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8 POSSIBILITIES,
PREFERENCES,
AND CHOICES
275
276 CHAPTER 8
Topic: Consumption Possibilities, Budget Line Topic: Consumption Possibilities, Real Income
Skill: Conceptual Skill: Analytical
9) Matt’s allowance is $20 per month. In order to 12) Suppose that Dave has $200 to spend per week
determine his budget line, you also need to know and he buys only magazines and pizza. The price
A) his indifference curve. of a pizza is $10 and the price of a magazine is $5.
B) his preference map. What is Dave’s real income in terms of maga-
C) the prices of available goods. zines?
D) both the prices of available goods and his prefer- A) 20.
ence map. B) 40.
Answer: C C) 200.
D) 10.
Answer: B
Topic: Consumption Possibilities, Real Income Topic: Consumption Possibilities, Relative Price
Skill: Conceptual Skill: Analytical
28) Real income equals a household’s income 32) In the table above, which case has the lowest rela-
A) in terms of the quantity of goods the household tive price for a hamburger?
can buy. A) Case A.
B) times the prices of the goods it buys. B) Case B.
C) divided by the prices of the goods it buys. C) Case C.
D) times the relative prices of the goods it buys. D) All three cases have an equal relative price for a
Answer: A hamburger.
Answer: A
Topic: Consumption Possibilities, Real Income
Skill: Conceptual
29) Suppose you are graphing the quantity of bagels
on the vertical axis and the quantity of coffee on
the horizontal axis. A household’s real income in
terms of bagels is the
A) relative price of coffee.
B) relative price of bagels.
C) point at which the budget line intersects the x-
axis.
D) point at which the budget line intersects the y-
axis.
Answer: D
Topic: Consumption Possibilities, Relative Price Topic: Consumption Possibilities, Relative Price
Skill: Analytical Skill: Conceptual
46) Given the budget line in the above figure, what is 50) Movies are $10 a ticket, and videotape rentals are
the relative price of pizza? $5 a tape per day. With movies on the vertical
A) 10 gallons of milk per pizza axis, the magnitude of the slope of the budget line
B) 6 gallons of milk per pizza is
C) 4 gallons of milk per pizza A) 1/2.
D) 2 gallons of milk per pizza B) 2.
Answer: D C) 5.
D) 10.
Topic: Consumption Possibilities, Relative Price Answer: A
Skill: Conceptual
47) The magnitude of the slope of the budget line is Topic: Consumption Possibilities, Relative Price
determined by Skill: Conceptual
A) the marginal rate of substitution. 51) If all prices rise by 5 percent and money income
B) the level of income. remains constant, the new budget line will have
C) the consumer’s preferences for the goods. A) a steeper slope.
D) relative prices. B) a flatter slope.
Answer: D C) a positive slope.
D) the same slope.
Topic: Consumption Possibilities, Relative Price Answer: D
Skill: Analytical
48) The magnitude of the slope of the budget line is Topic: Consumption Possibilities, Relative Price
the ratio of Skill: Conceptual
A) a price to its quantity. 52) If all prices fall by 5 percent and money income
B) a quantity to its price. remains constant, the new budget line will have
C) two prices. A) a positive slope.
D) two marginal rates of substitution. B) the same slope.
Answer: C C) a steeper slope.
D) a flatter slope.
Topic: Consumption Possibilities, Relative Price Answer: B
Skill: Recognition
49) The magnitude of the slope of the budget line
measures
A) the opportunity cost of the good on the hori-
zontal axis in terms of the good on the vertical
axis.
B) the opportunity cost of the good on the vertical
axis in terms of the good on the horizontal axis.
C) the price elasticity of demand.
D) the price elasticity of supply.
Answer: A
POSSIBILITIES, PREFERENCES, AND CHOICES 283
Topic: Predicting Consumer Behavior, Demand Topic: Predicting Consumer Behavior, Demand
Curve Curve
Skill: Analytical Skill: Analytical
133) In the above figure, Reggie’s budget line rotates 135) In the above figure, Brendan originally consumes
outward from BL1 to BL2. He initially consumes at point A. If his income rises and both compact
at point A. If his new consumption bundle is at discs and haircuts are normal goods then he will
point C, this implies that his demand curve for begin consuming at a point such as
kiwi fruit A) F.
A) has shifted. B) B.
B) is a vertical line. C) C.
C) slopes downward. D) D.
D) is a horizontal line. Answer: C
Answer: C
Topic: Predicting Consumer Behavior, Demand
Topic: Predicting Consumer Behavior, Demand Curve
Curve Skill: Analytical
Skill: Analytical 136) In the above figure, Brendan originally consumes
134) In the above figure, Reggie’s budget line rotates at point A. If his income rises and compact discs
outward from BL1 to BL2. He initially consumes are a normal good but haircuts are an inferior
good then he will begin consuming at a point
at point A. If his new consumption bundle is at
such as
point B, this implies that kiwi fruit and mangoes
are A) E.
B) B.
A) substitutes.
C) C.
B) complements.
D) D.
C) neither substitutes nor complements.
Answer: B
D) normal goods.
Answer: B
POSSIBILITIES, PREFERENCES, AND CHOICES 297
Topic: Predicting Consumer Behavior, Demand Topic: Predicting Consumer Behavior, Demand
Curve Curve
Skill: Analytical Skill: Analytical
137) In the above figure, Brendan originally consumes 140) In the above figure, as Brendan’s income rises his
at point A. If his income falls and compact discs consumption bundle moves from point A to
are a normal good but haircuts are an inferior point C. This implies that for Brendan, compact
good then he will begin consuming at a point discs are
such as A) a normal good, and haircuts are an inferior
A) B. good.
B) E. B) a normal good, and haircuts are also a normal
C) F. good.
D) G. C) an inferior good, and haircuts are also an infe-
Answer: D rior good.
D) an inferior good, and haircuts are a normal
Topic: Predicting Consumer Behavior, Demand good.
Curve Answer: B
Skill: Analytical
138) In the above figure, Brendan originally consumes Topic: Predicting Consumer Behavior, Demand
at point A. If his income rises and both compact Curve
discs and haircuts are normal goods then he could Skill: Analytical
begin consuming at point 141) In the above figure, as Brendan’s income falls his
A) B, C, or D. consumption bundle moves from point A to
B) B. point E. This implies that for Brendan, compact
C) C. discs are
D) D. A) a normal good, and haircuts are an inferior
Answer: C good.
B) a normal good, and haircuts are also a normal
Topic: Predicting Consumer Behavior, Demand good.
Curve
C) an inferior good, and haircuts are also an infe-
Skill: Analytical
rior good.
139) In the above figure, as Brendan’s income rises his
D) an inferior good, and haircuts are a normal
consumption bundle moves from point A to
good.
point B. This implies that for Brendan, compact
Answer: D
discs are
A) a normal good, and haircuts are an inferior Topic: Predicting Consumer Behavior, Change in
good. Price
B) a normal good, and haircuts are also a normal Skill: Recognition
good. 142) The effect of a change in price on the quantity of
C) an inferior good, and haircuts are also an infe- a good consumed is called the
rior good. A) income effect.
D) an inferior good, and haircuts are a normal B) substitution effect.
good. C) price effect.
Answer: A D) utility effect.
Answer: C
298 CHAPTER 8
Topic: Predicting Consumer Behavior, Marginal Topic: Predicting Consumer Behavior, Substitution
Rate of Substitution Effect
Skill: Analytical Skill: Analytical
149) In the figure above, at point A the consumer is 152) In the figure above, Sam originally selects his con-
willing to give up ____ pounds of pickles to get sumption bundle at point A with 3 pounds of ol-
one additional pound of olives. ives and 4 pounds of pickles a year. Then the
A) 8 price of pickles rises and the price of olives falls so
B) 6 that his budget line rotates but it still goes
C) 1 1/3 through point A. At point A, the slope of the in-
D) 2 difference curve I1 ____ the slope of the new
Answer: C budget line.
Topic: Predicting Consumer Behavior, Substitution A) is steeper than
Effect B) is flatter than
Skill: Analytical C) has the same slope as
150) In the figure above, Sam originally selects his con- D) could be steeper than, flatter than, or have the
sumption bundle at point A with 3 pounds of ol- same slope as
ives and 4 pounds of pickles a year. Then the Answer: A
price of pickles rises and the price of olives falls so
Topic: Predicting Consumer Behavior, Substitution
that his budget line rotates but it still goes Effect
through point A. Sam’s consumption of olives Skill: Conceptual
A) definitely will rise. 153) The substitution effect from a price rise
B) definitely will fall. A) leads to a movement along the fixed budget line,
C) definitely will stay the same. due to a change in relative prices.
D) could rise, fall, or stay the same. B) increases the quantity demanded of the good.
Answer: A C) decreases the quantity demanded of the good.
Topic: Predicting Consumer Behavior, Substitution
D) Both answers A and B are correct.
Effect Answer: C
Skill: Analytical
Topic: Predicting Consumer Behavior, Substitution
151) In the figure above, Sam originally selects his con- Effect
sumption bundle at point A with 3 pounds of ol- Skill: Recognition
ives and 4 pounds of pickles a year. Then the 154) The change in consumption that results from a
price of pickles rises and the price of olives falls so change in the relative price of goods while staying
that his budget line rotates but it still goes on the same indifference curve is the
through point A. Sam’s consumption of pickles A) income effect.
A) definitely will rise. B) substitution effect.
B) definitely will fall. C) indifference effect.
C) definitely will stay the same. D) price effect.
D) could rise, fall, or stay the same. Answer: B
Answer: B
300 CHAPTER 8
Topic: Predicting Consumer Behavior, Substitution Topic: Predicting Consumer Behavior, Substitution
Effect and Income Effect
Skill: Recognition Skill: Recognition
155) The effect of a change in price on the quantity 158) For an inferior good,
bought when the consumer remains indifferent A) the income effect is negative, so that an increase
between the original and the new situation is in income decreases the demand.
called the B) a lower price may not always lead to an increase
A) income effect. in the quantity demanded.
B) indifference effect. C) a lower price has a substitution effect that in-
C) substitution effect. creases the quantity demanded.
D) demand effect. D) All of the above answers are correct.
Answer: C Answer: D
Topic: Predicting Consumer Behavior, Substitution Topic: Predicting Consumer Behavior, Income
and Income Effect Effect
Skill: Conceptual Skill: Conceptual
156) Bart consumes food and clothing, which are both 159) Suppose the price of a good rises. The income
normal goods. Suppose that the price of food effect
falls. The substitution effect of this price decrease A) shows the change in consumption that results
is ____ and the income effect of this price de- from a change in relative prices while staying on
crease is ____. the same indifference curve.
A) that Bart buys more clothing and less food; that B) shows the change in consumption that results
Bart buys more of both food and clothing from a change in relative prices while keeping
B) reflected by a change in the relative prices of income constant.
food and clothing; is represented by a move- C) is shown by decreasing income at the new prices
ment along the original indifference curve in order to move from the old indifference curve
C) reflected by a parallel shift outward of the to the new indifference curve after the price
budget line; that Bart earns more money each change.
month D) is shown by increasing income at the new prices
D) reflected by the change in the slope of the in order to move from the old indifference curve
budget line; that Bart has greater purchasing to the new indifference curve after the price
power change.
Answer: D Answer: C
Topic: Predicting Consumer Behavior, Substitution Topic: Predicting Consumer Behavior, Income
and Income Effect Effect
Skill: Conceptual Skill: Conceptual
157) Nick considers macaroni and cheese to be an infe- 160) The income effect for an inferior good
rior good. As a result of macaroni and cheese be- A) is negative.
ing an inferior good, B) is zero.
A) the substitution effect must be larger in magni- C) is positive.
tude than the income effect so that less is pur- D) could be negative, zero, or positive.
chased as the price falls. Answer: A
B) the substitution effect must be smaller in magni-
tude than the income effect so that less is pur-
chased as the price falls.
C) the income effect is positive, so that more is pur-
chased as income increases.
D) the income effect is negative, so that less is pur-
chased as income increases.
Answer: D
POSSIBILITIES, PREFERENCES, AND CHOICES 301
Topic: Labor Supply Curve, Substitution and Topic: Study Guide Question, Marginal Rate of
Income Effect Substitution
Skill: Analytical Skill: Recognition
183) A rising wage causes both an income and a substi- 186) The magnitude of the slope of an indifference
tution effect. In the above figure, the income ef- curve
fect is stronger than the substitution effect be- A) is defined as the marginal rate of substitution.
tween points B) always equals the relative price of the product
A) a and b. measured along the horizontal axis.
B) b and c. C) increases as income increases.
C) c and d. D) decreases when income increases.
D) d and e. Answer: A
Answer: D
Topic: Study Guide Question, Degree of
Substitutability
Study Guide Questions Skill: Analytical
187) If two goods are complements, then their
Topic: Study Guide Question, Consumption
A) indifference curves are positively sloped straight
Possibilities, Budget Line
Skill: Analytical lines.
184) Sue consumes apples and bananas. Suppose Sue’s B) indifference curves are negatively sloped straight
income doubles and the prices of apples and ba- lines.
nanas do not change. Sue’s budget line will C) indifference curves are L-shaped.
A) shift leftward but its slope will not change. D) marginal rate of substitution is infinity.
Answer: C
B) remain unchanged.
C) shift rightward but its slope will not change. Topic: Study Guide Question, Predicting
D) shift rightward and become steeper. Consumer Behavior
Answer: C Skill: Conceptual
188) When oranges increase in price, the income effect
Topic: Study Guide Question, Preferences and
A) decreases the consumption of oranges only if or-
Indifference Curves
Skill: Analytical anges are a normal good.
185) An indifference diagram has good X measured on B) decreases the consumption of oranges only if or-
the horizontal axis and good Y on the vertical axis. anges are an inferior good.
As a consumer moves up an indifference curve, C) always increases the consumption of oranges.
thus increasing consumption of good Y, D) always decreases the consumption of oranges.
Answer: A
A) more of X is given up for each additional unit of
Y. Topic: Study Guide Question, Predicting
B) a constant amount of X is given up for each ad- Consumer Behavior
ditional unit of Y. Skill: Analytical
C) less of X is given up for each additional unit of 189) When the price of a normal good rises, the in-
Y. come effect results in a ____ in the quantity de-
D) the relative price of X decreases. manded and the substitution effect results in a
Answer: C ____ in the quantity demanded.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
306 CHAPTER 8
Topic: Study Guide Question, Labor Supply, Topic: Preferences and Indifference Curves
Substitution Effect Level 1: Definitions and Concepts
Skill: Conceptual 194) An indifference curve shows combinations of
190) The substitution effect from a rise in the wage goods ____.
rate A) which the consumer prefers equally
A) results in a decrease in the quantity of labor sup- B) that are affordable
plied. C) that are inside or on the budget line
B) results in an increase in the quantity of labor D) that have the same relative price
supplied. Answer: A
C) has no effect on the quantity of labor supplied.
D) has the same effect on the quantity of labor sup- Topic: Marginal Rate of Substitution
Level 1: Definitions and Concepts
plied as does the income effect.
Answer: B 195) The marginal rate of substitution is defined as the
____.
A) marginal cost of each good
MyEconLab Questions B) magnitude of the slope of the indifference curve
Topic: Consumption Possibilities, Budget Line C) inverse of the slope of the budget line
Level 1: Definitions and Concepts D) relative price of the two goods
191) The budget line ____. Answer: B
A) describes the limits to a household’s consump- Topic: Marginal Rate of Substitution
tion choices Level 1: Definitions and Concepts
B) illustrates a household’s preferences 196) As a consumer moves up along an indifference
C) defines a household's consumption when prices curve, the consumer’s ____.
change A) real income decreases
D) shows the income a household needs to be able B) marginal rate of substitution diminishes
to buy goods and services C) marginal rate of substitution does not change
Answer: A
D) marginal rate of substitution increases
Topic: Consumption Possibilities, Real Income Answer: D
Level 1: Definitions and Concepts
Topic: Degree of Substitutability
192) Real income is ____. Level 1: Definitions and Concepts
A) equal to money income minus taxes 197) For goods and services that are perfect substitutes,
B) equal to the income earned legally the consumer’s indifference curves are ____ lines.
C) equal to money income plus benefits minus A) straight, negatively sloped
taxes B) L-shaped
D) the maximum amount of goods and services that C) negatively sloped, bowed-outward
a household can afford D) negatively sloped, bowed-inward
Answer: D Answer: A
Topic: Consumption Possibilities, Relative Price Topic: Predicting Consumer Behavior, Price Effect
Level 1: Definitions and Concepts Level 1: Definitions and Concepts
193) The magnitude of the slope of the budget line is 198) The price effect is the effect of ____ on the quan-
equal to the ____ or ____ of the good plotted on tity of the good ____.
the ____ in terms of the other good. A) a decrease in the price; demanded
A) relative price; marginal cost; y-axis B) a change in the price; supplied
B) relative price; total cost; y-axis C) an increase in the price; consumed
C) relative price; opportunity cost; x-axis D) a change in the price; consumed
D) price; opportunity cost; x-axis Answer: D
Answer: C
POSSIBILITIES, PREFERENCES, AND CHOICES 307
Topic: Predicting Consumer Behavior, Income Topic: Consumption Possibilities, Relative Price
Effect Level 2: Using Definitions and Concepts
Level 1: Definitions and Concepts 203) If the price of peanuts increases by 10 percent and
199) The effect of a change in income on the quantity the price of potato chips does not change, then
of the good consumed is called the ____. the relative price of peanuts with respect to potato
A) marginal rate of substitution effect chips will ____ and the relative price of potato
B) income effect chips with respect to peanuts will ____.
C) price/income effect A) rise; rise
D) real income effect B) rise; fall
Answer: B C) fall; rise
D) fall; fall
Topic: Labor Supply, Substitution and Income
Answer: B
Effects
Level 1: Definitions and Concepts Topic: Preferences and Indifference Curves
200) A higher wage rate has a ____. Level 2: Using Definitions and Concepts
A) substitution effect and an income effect 204) ____ along an indifference curve that is farther
B) substitution effect but no income effect from the origin ____ along an indifference curve
C) neither a substitution effect nor an income effect that is closer to the origin.
D) an income effect but no substitution effect A) Some combinations; are preferred to some com-
Answer: A binations
B) Any combination; is preferred to any combina-
Topic: Consumption Possibilities, Budget Line
Level 2: Using Definitions and Concepts tion
201) As Judy moves down along her budget line, ____. C) Most combinations; are preferred to all combi-
A) the opportunity cost of the good measured along nations
the x-axis increases D) Combinations; are not as affordable as combina-
tions
B) the opportunity cost of the good measured along
Answer: B
the y-axis increases
C) her income decreases Topic: Indifference Curves
D) her income does not change and neither does Level 2: Using Definitions and Concepts
the relative prices of goods and services 205) Indifference curves ____.
Answer: D A) shift rightward when income increases
B) are bowed toward the origin
Topic: Consumption Possibilities, Real Income
Level 2: Using Definitions and Concepts
C) are defined by having a constant marginal rate of
202) John has $40 to spend on pizza and tacos. Pizza substitution
costs $10 each and tacos are $1 per taco. John’s D) are positive sloped indicating that the consumer
real income ____. likes both goods
Answer: B
A) is $40
B) is 4 pizzas or 40 tacos Topic: Marginal Rate of Substitution
C) is 4 pizzas plus 40 tacos Level 2: Using Definitions and Concepts
D) depends only on his money wage 206) The marginal rate of substitution is ____, the
Answer: B ____ is the ____.
A) greater; flatter; indifference curve
B) greater; steeper; budget line
C) smaller; steeper; indifference curve
D) smaller; flatter; indifference curve
Answer: D
308 CHAPTER 8
Topic: Predicting Consumer Behavior, Change in Topic: Predicting Consumer Behavior, Change in
Price Price
Level 4: Advanced Calculations and Predictions Level 4: Advanced Calculations and Predictions
222) The price of one good changes and Sue is now at 223) The figure illustrates Elijah’s preferences. He is
a point on her indifference curve where the mar- currently at point A. The price of pizza decreases.
ginal rate of substitution exceeds the relative The move from point A to point ____ is the sub-
price. Sue will now choose to buy ____ of the stitution effect and the move from point ____ to
good that is measured on the ____. point ____ is the income effect.
A) more; x-axis A) B; B; C
B) more; y-axis B) E; E; C
C) the same quantity; x-axis C) D; D; B
D) less; x-axis D) C; C; B
Answer: A Answer: B
Topic: Predicting Consumer Behavior, Change in Topic: Predicting Consumer Behavior, Income and
Price Substitution Effects
Level 4: Advanced Calculations and Predictions Level 4: Advanced Calculations and Predictions
225) Peter likes bagels and soda. The price of a bagel is 228) Wendy spends $30 a week on movies and maga-
$2 and the price of soda is $1 a can. Peter spends zines. The price of a movie is $8, the price of a
all his income and buys 3 bagels and 4 cans of magazine is $2, and Wendy sees 3 movies a week
soda. Now the price of soda rises to $2 a can. If and buys 3 magazines. The price of a magazine
Peter’s indifference curves have the regular shape, now increases to $4 and Wendy’s brother gives
he will most likely buy ____. her $6 a week so that she can still see 3 movies a
A) more bagels and more soda week and buy 3 magazines. In this situation,
B) less soda and fewer bagels Wendy will see ____ movies and buy ____ maga-
C) more bagels and less soda zines.
D) fewer bagels and more soda A) 3; 3
Answer: B B) less than 3; less than 3
C) more than 3; fewer than 3
Topic: Predicting Consumer Behavior, Change in
D) less than 3; more than 3
Price
Answer: C
Level 4: Advanced Calculations and Predictions
226) Tom spends all his income on comics and cola Topic: Predicting Consumer Behavior, Income and
and is at his best affordable point. The price of a Substitution Effects
comic is $4, and the price of a can of cola is $1. If Level 4: Advanced Calculations and Predictions
the quantity of cola is plotted on the y-axis, then 229) Sue consumes only sandwiches and soda and is at
____ 4. her best affordable point. Suppose that sand-
A) the relative price of cola is wiches are plotted on the x-axis. Now the price of
B) both Tom’s marginal rate of substitution and a sandwich halves. The substitution effect is that
the relative price of cola are Sue substitutes ____ for ____. The income effect
C) Tom’s real income in terms of cola is is that Sue ____.
D) Tom’s marginal rate of substitution is A) sandwiches; soda; buys less of both goods
Answer: D B) soda; sandwiches; buys more soda and fewer
sandwiches
Topic: Predicting Consumer Behavior, Income and
C) sandwiches; soda; buys more of both goods
Substitution Effects
D) soda; sandwiches; buys less soda and more
Level 4: Advanced Calculations and Predictions
227) Rosie consumes only coffee and sandwiches and is sandwiches
Answer: C
at her best affordable point. Now, the price of a
cup of coffee is cut in half and at the same time Topic: Labor Supply Curve, Substitution and
Rosie’s income decreases by the amount that al- Income Effects
lows her to continue buying the same amounts of Level 4: Advanced Calculations and Predictions
coffee and sandwiches. Rosie now buys ____ cups 230) The labor supply curve ____ at lower wage rates
of coffee and ____ sandwiches. if as the wage rate increases the ____ effect ex-
A) the same number of; the same number of ceeds the ____ effect.
B) fewer; more A) bends backwards; income; substitution
C) the same number of; more B) bends backward; price; income
D) more ; fewer C) has a negative slope; substitution; price
Answer: D D) has a positive slope; substitution; income
Answer: D