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Exam 21: The Theory of Consumer Choice

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Question 181

Multiple Choice

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A budget constraint illustrates the

A) prices that a consumer chooses to pay for products he consumes.
B) purchases made by consumers.
C) consumption bundles that a consumer can afford.
D) consumption bundles that give a consumer equal satisfaction.

E) A) and B)
F) B) and C)

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Question 182

Multiple Choice

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Good X is a Giffen good. When the price of X increases, the consumer will consume

A) more X.
B) the same amount of X.
C) less X.
D) more or less X depending on the size of the income effect relative to the size of the substitution effect.

E) B) and D)
F) None of the above

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Question 183

Multiple Choice

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Suppose the price of good X falls and the consumption of good X increases. From this we can infer that X is a(n) (i) normal good. (ii) inferior good. (iii) Giffen good.

Figure 21-30 The graph shows two budget constraints for a consumer. -Refer to Figure 21-30. Suppose Budget Constraint B applies. If the consumer's income is $90 and if he is buying 5 light bulbs, then how much money is he spending on hamburgers?

Figure 21-1 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-1. A consumer who chooses to spend all of her income could be at which point(s) on the figure?

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

Figure 21-6 -Refer to Figure 21-6. Suppose a consumer has $200 in income, the price of popcorn is $1, and the price of Mt. Dew is $2. What is the value of A?

The goal of the consumer is to

Figure 21-20 The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: -Refer to Figure 21-20. Assume that the consumer has an income of $100 and currently optimizes at bundle A. When the price of marshmallows decreases to $5, which bundle will the optimizing consumer choose?

Figure 21-32 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. -Refer to Figure 21-32. Of the four labeled points, which is (are) affordable to Hannah?

The goal of the consumer is to

For Molly, the substitution effect of a wage increase is stronger than the income effect. In response to a wage increase, will Sally work more hours or will she work fewer hours?

Figure 21-21 -Refer to Figure 21-21. Suppose that a consumer is originally at point R. Then the price of good X decreases. Which of the following represents the income effect of the price decrease?

The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope upward.

Giffen goods have positively-sloped demand curves because they are

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,

The theory of consumer choice is to demand as the theory of

Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback novels cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and paperback novels. Which consumer(s) can afford to purchase 3 slices of pizza and 4 paperback novels?

Figure 21-20 The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: -Refer to Figure 21-20. Assume that the consumer has an income of $40. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips were $4?

Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the interest rate decreases to 10%. What happens to the slope of your budget constraint relative to when the interest rate was 25%? The slope