Chapter 21

Chapter 21 The Theory of Consumer Choice
TRUE/FALSE 1. The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of Economics. ANS: T DIF: 1 R F: !1"# NAT: Analytic $%&: 'tility and consumer choice T%(: &onsumer choice )S&: Definitional !. A consumer*s +ud,et constraint for ,oods - and . is determined +y how much the consumer li/es ,ood relati0e to ,ood .. ANS: F DIF: ! R F: !1"1 NAT: Analytic $%&: 'tility and consumer choice T%(: 1ud,et constraint )S&: Definitional 2. The slope of the +ud,et constraint re0eals the relati0e price of ,ood - compared to ,ood .. ANS: T DIF: ! R F: !1"1 NAT: Analytic $%&: 'tility and consumer choice T%(: 1ud,et constraint )S&: Applicati0e 3. A +ud,et constraint illustrates +undles that a consumer prefers e4ually, while an indifference cur0e illustrates +undles that are e4ually afforda+le to a consumer. ANS: F DIF: ! R F: !1"1 5 !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: 1ud,et constraint )S&: Applicati0e 6. For a typical consumer, most indifference cur0es are +owed inward. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: Indifference cur0es )S&: Interpreti0e 7. For a typical consumer, most indifference cur0es are downward slopin,. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: Indifference cur0es )S&: Interpreti0e 8. For a typical consumer, indifference cur0es can intersect if they satisfy the property of transiti0ity. ANS: F DIF: ! R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: Indifference cur0es )S&: Interpreti0e 9. :hen two ,oods are perfect complements, the indifference cur0es are ri,ht an,les. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: (erfect complements )S&: Interpreti0e ;. The indifference cur0es for left shoes and ri,ht shoes are ri,ht an,les. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: (erfect complements )S&: Applicati0e 1#. The indifference cur0es for perfect su+stitutes are strai,ht lines. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: (erfect su+stitutes )S&: Applicati0e
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&hapter !1<The Theory of &onsumer &hoice

11. The indifference cur0es for nic/els and dimes are strai,ht lines. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: (erfect su+stitutes )S&: Applicati0e 1!. :hen two ,oods are perfect su+stitutes, the indifference cur0es are ri,ht an,les. ANS: F DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: (erfect complements 5 (erfect su+stitutes )S&: Interpreti0e 12. If ,oods A and 1 are perfect su+stitutes, then the mar,inal rate of su+stitution of ,ood A for ,ood 1 is constant. ANS: T DIF: ! R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: )ar,inal rate of su+stitution 5 (erfect su+stitutes )S&: Interpreti0e 13. The slope at any point on an indifference cur0e e4uals the a+solute price at which a consumer is willin, to su+stitute one ,ood for the other. ANS: F DIF: ! R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: )ar,inal rate of su+stitution )S&: Interpreti0e
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16. The mar,inal rate of su+stitution +etween ,oods A and 1 measures the price of A relati0e to the price of 1. ANS: F DIF: ! R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: )ar,inal rate of su+stitution )S&: Definitional 17. The mar,inal rate of su+stitution is the slope of the +ud,et constraint. ANS: F DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: )ar,inal rate of su+stitution )S&: Definitional 18. The mar,inal rate of su+stitution is the slope of the indifference cur0e. ANS: T DIF: 1 R F: !1"! NAT: Analytic $%&: 'tility and consumer choice T%(: )ar,inal rate of su+stitution )S&: Definitional 19. At a consumer*s optimal choice, the consumer chooses the com+ination of ,oods that e4uates the mar,inal rate of su+stitution and the price ratio. ANS: T DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: %ptimi=ation )S&: Interpreti0e 1;. At a consumer*s optimal choice, the consumer chooses the com+ination of ,oods such that the ratio of the mar,inal utilities e4uals the ratio of the prices. ANS: T DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: %ptimi=ation )S&: Interpreti0e !#. If consumers purchase more of a ,ood when their income rises, the ,ood is a normal ,ood. ANS: T DIF: 1 R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Normal ,oods 5 Inferior ,oods )S&: Definitional !1. If a consumer purchases more of ,ood 1 when his income rises, ,ood 1 is an inferior ,ood. ANS: F DIF: 1 R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Normal ,oods 5 Inferior ,oods )S&: Definitional

!!. If a consumer purchases more of ,ood A when her income falls, ,ood A is an inferior ,ood. ANS: T DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Inferior ,oods )S&: Definitional !2. The income effect of a price chan,e is unaffected +y whether the ,ood is a normal or inferior ,ood. ANS: F DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Income effect )S&: Interpreti0e !3. The income effect of a price chan,e is the chan,e in consumption that results from the mo0ement to a new indifference cur0e. ANS: T DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Income effect )S&: Interpreti0e !6. The direction of the su+stitution effect is not influenced +y whether the ,ood is normal or inferior. ANS: T DIF: 2 R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice > .: Su+stitution effect )S&: Analytical !7.
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The su+stitution effect of a price chan,e is the chan,e in consumption that results from the mo0ement to a new indifference cur0e. ANS: F DIF: ! R F: !1"2 NAT: Analytic $%&: 'tility and consumer choice T%(: Su+stitution effect )S&: Interpreti0e !8. All points on a demand cur0e are optimal consumption points. ANS: T DIF: 2 R F: !1"2 $%&: 'tility and consumer choice T%(: Demand NAT: Analytic )S&: Analytical
!9. conomists use the term ?iffen ,ood to descri+e a ,ood that 0iolates the law of demand. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: ?iffen ,ood )S&: Interpreti0e !;. ?iffen ,oods are inferior ,oods for which the income effect dominates the su+stitution effect. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: ?iffen ,ood )S&: Definitional 2#. conomists ha0e found e0idence of a ?iffen ,ood when studyin, the consumption of rice in the &hinese pro0ince of @unan. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: ?iffen ,ood )S&: Applicati0e 21. >atie wins A1 million in her state*s lottery. If >atie drastically reduces the num+er of hours she wor/s after she wins the money, we can infer that the income effect is lar,er than the su+stitution effect for her. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: $a+or supply )S&: Interpreti0e 2!. Susie wins A1 million in her state*s lottery. If Susie /eeps wor/in, after she wins the money, we can infer that the income effect is lar,er than the su+stitution effect for her. ANS: F DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: $a+or supply )S&: Interpreti0e 22. A rational person can ha0e a ne,ati0ely"sloped la+or supply cur0e. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: $a+or supply )S&: Applicati0e

23.
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The su+stitution effect in the wor/"leisure model induces a person to wor/ less in response to hi,her wa,es, which tends to ma/e the la+or"supply cur0e slope upward. ANS: F DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: $a+or supply )S&: Interpreti0e 26. The income effect in the wor/"leisure model induces a person to wor/ less in response to hi,her wa,es, which tends to ma/e the la+or"supply cur0e slope +ac/ward. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: $a+or supply )S&: Interpreti0e 27. Some economists ha0e ad0ocated reducin, the taBation of interest and other capital income, ar,uin, that such a policy chan,e would raise the after"taB interest rate that sa0ers can earn and would there+y encoura,e people to sa0e more. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: &onsumption"sa0in, decision )S&: Interpreti0e 28. A rise in the interest rate will ,enerally result in people consumin, more when they are old if the su+stitution effect outwei,hs the income effect. ANS: T DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: &onsumption"sa0in, decision )S&: Interpreti0e 29. A rise in the interest rate will ,enerally result in people consumin, less when they are old if the su+stitution effect outwei,hs the income effect. ANS: F DIF: ! R F: !1"3 NAT: Analytic $%&: 'tility and consumer choice T%(: &onsumption"sa0in, decision )S&: Interpreti0e SHORT ANS 1. ER Answer the followin, 4uestions +ased on the ta+le. A consumer is a+le to consume the followin, +undles of rice and +eans when the price of rice is A! and the price of +eans is A2. RI& 1! 7 # a. +. c. d. 1 ANS # 3 9 @ow much is this consumerCs incomeD Draw a +ud,et constraint ,i0en this information. $a+el it 1. &onstruct a new +ud,et constraint showin, the chan,e if the price of rice falls A1. $a+el this &. ?i0en the ori,inal prices for rice EA!F and +eans EA2F, construct a new +ud,et constraint if this consumerCs income increased to A39. $a+el this D.

ANS: a. A!3 +. c. d.
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DIF: T%(:
! R F: 1ud,et constraint
!1"1
NAT: Analytic )S&: Applicati0e
$%&: 'tility and consumer choice
!. Draw a +ud,et constraint that is consistent with the followin, prices and income. Income G !## (. G 6# (- G !6 a. Demonstrate how your ori,inal +ud,et constraint would chan,e if income increases to 6##. +. Demonstrate how your ori,inal +ud,et constraint would chan,e if (. decreases to !#. c. Demonstrate how your ori,inal +ud,et constraint would chan,e if (- increases to 3#. ANS:
DIF: T%(:
! R F: 1ud,et constraint
!1"1

2. Assume that a consumer faces the followin, +ud,et constraints.
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a. +. c. d. ANS: a. +. c. d. DIF: T%(: 3.
Assumin, that income is the same on +oth occasions, descri+e the difference in relati0e prices +etween (anel A and (anel 1. If income in (anel 1 is A1!7, what is the price of ,ood -D If income in (anel A is A93, what is the price of ,ood .D Assumin, that the price of ,ood - is the same on +oth occasions, descri+e the difference in income and price of ,ood . +etween (anel A and (anel 1. The price of ,ood . is relati0ely hi,her in (anel A than (anel 1. Said another way, the price of - is relati0ely lower in (anel A than (anel 1. A; A1! Income in (anel A is twice the income in (anel 1, and the price of H.H in (anel 1 is 1<19 the price of H.H in (anel A. ! R F: 1ud,et constraint !1"1 NAT: Analytic )S&: Applicati0e $%&: 'tility and consumer choice
0aluate the followin, statement, H:arren 1uffet is the second richest person in the world. @e doesnCt face any constraint on his a+ility to purchase commodities he wants.H
ANS: 0eryone faces scarcity of resources, re,ardless of how rich they are +ecause wants are assumed to +e infinite. DIF: T%(: 1 R F: 1ud,et constraint !1"1 NAT: Analytic )S&: Interpreti0e $%&: 'tility and consumer choice
6. $ist and +riefly eBplain each of the four properties of indifference cur0es. ANS: 1: @i,her indifference cur0es are preferred to lower ones, +ecause consumers usually prefer more of somethin, to less of it. !: Indifference cur0es are downward slopin,. The slope of an indifference cur0e reflects the rate at which the consumer is willin, to su+stitute one ,ood for another. If the 4uantity of one ,ood is reduced, the 4uantity of the other ,ood must increase in order for the consumer to +e e4ually happy. 2: Indifference cur0es do not cross. If indifference cur0es did cross, the same point could +e on two different cur0es, thus contradictin, the assumption that consumers prefer more of +oth ,oods to less. 3: Indifference cur0es are +owed inward. This is +ecause people are more willin, to trade away ,oods that they ha0e in a+undance and less willin, to trade away ,oods of which they ha0e less. DIF: T%(: 1 R F: Indifference cur0es !1"! NAT: Analytic )S&: Interpreti0e $%&: 'tility and consumer choice

7. Draw indifference cur0es that reflect the followin, preferences. a. pencils with white erasers and pencils with pin/ erasers +. left shoes and ri,ht shoes c. potatoes and rice d. income and polluted water
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ANS:
DIF: T%(:
! R F: Indifference cur0es
!1"!

8. ANS:
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?raphically demonstrate the conditions associated with a consumer optimum. &arefully la+el all cur0es and aBes.
:here )GIncome DIF: T%(: 1 %ptimi=ation R F: !1"2 NAT: Analytic )S&: Applicati0e $%&: 'tility and consumer choice
9. Bplain the relationship +etween the +ud,et constraint and indifference cur0e at a consumer*s optimum. ANS: Since the +ud,et constraint is tan,ent to the indifference cur0e at a consumer*s optimum, the slope of the +ud,et constraint Erelati0e mar/et pricesF and the slope of the indifference cur0e Ethe mar,inal rate of su+stitutionF are e4ual at the optimal consumption point. DIF: T%(: 1 R F: &onsumer choice !1"2 NAT: Analytic )S&: Interpreti0e $%&: 'tility and consumer choice

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Assume that a person consumes two ,oods, &o/e and Snic/ers. 'se a ,raph to demonstrate how the consumer adIusts his<her optimal consumption +undle when the price of &o/e decreases. &arefully la+el all cur0es and aBes. :hat will happen to consumption if &o/e is a normal ,oodD :hat will happen to consumption if &o/e is an inferior ,oodD ERemem+er to eBplain the possi+le chan,e when the income effect dominates and when the su+stitution effect dominates.F
ANS:
If &o/e is a normal ,ood, the consumption of &o/e will increase when the price decreases. If &o/e is an inferior ,ood and the su+stitution effect dominates, the consumption of &o/e will increase when the price decreases. If &o/e is an inferior ,ood and the income effect dominates, the consumption of &o/e will decrease when the price decreases. If consumption decreases, the demand cur0e is upward slopin,, and &o/e would +e a ?iffen ,ood. ?iffen ,oods are 0ery rare in the real world, and &o/e is not li/ely to +e one. DIF: T%(: ! R F: &onsumer choice !1"2 NAT: Analytic )S&: Applicati0e $%&: 'tility and consumer choice

1#. 'sin, the ,raph shown, construct a demand cur0e for )J)Cs ,i0en an income of A1#.
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ANS:
DIF: T%(:
2 Demand
R F: !1"2 )S&: Analytical
NAT: Analytic

11. ANS:
127
'sin, indifference cur0es and +ud,et constraints, ,raphically illustrate the su+stitution and income effect that would result from a chan,e in the price of a normal ,ood.
The ,raph a+o0e illustrates a price decrease for potato chips. )o0in, from point A to point 1 illustrates the su+stitution effect, while mo0in, from point 1 to point & illustrates the income effect. DIF: T%(: 1!. 2 R F: !1"2 Income effect 5 Su+stitution effect NAT: Analytic )S&: Applicati0e $%&: 'tility and consumer choice
Bplain the difference +etween inferior and normal ,oods. As a de0elopin, economy eBperiences increases in income Emeasured +y ?D(F, what would you predict to happen to demand for inferior ,oodsD
ANS: Normal ,oods are those for which consumption increases as income rises. Inferior ,oods are those for which consumption decreases as income rises. :e would eBpect the demand for inferior ,oods to decrease as de0elopin, countries eBperience increases in income. DIF: T%(: 12. ! R F: !1"2 Inferior ,oods 5 Normal ,oods NAT: Analytic )S&: Interpreti0e $%&: 'tility and consumer choice
Kanet /nows that she will ultimately face retirement. Assume that Kanet will eBperience two periods in her life, one in which she wor/s and earns income, and one in which she is retired and earns no income. Kanet can earn A!6#,### durin, her wor/in, period and nothin, in her retirement period. She must +oth sa0e and consume in her wor/ period and can earn 1# percent interest on her sa0in,s. a. 'se a ,raph to demonstrate KanetCs +ud,et constraint. +. %n your ,raph, show Kanet at an optimal le0el of consumption in the wor/ period e4ual to A16#,###. :hat is the implied optimal le0el of consumption in her retirement periodD c. Now, usin, your ,raph from part + a+o0e, demonstrate how Kanet will +e affected +y an increase in the interest rate on sa0in,s to 13 percent. Discuss the role of income and su+stitution effects in determinin, whether Kanet will increase, or decrease her sa0in,s in the wor/ period. a. +. c. see ,raph +elow see ,raph +elow see ,raph +elow
ANS:
128
Su+stitution effect: Retirement spendin, +ecomes less costly, so she should increase sa0in,. Income effect: As income increases she should increase consumption in +oth periods Ethus reducin, her sa0in, in the wor/ period.F DIF: T%(: 2 R F: !1"3 &onsumption"sa0in, decision NAT: Analytic )S&: Applicati0e $%&: 'tility and consumer choice
Sec !! " The Theory of Consumer Choice

#ULT$%LE CHO$CE 1. :hich of the followin, does not represent a tradeoff facin, a consumerD a. choosin, to purchase more of all ,oods +. choosin, to spend more leisure time and less wor/in, time c. choosin, to spend more now and consume less in the future d. choosin, to purchase less of one ,ood in order to purchase more of another ,ood R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !.
@ow are the followin, three 4uestions related: 1F Do all demand cur0es slope downwardD !F @ow do wa,es affect la+or supplyD 2F @ow do interest rates affect household sa0in,D a. They all relate to macroeconomics. +. They all relate to monetary economics. c. They all relate to the theory of consumer choice. d. They are not related to each other in any way. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 2.
Kust as the theory of the competiti0e firm pro0ides a more complete understandin, of supply, the theory of consumer choice pro0ides a more complete understandin, of a. demand. +. profits. c. production possi+ility frontiers. d. wa,es.

ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 3. R F: T%(: !1"# NAT: Analytic &onsumer choice
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:hich of the followin, statements is correctD a. The theory of consumer choice pro0ides a more complete understandin, of supply, Iust as the theory of the competiti0e firm pro0ides a more complete understandin, of demand. +. The theory of consumer choice pro0ides a more complete understandin, of demand, Iust as the theory of the competiti0e firm pro0ides a more complete understandin, of supply. c. )onetary theory pro0ides a more complete understandin, of demand, Iust as the theory of the competiti0e firm pro0ides a more complete understandin, of supply. d. The theory of pu+lic choice pro0ides a more complete understandin, of supply, Iust as the theory of the competiti0e firm pro0ides a more complete understandin, of demand. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 6.
:hen a consumer spends less time enIoyin, leisure and more time wor/in,, she has a. lower income and therefore cannot afford more consumption. +. lower income and therefore can afford more consumption. c. hi,her income and therefore cannot afford more consumption. d. hi,her income and therefore can afford more consumption. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 7.
The theory of consumer choice pro0ides the foundation for understandin, the a. structure of a firm. +. profita+ility of a firm. c. demand for a firmCs product. d. supply of a firmCs product. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 8.
The theory of consumer choice eBamines a. the determination of output in competiti0e mar/ets. +. the tradeoffs inherent in decisions made +y consumers. c. how consumers select inputs into manufacturin, production processes. d. the determination of prices in competiti0e mar/ets. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 9.
The theory of consumer choice most closely eBamines which of the followin, Ten Principles of EconomicsD a. (eople face trade"offs. +. The cost of somethin, is what you ,i0e up to ,et it. c. Trade can ma/e e0eryone +etter off. d. )ar/ets are usually a ,ood way to or,ani=e economic acti0ity. R F: T%(: !1"# NAT: Analytic &onsumer choice
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e
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Sec !1" The Theory of Consumer Choice " The &u'(et Constraint) Can Affor'
#ULT$%LE CHO$CE 1.
hat the Consumer
>aren, Tara, and &helsea each +uy ice cream and paper+ac/ no0els to enIoy on hot summer days. Ice cream costs A6 per ,allon, and paper+ac/ no0els cost A9 each. >aren has a +ud,et of A9#, Tara has a +ud,et of A7#, and &helsea has a +ud,et of A3# to spend on ice cream and paper+ac/ no0els. :ho can afford to purchase 9 ,allons of ice cream and 6 paper+ac/ no0elsD a. >aren, Tara, and &helsea +. >aren only c. Tara and &helsea +ut not >aren d. none of the women R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !.
>aren, Tara, and &helsea each +uy ice cream and paper+ac/ no0els to enIoy on hot summer days. Ice cream costs A6 per ,allon, and paper+ac/ no0els cost A9 each. >aren has a +ud,et of A9#, Tara has a +ud,et of A7#, and &helsea has a +ud,et of A3# to spend on ice cream and paper+ac/ no0els. :ho can afford to purchase 6 ,allons of ice cream and 9 paper+ac/ no0elsD a. >aren, Tara, and &helsea +. >aren only c. Tara and &helsea +ut not >aren d. none of the women R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 2.
>aren, Tara, and &helsea each +uy ice cream and paper+ac/ no0els to enIoy on hot summer days. Ice cream costs A6 per ,allon, and paper+ac/ no0els cost A9 each. >aren has a +ud,et of A9#, Tara has a +ud,et of A7#, and &helsea has a +ud,et of A3# to spend on ice cream and paper+ac/ no0els. :ho can afford to purchase 3 ,allons of ice cream and 6 paper+ac/ no0elsD a. >aren, Tara, and &helsea +. >aren only c. >aren and Tara +ut not &helsea d. none of the women R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
>aren, Tara, and &helsea each +uy ice cream and paper+ac/ no0els to enIoy on hot summer days. Ice cream costs A6 per ,allon, and paper+ac/ no0els cost A9 each. >aren has a +ud,et of A9#, Tara has a +ud,et of A7#, and &helsea has a +ud,et of A3# to spend on ice cream and paper+ac/ no0els. :hich of the followin, statements is correctD a. ach woman faces the same +ud,et constraint. +. The slope of the +ud,et constraint is the same for each woman. c. The area underneath the +ud,et constraint is lar,er for &helsea than for >aren. d. All of the a+o0e are correct. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

6.
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Suppose a consumer has an income of A9## per month and that she spends her entire income each month on +eer and +ratwurst. The price of a pint of +eer is A6, and the price of a +ratwurst is A3. :hich of the followin, com+inations of +eers and +ratwursts represents a point that would lie to the interior of the consumer*s +ud,et constraintD a. 17# +eers and !## +ratwursts +. 3# +eers and 6# +ratwursts c. 9# +eers and 1## +ratwursts d. 17# +eers and # +ratwursts R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical 7.
Suppose a consumer has an income of A9## per month and that she spends her entire income each month on +eer and +ratwurst. The price of a pint of +eer is A6, and the price of a +ratwurst is A3. :hich of the followin, com+inations of +eers and +ratwursts represents a point that would lie to the exterior of the consumer*s +ud,et constraintD a. 17# +eers and !## +ratwursts +. 3# +eers and 6# +ratwursts c. 9# +eers and 1## +ratwursts d. 17# +eers and # +ratwursts R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical 8.
Suppose a consumer has an income of A9## per month and that she spends her entire income each month on +eer and +ratwurst. The price of a pint of +eer is A6, and the price of a +ratwurst is A3. :hich of the followin, com+inations of +eers and +ratwursts represents a point that would lie directly on the consumer*s +ud,et constraintD a. 17# +eers and !## +ratwursts +. 3# +eers and 6# +ratwursts c. 9# +eers and 1## +ratwursts d. 9# +eers and # +ratwursts R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical 9.
&onsider two ,oods, +oo/s and ham+ur,ers. The slope of the consumerCs +ud,et constraint is measured +y the a. consumerCs income di0ided +y the price of ham+ur,ers. +. relati0e price of +oo/s and ham+ur,ers. c. consumerCs mar,inal rate of su+stitution. d. num+er of +oo/s purchased di0ided +y the num+er of ham+ur,ers purchased. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e ;.
Suppose a consumer spends his income on &Ds and DLDs. If his income decreases, the +ud,et constraint for &Ds and DLDs will a. shift outward, parallel to the ori,inal +ud,et constraint. +. shift inward, parallel to the ori,inal +ud,et constraint. c. rotate outward alon, the &D aBis +ecause he can afford more &Ds. d. rotate outward alon, the DLD aBis +ecause he can afford more DLDs. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical

1#. :hen the price of a shirt falls, the a. 4uantity of shirts demanded falls. +. 4uantity of shirts demanded rises. c. 4uantity of shirts supplied rises. d. demand for shirts falls. R F: T%(: !1"1 Demand NAT: Analytic )S&: Analytical
131
ANS: 1 DIF: 1 $%&: 'tility and consumer choice 11.
A +ud,et constraint illustrates the a. prices that a consumer chooses to pay for products he consumes. +. purchases made +y consumers. c. consumption +undles that a consumer can afford. d. consumption +undles that ,i0e a consumer e4ual satisfaction. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 1!.
Assume that a colle,e student spends her income on +oo/s and pi==a. The price of a pi==a is A9, and the price of a +oo/ is A16. If she has A1## of income, she could choose to consume a. 9 pi==as and 3 +oo/s. +. 3 pi==as and 6 +oo/s. c. ; pi==as and 2 +oo/s. d. 3 pi==as and 2 +oo/s. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 12.
Assume that a colle,e student spends her income on mac"n"cheese and &Ds. The price of one +oB of mac"n" cheese is A1, and the price of one &D is A1!. If she has A1## of income, she could choose to consume a. 16 +oBes of mac"n"cheese and 7 &Ds. +. !# +oBes of mac"n"cheese and 8 &Ds. c. 1# +oBes of mac"n"cheese and 9 &Ds. d. 2# +oBes of mac"n"cheese and 7 &Ds. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 13.
A consumer who doesnCt spend all of her income a. would +e at a point outside of her +ud,et constraint. +. would +e at a point inside her +ud,et constraint. c. must not +e consumin, positi0e 4uantities of all ,oods. d. must +e consumin, at a point where her +ud,et constraint touches one of the aBes. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 16.
An increase in income will cause a consumerCs +ud,et constraint to a. shift outward, parallel to its initial position. +. shift inward, parallel to its initial position. c. pi0ot around the hori=ontal aBis. d. pi0ot around the 0ertical aBis. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical

Figure 21-1
13!
17.
Refer to Fi(ure 21"1. :hich point in the fi,ure showin, a consumer*s +ud,et constraint represents the consumerCs income di0ided +y the price of a &DD a. point A +. point & c. point D d. point R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 18.
Refer to Fi(ure 21"1. A consumer that chooses to spend all of her income could +e at which pointEsF on the +ud,et constraintD a. A only +. only c. 1, &, or D only d. A, 1, &, or D only R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Fi(ure 21"1. All of the points identified in the fi,ure represent afforda+le consumption options with the eBception of a. A. +. . c. A and . d. None. All points are afforda+le. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

Figure 21-2
Pepsi
132
L :
. Pizza
1;.
Refer to Fi(ure 21"2. A consumer that chooses to spend all of her income could +e at which pointEsF on the +ud,et constraintD a. L only +. M only c. L, :, -, or . only d. :, -, or . only R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !#.
Refer to Fi(ure 21"2. :hich points are afforda+leD a. :, -, and . only +. M only c. L, :, -, and . only d. L, :, -, ., and M R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !1.
Refer to Fi(ure 21"2. :hich of the followin, statements is not correctD a. (oints :, -, and . all cost the consumer the same amount of money. +. (oint M is unafforda+le for the consumer ,i0en his +ud,et constraint. c. (oint L costs less than point M. d. (oints :, -, and . ,i0e the consumer the same le0el of satisfaction. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical !!.
Refer to Fi(ure 21"2. :hich of the followin, statements is correctD a. (oints :, -, and . all cost the consumer the same amount of money. +. (oint L is unafforda+le for the consumer ,i0en his +ud,et constraint. c. (oint M costs less than point L. d. (oints :, -, and . ,i0e the consumer the same le0el of satisfaction. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint

Figure 21-3 In each case, the +ud,et constraint mo0es from 1&"1 to 1&"!.
y y
133
EaF
E+F
1&"!
1&"1 x
1&"1
1&"! x
EcF
1&"1 1&"!
EdF
1&"!
1&"1
!2.
Refer to Fi(ure 21"*. :hich of the ,raphs in the fi,ure reflects a decrease in the price of ,ood - onlyD a. ,raph a +. ,raph + c. ,raph c d. ,raph d R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical !3.
Refer to Fi(ure 21"*. :hich of the ,raphs in the fi,ure reflects an increase in the price of ,ood . onlyD a. ,raph a +. ,raph + c. ,raph c d. ,raph d R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical !6.
Refer to Fi(ure 21"*. :hich of the ,raphs in the fi,ure could reflect a decrease in the prices of +oth ,oodsD a. ,raph a +. ,raph + c. ,raph c d. None of the a+o0e is correct. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical

!7. The followin, dia,ram shows two +ud,et lines: A and 1.
136
:hich of the followin, could eBplain the chan,e in the +ud,et line from A to 1D a. a decrease in the price of +. an increase in the price of . c. a decrease in the price of . d. )ore than one of the a+o0e could eBplain this chan,e. ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical !8. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
The followin, dia,ram shows two +ud,et lines: A and 1.
:hich of the followin, could eBplain the chan,e in the +ud,et line from A to 1D a. a simultaneous decrease in the price of - and the price of . +. an increase in income c. an increase in income and a decrease in the price of . d. 1oth a and + are correct. ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"1 NAT: Analytic 1ud,et constraint

!9. The followin, dia,ram shows two +ud,et lines: A and 1.
137
:hich of the followin, could eBplain the chan,e in the +ud,et line from A to 1D a. a decrease in income and a decrease in the price of +. a decrease in income and an increase in the price of c. an increase in income and a decrease in the price of d. an increase in income and an increase in the price of ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical !;. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
The slope of the +ud,et constraint is determined +y the a. relati0e price of the ,oods measured on the aBes. +. relati0e price of the ,oods measured on the aBes and the consumer*s income. c. endowment of producti0e resources. d. preferences of the consumer. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 2#.
The slope of the +ud,et constraint is all of the followin, except a. the relati0e price of two ,oods. +. the rate at which a consumer can trade one ,ood for another. c. the mar,inal rate of su+stitution. d. constant. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional

Figure 21-4
138
21.
Refer to Fi(ure 21"+. In ,raph EaF, if income is e4ual to A1!#, the price of ,ood . is a. A1 +. A! c. A2 d. A3 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 2!.
Refer to Fi(ure 21"+. In ,raph EaF, what is the price of ,ood . relati0e to ,ood - Ei.e., (y<(BFD a. 1<2 +. 1<3 c. 2 d. 3 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 22.
Refer to Fi(ure 21"+. In ,raph E+F, what is the price of ,ood - relati0e to ,ood . Ei.e., (B<(yFD a. !<8 +. 2<7 c. 8<! d. 8 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 23.
Refer to Fi(ure 21"+. Assume that a consumer faces +oth +ud,et constraints in ,raph EaF and ,raph E+F on two different occasions. If her income has remained constant, what has happened to pricesD a. The price of - in ,raph EaF is hi,her than the price of - in ,raph E+F. +. The price of . in ,raph EaF is hi,her than the price of . in ,raph E+F. c. The prices of +oth - and . are lower in ,raph EaF. d. None of the a+o0e is true. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

26.
139
Suppose a consumer spends her income on two ,oods: music &Ds and DLDs. The consumer has A!## to allocate to these two ,oods, the price of a &D is A1#, and the price of a DLD is A!#. :hat is the maBimum num+er of &Ds the consumer can purchaseD a. 1# +. !# c. 3# d. 6# R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Suppose a consumer spends her income on two ,oods: iTunes music downloads and +oo/s. The consumer has A1## to allocate to these two ,oods, the price of a downloaded son, is A1, and the price of a +oo/ is A!#. :hat is the maBimum num+er of +oo/s the consumer can purchaseD a. 1## +. !# c. 1# d. 6 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Suppose a consumer spends her income on two ,oods: music &Ds and DLDs. The price of a &D is A9, and the price of a DLD is A!#. If we ,raph the +ud,et constraint +y placin, the 4uantity of &Ds purchased on the hori=ontal aBis, what is the slope of the +ud,et constraintD a. "6.# +. "!.6 c. "#.3 d. The slope of the +ud,et constraint cannot +e determined without /nowin, the income the consumer has a0aila+le to spend on the two ,oods. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Suppose a consumer is currently spendin, all of her a0aila+le income on two ,oods: music &Ds and DLDs. If the price of a &D is A;, the price of a DLD is A19, and she is currently consumin, 1# &Ds and 6 DLDs, what is the consumerCs incomeD a. A;# +. A19# c. A!8# d. A27# R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 2;.
A consumer is currently spendin, all of her a0aila+le income on two ,oods: music &Ds and DLDs. At her current consumption +undle she is spendin, twice as much on &Ds as she is on DLDs. If the consumer has A1!# of income and is consumin, 1# &Ds and ! DLDs, what is the price of a &DD a. A3 +. A9 c. A1! d. A!# R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

3#. The followin, dia,ram shows a +ud,et constraint for a particular consumer.
13;
If the price of - is A1#, what is the price of .D a. A16 +. A!6 c. A26 d. A8# ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 31.
3# 2# !# 1# 1# !# 2# 3# 6# 7# 8# 9# ;# x y
R F: T%(:
!1"1 NAT: Analytic 1ud,et constraint
The followin, dia,ram shows a +ud,et constraint for a particular consumer.
If the price of - is A6, what is the price of .D a. A! +. A1# c. A2# d. A2## ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"1 NAT: Analytic 1ud,et constraint

3!.
3# 2# !# 1# 1# !# 2# 3# 6# 7# 8# 9# ;# x
16#
The followin, dia,ram shows a +ud,et constraint for a particular consumer.

y
If the price of - is A6, what is the consumer*s incomeD a. A! +. A1# c. A2# d. A2## ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 32. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
1ud,et constraints eBist for consumers +ecause a. their utility from consumin, ,oods e0entually reaches a maBimum le0el. +. e0en with unlimited incomes they ha0e to pay for each ,ood they consume. c. they ha0e to pay for ,oods, and they ha0e limited incomes. d. prices and incomes are in0ersely related. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 33.
A family on a trip +ud,ets A9## for meals and ,asoline. If the price of a meal for the family is A6#, how many meals can the family +uy if they do not +uy any ,asolineD a. 9 +. 17 c. !3 d. 2! R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 36.
A family on a trip +ud,ets A9## for meals and hotel accommodations. Suppose the price of a meal is A3#. In addition, suppose the family could afford a total of 9 ni,hts in a hotel if they don*t +uy any meals. @ow many meals could the family afford if they ,a0e up two ni,hts in the hotelD a. 1 +. ! c. 6 d. 9 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
If the price of +read is =ero, the +ud,et constraint +etween +read Eon the 0ertical aBisF and cheese Eon the hori=ontal aBisF would a. +e 0ertical. +. coincide with the 0ertical aBis. c. coincide with the hori=ontal aBis. d. +e hori=ontal. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
161
Scenario 21-1 Suppose the price of hot win,s is A1#, the price of +eer is A1, and the consumer*s income is A6#. In addition, suppose the consumer*s +ud,et constraint illustrates hot win,s on the hori=ontal aBis and +eer on the 0ertical aBis. 38. Refer to Scenario 21"1, If the price of +eer dou+les to A!, then the a. +ud,et constraint intersects the 0ertical aBis at !6 +eers. +. slope of the +ud,et constraint rises to "!. c. +ud,et constraint intersects the 0ertical aBis at 1## +eers. d. +ud,et constraint shifts inward in a parallel fashion. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Scenario 21"1, If the consumerCs income rises to A7#, then the +ud,et line for hot win,s and +eer would a. now intersect the hori=ontal aBis at 7 orders of hot win,s and the 0ertical aBis at 7# +eers. +. not chan,e. c. now intersect the hori=ontal aBis at 3 orders of hot win,s and the 0ertical aBis at 17 +eers. d. rotate outward alon, the +eer aBis. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 3;.
An increase in a consumerCs income a. increases the slope of the consumerCs +ud,et constraint. +. has no effect on the slope of the consumerCs +ud,et constraint. c. decreases the slope of the consumerCs +ud,et constraint. d. has no effect on the consumerCs +ud,et constraint. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical 6#.
A decrease in a consumerCs income a. increases the slope of the consumerCs +ud,et constraint. +. has no effect on the consumerCs +ud,et constraint. c. decreases the slope of the consumerCs +ud,et constraint. d. has no effect on the slope of the consumerCs +ud,et constraint. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical 61.
)ar/ spends his wee/ly income on ,in and coc/tail oli0es. The price of ,in has risen from A8 to A; per +ottle, the price of coc/tail oli0es has fallen from A7 to A6 per Iar, and )ar/Cs income has stayed fiBed at A37 per wee/. Since the price chan,es, )ar/ has +een +uyin, 3 +ottles of ,in and ! Iars of coc/tail oli0es per wee/. At the ori,inal prices, 3 +ottles of ,in and ! Iars of coc/tail oli0es would ha0e a. eBactly eBhausted his income. +. cost more than his income. c. cost less than his income. d. could ha0e maBimi=ed his satisfaction ,i0en his +ud,et constraint. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

6!.
16!
)ar/ spends his wee/ly income on ,in and coc/tail oli0es. The price of ,in has risen from A8 to A; per +ottle, the price of coc/tail oli0es has fallen from A7 to A6 per Iar, and )ar/Cs income has stayed fiBed at A37 per wee/. If you illustrate ,in on the 0ertical aBis and coc/tail oli0es on the hori=ontal aBis, then the +ud,et constraint a. is steeper after the price chan,es. +. is flatter after the price chan,es. c. is the same after the price chan,es. d. shifts in a parallel fashion to the old +ud,et constraint after the price chan,es. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Suppose the only two ,oods that 1rett consumes are wine and cheese. :hen wine sells for A1# a +ottle and cheese sell for A1# a pound, he +uys 7 +ottles of wine and 3 pounds of cheese N spendin, his entire income of A1##. %ne day the price of wine falls to A6 a +ottle and the price of cheese increases to A!# a pound, while his income does not chan,e. The +undle of wine and cheese that he purchased at the old prices now costs a. the same amount at the new prices. +. less than 1rettCs income at the new prices. c. more than 1rettCs income at the new prices. d. :e do not ha0e enou,h information to answer the 4uestion. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Suppose the only two ,oods that 1rett consumes are wine and cheese. :hen wine sells for A1# a +ottle and cheese sell for A1# a pound, he +uys 7 +ottles of wine and 3 pounds of cheese N spendin, his entire income of A1##. %ne day the price of wine falls to A6 a +ottle, and the price of cheese increases to A!# a pound, while his income does not chan,e. If you illustrate wine on the 0ertical aBis and cheese on the hori=ontal aBis, then a. the slope of 1rettCs +ud,et has not chan,ed. +. the slope of 1rettCs +ud,et constraint is flatter at the new prices. c. the slope of 1rettCs +ud,et constraint is steeper at the new prices. d. 1rettCs +ud,et constraint has shifted in a parallel fashion to the +ud,et constraint with the old prices. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
If the relati0e price of a concert tic/et is three times the price of a meal at a ,ood restaurant, then the opportunity cost of a concert tic/et can +e measured +y the a. slope of the +ud,et constraint. +. slope of an indifference cur0e. c. mar,inal rate of su+stitution. d. income effect. R F: T%(: !1"1 NAT: Analytic 1ud,et constraint

Figure 21-5
Mt. Dew
162
Popcorn
67.
Refer to Fi(ure 21"-, Suppose a consumer has A1## in income, the price of popcorn is A!, and the 0alue of 1 is 1##. :hat is the price of )t. DewD a. A1 +. A! c. A6 d. A1## R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Fi(ure 21"-, Suppose a consumer has A!## in income, the price of popcorn is A1, and the price of )t. Dew is A!. :hat is the 0alue of AD a. !## +. 1## c. 6# d. !6 R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Fi(ure 21"-, Suppose the price of popcorn is A!, the price of )t. Dew is A3, the 0alue of A is 2#, and the 0alue of 1 is 16. @ow much income does the consumer ha0eD a. A1!# +. A9# c. A7# d. A2# R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical

Figure 21-6
DVDs
163
Books
6;.
Refer to Fi(ure 21"., Suppose a consumer has A6## in income, the price of a +oo/ is A1#, and the 0alue of 1 is 6#. :hat is the price of a DLDD a. A6 +. A1# c. A6# d. A1## R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Fi(ure 21"., Suppose a consumer has A!## in income, the price of a +oo/ is A6, and the price of a DLD is A1#. :hat is the 0alue of AD a. 3# +. !# c. 1# d. ! R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Refer to Fi(ure 21"., Suppose the price of a +oo/ is A16, the price of a DLD is A1#, the 0alue of A is 6, and the 0alue of 1 is 8.6. @ow much income does the consumer ha0eD a. A16# +. A1## c. A86 d. A28.6# R F: T%(: !1"1 NAT: Analytic 1ud,et constraint
Sec !2 " The Theory of Consumer Choice " %references)

#ULT$%LE CHO$CE 1. An indifference cur0e illustrates a. a firm*s profits. +. a consumer*s +ud,et. c. a consumer*s preferences. d. the prices of two ,oods.
hat the Consumer
ants

ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional !. R F: T%(: !1"! NAT: Analytic Indifference cur0es
166
conomists represent a consumerCs preferences usin, a. demand cur0es. +. +ud,et constraints. c. indifference cur0es. d. supply cur0es. R F: T%(: !1"! NAT: Analytic Indifference cur0es
If two +undles of ,oods ,i0e a consumer the same satisfaction, the consumer must +e a. on her +ud,et constraint. +. in a position of e4uili+rium. c. indifferent +etween the +undles. d. 1oth a and c are correct. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Indifference cur0es ,raphically represent a. an income le0el sufficient to allow an indi0idual to achie0e a ,i0en le0el of satisfaction. +. the constraints faced +y indi0iduals. c. an indi0idualCs preferences. d. the relati0e price of commodities. R F: T%(: !1"! NAT: Analytic Indifference cur0es
A consumer a. is e4ually satisfied with any indifference cur0e. +. prefers indifference cur0es with positi0e slopes. c. prefers hi,her indifference cur0es to lower indifference cur0es. d. prefers indifference cur0es that are strai,ht lines to indifference cur0es that are ri,ht an,les.. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 7.
A consumerCs preferences pro0ide a a. ran/in, of the set of +undles that happen to fall on indifference cur0es. +. relati0e ran/in, of +undles that pro0ide more of all ,oods. c. framewor/ for e0aluatin, mar/et e4uili+riums. d. complete ran/in, of all possi+le consumption +undles. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Definitional

8.
167
If :alter has one hour of leisure time in which to watch a sportin, e0ent on tele0ision, his preferences are as follows: :alter prefers watchin, foot+all to watchin, +ase+all, +ut he prefers watchin, +ase+all to watchin, +as/et+all. @e is indifferent +etween watchin, +ase+all and watchin, hoc/ey. 1undle A contains one hour of foot+all and =ero hours of all other sports. 1undle 1 contains one hour of +ase+all and =ero hours of all other sports. 1undle & contains one hour of +as/et+all and =ero hours of all other sports. 1undle D contains one hour of hoc/ey and =ero hours of all other sports. If we were to ,raph :alter*s preferences usin, indifference cur0es, which of the followin, +undles would +e on the same indifference cur0eD a. A, 1, and & only +. 1 and D only c. A and D only d. There is no com+ination of the sports that could +e drawn on the same indifference cur0e. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 9.
Diana and Sarah each li/e Iewelry and music +y the Rollin, Stones. If we were to ,raph an indifference cur0e with Iewelry on the hori=ontal aBis and cd*s +y the Rollin, Stones on the 0ertical aBis, then a. Diana and Sarah would ha0e identical indifference cur0es. +. Diana*s indifference cur0e would +e hi,her than Sarah*s indifference cur0e. c. Sarah*s indifference cur0e would +e hi,her than Diana*s indifference cur0e. d. 1ecause we do not /now the intensity of each woman*s preferences, we do not ha0e enou,h information to compare their indifference cur0es. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;.
1oth Diana and Sarah li/e Ia== music and music +y the 1eatles. Diana li/es music +y the 1eatles much +etter than Ia== music, whereas Sarah prefers Ia== music to music +y the 1eatles. If we were to ,raph an indifference cur0e with cd*s +y the 1eatles on the hori=ontal aBis and Ia== cd*s on the 0ertical aBis, then a. Diana and Sarah would ha0e identical indifference cur0es. +. Diana*s indifference cur0e would +e steeper than Sarah*s indifference cur0e. c. Sarah*s indifference cur0e would +e steeper than Diana*s indifference cur0e. d. :e do not ha0e enou,h information to compare their indifference cur0es. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Alicia is a 0e,etarian, so she does not eat +eef. That is, +eef pro0ides no additional utility to Alicia. She lo0es potatoes, howe0er. If we illustrate Alicia*s indifference cur0es +y drawin, +eef on the hori=ontal aBis and potatoes on the 0ertical aBis, her indifference cur0es will a. slope downward. +. +e 0ertical strai,ht lines. c. slope upward. d. +e hori=ontal strai,ht lines. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 11.
Irene is a 0e,etarian, so she does not eat por/. That is, por/ pro0ides no additional utility to Irene. She lo0es +roccoli, howe0er. If we illustrate Irene*s indifference cur0es +y drawin, +roccoli on the hori=ontal aBis and por/ on the 0ertical aBis, her indifference cur0es will a. slope downward. +. +e 0ertical strai,ht lines. c. slope upward. d. +e hori=ontal strai,ht lines. R F: T%(: !1"! NAT: Analytic Indifference cur0es

Figure 21-7
Donuts
168
1 D &
Indifference &ur0e 2 Indifference &ur0e ! Indifference &ur0e 1

Cake
1!.
Refer to Fi(ure 21"/, :hen comparin, +undle A to +undle , the consumer a. prefers +undle A +ecause it contains more donuts. +. prefers +undle +ecause it lies on a hi,her indifference cur0e. c. prefers +undle +ecause it contains more donuts. d. is indifferent +etween the two +undles. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Refer to Fi(ure 21"/, :hen comparin, +undle 1 to +undle &, the consumer a. prefers +undle 1 +ecause it contains more donuts. +. is indifferent +etween the two +undles. c. prefers +undle & +ecause it contains more ca/e. d. In order to compare +undle 1 to +undle &, we must /now the prices of ca/e and donuts. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Refer to Fi(ure 21"/. A person that chooses to consume +undle & is li/ely to a. recei0e hi,her total satisfaction at +undle & than at +undle A. +. spend more on +undle & than +undle A. c. recei0e hi,her mar,inal utility from ca/e than from donuts. d. recei0e hi,her mar,inal utility from donuts than from ca/e. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Refer to Fi(ure 21"/. :hich of the followin, statements is correctD a. 1undle A is preferred e4ually to +undle . +. 1undle A is preferred e4ually to +undle &. c. 1undle 1 contains more ca/e than +undle &. d. The +undles alon, indifference cur0e Indifference &ur0e ! are preferred to those alon, indifference cur0e Indifference &ur0e 2. R F: T%(: !1"! NAT: Analytic Indifference cur0es

17. Refer to Fi(ure 21"/. :hich of the followin, statements is correctD a. If a consumer mo0es from +undle & to +undle A, her loss of ca/e cannot +e compensated for +y an increase in donuts. +. 1undle is preferred to all other points identified in the fi,ure. c. Since more is preferred to less, +undle & may +e preferred to +undle in some circumstances for this consumer. d. 0en thou,h +undle has more of +oth ,oods than +undle 1, we could draw a different set of indifference cur0es in which +undle 1 is preferred to +undle . R F: T%(: !1"! NAT: Analytic Indifference cur0es
169
Refer to Fi(ure 21"/. :hich of the followin, statements is not true for a consumer who mo0es from +undle 1 to +undle &D a. At +undle & the consumer would +e willin, to ,i0e up a lar,er amount of ca/e in eBchan,e for a donut than at +undle 1. +. The mar,inal rate of su+stitution at +undles 1 and & are the same since the points lie on the same indifference cur0e. c. The consumer is willin, to sacrifice donuts to o+tain ca/e. d. The consumer recei0es the same le0el of satisfaction at +undles 1 and &. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Refer to Fi(ure 21"/. :hich of the followin, statements is not correctD a. 1undles on Indifference &ur0e 2 are preferred to +undles on Indifference &ur0e 1. +. The consumer is indifferent +etween +undles A and +ecause they contain the same num+er of donuts. c. The consumer is indifference +etween +undles 1 and &. d. The consumer prefers +undle & to +undle D. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical 1;.
Refer to Fi(ure 21"/, :hich of the followin, comparisons is correct re,ardin, the mar,inal rate of su+stitution E)RSF of donuts for ca/eD a. The )RS is ,reater +etween +undles A and 1 than +etween +undles 1 and &. +. The )RS is ,reater +etween +undles 1 and & than +etween +undles A and 1. c. The )RS is the same +etween +undles A and 1 and +undles 1 and & +ecause all three +undles lie on the same indifference cur0e. d. The )RS is ,reater +etween +undles and 1 than +etween +undles 1 and D. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical !#.
ach of the followin, are characteristics of an indifference cur0e map except a. mo0in, northeast to a new indifference cur0e will increase utility. +. points on the same indifference cur0e yield e4ual utility. c. the aBes represent le0els of utility for each of the ,oods. d. indifference cur0es cannot cross. R F: T%(: !1"! NAT: Analytic Indifference cur0es

!1.
16;
1undle A contains 1# units of ,ood - and 6 units of ,ood .. 1undle 1 contains 6 units of ,ood - and 1# units of ,ood .. 1undle & contains 1# units of ,ood - and 1# units of ,ood .. The consumer is indifferent +etween +undle A and +undle 1. Assume that the consumer*s preferences satisfy the four properties of indifference cur0es. :hich of the followin, statements is correctD a. The consumer must prefer +undle & to either +undle A or 1. +. 1undle A and +undle 1 lie on the same indifference cur0e. c. The consumer must prefer +undle 1 to +undle &. d. 1oth aF and +F are correct. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e !!.
A consumer has preferences o0er two ,oods: +oo/s and mo0ies. The two +undles shown in the ta+le +elow lie on the same indifference cur0e for the consumer. &un'0e A 1 &oo1s ! 2 #o2ies 2 !
:hich of the followin, +undles could not lie on the same indifference cur0e with A and 1 and satisfy the four properties of indifference cur0esD a. 1 mo0ie and 6 +oo/s +. 2 mo0ies and 2 +oo/s c. 6 mo0ies and 1 +oo/ d. 1 mo0ie and 8 +oo/s ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical !2. R F: T%(: !1"! NAT: Analytic Indifference cur0es
A consumer has preferences o0er two ,oods: +oo/s and mo0ies. The three +undles shown in the ta+le +elow lie on the same indifference cur0e for the consumer. &un'0e A 1 & &oo1s ! 3 2 #o2ies 3 ! 2
:hich of the followin, properties of indifference cur0es would this consumerCs preferences 0iolateD a. Indifference cur0es are downward slopin,. +. Indifference cur0es do not cross. c. Indifference cur0es are +owed inward. d. These +undles do not 0iolate any of the properties of indifference cur0es. ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical !3. R F: T%(: !1"! NAT: Analytic Indifference cur0es
$aura consumes only +eer and chips. @er indifference cur0es are all +owed inward. &onsider the +undles E!,7F, E3,3F, and E7,!F. If $aura is indifferent +etween E!,7F and E7,!F, then $aura must a. prefer E3,3F to E7,!F. +. +e indifferent +etween E3,3F and E7,!F. c. prefer E7,!F to E3,3F. d. prefer E!,7F to E3,3F. R F: T%(: !1"! NAT: Analytic Indifference cur0es

!6. :hich of the followin, is a property of indifference cur0esD a. Indifference cur0es usually intersect. +. Indifference cur0es ha0e positi0e slopes. c. Indifference cur0es are downward slopin, and always linear. d. Indifference cur0es are +owed in toward the ori,in. R F: T%(: !1"! NAT: Analytic Indifference cur0es
17#
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e !7.
All of the followin, are properties of indifference cur0es except a. hi,her indifference cur0es are preferred to lower ones. +. indifference cur0es are downward slopin,. c. indifference cur0es do not cross. d. indifference cur0es are +owed outward. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e !8.
:hich of the followin, is a property of a typical indifference cur0eD a. upward slopin, +. +owed away from the ori,in c. do not intersect d. lower ones are preferred to hi,her ones R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e !9.
:hich of the followin, is a property of a typical indifference cur0eD a. upward slopin, +. +owed away from the ori,in c. they often intersect d. hi,her ones are preferred to lower ones R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e !;.
:hich of the followin, is not a property of a typical indifference cur0eD a. downward slopin, +. +owed away from the ori,in c. do not intersect d. hi,her ones are preferred to lower ones R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 2#.
@i,her indifference cur0es are preferred to lower ones as lon, as the a. mar,inal rate of su+stitution is diminishin,. +. products in the +undle are O+adsP not O,oods.P c. products in the +undle are O,oodsP not O+ads.P d. +ud,et constraint does not shift. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e

21. Kanet prefers cashews to almonds. She prefers macadamia nuts to peanuts, +ut she is indifferent +etween almonds and peanuts. :hich of the followin, statements can we say for sureD a. Kanet prefers cashews to macadamia nuts. +. Kanet prefers peanuts to cashews. c. Kanet prefers macadamia nuts to almonds. d. Kanet prefers almonds to macadamia nuts. R F: T%(: !1"! Transiti0ity NAT: Analytic )S&: Applicati0e
171
ANS: & DIF: ! $%&: 'tility and consumer choice 2!.
Indifference cur0es that cross would su,,est that a. the consumer does not prefer more to less. +. the consumer is li/ely to prefer a redistri+ution of income from rich to poor. c. different indi0iduals ha0e different preferences for the same ,oods. d. the mar,inal rate of su+stitution is the same for +oth indifference cur0es. R F: T%(: !1"! Transiti0ity NAT: Analytic )S&: Analytical
ANS: A DIF: ! $%&: 'tility and consumer choice 22.
:hich of the followin, is not correctD a. Indifference cur0es are downward slopin,. +. Indifference cur0es that are closer to the ori,in are preferred to indifference cur0es that are further from the ori,in. c. Indifference cur0es are +owed in toward the ori,in. d. Indifference cur0es do not cross. R F: T%(: !1"! NAT: Analytic Indifference cur0es
:hen indifference cur0es are +owed in toward the ori,in, a. consumers are less inclined to trade away ,oods they are lac/in,. +. consumersC willin,ness to trade away ,oods they ha0e in a+undance diminishes. c. an increase in income will shift the indifference cur0e away from the ori,in. d. a decrease in income will shift the indifference cur0e away from the ori,in. R F: T%(: !1"! NAT: Analytic Indifference cur0es
Indifference cur0es tend to +e +owed inward +ecause of diminishin, a. mar,inal rates of su+stitution. +. demand for the ,ood as prices rise. c. income. d. 1oth a and + are correct. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 27.
The slope of an indifference cur0e is a. the rate of chan,e of consumerCs preferences. +. the mar,inal rate of preference. c. the mar,inal rate of su+stitution. d. always e4ual to the slope of the +ud,et constraint. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution

28. The rate at which a consumer is willin, to eBchan,e one ,ood for another, and maintain a constant le0el of satisfaction, is called the a. relati0e eBpenditure ratio. +. 0alue of mar,inal product. c. mar,inal rate of su+stitution. d. relati0e price ratio. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
17!
The mar,inal rate of su+stitution is a. the slope of a +ud,et constraint. +. always constant. c. the slope of an indifference cur0e. d. the point at which the +ud,et constraint and the indifference cur0e are tan,ent. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 2;.
The rate at which a consumer is willin, to trade one ,ood for another to maintain the same le0el of satisfaction is affected +y the a. prices of the products. +. amount of each ,ood the consumer is currently consumin,. c. consumer*s income. d. mar,inal 0alue product. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
1o+ enIoys fishin, and huntin,. @e di0ides his leisure hours +etween the two outdoor acti0ities. Suppose we were to draw 1o+*s indifference cur0es for the two acti0ities, placin, fishin, on the hori=ontal aBis and huntin, on the 0ertical aBis. If 1o+*s indifference cur0es are +owed inward, then a. the rate at which he is willin, to ,i0e up an hour of huntin, for an hour of fishin, chan,es dependin, on how many hours of each acti0ity he has done. For eBample, if 1o+ has already fished a lot in one wee/, he will +e more willin, to ,i0e up an hour of fishin, for an hour of huntin, than if he has only fished a little that wee/. +. the rate at which he is willin, to ,i0e up an hour of huntin, for an hour of fishin, is constant +ecause he must deri0e the same enIoyment out of each acti0ity. c. the rate at which he is willin, to ,i0e up an hour of huntin, for an hour of fishin, chan,es dependin, on how many hours of each acti0ity he has done. For eBample, if 1o+ has already fished a lot in one wee/, he will +e less willin, to ,i0e up an hour of fishin, for an hour of huntin, than if he has only fished a little that wee/. d. 1o+*s indifference cur0es will not cross. :hen indifference cur0es are +owed outward, the indifference cur0es must cross. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
The mar,inal rate of su+stitution a. 0aries alon, an indifference cur0e if the cur0e is +owed inward. +. is constant alon, an indifference cur0e if the cur0e is a strai,ht line. c. is ,reater when a consumer has more of two ,oods rather than less of two ,oods. d. 1oth a and + are correct. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution

3!.
172
1undle $ contains 1# units of ,ood - and !# units of ,ood .. 1undle ) contains 9 units of ,ood - and !1 units of ,ood .. The consumer is indifferent +etween +undle $ and +undle ). Assume that the consumer*s preferences satisfy the four properties of indifference cur0es. :hich of the followin, correctly eBpresses the mar,inal rate of su+stitution of ,ood - for ,ood . +etween these two pointsD a. The consumer will ,i0e up 1 unit of ,ood - to ,ain ! units of ,ood .. +. The consumer will ,i0e up ! units of ,ood - to ,ain 1 unit of ,ood .. c. The price of ,ood - is twice as lar,e as the price of ,ood .. d. The price of ,ood - is half as lar,e as the price of ,ood .. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
Assume that a consumer*s indifference cur0e is +owed inward and satisfies the other three properties of indifference cur0es. As the consumer mo0es from left to ri,ht alon, the hori=ontal aBis, the consumer*s mar,inal rate of su+stitution a. increases. +. decreases. c. remains constant. d. increases, then decreases. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
Assume that a consumer*s indifference cur0e is +owed outward +ut satisfies the other three properties of indifference cur0es. As the consumer mo0es from left to ri,ht alon, the hori=ontal aBis, the consumer*s mar,inal rate of su+stitution a. increases. +. decreases. c. remains constant. d. increases, then decreases. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 36.
Assume that a consumer*s indifference cur0e is a downward"slopin, strai,ht line. As the consumer mo0es from left to ri,ht alon, the hori=ontal aBis, the consumer*s mar,inal rate of su+stitution a. increases. +. decreases. c. remains constant. d. increases, then decreases. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
If an indifference cur0e is +owed in toward the ori,in, the mar,inal rate of su+stitution is a. not li/ely to reflect the relati0e 0alue of ,oods. +. li/ely to +e constant for all +undles alon, the indifference cur0e. c. li/ely to +e identical to the price ratio for each +undle alon, the indifference cur0e. d. different for each +undle alon, the indifference cur0e. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
As lon, as a consumer remains on the same indifference cur0e, a. she is indifferent to all points that lie on any other indifference cur0e. +. her preferences will not affect the mar,inal rate of su+stitution. c. she is una+le to decide which +undle of ,oods to choose. d. she is indifferent amon, the points on that cur0e.

ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 39. R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution
173
The +owed shape of the indifference cur0e reflects the consumerCs a. unwillin,ness to ,i0e up a ,ood that he already has in lar,e 4uantity. +. unwillin,ness to purchase a ,ood that he already has in lar,e 4uantity. c. ,reater willin,ness to ,i0e up a ,ood that he already has in lar,e 4uantity. d. ,reater willin,ness to purchase a ,ood that he already has in lar,e 4uantity. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 3;.
The followin, dia,ram shows one indifference cur0e representin, the preferences for ,oods - and . for one consumer.
:hat is the mar,inal rate of su+stitution +etween points A and 1D a. !<6 +. 1 c. 6<! d. 2 ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"! NAT: Analytic )ar,inal rate of su+stitution

6#.
176
The followin, dia,ram shows one indifference cur0e representin, the preferences for ,oods - and . for one consumer.
:hat is the mar,inal rate of su+stitution +etween points A and 1D a. 1<! +. 3<2 c. ! d. 2 ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical Figure 21-8
y
R F: T%(:
!1"! NAT: Analytic )ar,inal rate of su+stitution
EaF
E+F
EcF
61.
Refer to Fi(ure 21"3. :hich of the ,raphs shown may represent indifference cur0esD a. ,raph a +. ,raph + c. ,raph c d. All of the a+o0e are correct. R F: T%(: !1"! NAT: Analytic Indifference cur0es
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical 6!.
Refer to Fi(ure 21"3. :hich of the ,raphs shown represent indifference cur0es for perfect complementsD a. ,raph a +. ,raph + c. ,raph c d. All of the a+o0e are correct. R F: T%(: !1"! NAT: Analytic (erfect complements
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e

62. Refer to Fi(ure 21"3. :hich of the ,raphs shown represent indifference cur0es for perfect su+stitutesD a. ,raph a +. ,raph + c. ,raph c d. All of the a+o0e are correct. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
177
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 63.
Refer to Fi(ure 21"3. :hich of the followin, statements is correctD a. The indifference cur0es represented in ,raph a are perfect complements. +. The indifference cur0es represented in ,raph + are perfect su+stitutes. c. The indifference cur0es represented in ,raph c are neither perfect su+stitutes not perfect complements. d. All of the a+o0e are correct. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes 5 (erfect complements
Refer to Fi(ure 21"3. :hich of the followin, statements is correctD a. The indifference cur0es represented in ,raph a are perfect su+stitutes. +. The indifference cur0es represented in ,raph + are perfect complements. c. The indifference cur0es represented in ,raph c are neither perfect su+stitutes not perfect complements. d. All of the a+o0e are correct. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes 5 (erfect complements
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 67.
:hen two ,oods are perfect su+stitutes, the mar,inal rate of su+stitution a. is constant alon, the indifference cur0e. +. decreases as the scarcity of one ,ood increases. c. increases as the scarcity of one ,ood increases. d. chan,es to reflect the consumer*s chan,in, preferences for the ,oods. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 68.
&onsider the indifference cur0e map for nic/els and 4uarters. Assume nic/els are on the 0ertical aBis and 4uarters are on the hori=ontal aBis. The indifference cur0es for nic/els and 4uarters are a. strai,ht lines with slope of "1<6 +. strai,ht lines with a slope of "1. c. strai,ht lines with a slope of "6. d. $ shaped. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
A consumer*s preferences for A1 +ills and A!# +ills can +e represented +y indifference cur0es that are a. +owed out from the ori,in +. +owed in toward the ori,in c. strai,ht lines d. ri,ht an,les R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e

6;. :hen two ,oods are perfect su+stitutes, the indifference cur0e is a. a hori=ontal strai,ht line. +. +owed outward. c. a downward"slopin, strai,ht line. d. a ri,ht an,le. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
178
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 7#.
:hen two ,oods are perfect su+stitutes, the a. indifference cur0e is a hori=ontal strai,ht line. +. mar,inal rate of su+stitution is constant. c. indifference cur0e is a 0ertical strai,ht line. d. 1oth a and + are correct. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
:hen two ,oods are perfect su+stitutes, the a. indifference cur0e is a downward"slopin, strai,ht line. +. mar,inal rate of su+stitution is constant. c. indifference cur0e is a 0ertical strai,ht line. d. 1oth a and + are correct. R F: T%(: !1"! NAT: Analytic (erfect su+stitutes
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

7!.
179
Suppose &aroline is indifferent +etween tea and coffee as lon, as she consumes an e4ui0alent amount of caffeine. Suppose that coffee has twice as much caffeine as tea. :hich ,raph would illustrate a representati0e indifference cur0eD Tea a. ;
9 8 7 6 3 2 ! 1 1 ! 2 3 6 7 8 9 ; Coffee
+.
Tea ; 9 8 7 6 3 2 ! 1 1 ! 2 3 6 7 8 9 ; Coffee
c.
Tea ; 9 8 7 6 3 2 ! 1 1 ! 2 3 6 7 8 9 ; Coffee
d.
Tea ; 9 8 7 6 3 2 ! 1 1 ! 2 3 6 7 8 9 ; Coffee
R F: T%(:
!1"! NAT: Analytic (erfect su+stitutes
A set of indifference cur0es that are only sli,htly +owed inward represent ,oods that could +est +e descri+ed as a. perfect su+stitutes. +. perfect complements. c. 0ery close su+stitutes. d. 0ery close complements. R F: T%(: !1"! NAT: Analytic Indifference cur0es
:hen two ,oods are perfect complements, the indifference cur0e is a. a hori=ontal strai,ht line. +. +owed outward. c. a downward"slopin, strai,ht line. d. a ri,ht an,le.

ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 76. R F: T%(: !1"! NAT: Analytic (erfect complements
17;
A consumer*s preferences for ri,ht shoes and left shoes can +e represented +y indifference cur0es that are a. +owed out from the ori,in +. +owed in toward the ori,in c. strai,ht lines d. ri,ht an,les R F: T%(: !1"! NAT: Analytic (erfect complements
:hen two ,oods are perfect complements, the indifference cur0es will a. ha0e a positi0e slope. +. +e ri,ht an,les. c. ha0e a constant mar,inal rate of su+stitution. d. 1oth + and c are correct. R F: T%(: !1"! NAT: Analytic (erfect complements
H$eftH ,lo0es and Hri,htH ,lo0es pro0ide a ,ood eBample of a. perfect su+stitutes. +. perfect complements. c. ne,ati0ely sloped indifference cur0es. d. positi0ely sloped indifference cur0es. R F: T%(: !1"! NAT: Analytic (erfect complements
:hen two ,oods are perfect complements, the indifference cur0es are a. positi0ely sloped. +. ne,ati0ely sloped. c. strai,ht lines. d. ri,ht an,les. R F: T%(: !1"! NAT: Analytic (erfect complements
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 7;.
Suppose Rich always uses two pac/ets of su,ar with his coffee. RichCs indifference cur0es for su,ar and coffee are a. +owed inward. +. +owed outward. c. strai,ht lines. d. $ shaped. R F: T%(: !1"! NAT: Analytic (erfect complements
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 8#.
A consumer has preferences o0er two ,oods: pi==a and +eer. The four +undles shown in the ta+le +elow lie on the same indifference cur0e for the consumer. &un'0e A 1 & D %i44a ! ! ; 7 &eer 9 ! ! !

:hich of the followin, statements re,ardin, these +undles is correctD a. The ,oods are perfect su+stitutes for this consumer. +. The ,oods are perfect complements for this consumer. c. These +undles 0iolate the property that indifference cur0es are +owed inward. d. These +undles 0iolate the property that indifference cur0es do not cross. ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"! NAT: Analytic (erfect complements
18#
Sec !* " The Theory of Consumer Choice " Optimi4ation)

#ULT$%LE CHO$CE 1. The ,oal of the consumer is to a. maBimi=e utility. +. +e on the hi,hest indifference cur0e. c. maBimi=e satisfaction. d. All of the a+o0e are the ,oals of the consumer. R F: T%(: !1"2 %ptimi=ation
hat the Consumer Chooses
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e !.
NAT: Analytic
The ,oal of the consumer is to a. maBimi=e utility. +. minimi=e eBpenses. c. spend more income in the current time period than in the future. d. All of the a+o0e are the ,oals of the consumer. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
:hen a consumer is purchasin, the +est com+ination of two ,oods, - and ., su+Iect to a +ud,et constraint, we say that the consumer is at an optimal choice point. A ,raph of an optimal choice point shows that it occurs a. alon, the hi,hest attaina+le indifference cur0e. +. where the indifference cur0e is tan,ent to the +ud,et constraint. c. where the mar,inal utility per dollar spent is the same for +oth - and .. d. All of the a+o0e are correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
:hen a consumer is purchasin, the +est com+ination of two ,oods, - and ., su+Iect to a +ud,et constraint, we say that the consumer is at an optimal choice point. A ,raph of an optimal choice point shows that it occurs a. alon, the hi,hest indifference cur0e. +. alon, the lowest +ud,et constraint. c. where the indifference cur0e is tan,ent to the +ud,et constraint. d. All of the a+o0e are correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
A consumer chooses an optimal consumption point where the a. mar,inal rate of su+stitution e4uals the relati0e price ratio. +. slope of the indifference cur0e e4uals the slope of the +ud,et constraint. c. ratio of the mar,inal utilities e4uals the ratio of the prices. d. All of the a+o0e are correct.

ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 7. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
181
A consumer chooses an optimal consumption point where the a. mar,inal rate of su+stitution is maBimi=ed. +. slope of the indifference cur0e eBceeds the slope of the +ud,et constraint +y the ,reatest amount. c. ratio of the mar,inal utilities e4uals the ratio of the prices. d. All of the a+o0e are correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
&arlos ,oes to the mo0ies e0ery Sunday afternoon. The mo0ie theater offers 3 com+inations of popcorn and +e0era,es: the Omini"com+oP costs A6 and includes a small popcorn and a small drin/, the Omedium"com+oP costs A8 and includes a medium popcorn and a medium drin/, the O0alue"com+oP also costs A8 and includes a small popcorn and a lar,e drin/, and the Olar,e"com+oP costs A; and includes a lar,e popcorn and a lar,e drin/. &arlos always purchases the O0alue"com+o.P :e can conclude that a. &arlos cannot afford the Olar,e"com+o.P +. &arlos cannot afford the Omedium"com+o.P c. &arlos prefers a com+o with a lar,er popcorn"to"+e0era,e ratio. d. &arlos prefers a com+o with a smaller popcorn"to"+e0era,e ratio. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical 9. EiF EiiF EiiiF Ei0F
:hich of the followin, e4uations corresponds to an optimal choice pointD )RS G (-<(. )'-<)'. G (-<(. )'-<(- G )'.<(. )'-<(. G )'.<(a. +. c. d. EiF only EiF, EiiF, and EiiiF only EiiF and Ei0F only EiF, EiiF, EiiiF, and Ei0F R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;.
1undle K contains 1# units of ,ood - and 6 units of ,ood .. 1undle > contains 6 units of ,ood - and 1# units of ,ood .. 1undle $ contains 1# units of ,ood - and 1# units of ,ood .. Assume that the consumer*s preferences satisfy the four properties of indifference cur0es. The price of - is A1, the price of . is A!, and the consumer has an income of A!#. :hich +undle will the consumer chooseD a. +undle K +. +undle > c. +undle $ d. either +undle K or +undle > R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 1#.
A consumer chooses an optimal consumption point where the a. mar,inal rate of su+stitution is maBimi=ed. +. rate at which the consumer is willin, to trade one ,ood for another e4uals the price ratio. c. price ratio is minimi=ed. d. All of the a+o0e are correct.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 11. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
18!
:hen considerin, her +ud,et, the hi,hest indifference cur0e that a consumer can reach is the a. one that is tan,ent to the +ud,et constraint. +. indifference cur0e farthest from the ori,in c. indifference cur0e that intersects the +ud,et constraint in at least two places. d. None of the a+o0e is correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 1!.
The relationship +etween the mar,inal utility that :endy ,ets from eatin, ham+ur,ers and the num+er of ham+ur,ers she eats per month is as follows: 1 !# ! 17 2 1! 3 9 6 3 7 #
Ham5ur(ers #ar(ina0 Uti0ity
:endy recei0es 2 units of utility from the last dollar spent on each of the other ,oods she consumes. If ham+ur,ers cost A3 each, how many ham+ur,ers will she consume per month if she maBimi=es utilityD a. ! +. 2 c. 3 d. 6 ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 12. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
:il+ur consumes two ,oods, +acon and e,,s. @e has maBimi=ed his utility ,i0en his income. ,,s costs A! per do=en, and he consumes them to the point where the mar,inal utility he recei0es is 7. 1acon cost A3 per ser0in,, and the relationship +etween the mar,inal utility that :il+ur ,ets from eatin, +acon and the num+er of ser0in,s he eats per month is as follows: 1 !# ! 17 2 1! 3 9 6 3 7 #
Ser2in(s of &acon #ar(ina0 Uti0ity
@ow many ser0in,s of +acon does :il+ur +uy each monthD a. 1 +. ! c. 2 d. 3 ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 13. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
An optimi=in, consumer will select a consumption +undle in which a. income is maBimi=ed, and prices are minimi=ed. +. utility is maBimi=ed, and prices are minimi=ed. c. utility is maBimi=ed, su+Iect to +ud,et constraints. d. utility is maBimi=ed, and indifference cur0es are linear. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e

16. If the consumerCs income and all prices simultaneously dou+le, then the optimum consumption +undle will a. shift outward relati0e to the old optimum. +. mo0e leftward alon, the old +ud,et constraint. c. not chan,e. d. shift inward relati0e to the old optimum. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
182
If the consumerCs income and all prices simultaneously decrease +y one"half, then the optimum consumption will a. shift outward relati0e to the old optimum. +. mo0e leftward alon, the old +ud,et constraint. c. shift inward relati0e to the old optimum. d. not chan,e. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
The consumerCs optimum choice is represented +y a. )'B<)'y G (B<(y. +. )'B<(B G )'y<(y. c. )RSBy G (B<(y. d. All of the a+o0e are correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
An optimi=in, consumer will select the consumption +undle in which the a. ratio of total utilities is e4ual to the relati0e price ratio. +. ratio of income to price e4uals the mar,inal rate of su+stitution. c. mar,inal rate of su+stitution is e4ual to the relati0e price ratio of the ,oods. d. mar,inal rate of su+stitution is e4ual to mar,inal utility. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 1;.
:hen the indifference cur0e is tan,ent to the +ud,et constraint, a. a consumer cannot +e made +etter off without increasin, her income. +. the consumer is li/ely to +e at a su+"optimal le0el of consumption. c. income is at its optimum for a consumer. d. indifference cur0es are li/ely to intersect. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e !#.
At the consumerCs optimum a. the +ud,et constraint will ha0e a slope of )'B<(B. +. it is still possi+le for the consumer to increase his consumption of +oth ,oods. c. the indifference cur0e will intersect the +ud,et constraint at the midpoint of the +ud,et constraint. d. the slope of the indifference cur0e is e4ual to the slope of the +ud,et constraint. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e

!1. At the consumerCs optimum a. the +ud,et constraint will ha0e a slope of )'B<(B. +. the slope of the indifference cur0e is e4ual to the slope of the +ud,et constraint. c. the indifference cur0e will intersect the +ud,et constraint at the midpoint of the +ud,et constraint. d. 1oth + and c are correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
183
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e Figure 21-9
!!.
Refer to Fi(ure 21"6. ?i0en the +ud,et constraint depicted in the ,raph, the consumer will choose +undle a. 1. +. &. c. D. d. . R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Analytical !2.
Refer to Fi(ure 21"6. It would +e possi+le for the consumer to reach I! if a. the price of . decreases. +. the price of - decreases. c. income increases. d. All of the a+o0e would +e correct. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical !3.
Refer to Fi(ure 21"6. 1undle 1 represents a point where a. )RSBy Q (y<(B. +. )RSBy G (B<(y. c. )RSBy R (B<(y. d. )RSBy Q (B<(y. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

!6. Refer to Fi(ure 21"6. 1undle & represents a point where a. )RSBy Q (y<(B. +. )RSBy G (B<(y. c. )RSBy R (B<(y. d. )RSBy Q (B<(y. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
186
Refer to Fi(ure 21"6. 1undle D represents a point where a. )RSBy Q (y<(B. +. )RSBy G (B<(y. c. )RSBy R (B<(y. d. )RSBy R (y<(B. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical !8. The consumerCs optimum is where a. )'B<)'y G (y<(B. +. )'B<(y G )'y<(B. c. (B<)'B G (y<)'y. d. )'B<)'y G (B<(y.
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Definitional Figure 21-10
R F: T%(:
!1"2 %ptimi=ation
NAT: Analytic
!9.
Refer to Fi(ure 21"1!. Assume that the consumer depicted in the fi,ure has an income of A!#. The price of S/ittles is A! and the price of )J)Cs is A3. This consumer will choose a consumption +undle where the mar,inal rate of su+stitution is a. !. +. !<2. c. 1<!. d. 1<2. R F: T%(: !1"2 NAT: Analytic )ar,inal rate of su+stitution

!;.
187
Refer to Fi(ure 21"1!. Assume that the consumer depicted in the fi,ure has an income of A!#. The price of S/ittles is A! and the price of )J)Cs is A3. This consumer will choose consumption +undle a. A. +. 1. c. &. d. D. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Refer to Fi(ure 21"1!. Assume that the consumer depicted in the fi,ure has an income of A6#. The price of S/ittles is A6 and the price of )J)Cs is A6. This consumer will choose a consumption +undle where the mar,inal rate of su+stitution is a. 1#. +. 6. c. 1. d. 1<6. R F: T%(: !1"2 NAT: Analytic )ar,inal rate of su+stitution
Refer to Fi(ure 21"1!. Assume that the consumer depicted in the fi,ure has an income of A!#. The price of S/ittles is A! and the price of )J)Cs is A!. This consumer will choose to optimi=e +y purchasin, +undle a. A. +. 1. c. &. d. D. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 2!.
Refer to Fi(ure 21"1!. Assume that the consumer depicted in the fi,ure faces prices and income such that she optimi=es at point 1. Accordin, to the ,raph, which of the followin, would cause the consumer to mo0e to point AD a. a decrease in the price of S/ittles +. a decrease in the price of )J)Cs c. an increase in the price of S/ittles d. an increase in the price of )J)Cs R F: T%(: !1"2 %ptimi=ation NAT: Analytic

Figure 21-11
188
22.
Refer to Fi(ure 21"11. Assume that the consumer depicted in the fi,ure has an income of A3#, the price of a +a, of marshmallows is A!, and the price of a +a, of chocolate chips is A!. The optimi=in, consumer will choose to purchase which +undle of marshmallows and chocolate chipsD a. A +. 1 c. & d. D R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Refer to Fi(ure 21"11. Assume that the consumer depicted in the fi,ure has an income of A1## and currently optimi=es at +undle A. :hen the price of marshmallows decreases to A6, which +undle will the optimi=in, consumer chooseD a. A +. 1 c. & d. D R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Refer to Fi(ure 21"11. Assume that the consumer depicted in the fi,ure has an income of A3#. If the price of chocolate chips is A3 and the price of marshmallows is A3, the optimi=in, consumer would choose to purchase a. ; marshmallows and 7 chocolate chips. +. 1# marshmallows and 1# chocolate chips. c. 6 marshmallows and 6 chocolate chips. d. 2 marshmallows and ; chocolate chips. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Refer to Fi(ure 21"11. Assume that the consumer depicted in the fi,ure has an income of A9#. If the price of chocolate chips is A3 and the price of marshmallows is A3, the optimi=in, consumer would choose to purchase a. ; marshmallows and 7 chocolate chips. +. 1# marshmallows and 1# chocolate chips. c. 6 marshmallows and 6 chocolate chips. d. 2 marshmallows and ; chocolate chips.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 28. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
189
Refer to Fi(ure 21"11. Assume that the consumer depicted in the fi,ure has an income of A3#. 1ased on the information a0aila+le in the ,raph, which of the followin, price"4uantity com+inations would +e on her demand cur0e for marshmallows if the price of chocolate chips is A3D a. (GA!, SG2 +. (GA!, SG; c. (GA3, SG2 d. (GA3, SG; R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Refer to Fi(ure 21"11. Assume that the consumer depicted the fi,ure has an income of A6#. 1ased on the information a0aila+le in the ,raph, which of the followin, price"4uantity com+inations would +e on her demand cur0e for marshmallows if the price of chocolate chips is A!.6#D a. (GA!.6#, SG7 +. (GA!.6#, SG1# c. (GA6.##, SG2 d. (GA6.##, SG6 R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 2;.
:hich of the followin, represents a consumerCs optimumD a. )'B<)'y G (y<(B +. )'B<(y G )'y<(B c. )'B<(B G )'y<(y d. )'y<)'B G (B<(y R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 3#.
A consumer has preferences o0er two ,oods, - and .. Suppose we ,raph this consumerCs preferences Ewhich satisfy the usual properties of indifference cur0esF and +ud,et constraint on a dia,ram with - on the hori=ontal aBis and . on the 0ertical aBis. At the consumerCs current consumption +undle, the consumer is spendin, all a0aila+le income, and the mar,inal rate of su+stitution is ,reater than the slope of the +ud,et constraint. :e can conclude that the consumer a. is currently maBimi=in, satisfaction. +. could increase satisfaction +y consumin, more - and less .. c. could increase satisfaction +y consumin, less - and more .. d. could purchase more - and more . and increase total satisfaction. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 31.
A consumer has preferences o0er two ,oods, - and .. Suppose we ,raph this consumerCs preferences Ewhich satisfy the usual properties of indifference cur0esF and +ud,et constraint on a dia,ram with - on the hori=ontal aBis and . on the 0ertical aBis. At the consumerCs current consumption +undle, the consumer is spendin, all a0aila+le income, and the mar,inal rate of su+stitution is less than the slope of the +ud,et constraint. :e can conclude that the consumer a. is currently maBimi=in, satisfaction. +. could increase satisfaction +y consumin, more - and less .. c. could increase satisfaction +y consumin, less - and more .. d. could purchase more - and more . and increase total satisfaction.

ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 3!. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
18;
Suppose a consumer has preferences o0er two ,oods, - and ., which are perfect su+stitutes. In particular, two units of - is e4ui0alent to one unit of .. If the price of - is A1, the price of . is A2, and the consumer has A2# of income to allocate to these two ,oods, how much of each ,ood should the consumer purchase to maBimi=e satisfactionD a. 2# units of - and # units of . +. # units of - and 1# units of . c. 16 units of - and 6 units of . d. 1! units of - and 7 units of . R F: T%(: !1"2 %ptimi=ation NAT: Analytic
>en consumes two ,oods, Sprite and potato chips. Sprite costs A! per can, and he consumes it to the point where the mar,inal utility he recei0es from his last Sprite is 3. (otato chips cost A2 per +a,, and the relationship +etween the mar,inal utility he ,ets from eatin, a +a, of potato chips and the num+er of +a,s he eats per month is as follows: 1 2# ! !# 2 1! 3 7 6 ! 7 #
&a(s of potato chips #ar(ina0 uti0ity
If >en is maBimi=in, his utility, how many +a,s of potato chips does he +uy each monthD a. ! +. 2 c. 3 d. 6 ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 33. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
>en consumes two ,oods, Sprite and potato chips. Sprite costs A1 per can, and he consumes it to the point where the mar,inal utility he recei0es from his last Sprite is 2. (otato chips cost A! per +a,, and the relationship +etween the mar,inal utility he ,ets from eatin, a +a, of potato chips and the num+er of +a,s he eats per month is as follows: 1 2# ! !# 2 1! 3 7 6 ! 7 #
If >en is maBimi=in, his utility, how many +a,s of potato chips does he +uy each monthD a. ! +. 2 c. 3 d. 6 ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 36. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
>en consumes two ,oods, Sprite and potato chips. Sprite costs A1 per can, and he consumes it to the point where the mar,inal utility he recei0es from his last Sprite is 2. (otato chips cost A! per +a,, and the relationship +etween the mar,inal utility he ,ets from eatin, a +a, of potato chips and the num+er of +a,s he eats per month is as follows: 1 2# ! !# 2 1! 3 7 6 ! 7 #

If >en is maBimi=in, his utility, how much does he spend on potato chips each monthD a. A! +. A7 c. A9 d. A1! ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 37. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
19#
Keffrey spends all of his income on warm"up suits and runnin, shoes, and the price of a pair of shoes is four times the price of a warm"up suit. In order to maBimi=e total utility, Keffrey should a. +uy four times as many warm"up suits as pairs of runnin, shoes. +. +uy four times as many pairs of runnin, shoes as warm"up suits. c. +uy +oth items until the mar,inal utility of a pair of runnin, shoes is four times the mar,inal utility of a warm"up suit. d. +uy +oth items until the mar,inal utility of a warm"up suit is four times the mar,inal utility of a pair of runnin, shoes. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 38.
Amy spends all of her income on Iewelry and Ieans, and the price of a pair of Ieans is three times the price of Iewelry. In order to maBimi=e total utility, Amy should a. +uy three times as much Iewelry as pairs of Ieans. +. +uy three times as many pairs of Ieans as Iewelry. c. +uy +oth items until the mar,inal utility of Iewelry is three times the mar,inal utility of a pair of Ieans. d. +uy +oth items until the mar,inal utility of a pair of Ieans is three times the mar,inal utility of Iewelry. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
Kane is maBimi=in, total utility while consumin, food and clothin,. @er mar,inal utility from food is 6#, and her mar,inal utility from clothin, is !6. If clothin, is priced at A1# per unit, the price of food per unit must +e a. A!. +. A!.6#. c. A6. d. A!#. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e 3;.
Suppose at the consumer*s current consumption +undle the mar,inal rate of su+stitution of cheese for wine is 1<! +ottle of wine per pound of cheese. The price of one pound of cheese is A7, and the price of a +ottle of wine is A1#. The consumer should increase his consumption of a. cheese, decrease his consumption of wine, and mo0e to a lower indifference cur0e. +. cheese, decrease his consumption of wine, and mo0e to a hi,her indifference cur0e. c. wine, decrease consumption of cheese, and mo0e to a hi,her indifference cur0e. d. cheese, decrease consumption of wine, and remain on the same indifference cur0e. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e

6#. The consumerCs optimal choice is the one in which the mar,inal utility per dollar spent on ,ood - is a. e4ual to the mar,inal utility per dollar sa0ed on ,ood -. +. ,reater than the mar,inal utility per dollar spent on ,ood .. c. e4ual to the mar,inal utility per dollar spent on ,ood .. d. less than the mar,inal utility per dollar spent on ,ood .. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
191
:hen economists descri+e preferences, they often use the concept of a. mar/ets. +. income. c. utility. d. prices. R F: T%(: !1"2 'tility NAT: Analytic )S&: Interpreti0e
ANS: & DIF: 1 $%&: 'tility and consumer choice 6!.
'tility measures the a. income a consumer recei0es from consumin, a +undle of ,oods. +. satisfaction a consumer recei0es from consumin, a +undle of ,oods. c. satisfaction a consumer places on her +ud,et constraint. d. All of the a+o0e are correct. R F: T%(: !1"2 'tility NAT: Analytic )S&: Definitional
ANS: 1 DIF: 1 $%&: 'tility and consumer choice 62. A rational consumer maBimi=es her a. preferences. +. mar,inal rate of su+stitution. c. utility. d. +ud,et constraint.
ANS: & DIF: 1 $%&: 'tility and consumer choice 63.
R F: T%(:
!1"2 'tility
NAT: Analytic )S&: Interpreti0e
As more units of an item are purchased, e0erythin, else e4ual, mar,inal satisfaction from consumin, additional units will tend to a. decrease at the same rate for all consumers. +. decrease +ut at different rates for different people. c. increase at the same rate for all consumers. d. increase +ut at a decreasin, rate for all consumers. R F: T%(: !1"2 NAT: Analytic )ar,inal utility
If KohnCs mar,inal utility deri0ed from the consumption of another candy +ar is 1 and the price of the candy +ar is A1.6#, then a. this is the last candy +ar Kohn will purchase since the mar,inal utility is less than the price. +. the opportunity cost of the candy +ar is less than A1.6#. c. if Kohn purchases and consumes the candy +ar his total satisfaction will ,o down since the mar,inal utility is less than the price. d. there is not enou,h information to determine if Kohn will or will not purchase the candy +ar. R F: T%(: !1"2 NAT: Analytic )ar,inal utility
The mar,inal rate of su+stitution +etween two ,oods always e4uals the a. mar,inal utility of one di0ided +y the mar,inal utility of the other. +. mar,inal utility of one times the mar,inal utility of the other. c. price of one ,ood di0ided +y the price of the other. d. 1oth a and c are correct.

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 68. R F: T%(: !1"2 NAT: Analytic )ar,inal rate of su+stitution
19!
If income increases and prices are unchan,ed, the consumer*s +ud,et constraint a. remains the same. +. shifts outward. c. shifts inward. d. rotates outward alon, the hori=ontal aBis. R F: T%(: !1"2 NAT: Analytic 1ud,et constraint
If income decreases and prices are unchan,ed, the consumer*s +ud,et constraint a. remains the same. +. shifts outward. c. shifts inward. d. rotates outward alon, the hori=ontal aBis. R F: T%(: !1"2 NAT: Analytic 1ud,et constraint
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 6;.
:hich of the followin, is not correctD a. An increase in income shifts a consumer*s +ud,et constraint outward. +. An increase in the price of ,ood - causes a consumer*s +ud,et constraint to rotate inward alon, the - aBis. c. A decrease in the price of ,ood . causes a consumer*s +ud,et constraint to rotate outward alon, the . aBis. d. &han,es in income affect the slope of the +ud,et constraint as well as its location on a ,raph. R F: T%(: !1"2 NAT: Analytic 1ud,et constraint
If we o+ser0e that Rae*s +ud,et constraint has shifted outward, then we /now for certain that a. her income must ha0e increased. +. she will +e indifferent +etween ,oods - and .. c. the price of one or +oth of the ,oods must ha0e decreased. d. she can reach a hi,her indifference cur0e. R F: T%(: !1"2 NAT: Analytic 1ud,et constraint
If we o+ser0e that Rae*s +ud,et constraint has shifted inward, then we /now for certain that a. her income must ha0e decreased. +. she will +e indifferent +etween ,oods - and .. c. the price of one or +oth of the ,oods must ha0e increased. d. her utility will decrease. R F: T%(: !1"2 NAT: Analytic 1ud,et constraint
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 7!.
If we o+ser0e that a consumer*s +ud,et constraint has shifted outward, we can assume that the consumer will +uy a. fewer normal ,oods and more inferior ,oods. +. more normal ,oods and fewer inferior ,oods. c. more normal ,oods and more inferior ,oods. d. fewer normal ,oods and fewer inferior ,oods.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 72. R F: T%(: !1"2 NAT: Analytic Normal ,oods 5 Inferior ,oods
192
If we o+ser0e that a consumer*s +ud,et constraint has shifted inward, we can assume that the consumer will +uy a. fewer normal ,oods and more inferior ,oods. +. more normal ,oods and fewer inferior ,oods. c. more normal ,oods and more inferior ,oods. d. fewer normal ,oods and fewer inferior ,oods. R F: T%(: !1"2 NAT: Analytic Normal ,oods 5 Inferior ,oods
:hen Sam has an income of A1,###, he consumes 2# units of ,ood A and 6# units of ,ood 1. After Sam*s income increases to A1,6##, he consumes 7# units of ,ood A and 36 units of ,ood 1. :hich of the followin, statements is correctD a. 1oth ,oods A and 1 are normal ,oods. +. 1oth ,oods A and 1 are inferior ,oods. c. ?ood A is a normal ,ood, and ,ood 1 is an inferior ,ood. d. ?ood A is an inferior ,ood, and ,ood 1 is a normal ,ood. R F: T%(: !1"2 NAT: Analytic Normal ,oods 5 Inferior ,oods
Kaime is currently consumin, some of ,ood - and some of ,ood .. If ,ood . is a normal ,ood for this consumer, a rise in her income will definitely cause her to a. increase her consumption of -. +. increase her consumption of .. c. decrease her consumption of -. d. decrease her consumption of .. R F: T%(: !1"2 NAT: Analytic Normal ,oods
@i,her education is a normal ,ood. If its price falls, a. the 4uantity demanded of hi,her education will fall. +. the su+stitution and income effects wor/ in opposite directions. c. the income effect is positi0e. d. hi,her education will +e a ?iffen ,ood. R F: T%(: !1"2 NAT: Analytic Normal ,oods
Da0e consumes two normal ,oods, - and ., and is currently at an optimum. If the price of ,ood - falls, we can predict with certainty that a. Da0e will definitely consume more of +oth ,oods since his real income has risen. +. the su+stitution effect will +e positi0e for ,ood - and ne,ati0e for ,ood .. c. may consume more or less of ,ood - and he will definitely consume less of ,ood .. d. the su+stitution effect will offset the income effect for ,ood -. R F: T%(: !1"2 NAT: Analytic Normal ,oods
A normal ,ood is one in which a. the a0era,e consumer chooses to consume at a normal le0el. +. the a0era,e consumer chooses to consume the ,ood o0er other similar ,oods. c. an increase in income increases consumption of the ,ood. d. an increase in income decreases consumption of the ,ood.

ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 7;. R F: T%(: !1"2 NAT: Analytic Normal ,oods
193
An inferior ,ood is one in which a. the a0era,e consumer chooses not to consume. +. the ,ood is not e4ually 0alued +y all consumers. c. an increase in income increases consumption of the ,ood. d. an increase in income decreases consumption of the ,ood. R F: T%(: !1"2 NAT: Analytic Inferior ,oods
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 8#.
:hich of the followin, is most li/ely an inferior ,oodD a. an anti4ue car +. ,asoline c. a +us tic/et d. an airline tic/et R F: T%(: !1"2 NAT: Analytic Inferior ,oods
A ,ood is an inferior ,ood if the consumer +uys less of it when a. his income rises. +. the price of the ,ood rises. c. the price of a su+stitute ,ood falls. d. his income falls. R F: T%(: !1"2 NAT: Analytic Inferior ,oods
ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 8!.
?ood - is an inferior ,ood +ut not a ?iffen ,ood. :hen the price of - increases, the consumer will consume a. more -. +. the same amount of -. c. less -. d. more or less - dependin, on the si=e of the income effect relati0e to the si=e of the su+stitution effect. R F: T%(: !1"2 NAT: Analytic Inferior ,oods
Suppose the price of ,ood - falls. As a result, the 4uantity demanded for ,ood - increases for a particular consumer. For this consumer, the su+stitution effect induced the consumer to purchase more - while the income effect induced the consumer to purchase less -. :e can infer that - is aEnF a. normal ,ood. +. inferior ,ood. c. ?iffen ,ood. d. luBury ,ood. R F: T%(: !1"2 NAT: Analytic Inferior ,oods
:hen the price of a ,ood increases, all else e4ual, the hi,her price a. reduces the consumerCs set of +uyin, opportunities. +. leads to a parallel shift of the +ud,et constraint. c. will necessarily lead to an increase in the consumption of ,oods whose price did not chan,e. d. ,enerally discoura,es the consumption of inferior ,oods.

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical 86. R F: T%(: !1"2 %ptimi=ation NAT: Analytic
196
If the price of a ,ood increases, all else e4ual, consumers percei0e a. an increase in purchasin, power if the ,ood is an inferior ,ood. +. an increase in income if the price increase occurs for a normal ,ood. c. a decrease in purchasin, power. d. a net ,ain in purchasin, power if they decrease consumption of some ,oods. R F: T%(: !1"2 Income effect NAT: Analytic
&onsider the indifference cur0e map and +ud,et constraint for two ,oods, - and .. Suppose the ,ood on the hori=ontal aBis, -, is normal. :hen the price of - increases a. the su+stitution effect and income effect +oth cause an increase in the consumption of -. +. the su+stitution effect causes a decrease in the consumption of -, and the income effect causes an increase in the consumption of -. @owe0er, the su+stitution effect is ,reater than the income effect. c. the su+stitution effect causes an increase in the consumption of -, and the income effect causes a decrease in the consumption of -. @owe0er, the su+stitution effect is ,reater than the income effect. d. the su+stitution effect and income effect +oth cause a decrease in the consumption of -. R F: T%(: !1"2 NAT: Analytic Normal ,oods 5 Income effect 5 Su+stitution effect
A consumer consumes two normal ,oods, pret=els and )t. Dew. The price of pret=els rises. The income effect, +y itself, su,,ests that the consumer will consume a. more pret=els and more )t. Dews. +. fewer pret=els and fewer )t. Dews. c. more pret=els and fewer )t. Dews. d. fewer pret=els and more )t. Dews. R F: T%(: !1"2 Income effect NAT: Analytic
If the income effect counteracts the su+stitution effect, we /now that the ,ood in 4uestion is aEnF a. complementary ,ood. +. inferior ,ood. c. luBury ,ood. d. normal ,ood. R F: T%(: !1"2 NAT: Analytic Inferior ,oods 5 Su+stitution effect 5 Income effect
ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 8;.
:hat are the two effects of a chan,e in a price that a consumer eBperiencesD a. the income effect and the +ud,et effect +. the complement effect and the su+stitute effect c. the price effect and the preference effect d. the income effect and the su+stitution effect R F: T%(: !1"2 NAT: Analytic Income effect 5 Su+stitution effect
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Definitional

9#. :hen the price of a normal ,ood increases, a. +oth the income and su+stitution effects encoura,e the consumer to purchase more of the ,ood. +. +oth the income and su+stitution effects encoura,e the consumer to purchase less of the ,ood. c. the income effect encoura,es the consumer to purchase more of the ,ood, and the su+stitution effect encoura,es the consumer to purchase less of the ,ood. d. the income effect encoura,es the consumer to purchase less of the ,ood, and the su+stitution effect encoura,es the consumer to purchase more of the ,ood. R F: T%(: !1"2 NAT: Analytic Income effect 5 Su+stitution effect
197
:hen the price of a normal ,ood decreases, a. +oth the income and su+stitution effects encoura,e the consumer to purchase more of the ,ood. +. +oth the income and su+stitution effects encoura,e the consumer to purchase less of the ,ood. c. the income effect encoura,es the consumer to purchase more of the ,ood, and the su+stitution effect encoura,es the consumer to purchase less of the ,ood. d. the income effect encoura,es the consumer to purchase less of the ,ood, and the su+stitution effect encoura,es the consumer to purchase more of the ,ood. R F: T%(: !1"2 NAT: Analytic Income effect 5 Su+stitution effect
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical 9!.
:hen the price of an inferior ,ood increases, a. +oth the income and su+stitution effects encoura,e the consumer to purchase more of the ,ood. +. +oth the income and su+stitution effects encoura,e the consumer to purchase less of the ,ood. c. the income effect encoura,es the consumer to purchase more of the ,ood, and the su+stitution effect encoura,es the consumer to purchase less of the ,ood. d. the income effect encoura,es the consumer to purchase less of the ,ood, and the su+stitution effect encoura,es the consumer to purchase more of the ,ood. R F: T%(: !1"2 NAT: Analytic Income effect 5 Su+stitution effect
:hen the price of an inferior ,ood decreases, a. +oth the income and su+stitution effects encoura,e the consumer to purchase more of the ,ood. +. +oth the income and su+stitution effects encoura,e the consumer to purchase less of the ,ood. c. the income effect encoura,es the consumer to purchase more of the ,ood, and the su+stitution effect encoura,es the consumer to purchase less of the ,ood. d. the income effect encoura,es the consumer to purchase less of the ,ood, and the su+stitution effect encoura,es the consumer to purchase more of the ,ood. R F: T%(: !1"2 NAT: Analytic Income effect 5 Su+stitution effect
A decrease in the price of DLD players leads consumers to +uy more DLD players. From this information we can conclude that DLD players a. are normal ,oods. +. are inferior ,oods. c. are luBury ,oods. d. None of the a+o0e is correct. R F: T%(: !1"2 Income effect NAT: Analytic
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Interpreti0e

96. ner,y drin/s and ,ranola +ars are normal ,oods. :hen the price of ener,y drin/s decreases, the income effect causes a a. shift to a lower indifference cur0e and the consumer +uys fewer ,ranola +ars. +. shift to a hi,her indifference cur0e and the consumer +uys more ,ranola +ars. c. mo0ement alon, the indifference cur0e and the consumer +uys fewer ,ranola +ars. d. mo0ement alon, the indifference cur0e and the consumer +uys more ,ranola +ars. R F: T%(: !1"2 Income effect NAT: Analytic
198
ner,y drin/s and ,ranola +ars are normal ,oods. :hen the price of ener,y drin/s decreases, the income effect causes a. the consumer to feel richer, so the consumer +uys more ,ranola +ars. +. the consumer to feel richer, so the consumer +uys fewer ,ranola +ars. c. ,ranola +ars to +e relati0ely more eBpensi0e, so the consumer +uys more ,ranola +ars. d. ,ranola +ars to +e relati0ely less eBpensi0e, so the consumer +uys fewer ,ranola +ars. R F: T%(: !1"2 Income effect NAT: Analytic
Assume that a colle,e student purchases only coffee and Snic/ers +ars. If coffee is an inferior ,ood and Snic/ers +ars are a normal ,ood, then the income effect associated with an increase in the price of a Snic/ers +ar will result in a. a decrease in the consumption of Snic/ers +ars and a decrease in the consumption of coffee. +. a decrease in the consumption of Snic/ers +ars and an increase in the consumption of coffee. c. an increase in the consumption of Snic/ers +ars and an increase in the consumption of coffee. d. an increase in the consumption of Snic/ers +ars and a decrease in the consumption of coffee. R F: T%(: !1"2 Income effect NAT: Analytic
Assume that a colle,e student purchases only coffee and Snic/ers +ars. If +oth coffee and Snic/ers +ars are normal ,oods, then the income effect associated with a decrease in the price of a Snic/ers +ar will result in a. a decrease in the consumption of Snic/ers +ars and an increase in the consumption of coffee. +. a decrease in the consumption of Snic/ers +ars and a decrease in the consumption of coffee. c. an increase in the consumption of Snic/ers +ars and a decrease in the consumption of coffee. d. an increase in the consumption of Snic/ers +ars and an increase in the consumption of coffee. R F: T%(: !1"2 Income effect NAT: Analytic
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Analytical 9;.
A consumer consumes two normal ,oods, pret=els and )t. Dew. The price of )t. Dew rises. The su+stitution effect, +y itself, su,,ests that the consumer will consume a. more pret=els and more )t. Dews. +. fewer pret=els and fewer )t. Dews. c. more pret=els and fewer )t. Dews. d. fewer pret=els and more )t. Dews. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e ;#.
The income effect of a price chan,e is depicted +y a. a parallel shift of the +ud,et constraint at the old set of prices. +. a parallel shift of the +ud,et constraint at the new set of prices. c. a mo0ement alon, the +ud,et constraint holdin, the le0el of satisfaction constant. d. not o+ser0a+le and is therefore neither a shift nor a chan,e in the slope of the +ud,et constraint. R F: T%(: !1"2 Income effect NAT: Analytic

;1.
199
Assume that a colle,e student purchases only coffee and Snic/ers +ars. The su+stitution effect associated with a decrease in the price of a Snic/ers +ar will result in a. an increase in the consumption of coffee only. +. a decrease in the consumption of coffee only. c. an increase in the consumption of Snic/ers +ars and a decrease in the consumption of coffee. d. a decrease in the consumption of Snic/ers +ars and an increase in the consumption of coffee. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;!.
&onsider a consumer who purchases two ,oods, - and .. If the price of ,ood . falls, then the su+stitution effect +y itself will a. cause the consumer to +uy more of ,ood . and less of ,ood -. +. cause the consumer to +uy more of ,ood - and less of ,ood .. c. not affect the amount of ,oods - and . that the consumer +uys. d. result in an upward"slopin, demand for ,ood . if the su+stitution effect is positi0e. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;2.
(epsi and pi==a are normal ,oods. :hen the price of pi==a falls, the su+stitution effect causes a a. shift to a lower indifference cur0e and the consumer +uys less (epsi. +. shift to a hi,her indifference cur0e and the consumer +uys more (epsi. c. mo0ement alon, the indifference cur0e and the consumer +uys more (epsi. d. mo0ement alon, the indifference cur0e and the consumer +uys less (epsi. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical ;3.
1eer and pret=els are normal ,oods. :hen the price of +eer falls, the su+stitution effect causes a. the consumer to feel richer, so the consumer +uys more pret=els. +. the consumer to feel richer, so the consumer +uys less pret=els. c. pret=els to +e relati0ely more eBpensi0e, so the consumer +uys less pret=els. d. pret=els to +e relati0ely less eBpensi0e, so the consumer +uys more pret=els. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;6.
(epsi and pi==a are normal ,oods. :hen the price of pi==a rises, the su+stitution effect causes (epsi to +e relati0ely a. more eBpensi0e, so the consumer +uys more (epsi. +. more eBpensi0e, so the consumer +uys less (epsi. c. less eBpensi0e, so the consumer +uys more (epsi. d. less eBpensi0e, so the consumer +uys less (epsi. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Analytical ;7.
:hich effect of a price chan,e mo0es the consumer alon, the same indifference cur0e to a point with a new mar,inal rate of su+stitutionD a. the +ud,et effect +. the preference effect c. the su+stitution effect d. the income effect R F: T%(: !1"2 NAT: Analytic Su+stitution effect

;8. The su+stitution effect of a price chan,e is depicted +y a a. mo0ement alon, the +ud,et constraint holdin, satisfaction constant. +. shift in the +ud,et constraint at the old prices. c. mo0ement alon, the consumer*s new indifference cur0e at the new prices. d. mo0ement alon, the ori,inal indifference cur0e to the point where the mar,inal rate of su+stitution e4uals the price ratio for the new set of prices. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
19;
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical ;9.
:hich of the followin, descriptions +est depicts the su+stitution effectD a. the chan,e in consumption resultin, from a chan,e in the consumerCs income, holdin, the prices of the ,oods constant +. the chan,e in consumption resultin, from a chan,e in the consumerCs income, holdin, the consumerCs le0el of satisfaction constant c. the chan,e in consumption resultin, from a chan,e in the price of one ,ood, holdin, the consumerCs le0el of satisfaction constant d. the chan,e in consumption resultin, from a chan,e in the price of one ,ood, allowin, the consumerCs le0el of satisfaction to chan,e R F: T%(: !1"2 NAT: Analytic Su+stitution effect
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Definitional ;;.
If the price of ham+ur,ers increases, the su+stitution effect wor/s to a. decrease the 4uantity of ham+ur,ers supplied. +. increase the num+er of ham+ur,er +uns demanded. c. decrease the 4uantity of ham+ur,ers demanded. d. increase the num+er of ham+ur,er +uns supplied. R F: T%(: !1"2 NAT: Analytic Su+stitution effect
1##. The chan,e in consumption that results when a price chan,e mo0es the consumer alon, a ,i0en indifference cur0e to a point with a new mar,inal rate of su+stitution is called the a. income effect. +. su+stitution effect. c. ?iffen ,ood effect. d. inferior ,ood effect. ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Definitional R F: T%(: !1"2 NAT: Analytic Su+stitution effect
1#1. Suppose that for mily, DLDs and trips to the mo0ie theater are perfect su+stitutes. &urrently, mily is spendin, all of her income on trips to the mo0ie theater. If the price of DLDs dou+les, the su+stitution effect will a. +e two times the income effect. +. +e half the income effect. c. +e =ero. d. always increase the num+er of trips to the mo0ie theater mily ma/es. ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"2 NAT: Analytic (erfect su+stitutes 5 Su+stitution effect

Figure 21-12
1;#
1#!. Refer to Fi(ure 21"12. If the consumer is currently at point A in the fi,ure, a mo0ement to point 1 as a result of a decrease in the price of potato chips represents the a. su+stitution effect. +. income effect. c. +ud,et effect. d. price effect. ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 NAT: Analytic Su+stitution effect
1#2. Refer to Fi(ure 21"12. If the consumer was initially at point A in the fi,ure, a mo0ement from point 1 to point & as a result of a decrease in the price of potato chips represents the a. su+stitution effect. +. income effect. c. +ud,et effect. d. price effect. ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 Income effect NAT: Analytic
1#3. Refer to Fi(ure 21"12. The shift from point 1 to point & in the fi,ure is due to the a. su+stitution effect of an increase in the price of potato chips. +. income effect of an increase in the price of potato chips. c. su+stitution effect of a decrease in the price of potato chips. d. income effect of a decrease in the price of potato chips. ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"2 Income effect NAT: Analytic
1#6. Suppose the price of ,ood - falls and the consumption of ,ood - increases. From this we can infer that - is aEnF a. normal ,ood. +. inferior ,ood. c. ?iffen ,ood. d. None of the a+o0e is correct. ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
1;1
1#7. A consumer consumes two normal ,oods, pret=els and )t. Dew. :hen the price of )t. Dew is A#.6# per can, the consumer purchases 3# cans. :hen the price rises to A#.76 per can, the consumer purchases 2# cans. :e can use the information pro0ided +y the consumer*s optimum choices to deri0e the a. demand cur0e. +. supply cur0e. c. production possi+ilities frontier. d. la+or"leisure tradeoff. ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
1#8. :hen we deri0e the demand cur0e for a ,ood, we should remem+er that the a. income effect must +e ,reater than the su+stitution effect. +. su+stitution effect must +e ,reater than the income effect. c. su+stitution effect must +e in the same direction as the income effect. d. income effect and the su+stitution effect may wor/ in the same or in opposite directions. ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
1#9. ?i0en a consumerCs indifference map, the demand cur0e for a ,ood can a. +e deri0ed +y mo0in, a consumerCs +ud,et constraint as her income falls. +. +e deri0ed +y mo0in, a consumerCs +ud,et constraint as her income rises. c. +e deri0ed +y mo0in, a consumerCs +ud,et constraint as the mar/et price of one ,ood chan,es. d. not +e deri0ed from consumer theory. ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
1#;. An indi0idualCs demand cur0e for a ,ood is deri0ed +y 0aryin, the a. income le0el and o+ser0in, the resultin, total utility deri0ed from +oth ,oods. +. price of one ,ood and o+ser0in, the resultin, 4uantities of the other ,ood. c. +ud,et line to the left and calculatin, the loss in total utility. d. price of one ,ood and o+ser0in, the resultin, 4uantities demanded of that ,ood. ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
11#. &onsumer theory pro0ides the foundation for understandin, demand cur0es +ecause a. each point on a demand cur0e represents an optimal choice point. +. consumers purchase more inferior ,oods than normal ,oods. c. increases in income cause the +ud,et constraint to rotate inward alon, one aBis, which chan,es the consumer*s purchases. d. increases in income cause the +ud,et constraint to rotate outward alon, one aBis, which chan,es the consumer*s purchases. ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e R F: T%(: !1"2 NAT: Analytic Demand cur0e
Sec !+ " The Theory of Consumer Choice " Three App0ications

#ULT$%LE CHO$CE 1. :e can use the theory of consumer choice to analy=e a. why most demand cur0es slope downward. +. the tradeoff +etween wor/ and leisure c. how interest rates affect household sa0in,. d. All of the a+o0e are correct.

ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !. R F: T%(: !1"3 NAT: Analytic &onsumer choice
1;!
If a ,ood is a ?iffen ,ood, then a. the supply cur0e slopes down. +. the demand cur0e slopes up. c. the demand cur0e is hori=ontal. d. there is no optimal le0el of consumption for the consumer. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
A ?iffen ,ood is a ,ood for which an increase in the price a. decreases the 4uantity supplied. +. increases the 4uantity supplied. c. decreases the 4uantity demanded. d. increases the 4uantity demanded. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
ANS: D DIF: 1 $%&: 'tility and consumer choice 3.
A ?iffen ,ood is a ,ood for which a. an increase in the price raises the 4uantity demanded. +. the income effect outwei,hs the su+stitution effect. c. an increase in the price decreases the 4uantity demanded. d. 1oth aF and +F are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
ANS: D DIF: ! $%&: 'tility and consumer choice 6.
A ?iffen ,ood is a ,ood for which a. a decrease in the price decreases the 4uantity demanded. +. the su+stitution effect outwei,hs the income effect. c. an increase in the price decreases the 4uantity demanded. d. 1oth aF and +F are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
ANS: A DIF: ! $%&: 'tility and consumer choice 7.
A ?iffen ,ood is a ,ood for which a. a decrease in the price decreases the 4uantity demanded. +. the income effect outwei,hs the su+stitution effect. c. an increase in the price decreases the 4uantity demanded. d. 1oth aF and +F are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
:hen a consumer eBperiences a price increase for an inferior ,ood, it is possi+le that the income effect is a. ,reater than the su+stitution effect, and the demand cur0e will +e downward slopin,. +. ,reater than the su+stitution effect, and the demand cur0e will +e upward slopin,. c. less than the su+stitution effect, and the demand cur0e will +e upward slopin,. d. less than the su+stitution effect +ut that the su+stitution effect is positi0e, and the demand cur0e will +e upward slopin,. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
ANS: 1 DIF: ! $%&: 'tility and consumer choice 9.
:hen a consumer eBperiences a price decrease for an inferior ,ood, it is possi+le that the income effect is a. less than the su+stitution effect, and the demand cur0e will +e downward slopin,. +. ,reater than the su+stitution effect, and the demand cur0e will +e upward slopin,. c. less than the su+stitution effect, and the demand cur0e will +e upward slopin,. d. +oth a and + are correct.

ANS: D DIF: ! $%&: 'tility and consumer choice ;. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
1;2
&onsider the indifference cur0e map and +ud,et constraint for two ,oods, +eef and potatoes. Suppose the ,ood on the hori=ontal aBis, potatoes, is a ?iffen ,ood. 1eef is measured on the 0ertical aBis and is a normal ,ood. :hen the price of potatoes increases, a. the su+stitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The su+stitution effect is less than the income effect. +. the su+stitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The su+stitution effect is ,reater than the income effect. c. the su+stitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The su+stitution effect is ,reater than the income effect. d. the su+stitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The su+stitution effect is less than the income effect. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
ANS: D DIF: 2 $%&: 'tility and consumer choice 1#.
A ?iffen ,ood is one in which the 4uantity demanded rises as the price rises +ecause the income effect a. reinforces the su+stitution effect. +. reinforces and is ,reater than the su+stitution effect. c. counteracts +ut is smaller than the su+stitution effect. d. counteracts and is ,reater than the su+stitution effect. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Interpreti0e
Liolations of the law of demand are assumed to occur a. re,ularly. +. only when ,oods are ?iffen ,oods. c. only when the su+stitution effect dominates the income effect. d. All of the a+o0e are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Interpreti0e
ANS: 1 DIF: ! $%&: 'tility and consumer choice 1!.
?iffen ,oods ha0e positi0ely"sloped demand cur0es +ecause they are a. inferior ,oods with no su+stitution effect. +. normal ,oods with no su+stitution effect. c. inferior ,oods for which the su+stitution effect outwei,hs the income effect. d. inferior ,oods for which the income effect outwei,hs the su+stitution effect. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
?iffen ,oods ha0e positi0ely"sloped demand cur0es +ecause they are a. normal ,oods for which the income effect outwei,hs the su+stitution effect. +. normal ,oods for which the su+stitution effect outwei,hs the income effect. c. inferior ,oods for which the income effect outwei,hs the su+stitution effect. d. inferior ,oods for which the su+stitution effect outwei,hs the income effect. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Definitional
ANS: & DIF: ! $%&: 'tility and consumer choice

13. :hich of the followin, statements is not correctD a. Reducin, taBes on interest income mi,ht encoura,e people to sa0e more. +. Reducin, taBes on interest income mi,ht reduce sa0in,. c. A price increase will create income and su+stitution effects that will +oth always wor/ to reduce consumption of the ,ood. d. 'tility is maBimi=ed when the mar,inal rate of su+stitution +etween any two ,oods e4uals the relati0e prices of the two ,oods. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
1;3
ANS: & DIF: 2 $%&: 'tility and consumer choice 16.
:hich of the followin, is an eBample of a ?iffen ,oodD a. potatoes durin, the Irish potato famine +. rice in the &hinese pro0ince of @unan c. fish in Kapan d. 1oth a and + are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
ANS: D DIF: 2 $%&: 'tility and consumer choice 17.
:hich of the followin, is an eBample of a ?iffen ,oodD a. fish in Kapan +. rice in the &hinese pro0ince of @unan c. por/ in India d. 1oth a and + are correct. R F: T%(: !1"3 ?iffen ,ood NAT: Analytic )S&: Analytical
The two O,oodsP used when economists analy=e la+or supply are a. wor/ and leisure. +. wor/ and consumption. c. sa0in, and consumption. d. leisure and consumption. R F: T%(: !1"3 $a+or supply NAT: Analytic
conomic theory predicts that an increase in wa,es a. will cause a wa,e earner to wor/ more. +. will cause a wa,e earner to wor/ less. c. will cause a wa,e earner to +e more producti0e. d. mi,ht cause a wa,e earner to wor/ more or wor/ less. R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e 1;.
The su+stitution effect of a wa,e decrease in the wor/"leisure model results in the wor/er choosin, to a. wor/ less than +efore. +. wor/ more than +efore. c. possi+ly wor/ more or less than +efore. d. wor/ more with a hi,her le0el of consumption. R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical !#.
In the wor/"leisure model, suppose consumption and leisure are +oth normal ,oods. The income effect of a wa,e increase results in the wor/er choosin, to a. wor/ less than +efore. +. wor/ more than +efore. c. possi+ly wor/ more or less than +efore. d. wor/ more than +efore with a hi,her le0el of consumption.

ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"3 $a+or supply NAT: Analytic
1;6
Scenario 21-2 Fred has recently ,raduated from colle,e with a de,ree in Iournalism and economics. @e has decided to pursue a career as a freelance Iournalist writin, for +usiness newspapers and ma,a=ines. Fred is typically awa/e for 11! hours each wee/ Ehe sleeps an a0era,e of 9 hours each dayF. For each hour Fred spends writin,, he can earn A86. Fred is such a ,ood writer that he can ,et paid for as many hours of writin, as he chooses to wor/. !1. Refer to Scenario 21"2. If Fred decides to spend 9# hours a wee/ playin, 0olley+all on the +each, and the rest of his time writin,, how much income will he ha0e a0aila+le to spend on consumption ,oodsD a. A;## +. A1,6## c. A!,3## d. A2,### R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e !!.
Refer to Scenario 21"2. If Fred*s wa,e increases to A;# per hour of writin,, which of the followin, points would fall on his +ud,et constraintD a. 86 hours of leisure, A!,886 of consumption +. 9# hours of leisure, A!,3## of consumption c. 96 hours of leisure, A!,32# of consumption d. ;# hours of leisure, A1,76# of consumption R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: & DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e !2.
The la+or supply cur0e may ha0e a +ac/ward +endin, portion +ecause at hi,her wa,es the a. income effect is smaller than the su+stitution effect. +. income effect is lar,er than the su+stitution effect. c. income effect is ne,ati0e. d. Any of the a+o0e could result in a +ac/ward"+endin, supply cur0e. R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e !3.
:hen leisure is a normal ,ood, the income effect from a decrease in wa,es is e0ident in a. a desire to consume more leisure. +. a desire to consume less leisure. c. an upward"slopin, la+or supply cur0e. d. a shift in la+or demand. R F: T%(: !1"3 $a+or supply NAT: Analytic
The su+stitution effect from an increase in wa,es is e0ident in a a. decrease in la+or demand. +. desire to consume less leisure. c. desire to consume more leisure. d. +ac/ward"+endin, la+or supply cur0e. R F: T%(: !1"3 $a+or supply NAT: Analytic

!7. If leisure were an inferior ,ood, then la+or supply cur0es a. would all +e ne,ati0ely sloped. +. would all +e positi0ely sloped. c. would all +e 0ertical. d. could still +e positi0ely or ne,ati0ely sloped. R F: T%(: !1"3 $a+or supply NAT: Analytic
1;7
A consumer has preferences o0er consumption and leisure, +oth of which are normal ,oods. :hen the wa,e decreases, the consumer chooses to consume less leisure. For this consumer the la+or supply cur0e will a. slope upward. +. slope +ac/ward. c. +e hori=ontal. d. +e 0ertical. R F: T%(: !1"3 $a+or supply NAT: Analytic
Suppose that Stacy*s hourly wa,e increases, and she decides to wor/ fewer hours. For her, the su+stitution effect of the wa,e chan,e is a. only partially offset +y the income effect. +. more than offset +y the income effect. c. eBactly offset +y the income effect. d. :e do not ha0e enou,h information with which to answer the 4uestion.. R F: T%(: !1"3 $a+or supply NAT: Analytic
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e !;.
In the upward"slopin, portion of the indi0idual la+or supply cur0e, the su+stitution effect is a. ,reater than the income effect. +. less than the income effect. c. e4ual to the income effect. d. eBactly offset +y the income effect. R F: T%(: !1"3 $a+or supply NAT: Analytic
Tom eBperiences an increase in his wa,es. The hours of la+or that he supplies to the mar/et would increase if a. the income effect is lar,er than the su+stitution effect. +. the su+stitution effect is lar,er than the income effect. c. neither the income effect nor the su+stitution effect apply to Tom*s la+or"leisure tradeoff. d. Tom 0iews +oth la+or and leisure as inferior ,oods. R F: T%(: !1"3 $a+or supply NAT: Analytic
@arry eBperiences an increase in his wa,es. The hours of la+or that he supplies to the mar/et would decrease if a. the income effect is lar,er than the su+stitution effect. +. the su+stitution effect is lar,er than the income effect. c. neither the income effect nor the su+stitution effect apply to @arry*s la+or"leisure tradeoff. d. @arry 0iews +oth la+or and leisure as inferior ,oods. R F: T%(: !1"3 $a+or supply NAT: Analytic

2!. :hich of the followin, statements is not correctD a. If Kane ,ets a hi,her wa,e and wor/s more, the su+stitution effect is ,reater than the income effect for her. +. If Spencer eBperiences a wa,e decrease and wor/s less, the income effect is ,reater than the su+stitution effect for him. c. If the su+stitution effect is ,reater than the income effect, the la+or"supply cur0e is upward slopin,. d. If the income effect is ,reater than the su+stitution effect, the la+or"supply cur0e is downward slopin,. R F: T%(: !1"3 $a+or supply NAT: Analytic
1;8
conomic studies of lottery winners and people who ha0e inherited lar,e amounts of money show that a. the income effect li/ely outwei,hs the su+stitution effect for most people. +. the su+stitution effect li/ely outwei,hs the income effect for most people. c. most people 0iew leisure as an inferior ,ood. d. most people*s la+or supply is unaffected +y chan,es in wealth. R F: T%(: !1"3 $a+or supply NAT: Analytic
Ka/e faces tradeoffs +etween consumin, in the current period when he is youn, and consumin, in a future period when he is old. Ka/e eBperiences a decrease in the current interest rate he earns on his sa0in,s. Ka/e will sa0e a. less in the current period if the su+stitution effect is ,reater than the income effect. +. less in the current period if the income effect is ,reater than the su+stitution effect. c. more in the current period if the su+stitution effect is ,reater than the income effect. d. more in the current period, re,ardless of the si=es of the income and su+stitution effects. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
:hen considerin, household sa0in,, the relati0e price +etween consumin, when youn, and consumin, when old is the a. consumption rate. +. interest rate that indi0iduals can earn on their pri0ate sa0in,s. c. prime rate. d. federal funds rate. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
If the interest rate rises, an indi0idual could choose to a. increase consumption when youn,. +. increase consumption when old. c. decrease consumption when youn,. d. Any of the a+o0e could +e correct. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
The su+stitution effect of an increase in the interest rate will result in an increase in a. consumption when youn, and increase in sa0in,s when youn,. +. consumption when old and an increase in sa0in,s when youn,. c. consumption when youn, and an increase in sa0in,s when old. d. sa0in,s when old and an increase in consumption when old. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision

29.
1;9
Assume that consumption when youn, and consumption when old are +oth normal ,oods. The income effect of an increase in the interest rate will result in a. an increase in sa0in, when youn,. +. an increase in sa0in, when old. c. a decrease in sa0in, when youn,. d. a decrease in sa0in, when old. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
Scenario 21-3 Diane /nows that she will ultimately face retirement. Assume that Diane will eBperience two periods in her life, one in which she wor/s and earns income, and one in which she is retired and earns no income. Diane can earn A!6#,### durin, her wor/in, period and nothin, in her retirement period. She must +oth sa0e and consume in her wor/ period with an interest rate of 1# percent on sa0in,s. 2;. Refer to Scenario 21"*. Assume that Diane decides to consume A1##,### in the wor/ period. @ow much money will she ha0e a0aila+le for consumption in her retirement periodD a. A1##,### +. A11#,### c. A16#,### d. A176,### R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
Refer to Scenario 21"*. If the interest rate on sa0in,s increases, it is possi+le that a. Diane will decrease her sa0in,s in the wor/ period. +. Diane will increase her sa0in,s in the wor/ period. c. Diane will not chan,e her consumption in the wor/ period. d. All of the a+o0e are possi+le. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
Refer to Scenario 21"*. If the interest rate on sa0in,s increases, a. Diane will decrease her sa0in,s in the wor/ period if the income effect is ,reater than the su+stitution effect for her. +. Diane will increase her sa0in,s in the wor/ period if the income effect is ,reater than the su+stitution effect for her. c. Diane will increase her sa0in,s in the wor/ period if the su+stitution effect is ,reater than the income effect for her. d. 1oth a and c are correct. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: D DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 3!.
Konathan is plannin, ahead for retirement and must decide how much to spend and how much to sa0e while heCs wor/in, in order to ha0e money to spend when he retires. :hen the income effect dominates the su+stitution effect, an increase in the interest rate on sa0in,s will cause him to a. decrease his sa0in,s rate. +. increase his sa0in,s rate. c. continue sa0in, at the current rate. d. Any of the a+o0e could +e correct. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision

32.
1;;
Konathan is plannin, ahead for retirement and must decide how much to spend and how much to sa0e while heCs wor/in, in order to ha0e money to spend when he retires. :hen the su+stitution effect dominates the income effect, an increase in the interest rate on sa0in,s will cause him to a. increase his sa0in,s rate. +. decrease his sa0in,s rate. c. continue sa0in, at the same rate. d. Any of the a+o0e are possi+le. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
Kohn is plannin, ahead for retirement in a two"period world. :hen Kohn is youn, he will earn A1 million, and when Kohn is old and retired he will +e ,i0en A6#,### from Social Security. If the interest rate +etween the two time periods is 8 percent, what is the slope of KohnCs +ud,et constraint when considerin, the consumption possi+ilities +etween the two periods if consumption when youn, is ,raphed on the hori=ontal aBis and consumption when old is ,raphed on the 0ertical aBisD a. "#.9; +. "1.#6 c. "1.#8 d. "1.1! R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: & DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 36.
Suppose %li0ia is plannin, for retirement in a two"period world. In the first period %li0ia is youn, and earns A1 million, and in the second period %li0ia is old and retired and earns nothin,. The interest rate is initially 1# percent, +ut then it falls to 8 percent. :hich of the followin, statements is correctD a. After the interest rate falls, the su+stitution effect will induce %li0ia to consume more when she is youn,. +. After the interest rate falls, the su+stitution effect will induce %li0ia to consume less when she is youn,. c. After the interest rate falls, the income effect will induce %li0ia to consume more when she is youn,. d. A chan,e in interest rates affects the su+stitution effect +ut not the income effect. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
%ne of the primary research results in taB policy analysis o0er the last !# years is that a. an increase in interest rates will increase sa0in,. +. an increase in interest rates will decrease sa0in,. c. lowerin, taBes on interest income will increase sa0in,. d. None of the a+o0e is correct. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
The opportunity cost of current household consumption is the a. wa,e rate. +. mar/et interest rate. c. price of the ,oods consumed. d. eBplicit cost of consumption. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Definitional

39.
!##
Suppose that you ha0e A1## today and eBpect to recei0e A1## one year from today. .our money mar/et account pays an annual interest rate of !6T, and you may +orrow money at that interest rate. If you sa0e all your money, how much money will you ha0e one year from todayD a. A1## +. A1!6 c. A!## d. A!!6 R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 3;.
Suppose that you ha0e A1## today and eBpect to recei0e A1## one year from today. .our money mar/et account pays an annual interest rate of !6T, and you may +orrow money at that interest rate. Suppose that you +orrow A7# and spend A17# today. After you repay your loan one year from today, how much money will you ha0e a0aila+le for consumption one year from todayD a. A# +. A!6 c. A6# d. A86 R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Applicati0e 6#.
Suppose that you ha0e A1## today and eBpect to recei0e A1## one year from today. .our money mar/et account pays an annual interest rate of !6T, and you may +orrow money at that interest rate. &onsider the +ud,et constraint +etween Ospendin, todayP on the hori=ontal aBis and Ospendin, a year from todayP on the 0ertical aBis. :hat is the slope of this +ud,et constraintD a. "#.86 +. "1.## c. "1.!6 d. "!.!6 R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
&onsider the +ud,et constraint +etween Ospendin, todayP on the hori=ontal aBis and Ospendin, a year from todayP on the 0ertical aBis. Suppose that you ha0e A1## today and eBpect to recei0e A1## one year from today. .our money mar/et account pays an annual interest rate of !6T, and you may +orrow money at that interest rate. Suppose now that the interest rate increases to 3#T. :hat happens to the slope of your +ud,et constraint relati0e to when the interest rate was A!6TD The slope a. +ecomes steeper. +. +ecomes flatter. c. doesnCt chan,e +ecause the +ud,et constraint shifts in parallel to the ori,inal +ud,et constraint. d. doesnCt chan,e +ecause the +ud,et constraint shifts out parallel to the ori,inal +ud,et constraint. R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical 6!.
&onsider the +ud,et constraint +etween Ospendin, todayP on the hori=ontal aBis and Ospendin, a year from todayP on the 0ertical aBis. Suppose that you ha0e A1## today and eBpect to recei0e A1## one year from today. .our money mar/et account pays an annual interest rate of !6T, and you may +orrow money at that interest rate. Suppose now that the interest rate decreases to 1#T. :hat happens to the slope of your +ud,et constraint relati0e to when the interest rate was A!6TD The slope a. +ecomes steeper. +. +ecomes flatter. c. doesnCt chan,e +ecause the +ud,et constraint shifts in parallel to the ori,inal +ud,et constraint. d. doesnCt chan,e +ecause the +ud,et constraint shifts out parallel to the ori,inal +ud,et constraint.

ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical R F: T%(: !1"3 NAT: Analytic &onsumption"sa0in, decision
!#1
Sec !- " The Theory of Consumer Choice " Conc0usion

#ULT$%LE CHO$CE 1. The theory of consumer choice eBplains how people choose +etween a. teBt+oo/s and ener,y drin/s. +. la+or and leisure. c. spendin, now and spendin, in the future. d. All of the a+o0e are correct. R F: T%(: !1"6 NAT: Analytic &onsumer choice
ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !.
The theory of consumer choice pro0ides aEnF a. literal account of how people ma/e decisions. +. unrealistic picture of how people ma/e decisions. c. model that is consistent with how people ma/e decisions. d. in"depth model that is +ased more in psycholo,y than in economics. R F: T%(: !1"6 NAT: Analytic &onsumer choice
ANS: & DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e

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Chapter 21 The Theory of Consumer Choice

&hapter !1<The Theory of &onsumer &hoice

&hapter !1<The Theory of &onsumer &hoice

&hapter !1<The Theory of &onsumer &hoice

&hapter !1<The Theory of &onsumer &hoice

NAT: Analytic )S&: Applicati0e

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a. +. c. d. ANS: a. +. c. d. DIF: T%(: 3.

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$%&: 'tility and consumer choice

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&hapter !1<The Theory of &onsumer &hoice

Sec !! " The Theory of Consumer Choice

ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !.

&hapter !1<The Theory of &onsumer &hoice

ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 6.

ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e 7.

ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Definitional 9.

ANS: A DIF: 1 $%&: 'tility and consumer choice )S&: Interpreti0e

&hapter !1<The Theory of &onsumer &hoice

hat the Consumer

ANS: 1 DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e !.

ANS: D DIF: 1 $%&: 'tility and consumer choice )S&: Applicati0e 2.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

&hapter !1<The Theory of &onsumer &hoice

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical 7.

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical 8.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Interpreti0e ;.

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

ANS: 1 DIF: 1 $%&: 'tility and consumer choice 11.

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

ANS: 1 DIF: ! $%&: 'tility and consumer choice )S&: Applicati0e

&hapter !1<The Theory of &onsumer &hoice

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

ANS: D DIF: ! $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

The followin, dia,ram shows two +ud,et lines: A and 1.

&hapter !1<The Theory of &onsumer &hoice

&hapter !1<The Theory of &onsumer &hoice

ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

ANS: 1 DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

!1"1 NAT: Analytic 1ud,et constraint

The followin, dia,ram shows a +ud,et constraint for a particular consumer.

&hapter !1<The Theory of &onsumer &hoice

The followin, dia,ram shows a +ud,et constraint for a particular consumer.

ANS: A DIF: 2 $%&: 'tility and consumer choice )S&: Analytical

&hapter !1<The Theory of &onsumer &hoice

&hapter !1<The Theory of &onsumer &hoice

ANS: A DIF: ! $%&: 'tility and consumer choice )S&: Analytical