Question 1

Which of the following statements about the budget constraint is true? The slope of the budget constraint is: (i) the rate at which a consumer can trade one good for another
(ii) equal to the slope of the highest indifference curve
(iii) constant

Accepted Answer

The slope of the budget constraint is the rate at which a consumer can trade one good for another, which is represented by the opportunity cost of one good in terms of the other. This is true for choice (i). 
The slope of the highest indifference curve represents the marginal rate of substitution, which is the rate at which a consumer is willing to trade one good for another in order to maintain the same level of utility. This is not true for all indifference curves, therefore choice (ii) is not correct. 
The budget constraint assumes a fixed income and prices, thus the slope is constant. This is true for choice (iii). Therefore, the correct answer is D.

Question 2

Graph 22-1
 
-Refer to Graph 22-1. A consumer who chooses to spend all of her income will be at point(s):

Accepted Answer

The answer of Graph 22-1
 
-Refer to Graph 22-1. A...

Question 3

Which of the following statements is true? (i) consumers cannot consume at points outside their budget constraint
(ii) optimising consumers spend half of their income on each of two goods
(iii) consumers can consume at points inside their budget constraint

Accepted Answer

Statement (i) is true because a consumer can only afford to purchase goods and services within the limits of their budget constraint.
Statement (ii) is not necessarily true as it depends on the consumer's preferences and the prices of the two goods.
Statement (iii) is also true because a consumer can choose to consume at any point within their budget constraint, including points inside it.

Question 4

When income increases, a budget constraint will:

Accepted Answer

When income increases, the budget constraint shifts outward, parallel to its initial position. This is because with an increase in income, the consumer can afford to purchase more of all goods and services, while the prices remain constant. Therefore, the budget constraint line moves away from the origin (representing zero consumption of both goods) while remaining parallel to its initial position.

Question 5

Graph 22-2
 
-Refer to Graph 22-2. Which of the graphs shown reflects an increase in the price of good Y?

Accepted Answer

Graph C shows a leftward shift of the demand curve for good Y, which is consistent with an increase in the price of good Y, as it would decrease the quantity demanded at each price level.

Question 6

When the price of a good rises:

Accepted Answer

When the price of a good rises, the quantity demanded of that good falls. This is a movement along the demand curve, reflecting the fact that consumers will buy less of the good at higher prices. However, the overall level of demand does not necessarily change, as there may still be some consumers who are willing and able to purchase the good at the higher price.

Question 7

The theory of consumer choice provides the foundation for understanding:

Accepted Answer

The theory of consumer choice focuses on how consumers make decisions about which goods and services to buy, based on their preferences and budget constraints. Therefore, it provides the foundation for understanding product demand.

Question 8

As a general rule, the theory of consumer choice provides insight into the behaviour of:

Accepted Answer

The theory of consumer choice is based on the assumption that individuals make choices among a set of alternatives subject to constraints, such as limited income and prices of goods. Thus, it provides insight into the behaviour of individuals who make constrained choices, which is the most common situation in real-world economic settings.

Question 9

Amy buys sushi and miso for lunch. Her weekly budget for lunch is $24. If the price of sushi is $0.50 a piece and the price of miso is $1.20 a cup, then during the week Amy could choose to consume:

Accepted Answer

The total cost for 24 sushi pieces and 10 cups of miso is $12 + $12 = $24, which matches Amy's weekly budget.

Question 10

The slope of the budget constraint is determined by the:

Accepted Answer

The slope of the budget constraint is determined by the relative price of the two commodities represented on the axis. In other words, it shows the rate at which one good can be exchanged for the other. The level of income, preferences, and endowment of resources all affect the position of the budget constraint, but not the slope.

Question 11

The theory of consumer choice examines:

Accepted Answer

The theory of consumer choice specifically focuses on the trade-offs consumers make when deciding how to allocate their limited resources (such as income) among competing options. Therefore, the correct choice is B. The other options listed are outside the scope of the theory of consumer choice.

Question 12

Graph 22-3
 
-Refer to Graph 22-3. Using the figure in panel (a), if income is equal to $120, the price of good Y is:

Accepted Answer

From the figure in panel (a), we can see that at an income of $120, the budget line intersects the Y-axis at a point between $2 and $3. By drawing a vertical line from this point to the graph of good Y, we can see that the price of good Y is approximately $2.40. Therefore, the best choice is option B.

Question 13

Graph 22-1
 
-Refer to Graph 22-1. All of the points identified on the graph shown represent possible consumption options with the exception of:

Accepted Answer

The answer of Graph 22-1
 
-Refer to Graph 22-1. All...

Question 14

A consumer who doesn't spend all of her income:

Accepted Answer

If a consumer doesn't spend all of her income, then she must be consuming less than what she can afford. Thus, she would be at a point inside her budget constraint.

Question 15

A budget constraint:

Accepted Answer

A budget constraint shows the consumption bundles that a consumer can afford within their budget, based on the prices of the goods and services they are consuming. It is not related to the consumer's level of happiness or their desire to increase their income.

Question 16

Graph 22-2
 
-Refer to Graph 22-2. Which of the graphs shown reflects a decrease in the price of good X only?

Accepted Answer

Graph B shows a leftward shift of the demand curve, indicating a decrease in the price of good X only. Graph A and D show a decrease in both the price of good X and the quantity demanded, while Graph C shows an increase in the price of good X and a decrease in quantity demanded.

Question 17

Graph 22-2
 
-Refer to Graph 22-2. Which of the graphs shown reflects an increase in income?

Accepted Answer

The answer of Graph 22-2
 
-Refer to Graph 22-2. Which...

Question 18

If an in-kind transfer of a good does not force the recipient to consume more of the good than he would on his own, then cash and in-kind transfers have exactly the same effect on the consumption and welfare of the recipient.

Accepted Answer

If the recipient is not forced to consume more of the good than he would on his own, then the value of the in-kind transfer and the cash transfer would be equal. This means that the recipient can use either the good or the cash to purchase other goods and services that they may prefer, resulting in the same level of consumption and welfare regardless of the type of transfer.

Question 19

The theory of consumer choice describes how people make decisions.

Accepted Answer

The theory of consumer choice is a well-known concept in economics that explains how individuals make decisions to allocate their resources between different goods and services based on their preferences, budget constraints, and other factors.

Question 20

Graph 22-1
 
-Refer to Graph 22-1. Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?

Accepted Answer

Point D represents a consumer who chooses not to spend her entire income, as this point lies below the 45-degree line. This indicates that the consumer is saving a portion of her income rather than spending it all. Points A, B, and C all lie on or above the 45-degree line, indicating that the consumer is spending all of her income in each scenario.

Quiz 22: The Theory of Consumer Choice

Which of the following statements about the budget constraint is true? The slope of the budget constraint is: (i) the rate at which a consumer can trade one good for another (ii) equal to the slope of the highest indifference curve (iii) constant

Graph 22-1 -Refer to Graph 22-1. A consumer who chooses to spend all of her income will be at point(s) :

Which of the following statements is true? (i) consumers cannot consume at points outside their budget constraint (ii) optimising consumers spend half of their income on each of two goods (iii) consumers can consume at points inside their budget constraint

When income increases, a budget constraint will:

Graph 22-2 -Refer to Graph 22-2. Which of the graphs shown reflects an increase in the price of good Y?

When the price of a good rises:

The theory of consumer choice provides the foundation for understanding:

As a general rule, the theory of consumer choice provides insight into the behaviour of:

Amy buys sushi and miso for lunch. Her weekly budget for lunch is $24. If the price of sushi is $0.50 a piece and the price of miso is $1.20 a cup, then during the week Amy could choose to consume:

The slope of the budget constraint is determined by the:

The theory of consumer choice examines:

Graph 22-3 -Refer to Graph 22-3. Using the figure in panel (a) , if income is equal to $120, the price of good Y is:

Graph 22-1 -Refer to Graph 22-1. All of the points identified on the graph shown represent possible consumption options with the exception of:

A consumer who doesn't spend all of her income:

A budget constraint:

Graph 22-2 -Refer to Graph 22-2. Which of the graphs shown reflects a decrease in the price of good X only?

Graph 22-2 -Refer to Graph 22-2. Which of the graphs shown reflects an increase in income?

If an in-kind transfer of a good does not force the recipient to consume more of the good than he would on his own, then cash and in-kind transfers have exactly the same effect on the consumption and welfare of the recipient.

The theory of consumer choice describes how people make decisions.

Graph 22-1 -Refer to Graph 22-1. Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?