The Theory of Consumer Choice 5283
Figure 21-24
The figure shows three indifference curves and a budget constraint for a certain consumer
named Steve.
131. Refer to Figure 21-24. Suppose the price of pears, the price of apples, and Steve’s income
remain constant, and Steve moves from point B to point C. In doing so, Steve
a. becomes better off.
b. moves from a point that is not optimal to a point that is optimal.
c. gives up some apples to get some pears.
d. All of the above are correct.
5284 The Theory of Consumer Choice
132. Refer to Figure 21-24. In moving from point A to point C, Steve gives up
a. 4.9 pounds of apples, gains 2.0 pounds of pears, and becomes worse off.
b. 4.9 pounds of apples, gains 2.0 pounds of pears, and becomes better off.
c. 5.5 pounds of apples, gains 4.1 pounds of pears, and becomes worse off.
d. 5.5 pounds of apples, gains 4.1 pounds of pears, and becomes better off.
133. Refer to Figure 21–24. Steve
a. gains 1.1 pounds of pears and becomes better off by moving from point A to point B.
b. gains 1.1 pounds of pears and becomes better off by moving from point A to point C.
c. gains 1.1 pounds of pears and becomes better off by moving from point B to point C.
d. gives up 1.1 pounds of pears and becomes better off by moving from point C to point B.
The Theory of Consumer Choice 5285
134. Refer to Figure 21–24. Which of the following pairs of prices matches the appearance of the
budget constraint?
a. price of apples = $6/pound; price of pears = $4/pound
b. price of apples = $4/pound; price of pears = $6/pound
c. price of apples = $6/pound; price of pears = $5/pound
d. price of apples = $5/pound; price of pears = $6/pound
135. Refer to Figure 21-24. If the price of a pound of pears is $3, then Steve’s income is
a. $12.00.
b. $13.50.
c. $16.20.
d. $18.80.
5286 The Theory of Consumer Choice
136. Refer to Figure 21-24. If Steve’s income is $12.60, then the price of a pound of apples is
a. $4.50.
b. $3.85.
c. $3.00.
d. $2.80.
137. Refer to Figure 21-24. At his optimum, Steve is willing to give up about
a. 0.75 pounds of pears for 1 pound of apples.
b. 0.75 pounds of apples for 1 pound of pears.
c. 1.20 pounds of pears for 1 pound of apples.
d. 1.20 pounds of apples for 1 pound of pears.
The Theory of Consumer Choice 5287
138. Refer to Figure 21-24. At his optimum, Steve is buying
a. 0.6 pounds of apples.
b. 2.0 pounds of apples.
c. 4.5 pounds of apples.
d. 5.5 pounds of apples.
139. Refer to Figure 21-24. About what percentage of his income is Steve spending on apples
when he is at his optimum?
a. 33.3 percent
b. 38.2 percent
c. 44.4 percent
d. 56.7 percent
5288 The Theory of Consumer Choice
Figure 21-25
The figure pertains to a particular consumer. On the axes, X represents the quantity of good X
and Y represents the quantity of good Y.
140. Refer to Figure 21-25. The four curves that are drawn on the figure are
a. indifference curves.
b. budget constraints.
c. demand curves.
d. income curves.
The Theory of Consumer Choice 5289
141. Refer to Figure 21–25. Suppose the price of good X is $8, the price of good Y is $10, and the
consumer’s income is $360. Then the consumer’s optimal choice is represented by a point on
which curve?
a. I1
b. I2
c. I3
d. I4
142. Refer to Figure 21–25. Suppose the price of good X is $8, the price of good Y is $10, and the
consumer’s income
is $360. Then the consumer’s optimal choice is to buy
a. 15 units of good X and 24 units of good Y.
b. 20 units of good X and 20 units of good Y.
c. 30 units of good X and 12 units of good Y.
d. 40 units of good X and 4 units of good Y.
5290 The Theory of Consumer Choice
143. Refer to Figure 21-25. Suppose the price of good X is $15, the price of good Y is $10, and the
consumer’s income is $450. Then the consumer’s optimal choice is represented by a point on
which curve?
a. I1
b. I2
c. I3
d. I4
144. Refer to Figure 21-25. Suppose the price of good X is $15, the price of good Y is $10, and the
consumer’s income is $450. Then the consumer’s optimal choice is to buy
a. 6 units of good X and 36 units of good Y.
b. 12 units of good X and 27 units of good Y.
c. 20 units of good X and 15 units of good Y.
d. 26 units of good X and 6 units of good Y.
The Theory of Consumer Choice 5291
145. Refer to Figure 21–25. Suppose the price of good X is $10, the price of good Y is $5, and the
consumer’s income is $210. Then the consumer’s optimal choice is represented by a point on
which curve?
a. I1
b. I2
c. I3
d. I4
146. Refer to Figure 21–25. Suppose the price of good X is $10, the price of good Y is $5, and the
consumer’s income is $210. Then the consumer’s optimal choice is to buy
a. 8 units of good X and 26 units of good Y.
b. 11 units of good X and 20 units of good Y.
c. 14 units of good X and 14 units of good Y.
d. 18 units of good X and 6 units of good Y.
5292 The Theory of Consumer Choice
Multiple Choice – Section 03: Optimization: What the Consumer Chooses
1. We can use the theory of consumer choice to analyze
a. why most demand curves slope downward.
b. the tradeoff between work and leisure
c. how interest rates affect household saving.
d. All of the above are correct.
2. Suppose the price of good X falls and the consumption of good X increases. From this we can infer
that X is a(n)
(i) normal good.
(ii) inferior good.
(iii) Giffen good.
a. (i) only
b. (i) or (ii) only
c. (iii) only
d. (ii) or (iii) only
The Theory of Consumer Choice 5293
3. When Adam’s income increases, he purchases more tickets to Broadway musicals than he did
before his income increased. For Adam, Broadway musicals are a(n)
a. normal good.
b. inferior good that is not a Giffen good.
c. Giffen good.
d. optimal good.
4. Good X is an inferior good but not a Giffen good. When the price of X increases, the consumer
will consume
a. more X.
b. the same amount of X.
c. less X.
d. more or less X depending on the size of the income effect relative to the size of the substitution
effect.
5294 The Theory of Consumer Choice
5. Suppose the price of good X falls. As a result, the quantity demanded for good X increases for a
particular consumer. For this consumer, the substitution effect induced the consumer to purchase
more X while the income effect induced the consumer to purchase less X. We can infer that X is
a(n)
a. normal good.
b. inferior good.
c. Giffen good.
d. luxury good.
6. Good X is a Giffen good. When the price of X increases, the consumer will consume
a. more X.
b. the same amount of X.
c. less X.
d. more or less X depending on the size of the income effect relative to the size of the substitution
effect.
The Theory of Consumer Choice 5295
7. Higher education is a normal good. If its price falls,
a. the quantity demanded of higher education will fall.
b. the substitution and income effects work in opposite directions.
c. the income effect is positive.
d. higher education will be a Giffen good.
8. When Joshua’s income increases, he purchases more prime-rib dinners than he did before his
income increased. For Joshua, prime-rib dinners are a(n)
a. normal good.
b. inferior good.
c. optimal good.
d. Giffen good.
5296 The Theory of Consumer Choice
9. The change in consumption that results when a price change moves the consumer along a given
indifference curve to a point illustrating the new marginal rate of substitution is called the
a. income effect.
b. substitution effect.
c. Giffen good effect.
d. inferior good effect.
10. If a good is a Giffen good, then
a. the supply curve is downward sloping.
b. the demand curve is upward sloping.
c. the demand curve is horizontal.
d. there is no optimal level of consumption for the consumer.
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11. All Giffen goods are
a. inferior goods, and all inferior goods are Giffen goods.
b. inferior goods, but not all inferior goods are Giffen goods.
c. normal goods, but not all normal goods are Giffen goods.
d. normal goods, and all normal goods are Giffen goods.
12. A Giffen good is a good for which an increase in the price
a. decreases the quantity supplied.
b. increases the quantity supplied.
c. decreases the quantity demanded.
d. increases the quantity demanded.
13. A Giffen good is a good for which
a. an increase in the price raises the quantity demanded.
b. the income effect outweighs the substitution effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
5298 The Theory of Consumer Choice
14. A Giffen good is a good for which
a. a decrease in the price decreases the quantity demanded.
b. the substitution effect outweighs the income effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
15. A Giffen good is a good for which
a. a decrease in the price decreases the quantity demanded.
b. the income effect outweighs the substitution effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
The Theory of Consumer Choice 5299
16. When a consumer experiences a price increase for an inferior good, if the income effect is
a. greater than the substitution effect, the demand curve will be downward sloping.
b. greater than the substitution effect, the demand curve will be upward sloping.
c. less than the substitution effect, the demand curve will be upward sloping.
d. less than the substitution effect but the substitution effect is positive, the demand curve will be
upward sloping.
17. When a consumer experiences a price decrease for an inferior good, if the income effect is
a. less than the substitution effect, the demand curve will be downward sloping.
b. greater than the substitution effect, the demand curve will be upward sloping.
c. less than the substitution effect, the demand curve will be upward sloping.
d. both a) and b) are correct.
5300 The Theory of Consumer Choice
18. Consider the indifference curve map and budget constraint for two goods, beef and potatoes.
Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured
on the vertical axis and is a normal good. When the price of potatoes increases, the substitution
effect causes
a. an increase in the consumption of potatoes, and the income effect causes a decrease in the
consumption of potatoes. The substitution effect is less than the income effect.
b. a decrease in the consumption of potatoes, and the income effect causes an increase in the
consumption of potatoes. The substitution effect is greater than the income effect.
c. an increase in the consumption of potatoes, and the income effect causes a decrease in the
consumption of potatoes. The substitution effect is greater than the income effect.
d. a decrease in the consumption of potatoes, and the income effect causes an increase in the
consumption of potatoes. The substitution effect is less than the income effect.
19. A Giffen good is one for which the quantity demanded rises as the price rises because the income
effect
a. reinforces the substitution effect.
b. reinforces and is greater than the substitution effect.
c. counteracts but is smaller than the substitution effect.
d. counteracts and is greater than the substitution effect.
The Theory of Consumer Choice 5301
20. Violations of the law of demand are assumed to occur
a. regularly.
b. only when goods are Giffen goods.
c. only when the substitution effect dominates the income effect.
d. All of the above are correct.
21. Giffen goods have positively-sloped demand curves because they are
a. inferior goods with no substitution effect.
b. normal goods with no substitution effect.
c. inferior goods for which the substitution effect outweighs the income effect.
d. inferior goods for which the income effect outweighs the substitution effect.
22. Giffen goods have positively-sloped demand curves because they are
a. normal goods for which the income effect outweighs the substitution effect.
b. normal goods for which the substitution effect outweighs the income effect.
c. inferior goods for which the income effect outweighs the substitution effect.
d. inferior goods for which the substitution effect outweighs the income effect.
5302 The Theory of Consumer Choice
23. Which of the following statements is not correct?
a. Reducing taxes on interest income might encourage people to save more.
b. Reducing taxes on interest income might reduce saving.
c. A price increase will create income and substitution effects that will both always work to
reduce consumption of the good.
d. Utility is maximized when the marginal rate of substitution between any two goods equals the
relative prices of the two goods.
24. Which of the following is an example of a Giffen good?
a. potatoes during the Irish potato famine
b. rice in the Chinese province of Hunan
c. fish in Japan
d. Both a and b are correct.