The Theory of Consumer Choice 5263
93. If the income effect counteracts the substitution effect, we know that the good in question is a(n)
a. complementary good.
b. inferior good.
c. luxury good.
d. normal good.
94. When the price of a normal good increases,
a. both the income and substitution effects encourage the consumer to purchase more of the
good.
b. both the income and substitution effects encourage the consumer to purchase less of the good.
c. the income effect encourages the consumer to purchase more of the good, and the substitution
effect encourages the consumer to purchase less of the good.
d. the income effect encourages the consumer to purchase less of the good, and the substitution
effect encourages the consumer to purchase more of the good.
5264 The Theory of Consumer Choice
95. When the price of a normal good decreases,
a. both the income and substitution effects encourage the consumer to purchase more of the
good.
b. both the income and substitution effects encourage the consumer to purchase less of the good.
c. the income effect encourages the consumer to purchase more of the good, and the substitution
effect encourages the consumer to purchase less of the good.
d. the income effect encourages the consumer to purchase less of the good, and the substitution
effect encourages the consumer to purchase more of the good.
96. When the price of an inferior good increases,
a. both the income and substitution effects encourage the consumer to purchase more of the
good.
b. both the income and substitution effects encourage the consumer to purchase less of the good.
c. the income effect encourages the consumer to purchase more of the good, and the substitution
effect encourages the consumer to purchase less of the good.
d. the income effect encourages the consumer to purchase less of the good, and the substitution
effect encourages the consumer to purchase more of the good.
The Theory of Consumer Choice 5265
97. When the price of an inferior good decreases,
a. both the income and substitution effects encourage the consumer to purchase more of the
good.
b. both the income and substitution effects encourage the consumer to purchase less of the good.
c. the income effect encourages the consumer to purchase more of the good, and the substitution
effect encourages the consumer to purchase less of the good.
d. the income effect encourages the consumer to purchase less of the good, and the substitution
effect encourages the consumer to purchase more of the good.
Figure 21–22
5266 The Theory of Consumer Choice
98. Refer to Figure 21-22. If the consumer is currently at point A in the figure, a movement to point
B as a result of a decrease in the price of potato chips represents the
a. substitution effect.
b. income effect.
c. budget effect.
d. price effect.
99. Refer to Figure 21-22. If the consumer were initially at point A in the figure, a movement from
point B to point C as a result of a decrease in the price of potato chips represents the
a. substitution effect.
b. income effect.
c. budget effect.
d. price effect.
The Theory of Consumer Choice 5267
100. Refer to Figure 21-22. The shift from point B to point C in the figure is due to the
a. substitution effect of an increase in the price of potato chips.
b. income effect of an increase in the price of potato chips.
c. substitution effect of a decrease in the price of potato chips.
d. income effect of a decrease in the price of potato chips.
101. If the price of a good increases, all else equal, consumers perceive
a. an increase in purchasing power if the good is an inferior good.
b. an increase in income if the price increase occurs for a normal good.
c. a decrease in purchasing power.
d. a net gain in purchasing power if they decrease consumption of some goods.
5268 The Theory of Consumer Choice
102. A consumer consumes two normal goods, coffee and chocolate. The price of coffee rises. The
income effect, by itself, suggests that the consumer will consume
a. more coffee and more chocolate.
b. less coffee and less chocolate.
c. more coffee and less chocolate.
d. less coffee and more chocolate.
103. A decrease in the price of DVD players leads consumers to buy more DVD players. From this
information we can conclude that DVD players
a. are normal goods.
b. are inferior goods.
c. are luxury goods.
d. could be any of the above.
The Theory of Consumer Choice 5269
104. Energy drinks and granola bars are normal goods. When the price of energy drinks decreases,
the income effect causes a
a. shift to a lower indifference curve, and the consumer buys fewer granola bars.
b. shift to a higher indifference curve, and the consumer buys more granola bars.
c. movement along the indifference curve, and the consumer buys fewer granola bars.
d. movement along the indifference curve, and the consumer buys more granola bars.
105. Energy drinks and granola bars are normal goods. When the price of energy drinks decreases,
the income effect causes
a. the consumer to feel richer, so the consumer buys more granola bars.
b. the consumer to feel richer, so the consumer buys fewer granola bars.
c. granola bars to be relatively more expensive, so the consumer buys more granola bars.
d. granola bars to be relatively less expensive, so the consumer buys fewer granola bars.
5270 The Theory of Consumer Choice
106. Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles
are an inferior good and textbooks are a normal good, then the income effect associated with an
increase in the price of a textbook will result in
a. a decrease in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
b. a decrease in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
c. an increase in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
d. an increase in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
107. Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles
are an inferior good and textbooks are a normal good, then the income effect associated with a
decrease in the price of a textbook will result in
a. a decrease in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
b. a decrease in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
c. an increase in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
d. an increase in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
The Theory of Consumer Choice 5271
108. Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles
are an inferior good and textbooks are a normal good, then the substitution effect associated
with a decrease in the price of a textbook, by itself, will result in
a. a decrease in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
b. a decrease in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
c. an increase in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
d. an increase in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
109. Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles
are an inferior good and textbooks are a normal good, then the substitution effect associated
with a decrease in the price of Ramen noodles, by itself, will result in
a. a decrease in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
b. a decrease in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
c. an increase in the consumption of textbooks and an increase in the consumption of Ramen
noodles.
d. an increase in the consumption of textbooks and a decrease in the consumption of Ramen
noodles.
5272 The Theory of Consumer Choice
110. The income effect of a price change is depicted by
a. a parallel shift of the budget constraint at the old set of prices.
b. a parallel shift of the budget constraint at the new set of prices.
c. a movement along the budget constraint holding the level of satisfaction constant.
d. not observable and is therefore neither a shift nor a change in the slope of the budget
constraint.
111. Dave consumes two normal goods, X and Y, and is currently at an optimum. If the price of good
X falls, we can predict with certainty that
a. Dave will consume more of both goods because his real income has risen.
b. the substitution effect will be positive for good X and negative for good Y.
c. Dave may consume more or less of good X, but he will consume less of good Y.
d. the substitution effect will offset the income effect for good X.
The Theory of Consumer Choice 5273
112. A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The
substitution effect, by itself, suggests that the consumer will consume
a. more popcorn and more Pepsi.
b. less popcorn and less Pepsi.
c. more popcorn and less Pepsi.
d. less popcorn and more Pepsi.
113. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the
substitution effect by itself will
a. cause the consumer to buy more of good Y and less of good X.
b. cause the consumer to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that the consumer buys.
d. result in an upward-sloping demand for good Y if the substitution effect is positive.
5274 The Theory of Consumer Choice
114. Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect by itself
will cause a
a. shift to a lower indifference curve so that the consumer buys less Pepsi.
b. shift to a higher indifference curve so that the consumer buys more Pepsi.
c. movement along the indifference curve so that the consumer buys more Pepsi.
d. movement along the indifference curve so that the consumer buys less Pepsi.
115. Cashews and asparagus are normal goods. When the price of asparagus falls, the substitution
effect by itself causes
a. the consumer to feel richer, so the consumer buys more cashews.
b. the consumer to feel richer, so the consumer buys less cashews.
c. cashews to be relatively more expensive, so the consumer buys less cashews.
d. cashews to be relatively less expensive, so the consumer buys more cashews.
The Theory of Consumer Choice 5275
116. Pepsi and pizza are normal goods. When the price of pizza rises, the substitution effect causes
Pepsi to be relatively
a. more expensive, so the consumer buys more Pepsi.
b. more expensive, so the consumer buys less Pepsi.
c. less expensive, so the consumer buys more Pepsi.
d. less expensive, so the consumer buys less Pepsi.
117. Which effect of a price change moves the consumer along the same indifference curve to a
point with a new marginal rate of substitution?
a. the budget effect
b. the preference effect
c. the substitution effect
d. the income effect
5276 The Theory of Consumer Choice
118. The substitution effect of a price change is depicted by a
a. movement along the budget constraint holding satisfaction constant.
b. shift in the budget constraint at the old prices.
c. movement along the consumer’s new indifference curve at the new prices.
d. movement along the original indifference curve to the point where the marginal rate of
substitution equals the price ratio for the new set of prices.
119. Which of the following descriptions best depicts the substitution effect?
a. the change in consumption resulting from a change in the consumer’s income, holding the
prices of the goods constant
b. the change in consumption resulting from a change in the consumer‘s income, holding the
consumer‘s level of satisfaction constant
c. the change in consumption resulting from a change in the price of one good, holding the
consumer‘s level of satisfaction constant
d. the change in consumption resulting from a change in the price of one good, allowing the
consumer‘s level of satisfaction to change
The Theory of Consumer Choice 5277
120. Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently,
Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles,
the substitution effect will
a. be two times the income effect.
b. be half the income effect.
c. be zero.
d. always increase the number of trips to the movie theater Emily makes.
Figure 21–23
5278 The Theory of Consumer Choice
121. Refer to Figure 21–23. When the price of X is $80, the price of Y is $20, and the consumer’s
income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The
substitution effect can be illustrated as the movement from
a. D to E.
b. D to C.
c. C to E.
d. E to D.
122. Refer to Figure 21–23. When the price of X is $80, the price of Y is $20, and the consumer’s
income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The
income effect can be illustrated as the movement from
a. D to E.
b. D to C.
c. C to E.
d. E to D.
The Theory of Consumer Choice 5279
123. Refer to Figure 21–23. When the price of X is $80, the price of Y is $20, and the consumer’s
income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The
demand curve can be illustrated as the movement from
a. D to E.
b. D to C.
c. C to E.
d. E to D.
124. A consumer consumes two normal goods, sandwiches and milk. When the price of milk is $0.50
per glass, the consumer purchases 40 glasses. When the price rises to $0.65 per glass, the
consumer purchases 30 glasses. We can use the information provided by the consumer’s
optimum choices to derive the
a. demand curve for milk.
b. demand curve for sandwiches.
c. supply curve for milk.
d. labor-leisure tradeoff.
5280 The Theory of Consumer Choice
125. When we derive the demand curve for a good, we should remember that the
a. income effect must be greater than the substitution effect.
b. substitution effect must be greater than the income effect.
c. substitution effect must be in the same direction as the income effect.
d. income effect and the substitution effect may work in the same or in opposite directions.
126. Given a consumer’s indifference map, the demand curve for a good can
a. be derived by moving a consumer’s budget constraint as her income falls.
b. be derived by moving a consumer’s budget constraint as her income rises.
c. be derived by moving a consumer’s budget constraint as the market price of one good
changes.
d. not be derived from consumer theory.
The Theory of Consumer Choice 5281
127. An individual‘s demand curve for a good is derived by varying the
a. income level and observing the resulting total utility derived from both goods.
b. price of one good and observing the resulting quantities of the other good.
c. budget line to the left and calculating the loss in total utility.
d. price of one good and observing the resulting quantities demanded of that good.
128. Consumer theory provides the foundation for understanding demand curves because
a. each point on a demand curve represents an optimal choice point.
b. consumers purchase more inferior goods than normal goods.
c. increases in income cause the budget constraint to rotate inward along one axis, which
changes the consumer’s purchases.
d. increases in income cause the budget constraint to rotate outward along one axis, which
changes the consumer’s purchases.
5282 The Theory of Consumer Choice
129. You can think of an indifference curve as an
a. equal-cost curve.
b. equal-marginal-cost curve.
c. equal-utility curve.
d. equal–marginal-utility curve.
130. Frannie spends her income on rice and beans. At her optimum, Frannie’s
a. utility from consuming rice is equal to her utility from consuming beams.
b. marginal utility of rice is equal to her marginal utility of beans.
c. marginal utility per dollar spent on rice equals her marginal utility per dollar spent on beans.
d. marginal rate of substitution is equal to 1.