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Exam 22: The Theory of Consumer Choice

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Question 51

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When the price of a good decreases, ceteris paribus, the lower price:

A) generally encourages the consumption of inferior goods
B) leads to a parallel shift of the linear budget constraint
C) will necessarily lead to a decrease in the consumption of goods whose price did not change
D) expands the consumer's set of buying opportunities

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

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Question 52

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The point at which the indifference curve is tangent to the budget constraint is called an optimum.

A) True
B) False

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Question 53

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Draw a budget constraint that is consistent with the following prices and income. Income = 100 PY = 25 PX = 12.5 a. Demonstrate how your original budget constraint would change if income increased to 250. b. Demonstrate how your original budget constraint would change if PY decreased to 10. c. Demonstrate how your original budget constraint would change if PX increased to 20.

Graph 22-5 -Refer to Graph 22-5. It will be possible for the consumer to reach I₂ if:

The indifference curve maps out the consumption bundles that give the consumer the same level of satisfaction.

The slope of a budget constraint is equal to the relative prices of the two goods.

Graph 22-2 -Refer to Graph 22-2. Which of the graphs shown reflects an increase in income?

Use a graph to demonstrate how an individual labour supply curve is derived. Is it possible to generate a labour supply curve that is downward-sloping for all wage rates? Explain what conditions must be satisfied for this to occur.

Suppose you win a 'grocery-grab' at your local supermarket. This gives you 10 minutes to take as many groceries off the shelves as you can for free. Have you escaped the problem of scarcity in this situation?

Assume that a consumer faces the budget constraints shown. a. Assuming that income is the same on both occasions, describe the difference in relative prices between panel a and panel b. b. If income in panel b is $320, what is the price of good X? c. If income in panel a is $175, what is the price of good Y? d. Give an example of prices that may produce the graphs in panel A and panel B (hint: what are the relative prices?)

If an in-kind transfer forces the recipient to consume more of the good than he would choose with a cash transfer of equal value, then:

A consumer always prefers to be on a higher indifference curve to a lower indifference curve.

Graph 22-4 -Refer to Graph 22-4. Which of the following statements is true for a consumer who moves from point C to point D?

Bundles of goods on a consumer's indifference curve have the same total cost.

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

Graph 22-3 -Refer to Graph 22-3. Using the figure in panel (a) , if income is equal to $160, the price of good Y is:

Frida and Brent, two economists working on public policy, are discussing a compensation scheme to accompany the introduction of a new carbon tax. The scheme compensates households by giving them just enough money to put them back on the same indifference curve they were on before the introduction of the tax. "This compensation scheme is pointless," proclaims Brent. "If we put consumers back on the same indifference curve, they will purchase the same bundle of goods they did before and we won't achieve any reduction in carbon emissions." "Nah, you're so wrong," argues Frida, "what matters is the relative prices of the goods. As long as they are different we can still lower carbon emissions" Is Frida or Brent correct? Explain your reasoning.

Amy purchases only coffee and croissants. If coffee is an inferior good and croissants are normal goods, the income effect associated with an increase in the price of croissants will result in a(n) :

Graph 22-1 -Refer to Graph 22-1. Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?

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 work period and nothing in her retirement period. She must both save and consume in her work period, and can earn 10 per cent 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 15 per cent. Discuss the role of income and substitution effects in determining whether Janet will increase or decrease her savings in the work period.