Question 1

The substitution effect of a wage decrease in the work-leisure model results in the worker choosing to
A)work less than before.
B)work more than before.
C)possibly work more or less than before.
D)work more with a higher level of consumption.

Accepted Answer

In the work-leisure model, the substitution effect predicts that if the wage rate decreases, the opportunity cost of leisure time decreases relative to the opportunity cost of working. Therefore, the worker will choose to work less and have more leisure time. This is because the worker can still achieve the same level of income with less work, so the incentive to work more is reduced.

Question 2

When a consumer experiences a price increase for an inferior good,it is possible that the income effect is
A)greater than the substitution effect and the demand curve will be downward sloping.
B)greater than the substitution effect and the demand curve will be upward sloping.
C)less than the substitution effect and the demand curve will be upward sloping.
D)less than the substitution effect but the substitution effect is positive and the demand curve will be upward sloping.

Accepted Answer

For an inferior good, if the income effect is greater than the substitution effect, the consumer may buy more of the good when its price increases, leading to an upward sloping demand curve.

Question 3

In the work-leisure model,suppose consumption and leisure are both normal goods.The income effect of a wage increase results in the worker choosing to
A)work less than before.
B)work more than before.
C)possibly work more or less than before.
D)work more than before with a higher level of consumption.

Accepted Answer

The answer of In the work-leisure model,suppose consumption and leisure...

Question 4

A Giffen good can be explained as 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

A Giffen good is a type of inferior good for which an increase in price leads to an increase in quantity demanded, due to the income effect outweighing the substitution effect.

Question 5

Higher education is a normal good.If its price falls
A)the quantity demanded of higher education will fall.
B)the substitution and income effects work in opposite directions.
C)the income effect is positive.
D)higher education will be a Giffen good.

Accepted Answer

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

Question 6

The two "goods" used when economists analyze labor supply are
A)work and leisure.
B)work and consumption.
C)saving and consumption.
D)leisure and consumption.

Accepted Answer

The answer of The two "goods" used when economists analyze...

Question 7

If the consumer's income and all prices simultaneously double,then
A)the optimum consumption bundle will shift outward relative to the old optimum.
B)the optimum consumption bundle will move leftward along the old budget constraint.
C)the optimum consumption bundle will not change.
D)the optimum consumption bundle will shift inward relative to the old optimum.

Accepted Answer

When both income and prices double, the budget constraint remains unchanged in terms of relative prices and purchasing power, so the optimum consumption bundle does not change.

Question 8

Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese.The price of one pound of cheese is $6 and the price of a bottle of wine is $10.The consumer should
A)increase consumption of cheese and decrease consumption of wine, and move to a lower indifference curve.
B)increase consumption of cheese and decrease consumption of wine, and move to a higher indifference curve.
C)increase consumption of wine and decrease consumption of cheese, and move to a higher indifference curve.
D)increase consumption of cheese and decrease consumption of wine, and remain on the same indifference curve.

Accepted Answer

The consumer's marginal rate of substitution (MRS) is 1/2, meaning they are willing to give up 1/2 bottle of wine for 1 pound of cheese. The price ratio is 6/10 or 3/5. Since the MRS (1/2) is less than the price ratio (3/5), the consumer should consume more cheese and less wine to reach a higher indifference curve, where the MRS equals the price ratio.

Question 9

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is inferior and Giffen.When the price of the inferior good on the horizontal axis (K)increases
A)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is less than the income effect.
B)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect.
C)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect.
D)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is less than the income effect.

Accepted Answer

When a good is inferior and Giffen, the income effect dominates the substitution effect, and the consumption of the good decreases as its price increases. However, since the good is also Giffen, the substitution effect is still negative but smaller in magnitude than the income effect. Therefore, the consumer buys less of the good when its price increases, but the decrease is not as much as it would have been if the good were not Giffen. This is represented by a backward-sloping demand curve, which is the defining characteristic of a Giffen good.

Question 10

Suppose that for Edwin,DVDs and trips to the movie theater are perfect substitutes.Currently,Edwin is spending all of his 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 Edwin consumes.

Accepted Answer

Since DVDs and trips to the movie theater are perfect substitutes, the increase in price of DVDs will cause Edwin to substitute them with trips to the movie theater. This is the substitution effect. However, since he is currently spending all his income on trips to the movie theater, he cannot afford to buy any DVDs at the new price. Therefore, there is no income effect. Hence, the overall effect is only the substitution effect and it is equal to the price change, which is doubling in this case. Thus, the answer is C - the substitution effect will be zero.

Question 11

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

Accepted Answer

The change in consumption resulting from a price change that moves the consumer along a given indifference curve to a point with a new marginal rate of substitution is called the substitution effect. This effect shows how consumers substitute cheaper goods for more expensive ones in response to a change in relative prices while still remaining on the same indifference curve. The income effect, by contrast, refers to the change in consumption resulting from a price change that causes a shift in the consumer's budget constraint, affecting the quantity demanded of all goods. Giffen goods and inferior goods refer to specific types of goods that may defy the law of demand by having upward sloping demand curves when the price increases.

Question 12

When considering household saving,the relative price between "consuming when young" and "consuming when old" is the
A)consumption rate.
B)interest rate.
C)prime rate.
D)federal funds rate.

Accepted Answer

The relative price between "consuming when young" and "consuming when old" is determined by the interest rate. A higher interest rate makes it more attractive to save for future consumption, whereas a lower interest rate makes it more attractive to consume now. Therefore, the interest rate is a key factor to consider when making decisions about household saving.

Question 13

A Giffen good is one in which the quantity demanded rises as the price rises because the income effect
A)reinforces the substitution effect.
B)reinforces and is greater than the substitution effect.
C)counteracts but is smaller than the substitution effect.
D)counteracts and is greater than the substitution effect.

Accepted Answer

The answer of A Giffen good is one in which...

Question 14

Economic theory predicts that an increase in wages
A)will cause a wage earner to work more.
B)will cause a wage earner to work less.
C)will cause a wage earner to be more productive.
D)might cause a wage earner to work more or work less.

Accepted Answer

The effect of an increase in wages on a wage earner's choice to work more or less is ambiguous and depends on a variety of factors such as the income and substitution effects. The income effect suggests that an increase in wages would increase a worker's demand for leisure, causing them to work less. However, the substitution effect suggests that an increase in wages would make work more attractive relative to leisure, causing the worker to work more. Therefore, it is possible for a wage earner to work more or less when their wages increase. Additionally, the effect of an increase in wages on a worker's productivity may depend on the specific job and individual motivations.

Question 15

If the substitution effect is partly or fully offset by the income effect,we know that the good in question is a(n)
A)complementary good.
B)inferior good.
C)luxury good.
D)normal good.

Accepted Answer

If the income effect offsets the substitution effect, we can conclude that the consumer will purchase less of the good as their income increases, indicating that the good is an inferior good.

Question 16

If the consumer's income and all prices simultaneously decrease by one-half,then
A)the optimum will shift outward relative to the old optimum.
B)the optimum will move leftward along the old budget constraint.
C)the optimum will shift inward relative to the old optimum.
D)the optimum will not change.

Accepted Answer

When both income and prices decrease by half, the budget constraint will also shift outward by the same proportion. Therefore, the relative position of the optimum will not change, and the optimal bundle of goods will remain the same. Hence, the answer is D - the optimum will not change.

Question 17

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is inferior,but not Giffen.When the price of the inferior good on the horizontal axis (K)decreases
A)the substitution effect and income effect both cause an increase in the consumption of K.
B)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect.
C)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect.
D)the substitution effect and income effect both cause a decrease in the consumption of K.

Accepted Answer

Since the good on the horizontal axis is inferior, a decrease in its price will lead to an increase in the real income of the consumer. This will result in the income effect, causing a decrease in the consumption of K. However, since K is an inferior good, the substitution effect will cause an increase in the consumption of K, which will be greater than the decrease caused by the income effect. Therefore, the net effect will be an increase in the consumption of K, and the best choice is C.

Question 18

If the price of hamburgers increases,the substitution effect works to
A)decrease the quantity of hamburgers supplied.
B)increase the number of hamburger buns demanded.
C)decrease the quantity of hamburgers demanded.
D)increase the number of hamburger buns supplied.

Accepted Answer

When the price of hamburgers increases, consumers will likely switch to substitute goods, such as hot dogs or chicken sandwiches, as they become relatively cheaper. This decrease in demand for hamburgers is known as the substitution effect. Therefore, choice C is the best answer.

Question 19

An individual's demand curve for a good is derived by
A)varying the income level and observing the resulting total utility derived from both goods.
B)varying the price of one good and observing the resulting quantities of the other good.
C)shifting the budget line to the left and calculating the loss in total utility.
D)varying the 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 for a good is determined by its price, so as the price changes, the quantity demanded will also change, thereby creating a demand curve.

Question 20

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is normal.When the price of the normal good on the horizontal axis (K)increases
A)the substitution effect and income effect both cause an increase in the consumption of K.
B)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect.
C)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect.
D)the substitution effect and income effect both cause a decrease in the consumption of K.

Accepted Answer

The answer of Consider the indifference curve map and budget...

Quiz 21: The Theory of Consumer Choice

The substitution effect of a wage decrease in the work-leisure model results in the worker choosing to

When a consumer experiences a price increase for an inferior good,it is possible that the income effect is

In the work-leisure model,suppose consumption and leisure are both normal goods.The income effect of a wage increase results in the worker choosing to

A Giffen good can be explained as a good for which an increase in the price

Higher education is a normal good.If its price falls

The two "goods" used when economists analyze labor supply are

If the consumer's income and all prices simultaneously double,then

Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese.The price of one pound of cheese is $6 and the price of a bottle of wine is $10.The consumer should

Consider the indifference curve map and budget constraint for two goods (B and K) .Suppose the good on the horizontal axis (K) is inferior and Giffen.When the price of the inferior good on the horizontal axis (K) increases

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

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

When considering household saving,the relative price between "consuming when young" and "consuming when old" is the

A Giffen good is one in which the quantity demanded rises as the price rises because the income effect

Economic theory predicts that an increase in wages

If the substitution effect is partly or fully offset by the income effect,we know that the good in question is a(n)

If the consumer's income and all prices simultaneously decrease by one-half,then

Consider the indifference curve map and budget constraint for two goods (B and K) .Suppose the good on the horizontal axis (K) is inferior,but not Giffen.When the price of the inferior good on the horizontal axis (K) decreases

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

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

Consider the indifference curve map and budget constraint for two goods (B and K) .Suppose the good on the horizontal axis (K) is normal.When the price of the normal good on the horizontal axis (K) increases