00 and the price of marshmallows is $4.00,the optimizing consumer would choose to purchase

Assume that a college student purchases only coffee and Snickers.If both coffee and Snickers are normal goods,then the income effect associated with a decrease in the price of a Snickers will result in

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40.Which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $4?

When the price of a good increases,all else equal,the higher price

Figure 21-7 -Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $2.This consumer will choose to optimize by consuming

What are the two effects of a change in a price that a consumer experiences?

Figure 21-8 -Refer to Figure 21-8.If the consumer was initially at point A in the figure,a movement from point B to point C as a result of a decrease in the price of potato chips represents the

Figure 21-9 -Refer to Figure 21-9.Assume that the consumer depicted in the figure has an income of $40,the price of a bag of marshmallows is $2,and the price of a bag of chocolate chips is $2.The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate chips?