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Exam 21: The Theory of Consumer Choice

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Question 1

Multiple Choice

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A consumer chooses an optimal consumption point where the

A) marginal rate of substitution equals the relative price ratio.
B) slope of the indifference curve equals the slope of the budget constraint.
C) ratio of the marginal utilities equals the ratio of the prices.
D) All of the above are correct.

E) All of the above
F) B) and D)

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D

Question 2

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A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect.

A) True
B) False

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Question 3

Multiple Choice

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Figure 21-21 -Refer to Figure 21-21. Suppose that a consumer is originally at point R. Then the price of good X decreases. Which of the following represents the income effect of the price decrease?

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.

The marginal rate of substitution is

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. If Hannah chose to spend $30,000 on consumption when young, then how much could she spend on consumption when old?

Higher education is a normal good. If its price falls,

A good is an inferior good if the consumer buys more of it when

Figure 21-13 -Refer to Figure 21-13. As the consumer moves from A to B to C, the marginal rate of substitution

If an increase in the interest rate raises savings, then

Figure 21-2 The downward-sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which points are affordable?

Figure 21-14 -Refer to Figure 21-14. Which of the graphs illustrates indifference curves for which the marginal rate of substitution varies?

A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect.

Scenario 21-2 Lawrence has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of 8 hours each day) . For each hour Lawrence spends writing, he can earn $75. Lawrence is such a good writer that he can get paid for as many hours of writing as he chooses to work. -Refer to Scenario 21-2. If Lawrence's wage increases to $90 per hour of writing, which of the following points would fall on his budget constraint?

Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has $200 to allocate to these two goods, the price of a CD is $10, and the price of a DVD is $20. What is the maximum number of DVDs the consumer can purchase?

When Adam's income increases, he purchases more tickets to Broadway musicals than he did before his income increased. For Adam, Broadway musicals are a(n)

Giffen goods violate the law of demand.

The relationship between the marginal utility that Casey gets from eating ice cream sundaes and the number of ice cream cones he eats per week is as follows: Casey receives 3 units of utility from the last dollar spent on each of the other goods he consumes. If ice cream sundaes cost $4 each, how many ice cream sundaes will he consume per month if he maximizes utility?

On a graph we draw indifference curves to illustrate Steven's preferences for steak and broccoli. If two of Steven's indifference curves cross, then it cannot be the case that Steven

Suppose that Sam likes pears twice as much as apples, meaning that he is always indifferent between consuming one pear or two apples. Sam's indifference curves for pears and apples are