Question 1

The local golf course has upgraded seven of its 18 holes and raised its rates from 20 to 24 dollars. It would be correct to say that
A)the true inflation rate for golf is more than 20%.
B)the true inflation rate for golf is 20%.
C)the true inflation rate for golf is less than 20%.
D)more information is needed to answer this question.

Accepted Answer

The rate increase from $20 to $24 is a 20% increase. However, since the golf course has upgraded seven of its holes, the increase in price may not solely reflect inflation but also the value added by the upgrades. Therefore, the true inflation rate is likely less than 20%.

Question 2

If markets for addictive drugs have a more elastic demand curve than is often thought, and if addicts tend to be unstable people with low incomes, we might speculate that the most likely reason for the surprising elasticity estimates is that
A)the substitution effect is smaller than expected because addicts aren't as addicted as we thought.
B)the income effect has a more constraining effect than we had anticipated.
C)addictive drugs are inferior goods.
D)the income and substitution effects work in opposite directions.

Accepted Answer

If addictive drugs are inferior goods, an increase in income would lead to a decrease in demand, which could explain the higher elasticity observed.

Question 3

Differences in time preferences depend on
A)uncertainty regarding the future.
B)social preference.
C)differences in the relative size of expected future incomes.
D)the time.

Accepted Answer

Differences in time preferences arise due to uncertainty regarding the future. Individuals who are more uncertain about future outcomes tend to have a higher time preference, meaning they value present consumption over future consumption. This is because they are not sure if they will be around in the future to enjoy the benefits of delayed consumption. In contrast, individuals who are more certain about future outcomes tend to have a lower time preference, meaning they are willing to delay present consumption for the prospect of greater future consumption.

Question 4

Suppose a bank will pay you a 10% interest rate on your deposits for 1 period. In this case you must sacrifice $10 of current consumption to finance
A)$9 of future consumption.
B)$10 of future consumption.
C)$11 of future consumption.
D)$1 of future consumption.

Accepted Answer

With a 10% interest rate, sacrificing $10 of current consumption allows you to finance $11 of future consumption ($10 plus 10% of $10).

Question 5

The horizontal intercept of the intertemporal budget constraint is referred to as
A)the present value of lifetime income.
B)the current value of future income.
C)the future value of lifetime income.
D)the future value of present income.

Accepted Answer

The horizontal intercept of the intertemporal budget constraint represents the present value of lifetime income, indicating the total amount of resources available for consumption over a lifetime if all income were spent today.

Question 6

A decrease in the interest rate will
A)produce an increase in current savings.
B)produce an increase in current consumption.
C)produce a decrease in current savings.
D)depend on the particular consumer's preferences.

Accepted Answer

The answer of A decrease in the interest rate will
A)produce...

Question 7

In general, most people
A)have a positive time preference.
B)have a negative time preference.
C)value the present and the future about the same.
D)have a negative time preference for food and basic necessities and a positive time preference for services and luxuries.

Accepted Answer

Most people have a positive time preference, meaning they prefer to have goods and services sooner rather than later. This is evident in the fact that people are willing to pay interest on loans or be paid interest on savings, demonstrating a desire to have access to money sooner rather than later. Additionally, the popularity of instant gratification through online shopping, fast food, and other quick services further supports this idea.

Question 8

Suppose you receive Y1 of your income this period and Y2 of your income in the next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?
A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1

Accepted Answer

The most you can consume in the future period is by saving all of your income from the current period (Y1) and letting it accrue interest at rate r, plus your income in the next period (Y2). This gives Y1(1 + r) + Y2.

Question 9

If $100 today is worth $150 to you in the future, then you exhibit
A)a positive time preference.
B)a negative time preference.
C)a neutral time preference.
D)a negative marginal rate of substitution.

Accepted Answer

A positive time preference means you value present goods more than future goods. By saying that $100 today is worth $150 in the future, it indicates a preference for present goods over future goods, which is a characteristic of a positive time preference.

Question 10

If I get 10 units of pleasure from my first ice cream cone and 2 less units than before from each succeeding cone, I will buy ____ cones and gain _____ units of consumer surplus if the price of a cone = to 5 units of pleasure.
A)4; 28
B)6; 30
C)2; 18
D)3; 9

Accepted Answer

The answer of If I get 10 units of pleasure...

Question 11

If the marginal rate of substitution between future and current consumption is less than one, then this consumer exhibits
A)a positive time preference.
B)a negative time preference.
C)a neutral time preference.
D)an increasing preference.

Accepted Answer

The answer of If the marginal rate of substitution between...

Question 12

The Permanent Income and Life-Cycle Hypothesis imply that
A)consumers generally favor current consumption over future consumption.
B)the primary determinant of current consumption is permanent income.
C)the primary determinant of permanent income is current consumption.
D)consumers are more likely to save if they are uncertain about the future.

Accepted Answer

The Permanent Income and Life-Cycle Hypothesis state that the primary determinant of current consumption is a consumer's permanent income, rather than their current income. This means that people base their spending on their expected long-term income rather than their immediate earnings.

Question 13

If you buy food which then is put on special at half price just after you paid,
A)you will be disappointed and be worse off.
B)you will be better off because you will go back to get some more food at bargain prices.
C)your welfare will not change since you just finished your shopping.
D)logic cannot lead to an answer to this question even if you have a typical preference pattern.

Accepted Answer

You can take advantage of the special offer by purchasing more food at the reduced price, thus increasing your overall benefit or utility.

Question 14

If an educational voucher system were adopted where parents could spend their share of education tax dollars at any school of their choice, then we could expect families to
A)choose less education than before because the public schools would get better.
B)choose more education because they do not need to pay double for private education.
C)make no changes in their education choices because the relative price of private and public education has not changed.
D)make choices that cannot be predicted by economic theory.

Accepted Answer

The adoption of an educational voucher system would allow families to have more options and increased flexibility in the education of their children. As a result, families would be incentivized to choose more education because they can now use their share of education tax dollars to pay for private education without having to pay double.

Question 15

The consumer price index overestimates inflation because it
A)compares prices of what consumers actually buy rather than a fixed basket of goods.
B)allows consumers to move along a given indifference curve from one year to the next.
C)measures the cost of a market basket in the second year that has too many units of the most inflated items.
D)uses the second year's market basket as the base rather than the first year's basket.

Accepted Answer

The consumer price index measures the cost of a fixed basket of goods, but if that basket contains too many units of the most inflated items, it overestimates inflation. This may occur when the market basket is updated from year to year and doesn't accurately reflect changes in consumer behavior. Therefore, choice C is the best option.

Question 16

If you wear your favorite clothes first and eat your favorite food before the food you prefer less you most likely have a
A)positive time preference.
B)a negative time preference.
C)a neutral time preference.
D)time preference that varies depending on whether you are eating or dressing.

Accepted Answer

A positive time preference indicates a preference for immediate gratification over delayed gratification, which is demonstrated by choosing to wear favorite clothes first and eat favorite food before less preferred options.

Question 17

If the opportunity cost of a unit of current consumption is exactly 1 unit of future consumption then you must sacrifice $10 of current consumption to finance
A)$9 of future consumption.
B)$10 of future consumption.
C)$11 of future consumption.
D)$1 of future consumption.

Accepted Answer

If the opportunity cost of a unit of current consumption is exactly 1 unit of future consumption, it means that for every $1 of current consumption you give up, you can have $1 of future consumption. Therefore, sacrificing $10 of current consumption will give you $10 of future consumption. Hence, the correct option is B.

Question 18

Suppose you receive Y1 of your income this period and Y2 of your income next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the current period?
A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1

Accepted Answer

The answer of Suppose you receive Y1 of your income...

Question 19

If the government wanted to curb consumption of alcohol by taxing alcohol without hurting consumer's welfare it would
A)raise the tax on alcohol until demand for alcohol became elastic.
B)need to know the substitution effect but not the income effect of a tax hike.
C)need to know the income effect but not the substitution effect of a tax hike.
D)tax until the income effect of the price increase, which would be refunded, is exactly equal to the revenue gained from the tax.

Accepted Answer

By taxing until the income effect of the price increase, which would be refunded, is exactly equal to the revenue gained from the tax, consumers' purchasing power remains the same and their welfare is not affected. This requires knowledge of both the substitution and income effects of the tax hike.

Question 20

When people choose to wait for a kiss that they have won from a favorite movie star, they are clearly
A)exhibiting a negative time preference and anticipation value.
B)exhibiting a positive time preference with anticipation value.
C)exhibiting a zero time preference.
D)irrational by rational choice standards.

Accepted Answer

The answer of When people choose to wait for a...

Quiz 5: Applications of Rational Choice and Demand Theories

The local golf course has upgraded seven of its 18 holes and raised its rates from 20 to 24 dollars. It would be correct to say that

If markets for addictive drugs have a more elastic demand curve than is often thought, and if addicts tend to be unstable people with low incomes, we might speculate that the most likely reason for the surprising elasticity estimates is that

Differences in time preferences depend on

Suppose a bank will pay you a 10% interest rate on your deposits for 1 period. In this case you must sacrifice $10 of current consumption to finance

The horizontal intercept of the intertemporal budget constraint is referred to as

A decrease in the interest rate will

In general, most people

Suppose you receive Y1 of your income this period and Y2 of your income in the next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?

If $100 today is worth $150 to you in the future, then you exhibit

If I get 10 units of pleasure from my first ice cream cone and 2 less units than before from each succeeding cone, I will buy cones and gain _ units of consumer surplus if the price of a cone = to 5 units of pleasure.

If the marginal rate of substitution between future and current consumption is less than one, then this consumer exhibits

The Permanent Income and Life-Cycle Hypothesis imply that

If you buy food which then is put on special at half price just after you paid,

If an educational voucher system were adopted where parents could spend their share of education tax dollars at any school of their choice, then we could expect families to

The consumer price index overestimates inflation because it

If you wear your favorite clothes first and eat your favorite food before the food you prefer less you most likely have a

If the opportunity cost of a unit of current consumption is exactly 1 unit of future consumption then you must sacrifice $10 of current consumption to finance

Suppose you receive Y1 of your income this period and Y2 of your income next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the current period?

If the government wanted to curb consumption of alcohol by taxing alcohol without hurting consumer's welfare it would

When people choose to wait for a kiss that they have won from a favorite movie star, they are clearly