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Exam 21: The Theory of Consumer Choice

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Question 21

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If we observe that a consumer's budget constraint has shifted inward, we can assume that the consumer will buy

A) fewer normal goods and more inferior goods.
B) more normal goods and fewer inferior goods.
C) more normal goods and more inferior goods.
D) fewer normal goods and fewer inferior goods.

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

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Question 22

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Which of the following statements is not correct?

A) Reducing taxes on interest income might encourage people to save more.
B) Reducing taxes on interest income might reduce saving.
C) A price increase will create income and substitution effects that will both always work to reduce consumption of the good.
D) Utility is maximized when the marginal rate of substitution between any two goods equals the relative prices of the two goods.

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

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Question 23

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Figure 21-5 (a) (b) -Refer to Figure 21-5. In graph (b) , if income is equal to $420, then the price of good X is

For a typical consumer, most indifference curves are downward sloping.

Scenario 21-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. -Refer to Scenario 21-3. If the interest rate on savings increases,

Figure 21-25 The figure pertains to a particular consumer. On the axes, X represents the quantity of good X and Y represents the quantity of good Y. -Refer to Figure 21-25. Suppose the price of good X is $8, the price of good Y is $10, and the consumer's income is $360. Then the consumer's optimal choice is to buy

Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the exterior of the consumer's budget constraint?

Figure 21-31 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. -Refer to Figure 21-31. If the price of a shirt is $20 and point B is Kevin's optimum, then what is Kevin's income?

Scenario 21-2 Lawrence has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of 8 hours each day) . For each hour Lawrence spends writing, he can earn $75. Lawrence is such a good writer that he can get paid for as many hours of writing as he chooses to work. -Refer to Scenario 21-2. If Lawrence's wage increases to $90 per hour of writing, which of the following points would fall on his budget constraint?

Figure 21-23 -Refer to Figure 21-23. 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 demand curve can be illustrated as the movement from

The theory of consumer choice most closely examines which of the following Ten Principles of Economics?

Consider two goods: peanuts and crackers. The slope of the consumer's budget constraint is measured by the

Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income?

A consumer spends all of her income on goods x and y. At her optimum,

A Giffen good is a good for which

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 5 slices of pizza and 5 paperback novels?

Figure 21-5 (a) (b) -Refer to Figure 21-5. Assume that a consumer faces the budget constraint shown in graph (a) in January and the budget constraint shown in graph (b) in February. If the consumer's income has remained constant, then what has happened to prices between January and February?

The direction of the substitution effect is not influenced by whether the good is normal or inferior.

A Giffen good is a good for which an increase in the price

Figure 21-31 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. -Refer to Figure 21-31. If the price of a shirt is $36 and point A is Kevin's optimum, then what is Kevin's income?