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Exam 21: The Theory of Consumer Choice.

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Question 161

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A consumer

A) is equally satisfied with any indifference curve.
B) prefers indifference curves with positive slopes.
C) prefers higher indifference curves to lower indifference curves.
D) prefers indifference curves that are straight lines to indifference curves that are right angles.

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

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Question 162

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If an indifference curve is bowed out away from the origin,the marginal rate of substitution is

A) not likely to reflect the relative value of goods.
B) likely to be constant for all bundles along the indifference curve.
C) likely to be identical to the price ratio for each bundle along the indifference curve.
D) different for each bundle along the indifference curve.

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

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Question 163

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Giffen goods violate the law of demand.

The theory of consumer choice illustrates that people face tradeoffs,which is one of the Ten Principles of Economics.

Figure 21-19 The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: -Refer to Figure 21-19.Assume that the consumer has an income of $80.If the price of chocolate chips is $4 and the price of marshmallows is $4,the optimizing consumer would choose to purchase

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

If an indifference curve is bowed in toward the origin,the marginal rate of substitution is

A typical consumer consumes both coffee and donuts.After the consumer's income decreases,the consumer consumes more coffee but fewer donuts than before.For this consumer,coffee is a normal good,but donuts are an inferior good.

The slope of a consumer's budget constraint is unaffected by a change in income.

Traci consumes two goods,lemonade and pretzels.Lemonade costs $1 per glass,and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3.Pretzels cost $2 per bag.The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows: If Traci is maximizing his utility,how much does she spend on potato chips each month?

A decrease in the price of DVD players leads consumers to buy more DVD players.From this information we can conclude that DVD players

Janet knows that she will ultimately face retirement.Assume that Janet will experi-ence two periods in her life,one in which she works and earns income,and one in which she is retired and earns no income.Janet can earn $250,000 during her working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent interest on her savings. a.Use a graph to demonstrate Janet's budget constraint. b.On your graph,show Janet at an optimal level of consumption in the work period equal to $150,000.What is the implied optimal level of consumption in her retirement period? c.Now,using your graph from part b above,demonstrate how Janet will be affected by an increase in the interest rate on savings to 14 percent.Discuss the role of income and substitution effects in determining whether Janet will increase,or decrease her savings in the work period.

The following diagram shows a budget constraint for a particular consumer. If the price of X is $5,what is the price of Y?

Assume that a college student purchases only Ramen noodles and textbooks.If Ramen noodles are an inferior good and textbooks are a normal good,then the substitution effect associated with a decrease in the price of Ramen noodles,by itself,will result in

Suppose Rich always uses two packets of sugar with his coffee.Rich's indifference curves for sugar and coffee are

Figure 21-11 -Refer to Figure 21-11.What is the consumer's marginal rate of substitution as she moves from A to B?

If an increase in the interest rate raises savings,then

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

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

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