True/False
Indicate whether the
statement is true or false.
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1.
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If we measure the quantity of French fries on the horizontal axis and the
quantity of hamburgers on the vertical axis, and if the price of French fries is €0.60 and the
price of a hamburger is €2.40, then the slope of the budget constraint is 1/4 (and it is
negative).
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2.
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A budget constraint is a set of commodity bundles that provide the consumer with
the same level of satisfaction.
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3.
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Indifference curves measure the consumer's willingness to trade one good
for another good while maintaining a constant level of satisfaction.
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4.
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When drawn on a graph that measures the quantity of a good on each axis,
indifference curves are usually straight lines that slope downward (negatively).
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5.
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If two goods are perfect complements, indifference curves associated with these
two goods would cross each other at the optimum.
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6.
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Indifference curves tend to be bowed inward because a consumer is willing to
trade a greater amount of a good for another if they have an abundance of the good they are trading
away.
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7.
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At the consumer's optimum point, the marginal rate of substitution of
apples for oranges is equal to the ratio of the price of oranges to the price of apples.
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8.
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The more difficult it is to substitute one good for another, the more bowed
inward indifference curves become.
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9.
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If the price of a good falls, the substitution effect always causes an increase
in the quantity demanded of that good.
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10.
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If the price of a good falls and the good is a normal good, the income effect
causes a decrease in the quantity demanded of that good.
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11.
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If the price of a good falls and the good is an inferior good, the income effect
causes a decrease in the quantity demanded of that good.
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12.
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The income effect is measured as the change in consumption that results when a
price change moves the consumer along a given indifference curve to a point with a new marginal rate
of substitution.
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13.
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An increase in the interest rate will always lead to a greater amount of
saving.
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14.
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A Giffen good is an extremely inferior good.
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15.
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The theory of consumer choice can be used to demonstrate that labour supply
curves must be upward sloping.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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16.
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The limit on the consumption bundles that a consumer can afford is known
as
a. | an indifference curve. | c. | the marginal rate of substitution. | b. | the budget
constraint. | d. | the consumption
limit. |
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17.
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A change in the relative prices of which of the following pair of goods would
likely cause the smallest substitution effect?
a. | right shoes and left shoes | b. | petrol from BP and petrol from
Shell | c. | Kit-Kat chocolate snacks and Twix chocolate snacks | d. | Coke and
Pepsi |
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18.
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Indifference curves for perfect substitutes are
a. | right angles. | b. | bowed outward. | c. | straight
lines. | d. | nonexistent. | e. | bowed inward. |
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19.
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Suppose a consumer must choose between the consumption of sandwiches and pizza.
If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the
vertical axis, and if the price of a pizza is €10 and the price of a sandwich is €5, then
the slope of the budget constraint is
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20.
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The slope at any point on an indifference curve is known as the
a. | marginal rate of indifference. | c. | trade-off rate. | b. | marginal rate of
trade-off. | d. | marginal rate of
substitution. |
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21.
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Which of the following statements is not true with regard to the standard
properties of indifference curves?
a. | Indifference curves are downward sloping. | b. | Indifference curves
are bowed outward. | c. | Indifference curves do not cross each
other. | d. | Higher indifference curves are preferred to lower
ones. |
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22.
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The consumer's optimal purchase of any two goods is the point where
the
a. | budget constraint crosses the indifference curve. | b. | two highest
indifference curves cross. | c. | consumer reaches the highest indifference curve
subject to remaining on the budget constraint. | d. | consumer has reached the highest indifference
curve. |
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23.
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Which of the following is true about the consumer's optimum consumption
bundle? At the optimum,
a. | the slope of the indifference curve equals the slope of the budget
constraint. | b. | the indifference curve is tangent to the budget constraint. | c. | the relative prices
of the two goods equals the marginal rate of substitution. | d. | none of these
answers are true. | e. | all of these answers are
true. |
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24.
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Suppose we measure the quantity of good X on the horizontal axis and the
quantity of good Y on the vertical axis. If indifference curves are bowed inward, as we move from
having an abundance of good X to having an abundance of good Y, the marginal rate of substitution of
good Y for good X (the slope of the indifference curve)
a. | rises. | b. | stays the same. | c. | could rise or fall
depending on the relative prices of the two goods. | d. | falls. |
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25.
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If an increase in a consumer's income causes the consumer to increase his
quantity demanded of a good, then the good is
a. | a complementary good. | c. | a normal good. | b. | an inferior good. | d. | a substitute
good. |
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26.
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If an increase in a consumer's income causes the consumer to decrease her
quantity demanded of a good, then the good is
a. | a substitute good. | c. | a complementary good. | b. | a normal
good. | d. | an inferior
good. |
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27.
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Refer to Exhibit 4. Suppose that the consumer must choose between buying socks
and belts. Also, suppose that the consumer's income is €100. If the price of a belt is
€10 and the price of a pair of socks is €5, the consumer will choose to buy the commodity
bundle represented by point  a. | Z | b. | X | c. | Y | d. | the optimal point cannot be determined from
this graph. |
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28.
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Refer to Exhibit 4. Suppose that the consumer must choose between buying socks
and belts. Also, suppose that the consumer's income is €100. Suppose that the price of a
pair of socks falls from €5 to €2. The substitution effect is represented by the movement
from point  a. | Z to point X. | c. | X to point Z. | b. | X to point Y. | d. | Y to point X. |
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29.
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Refer to Exhibit 4. Suppose that the consumer must choose between buying socks
and belts. Also, suppose that the consumer's income is €100. Suppose that the price of a
pair of socks has falls from €5 to €2. The income effect is represented by the movement
from point  a. | Y to point X. | c. | X to point Y. | b. | X to point Z. | d. | Z to point X. |
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30.
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Refer to Exhibit 4. Suppose that the consumer must choose between buying socks
and belts. Also, suppose that the consumer's income is €100. A pair of socks
is  a. | an inferior good. | c. | a normal good. | b. | a Giffen good. | d. | a complementary
good. |
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31.
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The change in consumption that results when a price change moves the consumer
along a given indifference curve is known as the
a. | inferior effect. | b. | normal effect. | c. | substitution
effect. | d. | complementary effect. | e. | income effect. |
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32.
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If income were to double and prices were to double, the budget line would
a. | stay the same. | b. | rotate inward. | c. | shift outward in a
parallel fashion. | d. | rotate outward. | e. | shift inward in a
parallel fashion. |
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33.
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If leisure is a normal good, an increase in the wage will
a. | always increase the quantity of labour supplied. | b. | increase the amount
of labour supplied if the substitution effect outweighs the income effect. | c. | increase the amount
of labour supplied if the income effect outweighs the substitution effect. | d. | always decrease the
amount of labour supplied. |
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34.
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If consumption when young and when old are both normal goods, an increase in the
interest rate will
a. | always increase the quantity of saving. | b. | always decrease the
quantity of saving. | c. | increase the quantity of saving if the
substitution effect outweighs the income effect. | d. | increase the quantity of saving if the income
effect outweighs the substitution effect. |
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35.
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Which of the following is not true regarding the outcome of a consumer's
optimization process? The:
a. | marginal utility per dollar spent on each good is the same. | b. | marginal rate of
substitution between goods is equal to the ratio of the prices between goods. | c. | consumer's
indifference curve is tangent to his budget constraint. | d. | consumer has reached
his highest indifference curve subject to his budget constraint. | e. | consumer is
indifferent between any two points on his budget constraint. |
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