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Exam 21: The Theory of Consumer Choice

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Question 91

Multiple Choice

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Giffen goods are

A) normal goods for which the income effect dominates the substitution effect.
B) normal goods for which the substitution effect dominates the income effect.
C) inferior goods for which the income effect dominates the substitution effect.
D) inferior goods for which the substitution effect dominates the income effect.

E) A) and D)
F) A) and C)

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Question 92

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The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.

A) True
B) False

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Question 93

Multiple Choice

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Pete consumes two goods,rice and fish.When the price of fish rises,he consumes less fish.When the price of rice rises,he consumes more rice.For Pete,

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

"Left" gloves and "right" gloves provide a good example of

The slope of the budget constraint is all of the following except

Janet knows that she will ultimately face retirement.Assume that Janet will experience two periods in her life,one in which she works and earns income,and one in which she is retired and earns no income.Janet can earn $250,000 during her working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent interest on her savings. a.Use a graph to demonstrate Janet's budget constraint. b.On your graph,show Janet at an optimal level of consumption in the work period equal to $150,000.What is the implied optimal level of consumption in her retirement period? c.Now,using your graph from part b above,demonstrate how Janet will be affected by an increase in the interest rate on savings to 14 percent.Discuss the role of income and substitution effects in determining whether Janet will increase,or decrease her savings in the work period.

Assume that a college student spends her income on mac-n-cheese and CDs.The price of one box of mac-n-cheese is $1,and the price of one CD is $12.If she has $100 of income,she could choose to consume

A normal good is one

Using our model of consumer choice,is it possible for a consumer to buy less of a particular good when his income rises? Briefly explain.

A consumer has preferences over two goods,X and Y.Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis.At the consumer's current consumption bundle,the consumer is spending all available income,and the marginal rate of substitution is less than the slope of the budget constraint.We can conclude that the consumer

When a consumer is purchasing the best combination of two goods,X and Y,subject to a budget constraint,we say that the consumer is at an optimal choice point.A graph of an optimal choice point shows that it occurs

When indifference curves are bowed in toward the origin,

Figure 21-13 -Refer to Figure 21-13.What is the consumer's marginal rate of substitution as she moves from A to B?

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

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

A consumer's indifference curves are straight lines when,for the consumer,the goods in question are __________.

Both Diana and Sarah like jazz music and music by the Beatles.Diana likes music by the Beatles much better than jazz music,whereas Sarah prefers jazz music to music by the Beatles.If we were to graph an indifference curve with cds by the Beatles on the horizontal axis and jazz cds on the vertical axis,then

Assume that a consumer's indifference curve is bowed outward but satisfies the other three properties of indifference curves.As the consumer moves from left to right along the horizontal axis,the consumer's marginal rate of substitution

If Walter has one hour of leisure time in which to watch a sporting event on television,his preferences are as follows: Walter prefers watching football to watching baseball,but he prefers watching baseball to watching basketball.He is indifferent between watching baseball and watching hockey.Bundle A contains one hour of football and zero hours of all other sports.Bundle B contains one hour of baseball and zero hours of all other sports.Bundle C contains one hour of basketball and zero hours of all other sports.Bundle D contains one hour of hockey and zero hours of all other sports.If we were to graph Walter's preferences using indifference curves,which of the following bundles would be on the same indifference curve?