Chapter 5/Applying Consumer Theory
Chapter 5Applying Consumer Theory
MULTIPLE CHOICE
Choose the one alternative that best completes the statement or answers the question.
Figure 5.1
1)Figure 5.1 shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's price-consumption curve?
A) 10 snacks and 20 juices
B) 10 snacks and 0 juices
C) 10 snacks and 5 juices
D) 10 snacks and 15 juices
Answer: D
Diff: 0
Topic: Deriving Demand Curves
2)Figure 5.1 shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's demand curve for snacks?
A) p = 2, q = 10
B) p = 2, q = 13
C) p = 2, q = 5
D) p = 1, q = 20
Answer: C
Diff: 1
Topic: Deriving Demand Curves
3)Figure 5.1 shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. This information could be used to determine
A) the slope of Bobby's demand curve for juice.
B) the amount by which Bobby's demand curve for juice shifts when his income rises.
C) the amount by which Bobby's demand curve for juice shifts when the price of snacks rises.
D) All of the above.
Answer: C
Diff: 1
Topic: Deriving Demand Curves
4)Figure 5.1 shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, Bobby's utility
A) stays the same.
B) increases.
C) decreases.
D) might change, but there is not enough information to determine.
Answer: C
Diff: 0
Topic: Deriving Demand Curves
5)Figure 5.1 shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. Bobby's demand for snacks is
A) unit elastic.
B) elastic.
C) inelastic.
D) perfectly elastic.
Answer: C
Diff: 2
Topic: Deriving Demand Curves
6)As the price of a good rises, the consumer will experience
A) a desire to consume a different bundle.
B) a decrease in utility.
C) a southwesterly movement on the indifference map.
D) All of the above.
Answer: D
Diff: 1
Topic: Deriving Demand Curves
7)An increase in the price of a good causes
A) a change in the slope of the budget line.
B) an increase in the consumption of that good.
C) a rightward shift of the demand curve for that good.
D) a parallel rightward shift of the budget line.
Answer: A
Diff: 1
Topic: Deriving Demand Curves
8)Suppose a graph is drawn to show a consumer's preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontal when the price of football tickets changes, then
A) football tickets are an inferior good.
B) the demand for football tickets is perfectly elastic.
C) the demand for football tickets is unit elastic.
D) the demand curve for football tickets will be horizontal.
Answer: C
Diff: 2
Topic: Deriving Demand Curves
9)Suppose the quantity of x is measured on the horizontal axis. If the price consumption curve is vertical when the price of x changes, then the demand for x is
A) perfectly elastic.
B) perfectly inelastic.
C) unit elastic.
D) There is not enough information to determine the price elasticity of demand for x.
Answer: B
Diff: 2
Topic: Deriving Demand Curves
Figure 5.2
10)Figure 5.2 shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?
A) Pork is an inferior good.
B) Ham is an inferior good.
C) Neither pork nor ham is an inferior good.
D) Both ham and pork are inferior goods.
Answer: B
Diff: 1
Topic: How Income Changes Shift Demand Curves
11)Figure 5.2 shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?
A) Larry's Engel curve for pork will be upward sloping.
B) Larry's Engel curve for pork will be downward sloping.
C) Larry's Engel curve for pork will be backward bending.
D) Larry's Engel curve for pork cannot be derived from the information provided.
Answer: A
Diff: 1
Topic: How Income Changes Shift Demand Curves
12)Figure 5.2 shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?
A) Larry's demand curve for pork shifts rightward when his income increases.
B) Larry's income elasticity of demand for pork is greater than zero.
C) Pork is a normal good.
D) All of the above.
Answer: D
Diff: 2
Topic: How Income Changes Shift Demand Curves
13)After Joyce and Larry purchased their first house, they made additional home improvements in response to increases in income. After a while, their income rose so much that they could afford a larger home. Once they realized they would be moving, they reduced the amount of home improvements. Their Engel curve for home improvements on their current home is
A) negatively sloped.
B) flat.
C) positively sloped.
D) backward bending.
Answer: D
Diff: 2
Topic: How Income Changes Shift Demand Curves
14)Suppose the quantity of x is measured on the horizontal axis. If the income consumption curve is vertical, then the income elasticity of demand for x is
A) 0.
B) 1.
C) -1.
D) There is not enough information to determine the income elasticity of demand for x.
Answer: A
Diff: 2
Topic: How Income Changes Shift Demand Curves
Figure 5.3
15)When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in Figure 5.3 best represents John's Engel curve for frozen dinners?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: A
Diff: 2
Topic: How Income Changes Shift Demand Curves
16)When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in Figure 5.3 best represents John's Engel curve for dining out?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: B
Diff: 2
Topic: How Income Changes Shift Demand Curves
17)Even though Mary's income is very low, she makes sure that she purchases enough milk for her family to drink. As her income rises, she does buy more milk. Which graph in Figure 5.3 best represents Mary's Engel curve for milk?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: C
Diff: 2
Topic: How Income Changes Shift Demand Curves
18) When John was in college and his income was low, he drank "Red Ribbon" beer. As his income increased, he purchased better-quality beer and less "Red Ribbon." Which graph in Figure 5.3 best represents John's Engel curve for "Red Ribbon" beer?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: D
Diff: 2
Topic: How Income Changes Shift Demand Curves
19)Which graph in Figure 5.3 best represents a good that is an inferior good at some
income levels, and a normal good at other income levels?
A)Graph A
B)Graph B
C)Graph C
D)Graph D
Answer: A
Diff:1
Topic: How Income Changes Shift Demand Curves
20)Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that
A) milk is a luxury.
B) milk is a Giffen good.
C) the income effect from a change in the price of milk is very large.
D) the income effect from a change in the price of milk is very small.
Answer: D
Diff: 2
Topic: Effects of a Price Change
21)When the price of a good changes, the total effect of the price change on the quantities purchased can be found by comparing the quantities purchased
A) on the old budget line and the new budget line.
B) on the original indifference curve when faced with the original prices and when faced with the new prices.
C) on the new budget line and a hypothetical budget line that is a parallel shift back to the original indifference curve.
D) on the new indifference curve.
Answer: A
Diff: 2
Topic: Effects of a Price Change
22)When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased
A) on the old budget line and the new budget line.
B) on the original indifference curve when faced with the original prices and when faced with the new prices.
C) on the new budget line and a hypothetical budget line that is a parallel shift back to the original indifference curve.
D) on the new indifference curve.
Answer: B
Diff: 2
Topic: Effects of A Price Change
23)Suppose that frozen dinners were once a normal good for John, but now frozen dinners are an inferior good for him. John's demand curve for frozen dinners
A) has become steeper as a result.
B) has become flatter as a result.
C) has not changed as a result.
D) has disappeared as a result.
Answer: A
Diff: 2
Topic: Effects of a Price Change
24)One characteristic of a Giffen good is that it
A) is a luxury good.
B) is an inferior good.
C) has an upward-sloping Engel curve.
D) All of the above.
Answer: B
Diff: 2
Topic: Effects of a Price Change
25)If a good is an inferior good, then its
A) demand curve will be upward sloping.
B) income effect reinforces the substitution effect.
C) income elasticity is negative.
D) Engel curve cannot be drawn.
Answer: C
Diff: 2
Topic: Effects of a Price Change
26)Suppose Lisa spends all of her money on books and coffee. When the price of
coffee decreases, the
A) substitution effect on coffee is positive, and the income effect on coffee is positive.
B) substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous.
C) substitution effect on coffee is positive, and the income effect on coffee is ambiguous.
D) substitution effect on coffee is ambiguous, and the income effect on coffee is positive.
Answer: C
Diff: 1
Topic: Effects of a Price Change
27)In the case of a normal good
A) demand curves always slope downward.
B) the income effect and substitution effect are in the same direction.
C) the Engel curve slopes upward.
D) All of the above.
Answer: D
Diff: 2
Topic: Effects of A Price Change
Figure 5.4
28)Figure 5.4 shows Bobby's indifference map for soda and juice. B1 indicates his original budget line. B2 indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?
A) 3
B) 10
C) 15
D) 7
Answer: A
Diff: 2
Topic: Effects of a Price Change
29)Figure 5.4 shows Bobby's indifference map for soda and juice. B1 indicates his original budget line. B2 indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his income effect?
A) 3
B) 10
C) 15
D) 7
Answer: D
Diff: 2
Topic: Effects of a Price Change
30)Figure 5.4 shows Bobby's indifference map for soda and juice. B1 indicates his original budget line. B2 indicates his budget line resulting from an increase in the price of soda. From the graph, one can conclude that
A) Bobby views soda as an inferior good.
B) Bobby's demand for soda is perfectly inelastic.
C) Bobby views soda as a normal good.
D) the income elasticity of demand for soda is 1.
Answer: C
Diff: 2
Topic: Effects of a Price Change
31)The Slutsky equation shows that, holding the total effect constant, the income effect will be larger for goods that
A) have a smaller substitution effect.
B) make up a larger percentage of a household's budget.
C) have perfectly inelastic demand curves.
D) All of the above.
Answer: B
Diff: 2
Topic: Effects of a Price Change
32)Suppose that the interest rate paid to savers increases. As a result, Tom wishes to save less. This suggests that, for Tom,
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) utility maximization is not occurring.
D) future consumption is a luxury.
Answer: B
Diff: 2
Topic: Effects of a Price Change
33)Suppose that the interest rate paid to savers increases. As a result, Tom wishes to save more. This suggests that, for Tom,
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) utility maximization is not occurring.
D) future consumption is a luxury.
Answer: A
Diff: 2
Topic: Effects of a Price Change
34)A consumer price index adjustment overcompensates for inflation because it ignores
A) the income effect when relative prices change.
B) the substitution effect when relative prices change.
C) that some goods are inferior.
D) that the substitution effect may offset the income effect.
Answer: B
Diff:0
Topic: Cost-of-Living Adjustments
35)Employing a fixed-weight index like the Consumer Price Index to adjust a person's salary in response to inflation will overcompensate this person because doing so will allow this person to
A) buy the same bundle of goods as he did before the inflation.
B) achieve a higher level of utility than he did before the inflation.
C) achieve the same level of utility as before the inflation.
D) buy more of all goods.
Answer: B
Diff: 2
Topic: Cost-of-Living Adjustments
36)Under which of the following conditions will there be no substitution bias in the CPI?
A) Indifference curves are convex.
B) Indifference curves are L shaped.
C) Indifference curves are linear.
D) Indifference curves are downward sloping.
Answer: B
Diff: 2
Topic: Cost-of-Living Adjustments
37)Under which of the following conditions will there be no substitution bias in the CPI?
A) Lower-priced goods increase in price by a greater percentage than do higher-priced goods.
B) Higher-price goods increase in price by a greater percentage than do lower-priced goods.
C) All goods change in price by the same amount.
D) All goods change in price by the same percentage.
Answer: D
Diff: 2
Topic: Cost-of-Living Adjustments
38)A true cost-of-living adjustment in response to a change in prices would compensate consumers so that they will be able to
A) purchase the same bundle they purchased before prices changed.
B) achieve the same level of utility they did before prices changed.
C) face the same choices they did before prices changed.
D) achieve an increase in utility that is equal to the rate of inflation.
Answer: B
Diff: 2
Topic: Cost-of-Living Adjustments
39)If a person supplies more hours of labor in response to a wage increase, then
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the income effect equals the substitution effect.
D) the person is not maximizing utility.
Answer: A
Diff: 1
Topic: Deriving Labor Supply Curves
40)If a person supplies less hours of labor in response to a wage increase, then
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the income effect equals the substitution effect.
D) the person is not maximizing utility.
Answer: B
Diff: 1
Topic: Deriving Labor Supply Curves
41)A backward-bending labor supply curve implies that
A) the substitution effect dominates the income effect at higher wage rates but not at lower wage rates.
B) the substitution effect dominates the income effect at lower wage rates but not at higher wage rates.
C) leisure is an inferior good.
D) workers are irrational.
Answer: B
Diff: 1
Topic: Deriving Labor Supply Curves
42)If Bobby thinks that leisure is an inferior good, then his labor supply curve
A) is backward bending.
B) is always negatively sloped.
C) is always positively sloped.
D) does not exist.
Answer: C
Diff: 1
Topic: Deriving Labor Supply Curves
43)A tax cut that raises the after-tax wage rate will most likely result in more hours worked if
A) tax rates were low already.
B) the relevant portion of the labor supply curve is upward sloping.
C) the relevant portion of the labor supply curve is downward sloping.
D) workers can be easily fooled.
Answer: B
Diff: 1
Topic: Deriving Labor Supply Curves
44)If workers are in the backward-bending section of their labor supply curves, than
an increase in the income tax rate will
A)increase the tax revenue and increase the number of hours worked.
B)increase the tax revenue and decrease the number of hours worked.
C)decrease the tax revenue and increase the number of hours worked.
D)decrease the tax revenue and decrease the number of hours worked.
Answer: A
Diff: 2
Topic: Deriving Labor Supply Curves
45)In response to an increase in the wage rate, the substitution effect will cause a person to
A) supply fewer hours of labor.
B) supply more hours of labor.
C) supply the same hours of labor.
D) have a backward bend in her labor supply curve.
Answer: B
Diff: 1
Topic: Deriving Labor Supply Curves
46)In response to an increase in the wage rate, the income effect will cause a person to
A) supply fewer hours of labor.
B) supply more hours of labor.
C) supply the same hours of labor.
D) have a horizontal labor supply curve.
Answer: A
Diff: 1
Topic: Deriving Labor Supply Curves
TRUE/FALSE/EXPLAIN
1)If the price-consumption curve is upward sloping when the price of the good measured on the horizontal axis changes, then the demand curve for that good will be upward sloping.
Answer: False. An upward-sloping price-consumption curve indicates that as the price of the good falls, more of both goods will be purchased. So, the demand curve for the good measured on the horizontal axis slopes downward.