Question 1

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.

Accepted Answer

a.
see graph below
b.
see graph below
c....

Question 2

When two goods are perfect substitutes,the

Accepted Answer

A)   indifference curve is a horizontal straight line.
B)   marginal rate of substitution is constant.
C)   indifference curve is a vertical straight line.
D)   Both a and b are correct.E) None of the above
F) A) and D)

Question 3

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Accepted Answer

A) True 
 B)False

Question 4

Laura consumes only beer and chips.Her indifference curves are all bowed inward.Consider the bundles (2,6) ,(4,4) ,and (6,2) .If Laura is indifferent between (2,6) and (6,2) ,then Laura must

Accepted Answer

A)   prefer (4,4) to (6,2) .
B)   be indifferent between (4,4) and (6,2) .
C)   prefer (6,2) to (4,4) .
D)   prefer (2,6) to (4,4) .E) B) and D)
F) A) and B)

Question 5

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Accepted Answer

A) True 
 B)False

Question 6

An individual's demand curve for a good is derived by varying the

Accepted Answer

A)   income level and observing the resulting total utility derived from both goods.
B)   price of one good and observing the resulting quantities of the other good.
C)   budget line to the left and calculating the loss in total utility.
D)   price of one good and observing the resulting quantities demanded of that good.E) A) and B)
F) C) and D)

Question 7

The marginal rate of substitution is the slope of the budget constraint.

Accepted Answer

A) True 
 B)False

Question 8

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Accepted Answer

A) True 
 B)False

Question 9

If the interest rate rises,an individual could choose to

Accepted Answer

A)   increase consumption when young.
B)   increase consumption when old.
C)   decrease consumption when young.
D)   Any of the above could be correct.E) A) and B)
F) B) and C)

Question 10

Janet prefers cashews to almonds.She prefers macadamia nuts to peanuts,but she is indifferent between almonds and peanuts.Which of the following statements can we say for sure?

Accepted Answer

A)   Janet prefers cashews to macadamia nuts.
B)   Janet prefers peanuts to cashews.
C)   Janet prefers macadamia nuts to almonds.
D)   Janet prefers almonds to macadamia nuts.E) A) and B)
F) A) and C)

Question 11

The slope of the budget constraint is all of the following except

Accepted Answer

A)   the relative price of two goods.
B)   the rate at which a consumer can trade one good for another.
C)   the marginal rate of substitution.
D)   constant.E) C) and D)
F) None of the above

Question 12

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

Accepted Answer

A)   greater than the income effect.
B)   less than the income effect.
C)   equal to the income effect.
D)   exactly offset by the income effect.E) A) and C)
F) A) and B)

Question 13

Figure 21-12 
-Refer to Figure 21-12.The shift from point B to point C in the figure is due to the

Accepted Answer

A)   substitution effect of an increase in the price of potato chips.
B)   income effect of an increase in the price of potato chips.
C)   substitution effect of a decrease in the price of potato chips.
D)   income effect of a decrease in the price of potato chips.E) B) and D)
F) B) and C)

Question 14

A Giffen good is a good for which

Accepted Answer

A)   an increase in the price raises the quantity demanded.
B)   the income effect outweighs the substitution effect.
C)   an increase in the price decreases the quantity demanded.
D)   Both a) and b) are correct.E) C) and D)
F) None of the above

Question 15

If leisure were an inferior good,then labor supply curves

Accepted Answer

A)   would all be negatively sloped.
B)   would all be positively sloped.
C)   would all be vertical.
D)   could still be positively or negatively sloped.E) A) and B)
F) B) and C)

Question 16

An increase in a consumer's income

Accepted Answer

A)   increases the slope of the consumer's budget constraint.
B)   has no effect on the slope of the consumer's budget constraint.
C)   decreases the slope of the consumer's budget constraint.
D)   has no effect on the consumer's budget constraint.E) A) and B)
F) None of the above

Question 17

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

Accepted Answer

A)   shift to a lower indifference curve and the consumer buys less Pepsi.
B)   shift to a higher indifference curve and the consumer buys more Pepsi.
C)   movement along the indifference curve and the consumer buys more Pepsi.
D)   movement along the indifference curve and the consumer buys less Pepsi.E) A) and C)
F) A) and D)

Question 18

Which of the following is most likely an inferior good?

Accepted Answer

A)   an antique car
B)   gasoline
C)   a bus ticket
D)   an airline ticketE) A) and B)
F) B) and C)

Question 19

A budget constraint illustrates the

Accepted Answer

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

Question 20

An indifference curve illustrates

Accepted Answer

A)   a firm's profits.
B)   a consumer's budget.
C)   a consumer's preferences.
D)   the prices of two goods.E) C) and D)
F) A) and B)

Exam 21: The Theory of Consumer Choice

Which of the following is most likely an inferior good?

Correct Answer
verified

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

Correct Answer
verified

The marginal rate of substitution is the slope of the budget constraint.

Correct Answer
verified

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Correct Answer
verified

Janet prefers cashews to almonds.She prefers macadamia nuts to peanuts,but she is indifferent between almonds and peanuts.Which of the following statements can we say for sure?

Correct Answer
verified

When two goods are perfect substitutes,the

Correct Answer
verified

An individual's demand curve for a good is derived by varying the

Correct Answer
verified

If the interest rate rises,an individual could choose to

Correct Answer
verified

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

Correct Answer
verified

A budget constraint illustrates the

Correct Answer
verified

An indifference curve illustrates

Correct Answer
verified

Correct Answer
verified
a.
see graph below
b.
see graph below
c....
View Answer

Figure 21-12 -Refer to Figure 21-12.The shift from point B to point C in the figure is due to the

Correct Answer
verified

A Giffen good is a good for which

Correct Answer
verified

An increase in a consumer's income

Correct Answer
verified

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Correct Answer
verified

If leisure were an inferior good,then labor supply curves

Correct Answer
verified

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Correct Answer
verified

The slope of the budget constraint is all of the following except

Correct Answer
verified

Laura consumes only beer and chips.Her indifference curves are all bowed inward.Consider the bundles (2,6) ,(4,4) ,and (6,2) .If Laura is indifferent between (2,6) and (6,2) ,then Laura must

Correct Answer
verified

Exam 21: The Theory of Consumer Choice

Which of the following is most likely an inferior good?

Correct AnswerverifiedShow Answer

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

Correct AnswerverifiedShow Answer

The marginal rate of substitution is the slope of the budget constraint.

Correct AnswerverifiedShow Answer

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Correct AnswerverifiedShow Answer

Janet prefers cashews to almonds.She prefers macadamia nuts to peanuts,but she is indifferent between almonds and peanuts.Which of the following statements can we say for sure?

Correct AnswerverifiedShow Answer

When two goods are perfect substitutes,the

Correct AnswerverifiedShow Answer

An individual's demand curve for a good is derived by varying the

Correct AnswerverifiedShow Answer

If the interest rate rises,an individual could choose to

Correct AnswerverifiedShow Answer

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

Correct AnswerverifiedShow Answer

A budget constraint illustrates the

Correct AnswerverifiedShow Answer

An indifference curve illustrates

Correct AnswerverifiedShow Answer

Correct Answerverifieda.see graph belowb.see graph belowc....View AnswerShow Answer

Figure 21-12 -Refer to Figure 21-12.The shift from point B to point C in the figure is due to the

Correct AnswerverifiedShow Answer

A Giffen good is a good for which

Correct AnswerverifiedShow Answer

An increase in a consumer's income

Correct AnswerverifiedShow Answer

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Correct AnswerverifiedShow Answer

If leisure were an inferior good,then labor supply curves

Correct AnswerverifiedShow Answer

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Correct AnswerverifiedShow Answer

The slope of the budget constraint is all of the following except

Correct AnswerverifiedShow Answer

Laura consumes only beer and chips.Her indifference curves are all bowed inward.Consider the bundles (2,6) ,(4,4) ,and (6,2) .If Laura is indifferent between (2,6) and (6,2) ,then Laura must

Correct AnswerverifiedShow Answer

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a.
see graph below
b.
see graph below
c....
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