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Exam 21: The Theory of Consumer Choice

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Question 201

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Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

A) substitution effect will induce Reta to consume more when she is young.
B) substitution effect will induce Reta to consume less when she is young.
C) income effect will induce Reta to consume more when she is young.
D) change in interest rates affects the substitution effect but not the income effect.

E) None of the above
F) C) and D)

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Question 202

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Which of the following descriptions best depicts the substitution effect?

A) the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant
B) the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant
C) the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant
D) the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change

E) A) and C)
F) All of the above

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Question 203

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Figure 21-2 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which of the following statements is not correct?

Figure 21-17 -Refer to Figure 21-17. When the price of X is $40, the price of Y is $40, and income is $160, Paul's optimal choice is point B. Then Paul's income increases to $320, and his optimal choice is point E. For Paul,

For Brent, the income effect of a wage increase is stronger than the substitution effect. In response to a wage increase, will Brent work more hours or will he work fewer hours?

When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference curve.

Jordan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to

Scenario 21-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30. -Refer to Scenario 21-4. If Frank uses all of his income to buy hats during a certain month, then how many hats does he buy?

A consumer chooses an optimal consumption point where the

Figure 21-5 (a) (b) -Refer to Figure 21-5. In graph (b) , if income is equal to $420, then the price of good Y is

The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Which of the following is an example of a Giffen good?

Figure 21-30 The graph shows two budget constraints for a consumer. -Refer to Figure 21-30. Suppose Budget Constraint B applies. If the consumer's income is $90 and if he is buying 5 light bulbs, then how much money is he spending on hamburgers?

The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X is

All points on a demand curve are optimal consumption points.

The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward.

Figure 21-3 In each case, the budget constraint moves from BC-1 to BC-2. -Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good Y only?

Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for CDs and DVDs will

Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. What is the slope of this budget constraint?

Figure 21-8 -Refer to Figure 21-8. If the price of good X is $5, and your budget constraint is DE, what is the price of good Y?