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61
89) The diamond/water paradox helps to illustrate the concept of marginal value.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
90) The law of diminishing marginal utility implies that as a household consumes more of a product, its
total utility will increase by larger amounts -assuming marginal utility remains positive.
Topic: The Basis of Choice: Utility
Skill: Definition
Learning Outcome: Micro-10
91) The law of diminishing marginal utility implies that marginal utility never becomes negative.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
92) When consumers maximize utility, they are equating the ratio of total utility to price across all goods
consumed.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
93) Total utility can be positive even when marginal utility is negative.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
94) If MUx/Px exceeds MUy/Py, then a household can increase its utility by spending more on Y and less
on X.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
62
95) Assuming well-defined indifference curves, when marginal utility is zero, total utility is at a
maximum.
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
96) The diamond/water paradox is only true in theory, but no real-world examples have yet to be
discovered.
Answer: FALSE
Diff: 1
Topic: The Basis of Choice: Utility
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
6.3 Income and Substitution Effects
1) A rise in the price of Pepsi that causes a household to shift its purchasing pattern toward Coke and
away from Pepsi is the ________ effect of a price change.
A) income
B) substitution
C) complementary
D) diminishing marginal utility
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
2) For normal goods,
A) the substitution and income effects of a price decrease will both decrease the quantity of the good
demanded.
B) the substitution and income effects of a price decrease will both increase the quantity of the good
demanded.
C) the substitution effect of a price decrease will increase the quantity of the good demanded while the
income effect of a price decrease will decrease the quantity of the good demanded.
D) the substitution effect of a price decrease will decrease the quantity of the good demanded while the
income effect of a price decrease will increase the quantity of the good demanded.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
63
3) For inferior goods,
A) the substitution and income effects of a price increase will both decrease the quantity of the good
demanded.
B) the substitution and income effects of a price increase will both increase the quantity of the good
demanded.
C) the substitution effect of a price increase will increase the quantity of the good demanded while the
income effect of a price increase will decrease the quantity of the good demanded.
D) the substitution effect of a price increase will decrease the quantity of the good demanded while the
income effect of a price increase will increase the quantity of the good demanded.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
4) A price change would have the largest income effect on a
A) magazine.
B) tablet computer.
C) piece of clothing.
D) car.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
5) Assuming that charitable giving is a normal good, the income effect of a decrease in personal tax rates
would lead to
A) less giving because giving to charity would become more expensive relative to other goods.
B) more giving because giving to charity would become less expensive relative to other goods.
C) more giving because households would have more disposable income.
D) less giving because households would spend that money on luxury goods.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
64
6) Related to the Economics in Practice on page 125: Harry's Foods claims that you will pay less for
groceries by shopping at their stores. As evidence, Harry's Foods points out that the total price of the
bundle of goods that a particular shopper purchased at Harry's Foods was lower than the total price of
the same bundle of goods purchased at other stores. Which of the following points out a flaw in the
grocery store's argument?
A) The shopper in question may not have purchased the same bundle of goods had he shopped at one of
the other stores first.
B) It ignores the possibility that Harry's Foods used to charge higher prices than their competitors.
C) It fails to demonstrate that Harry's Foods offers the highest quality groceries.
D) Prices on the day the bundle was purchased may not be representative of prices on a typical day.
Topic: Income and Substitution Effects: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
7) A fall in the price of 7-UP that causes a household to shift its purchasing pattern away from Sprite and
toward 7-UP is the ________ effect of a price change.
A) income
B) substitution
C) complementary
D) diminishing marginal utility
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
8) If the price of a normal good rises, the income effect will result in households buying ________ of the
good and the substitution effect will result in households buying ________ of the good.
A) more; more
B) more; less
C) less; more
D) less; less
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
65
9) If the price of a normal good falls, the income effect will result in households buying ________ of the
good and the substitution effect will result in households buying ________ of the good.
A) more; more
B) more; less
C) less; more
D) less; less
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
10) If the price of an inferior good rises, the income effect will result in households buying ________ of the
good and the substitution effect will result in households buying ________ of the good.
A) more; more
B) more; less
C) less; more
D) less; less
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
11) If the price of an inferior good falls, the income effect will result in households buying ________ of the
good and the substitution effect will result in households buying ________ of the good.
A) more; more
B) more; less
C) less; more
D) less; less
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
12) A price change would have the smallest income effect on a
A) pack of chewing gum.
B) bicycle.
C) pair of shoes.
D) pickup truck.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
66
13) Related to the Economics in Practice on p. 125: Suppose Store ABC runs an ad claiming to have "low
prices every day." They even demonstrate that the total expenditure for a basket of groceries is less at
their store than at any of their competitors. Which of the following statements is not true?
A) You would clearly be better off shopping at Store ABC.
B) Your preferences may not be consistent with the basket used by Store ABC (in their example), thus it is
not clear whether or not you would be better off shopping at Store ABC or not.
C) Even if your preferences are generally consistent with the basket used by Store ABC, it may still be
possible for you to substitute other similar goods for those in the basket used by Store ABC (in their
example) and thus spend less at another store.
D) All of the above statements are true.
Topic: Income and Substitution Effects: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
14) Ignoring income effects, an increase in the wage rate will cause an increase in the quantity of labor
supplied.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
15) If the price of a normal good rises, the opportunity cost of that good rises and households buy less of
the good.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
16) For normal goods, the income and substitution effects work in the same direction.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
17) For normal goods, the income and substitution effects help explain the downward slope of the
demand curve.
Topic: Income and Substitution Effects
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
67
6.4 Household Choice in Input Markets
Refer to the information provided in Figure 6.11 below to answer the question(s) that follow.
Figure 6.11
1) Refer to Figure 6.11. Gordon's opportunity cost of one hour of leisure is
A) $10.
B) $24.
C) $240.
D) indeterminate from this information.
Topic: Household Choice in Input Markets
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-10
2) Refer to Figure 6.11. The opportunity cost for a day's worth of income is ________ of leisure.
A) 1 hour
B) 10 hours
C) 24 hours
D) indeterminate from this information.
Topic: Household Choice in Input Markets
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-10
68
3) Assume leisure is a normal good. The substitution effect of a wage decrease implies a ________
demand for leisure and a ________ labor supply.
A) lower; higher
B) higher; lower
C) higher; higher
D) lower; lower
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
4) If the substitution effect of a wage change outweighs the income effect of a wage change, the labor-
supply curve is
A) upward sloping.
B) horizontal.
C) vertical.
D) backward bending.
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
5) Assume leisure is an inferior good instead of a normal good. The income effect of a wage increase will
lead to a ________ demand for leisure and a ________ labor supply.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
6) Assuming that leisure is a normal good, if an individual's labor supply curve is backward bending,
then the
A) income effect outweighs the substitution effect at higher wages.
B) substitution effect outweighs the income effect at higher wages.
C) income effect and the substitution effects are equal.
D) income effect is zero.
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
69
7) Assume leisure is a normal good. The substitution effect of a wage increase implies a ________ demand
for leisure and a ________ labor supply.
A) lower; higher
B) higher; lower
C) higher; higher
D) lower; lower
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
8) If the income effect of a wage change outweighs the substitution effect of a wage change, the labor-
supply curve is
A) upward sloping.
B) horizontal.
C) vertical.
D) backward bending.
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
9) Assume leisure is an inferior good instead of a normal good. The income effect of a wage decrease will
lead to a ________ demand for leisure and a ________ labor supply.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
70
10) Assuming that leisure is a normal good, if an individual's labor supply curve is upward sloping, then
the
A) income effect outweighs the substitution effect at higher wages.
B) substitution effect outweighs the income effect at higher wages.
C) income effect and the substitution effects are equal.
D) income effect is zero.
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
11) Related to the Economics in Practice on page 127: Uber drivers can choose to drive as many or as few
hours as they desire, and most drivers have another job and drive for Uber as a way to supplement their
income. Assuming leisure is a normal good, if Uber increased the wages it paid its drivers then the
income effect would result in drivers working ________ and buying ________ leisure.
A) more; less
B) more; more
C) less; less
D) less; more
Topic: Household Choice in Input Markets: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
12) Related to the Economics in Practice on page 127: Uber drivers can choose to drive as many or as few
hours as they desire, and most drivers have another job and drive for Uber as a way to supplement their
income. Assuming leisure is a normal good, if Uber increased the wages it paid its drivers then the
substitution effect would result in drivers working ________ and buying ________ leisure.
A) more; less
B) more; more
C) less; less
D) less; more
Topic: Household Choice in Input Markets: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
13) The price of leisure is the wage rate.
Topic: Household Choice in Input Markets
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-10
