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Exam 21: The Theory of Consumer Choice

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Question 121

Multiple Choice

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Violations of the law of demand are assumed to occur

A) regularly.
B) only when goods are Giffen goods.
C) only when the substitution effect dominates the income effect.
D) All of the above are correct.

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

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Question 122

Multiple Choice

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Giffen goods are

A) normal goods for which the income effect dominates the substitution effect.
B) normal goods for which the substitution effect dominates the income effect.
C) inferior goods for which the income effect dominates the substitution effect.
D) inferior goods for which the substitution effect dominates the income effect.

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

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Question 123

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The slope of the budget constraint reveals the relative price of good X compared to good Y.

Figure 21-22 -Refer to Figure 21-22. If the consumer were initially at point A in the figure, a movement from point B to point C as a result of a decrease in the price of potato chips represents the

Figure 21-32 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. -Refer to Figure 21-32. From the figure we can determine how much income Hannah earns when young and we can determine the interest rate. Could the interest rate rise to a level at which Hannah could afford to be at point A?

The theory of consumer choice is to demand as the theory of

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 3 paperback novels?

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.

Figure 21-32 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. -Refer to Figure 21-32. At two of the four labeled points, Hannah is equally happy. Identify those two points.

An optimizing consumer will select the consumption bundle in which the

Figure 21-24 The figure shows three indifference curves and a budget constraint for a certain consumer named Steve. -Refer to Figure 21-24. Steve

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

If a consumer consumes two goods, X and Y, and has indifference curves that are bowed inward, the consumer's optional choice occurs when

Just as the theory of the competitive firm provides a more complete understanding of supply, the theory of consumer choice provides a more complete understanding of

Suppose that Elmer's hourly wage increases, and he decides to work fewer hours. For Elmer, the substitution effect of the wage change is

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?

If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant.

A consumer chooses an optimal consumption point where the

Susie wins $2 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.

A decrease in a consumer's income