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Exam 21: The Theory of Consumer Choice

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Question 211

Multiple Choice

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Energy drinks and granola bars are normal goods. When the price of energy drinks decreases, the income effect causes

A) the consumer to feel richer, so the consumer buys more granola bars.
B) the consumer to feel richer, so the consumer buys fewer granola bars.
C) granola bars to be relatively more expensive, so the consumer buys more granola bars.
D) granola bars to be relatively less expensive, so the consumer buys fewer granola bars.

E) C) and D)
F) B) and C)

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Question 212

Multiple Choice

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Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by measuring the quantity of CDs purchased on the vertical axis and the quantity of DVDs on the horizontal axis, what is the slope of the budget constraint?

A) -5.0
B) -2.5
C) -0.4
D) The slope of the budget constraint cannot be determined without knowing the income the consumer has available to spend on the two goods.

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

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Question 213

Multiple Choice

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If two bundles of goods give a consumer the same satisfaction, the consumer must be

What is an individual's marginal rate of substitution between nickels and dollar bills? Assume the individual only cares about the monetary value of each bundle.​

Figure 21-31 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. -Refer to Figure 21-31. Suppose point A was Kevin's optimum last week, and point B is his optimum this week. What happened between last week and this week?

Fiona uses all of her income to purchase popcorn and butter. At any two points A and B on Fiona'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 Kevin's income is $2,520 and point B is his optimum, then what is the price of a shirt?

Figure 21-31 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. -Refer to Figure 21-31. If Kevin's income is $1,260 and point A is his optimum, then what is the price of a shirt?

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.

Budget constraints exist for consumers because

The consumer's optimum is where

Katie wins $3 million in her state's lottery. If Katie drastically reduces the number of hours she works after she wins the money, we can infer that the income effect is larger than the substitution effect for her.

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

Figure 21-10 -Refer to Figure 21-10. A person who chooses to consume bundle C is likely to

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

At the consumer's optimum the

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?

Alicia is a vegetarian, so she does not eat beef. That is, beef provides no additional utility to Alicia. She loves potatoes, however. If we illustrate Alicia's indifference curves by drawing beef on the horizontal axis and potatoes on the vertical axis, her indifference curves will

Suppose a consumer has preferences over two goods, X and Y, which are perfect substitutes. In particular, two units of X is equivalent to one unit of Y. If the price of X is $1, the price of Y is $3, and the consumer has $30 of income to allocate to these two goods, how much of each good should the consumer purchase to maximize satisfaction?

Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.