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Exam 21: The Theory of Consumer Choice

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Question 151

Multiple Choice

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When we derive the demand curve for a good, we should remember that the

A) income effect must be greater than the substitution effect.
B) substitution effect must be greater than the income effect.
C) substitution effect must be in the same direction as the income effect.
D) income effect and the substitution effect may work in the same or in opposite directions.

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

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Question 152

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) A) and C)
F) None of the above

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Question 153

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A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption bundle, the consumer is spending all available income, and the marginal rate of substitution is greater than the slope of the budget constraint. We can conclude that the consumer

List and briefly explain each of the four properties of indifference curves.

In order to represent a consumer's choices on a graph, we draw her budget constraint as well as her curves.

Figure 21-1 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-1. All of the points identified on the figure represent affordable consumption options with the exception of

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

Figure 21-16 -Refer to Figure 21-16. The price of X is $20, the price of Y is $5, and the consumer's income is $40. Which point represents the consumer's optimal choice?

The rate at which a consumer is willing to trade off one good for another is called the .

Cashews and asparagus are normal goods. When the price of asparagus falls, the substitution effect by itself causes

If the income effect counteracts the substitution effect, we know that the good in question is a(n)

Is it possible for a normal good to be a Giffen good? Briefly explain.

The following diagram shows a budget constraint for a particular consumer. If the price of X is $12, then what is the price of Y?

Assume that consumption when young and consumption when old are both normal goods. The income effect of an increase in the interest rate will result in

Figure 21-1 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-1. If the consumer's income is $140, then what is the price of a CD?

A consumer consumes two normal goods, coffee and chocolate. The price of coffee rises. The income effect, by itself, suggests that the consumer will consume

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?

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point illustrating the new marginal rate of substitution is called the

Scenario 21-1 Suppose the price of hot wings is $10, the price of beer is $1, and the consumer's income is $50. In addition, suppose the consumer's budget constraint illustrates hot wings on the horizontal axis and beer on the vertical axis. -Refer to Scenario 21-1. If the consumer's income rises to $60, then the budget line for hot wings and beer would