Chapter 21 Theory of Consumer Choice

A change in the relative prices of which of the following pairs of goods would likely cause the smallest substitution effect?

Right shoes and left shoes

Indifference curves for perfect substitutes are

Straight lines

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

Substitution effect

Which of the following is not true regarding the outcome of a consumer's optimization process?

The consumer is indifferent between any two points on his budget constraint.

The slope at any point on an indifference curve is known as

The marginal rate of substitution

A Giffen good is an extremely inferior good.

True

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

True

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.

True

If the price of a good falls, the substitution effect always causes an increase in the quantity demanded of that good.

True

If an increase in a consumer's income causes the consumer to decrease her quantity demanded of a good, then the good is

an inferior good

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)

rises

If income and prices were both to double, the budget line would

stay the same

Which of the following is true about the consumer's optimum consumption bundle? At the optimum

1) the indifference curve is tangent to the budget constraint. 2) the slope of the indifference curve equals the slope of the budget constraint. 3)the relative prices of the two goods equals the marginal rate of substitution.

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

2

The limit on the consumption bundles that a consumer can afford is known as

Budget Constraint

A budget constraint is a set of commodity bundles that provide the consumer with the same level of satisfaction.

False. A budget constraint is the limit on the consumption bundles that a consumer can afford.

If two goods are perfect complements, indifference curves associated with these two goods would cross each other at the optimum.

False. Indifference curves for perfect complements are right angles but still never cross another indifference curve.

The theory of consumer choice can be used to demonstrate that labor-supply curves must be upward sloping.

False. Labor-supply curves can be backward sloping if the income effect from a change in the wage outweighs the substitution effect.

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.

False. The income effect is measured as the change in consumption that results when a change in price moves the consumer to a higher or lower indifference curve.

An increase in the interest rate will always lead to a greater amount of saving.

False. income effect from a change in interest rates outweighs the substitution effect, the individual will save less.

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.

False. the income effect would cause an increase in the quantity demanded.

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).

False.difference curves are negatively sloped but they are usually bowed inward

Which of the following statements is not true with regard to the standard properties of indifference curves?

Indifference curves are bowed outward

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).

True

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

True

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.

True

The more difficult it is to substitute one good for another, the more bowed inward indifference curves become.

True

If an increase in a consumer's income causes the consumer to increase his quantity demanded of a good, then the good is

a normal good

The consumer's optimal purchase of any two goods is the point where

the consumer reaches the highest indifference curve subject to remaining on the budget constraint.

If leisure is a normal good, an increase in the wage

will increase the amount of labor supplied if the substitution effect outweighs the income effect.

If consumption when young and when old are both normal goods, an increase in the interest rate

will increase the quantity of saving if the substitution effect outweighs the income effect.