Econ 204IS Exam 2

When a consumer spends all of the income, it must be true that they are consuming a basket of goods on their budget line. True or False

True

For an inferior good, the income and substitution effects 1) work together. 2) always exactly cancel each other. 3) work against each other. 4) can work together or in opposition to each other depending upon their relative magnitudes.

Work against each other

The slope of the budget line always equals the consumer's marginal value. True or False

False

If the consumer's income and all prices simultaneously triple, then his optimum will not change. True or False

True

Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods? 1) 4 pounds of apples and 6 pounds of oranges 2) 5 pounds of apples and 5 pounds of oranges 3) 10 pounds of oranges and no apples 4) 15 pounds of apples and no oranges 5) None of these

15 pounds of apples and no oranges

Which of the following is NOT an assumption regarding people's preferences in the theory of consumer behavior? 1)Preferences are complete. 2)Preferences are transitive. 3)Consumers prefer more of a good to less. 4)All of these are basic assumptions about consumer preferences.

All of these are basic assumptions about consumer preferences.

A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called: 1) Budget Line 2) Isoquant 3) An indifference curve 4) Demand Curve 5) None of these

An indifference curve

The budget constraint for a consumer who only buys apples (A) and bananas (B) is PAA + PBB = I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation: 1) B = -I/PB + (PA/PB)A 2)A = -I/PA + (PB/PA)B 3)A = I/PA - (PB/PA)B 4) B = I/PB - (PA/PB)A

B = I/PB - (PA/PB)A

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. Suppose the consumer is spending all of his income buying some of both goods. If the marginal value of X is greater than the relative price of X, how can the consumer improve his level of satisfaction? 1) By purchasing more of both goods. 2) By purchasing more of good X and less of good Y. 3) By purchasing more of good Y and less of good X. 4) The consumer cannot improve his level of satisfaction because he is at the optimum.

By purchasing more of good X and less of good Y.

The consumer's income has no effect of the slope of the consumer's budget line. True or False

True

Along a convex indifference curve, the marginal value of a good rises as the quantity of the good rises. True or False

False

If the consumer's income doubles, then his optimal purchases of all goods will double. True or False

False

Use the following two statements in answering this question: I. All Giffen goods are inferior goods. II. All inferior goods are Giffen goods. 1) I is true, and II is false. 2) I is false, and II true. 3) I and II are false. 4) I and II are true.

I is true, and II is false.

Which of the following is true concerning the substitution effect of a decrease in price? 1) It will lead to an increase in consumption only for a normal good. 2) It will lead to an increase in consumption only for a Giffen good. 3) It will lead to an increase in consumption only for an inferior good. 4) It always will lead to an increase in consumption.

It will lead to an increase in consumption only for a normal good.

When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that: 1) Joe is not consuming good X 2) Joe's preferences are incomplete. 3) Joe's preferences are irrational. 4) Joe is not consuming good Y.

Joe is not consuming good Y.

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket? 1) MRSxy is at a maximum 2) Px/Py = money income 3) MRSxy = money income 4) MRSxy = Px/Py. 5) All of these

MRSxy = Px/Py.

If Px = Py, then when the consumer maximizes utility, 1) MU(X) may equal MU(Y), but it is not necessarily so. 2) X must equal Y. 3) MU(X) must equal MU(Y). 4) X and Y must be substitutes.

MU(X) must equal MU(Y).

Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by 1) more than double. 2) exactly double. 3) less than double. 4) Any of these are possible. 5) None of these

None of these

The assumption of transitive preferences implies that indifference curves must: 1)not cross one another. 2)have a positive slope. 3)be L-shaped. 4)be convex to the origin 5)All of these

Not cross one another

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer? 1) Makes the budget line steeper 2) Makes the budget line flatter 3) Parallel outward (rightward) shift 4) Parallel inward (leftward) shift 5) None of these

Parallel outward (rightward) shift

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals: 1) Py/Px 2) one over the magnitude of the slope of the indifference curve through that point. 3) the magnitude of the slope of the indifference curve through that point. 4)Px/Py

Px/Py

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. If the marginal rate of good X in terms of good Y is large, then the indifference curve will be 1) Convex 2) Concave 3) Steep 4) Flat

Steep

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. When the price of good X rises, what happens to the budget line? 1) The budget line shifts in, with no change in the slope. 2) The budget line becomes flatter, and the horizontal intercept moves to the right. 3) The budget line becomes steeper, with no change in the vertical intercept. 4) The budget line pivots about the horizontal intercept, with the vertical intercept moving up.

The budget line becomes steeper, with no change in the vertical intercept.

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. Suppose the consumer is at an optimum, spending all his income on good X. How are the marginal value of X and the relative price of X related at this corner solution? 1) The marginal value of X and the relative price of X must be equal. 2) The marginal value of X must be less than or equal to the relative price of X. 3) The marginal value of X must be greater than or equal to the relative price of X. 4) There is no definite relationship between the marginal value and the relative price of X.

The marginal value of X must be greater than or equal to the relative price of X.

Under standard assumptions, which of the following is not a property of indifference curves? 1) They are downward sloping and convex. 2) They fill the plane and never cross. 3) Their slope is equal, in magnitude, to the relative price of the goods. 4) Baskets on indifference curves further away from the origin provide more satisfaction than those which are closer to the origin.

Their slope is equal, in magnitude, to the relative price of the goods.

If prices and income in a two-good society double, what will happen to the budget line? 1)The intercepts of the budget line will increase. 2) The intercepts of the budget line will decrease. 3) There will be no effect on the budget line 4) The slope of the budget line may either increase or decrease. 5) Insufficient information is given to determine what effect the change will have on the budget line but we know society is worse-off.

There will be no effect on the budget line.

A consumer prefers market basket A to market basket B, and prefers market basket B to market basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion is: 1) Completeness 2) all goods are good 3) diminishing MRS 4) Transitivity 5) assumption of rationality

Transitivity

If marginal value is constant, then the consumer's indifference curves are straight lines. True or False

True

An increase in income, holding prices constant, can be represented as: 1) a parallel outward shift in the budget line. 2) a parallel inward shift in the budget line. 3) an outward shift in the budget line with its slope becoming flatter. 4) a change in the slope of the budget line.

a parallel outward shift in the budget line.

An indifference curve shows the baskets of goods which: 1) have the same marginal values. 2) the consumer can purchase, given his income and the prices he faces. 3) are the most preferred of the baskets within his budget. 4) are all equally desirable, providing the consumer with some fixed level of satisfaction.

are all equally desirable, providing the consumer with some fixed level of satisfaction.

Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will: 1)become flatter. 2) become steeper or flatter depending on the relationship between prices and income. 3) become steeper. 4) shift outward.

become flatter.

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by: 1) increasing Pepsi consumption and reducing hamburger consumption. 2) increasing hamburger consumption and reducing Pepsi consumption. 3) maintaining his current consumption choices. 4) We do not have enough information to answer this question.

increasing Pepsi consumption and reducing hamburger consumption.

A Giffen good 1) is the special subset of inferior goods in which the substitution effect dominates the income effect. 2) is always the same as an inferior good. 3) must have a downward sloping demand curve. 4) is the special subset of inferior goods in which the income effect dominates the substitution effect.

is the special subset of inferior goods in which the income effect dominates the substitution effect.

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. 1) less, more 2) more, more 3) more, less 4) less, less

less, less

In using the composite-good convention in an indifference curve diagram, economists 1) compare the prices of market baskets at different points in time. 2) divide the world's production into two classes, goods and services. 3) divide the world's goods into two classes, high quality goods and low quality goods. 4) lump together all goods but one into a single good measured in a single unit, like dollars.

lump together all goods but one into a single good measured in a single unit, like dollars.

The assumption that preferences are complete: 1) is unnecessary, as long as transitivity is assumed 2)recognizes that there may be pairs of market baskets that cannot be compared 3) means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them. 4) means that a consumer will spend her entire income.

means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them.

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. 1) more, more 2) more, less 3) less, less 4) less, more

more, less

If a market basket is changed by adding more of at least one good, then rational consumers will: 1) rank the market basket more highly after the change. 2) have indifference curves that cross. 3) more likely prefer a different market basket. 4) rank the market basket as being just as desirable as before. 5) be unable to decide whether the first market basket is preferred to the second or vice versa.

rank the market basket more highly after the change.

The endpoints (horizontal and vertical intercepts) of the budget line: 1) measure the rate at which a consumer is willing to trade one good for another 2) indicate the highest level of satisfaction the consumer can achieve. 3) represent the quantity of each good that could be purchased if all of the budget were allocated to that good. 4) measure its slope. 5) measure the rate at which one good can be substituted for another.

represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

Comparing a market basket A to other market baskets, we can say that for a typical consumer, A is preferred to baskets to the: 1) southwest but less preferred to baskets to the northeast. 2) northeast but less preferred to baskets to the southwest. 3) northwest but less preferred to baskets to the southeast. 4) southeast but less preferred to baskets to the northwest .

southwest but less preferred to baskets to the northeast.

The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect. 1) substitution 2) real price 3) income 4) Giffen

substitution

Marginal utility measures: 1) the slope of the indifference curve 2) the additional satisfaction from consuming one more unit of a good. 3) the slope of the budget line. 4) the marginal rate of substitution. 5) None of these

the additional satisfaction from consuming one more unit of a good.

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. The relative price of good X in terms of good Y is always equal: 1) the magnitude of the slope of the budget line. 2) the marginal value of X in terms of Y. 3) the horizontal intercept of the budget line. 4) the vertical intercept of the budget line.

the magnitude of the slope of the budget line.

The slope of an indifference curve reveals: 1) that preferences are complete 2)the marginal rate of substitution of one good for another good. 3) the ratio of market prices 4) that preferences are transitive. 5) None of these

the marginal rate of substitution of one good for another good.

If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows, then 1) the consumer is at the optimum. 2) the consumer's level of satisfaction would increase if he buys more marshmallows and less of other goods. 3) a surplus of marshmallows exists in the market. 4) the optimum contains fewer marshmallows than the consumer is currently buying.

the optimum contains fewer marshmallows than the consumer is currently buying.

When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that: 1) the marginal utility of A times the price of A equals the marginal utility of B times the price of B 2) the ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of A. 3) the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B. 4) the marginal utility of A equals the marginal utility of B.

the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.

A budget line is constructed to show: 1) how consumers who budget their expenditures achieve more satisfaction than those who do not. 2) the set of all baskets that the consumer can afford, given prices and his or her income. 3) the set of all baskets that the consumer would be willing to purchase given various prices for the goods in the basket. 4) the set of all baskets that the consumer considers equally desirable.

the set of all baskets that the consumer can afford, given prices and his or her income.

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis: 1) the budget line will become steeper. 2) the budget line will become flatter 3) the slope of the budget line will change, but in an indeterminate way 4) the slope of the budget line will not change

the slope of the budget line will not change.

When Homer has 5 doughnuts, his marginal value is 15¢ per doughnut. We can conclude that Homer 1) places a value of 3¢ on each doughnut he owns. 2) needs to purchase more than 5 doughnuts to reach his optimum. 3) receives 75¢ worth of total satisfaction from his 5 doughnuts. 4) would refuse to pay more than 15¢ for a sixth doughnut.

would refuse to pay more than 15¢ for a sixth doughnut.