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Exam 21: The Theory of Consumer Choice

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Question 1

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Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

A) an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes.The substitution effect is less than the income effect.
B) a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes.The substitution effect is greater than the income effect.
C) an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes.The substitution effect is greater than the income effect.
D) a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes.The substitution effect is less than the income effect.

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

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Question 2

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The indifference curves for nickels and dimes are straight lines.

A) True
B) False

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Question 3

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Figure 21-7 The following graph shows three possible indifference curves (I) for a consumer. ​ -Refer to Figure 21-7. Which of the following statements is correct?

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

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

At a consumer's optimal choice, the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.

Using the graph shown, construct a demand curve for M&M's given an income of $10. ​

Figure 21-7 The following graph shows three possible indifference curves (I) for a consumer. ​ -Refer to Figure 21-7. Which of the following comparisons is correct regarding the marginal rate of substitution (MRS) of scones for pudding?

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.

Figure 21-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. ​ -Refer to Figure 21-18. If Kevin's income is $1,260 and point A is his optimum, then what is the price of a shirt?

For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good.

The direction of the substitution effect is not influenced by whether the good is normal or inferior.

Suppose Caroline is indifferent between tea and coffee as long as she consumes an equivalent amount of caffeine. Suppose that coffee has twice as much caffeine as tea. Which graph would illustrate a representative indifference curve?

When two goods are perfect complements, the indifference curves are right angles.

Figure 21-5 -Refer to Figure 21-5. You have $36 to spend on good X and good Y. If good X costs $6 and good Y costs $12, your budget constraint is

A consumer maximizes utility at a point where multiple indifference curves intersect the budget line.

Figure 21-19 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 21-19. Of the four labeled points, which is (are) affordable to Hannah?

The indifference curves for left gloves and right gloves are straight lines.

The substitution 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 upward.