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The Theory of Consumer Choice 5303
25. Which of the following is an example of a Giffen good?
a. fish in Japan
b. rice in the Chinese province of Hunan
c. pork in India
d. Both a and b are correct.
26. Pete consumes two goods, rice and fish. When the price of fish rises, he consumes less fish.
When the price of rice rises, he consumes more rice. For Pete,
a. fish is not a Giffen good but rice is.
b. rice is not a Giffen good but fish is.
c. both fish and rice are normal goods.
d. both fish and rice are Giffen goods.
5304 The Theory of Consumer Choice
27. Two economists found empirical evidence that when the price of rice decreased in the Hunan
province of China, local residents consumed less rice than before the price decrease. The study
provides a real-world example of a(n)
a. normal good.
b. inferior good that is not a Giffen good.
c. Giffen good.
d. luxury good.
Scenario 21-2
Lawrence has recently graduated from college with a degree in journalism and economics. He
has decided to pursue a career as a freelance journalist writing for business newspapers and
magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of 8
hours each day). For each hour Lawrence spends writing, he can earn $75. Lawrence is such a
good writer that he can get paid for as many hours of writing as he chooses to work.
28. Refer to Scenario 21-2. If Lawrence decides to spend 80 hours a week playing volleyball on the
beach and the rest of his time writing, how much income will he have available to spend on
consumption goods?
a. $900
b. $1,500
c. $2,400
d. $3,000
The Theory of Consumer Choice 5305
29. Refer to Scenario 21-2. If Lawrence’s wage increases to $90 per hour of writing, which of the
following points would fall on his budget constraint?
a. 75 hours of leisure, $2,775 of consumption
b. 80 hours of leisure, $2,400 of consumption
c. 85 hours of leisure, $2,430 of consumption
d. 90 hours of leisure, $1,650 of consumption
Figure 21-26
5306 The Theory of Consumer Choice
30. Refer to Figure 21-26. Rhonda experiences an increase in her hourly wage. Her optimal choice
point moves from A to B. For Rhonda,
a. her labor supply curve is backward bending.
b. her labor supply curve is upward sloping.
c. leisure is a normal good.
d. both a and c are correct.
Figure 21-27
The Theory of Consumer Choice 5307
31. Refer to Figure 21-27. Anna experiences an increase in her hourly wage. Her optimal choice
point moves from A to B. For Anna,
a. her labor supply curve is backward bending.
b. her labor supply curve is upward sloping.
c. leisure is an inferior good.
d. both a and c are correct.
32. The two “goods” used when economists analyze labor supply are
a. work and leisure.
b. work and consumption.
c. saving and consumption.
d. leisure and consumption.
5308 The Theory of Consumer Choice
33. Economic theory predicts that an increase in wages
a. will cause a wage earner to work more.
b. will cause a wage earner to work less.
c. will cause a wage earner to be more productive.
d. might cause a wage earner to work more or work less.
34. The substitution effect of a wage decrease in the work-leisure model results in the worker
choosing to
a. work less than before.
b. work more than before.
c. possibly work more or less than before.
d. work more with a higher level of consumption.
The Theory of Consumer Choice 5309
35. In the work-leisure model, suppose consumption and leisure are both normal goods. The income
effect of a wage increase results in the worker choosing to
a. work less than before.
b. work more than before.
c. possibly work more or less than before.
d. work more with a higher level of consumption.
36. The labor supply curve may have a backward-bending portion if, at higher wages, the income
effect is
a. smaller than the substitution effect.
b. larger than the substitution effect.
c. negative.
d. Any of the above could result in a backward-bending supply curve.
5310 The Theory of Consumer Choice
37. When leisure is a normal good, the income effect from a decrease in wages is evident in
a. a desire to consume more leisure.
b. a desire to consume less leisure.
c. an upward-sloping labor-supply curve.
d. a shift in labor demand.
38. The substitution effect from an increase in wages is evident in a
a. decrease in labor demand.
b. desire to consume less leisure.
c. desire to consume more leisure.
d. backward-bending labor supply curve.
39. If leisure were an inferior good, then labor supply curves
a. would all be negatively sloped.
b. would all be positively sloped.
c. would all be vertical.
d. could still be positively or negatively sloped.
The Theory of Consumer Choice 5311
40. A consumer has preferences over consumption and leisure, both of which are normal goods.
When the wage decreases, the consumer chooses to consume less leisure. For this consumer the
labor supply curve will
a. slope upward.
b. slope backward.
c. be horizontal.
d. be vertical.
41. Suppose that Elmer’s hourly wage increases, and he decides to work fewer hours. For Elmer, the
substitution effect
of the wage change is
a. only partially offset by the income effect.
b. more than offset by the income effect.
c. exactly offset by the income effect.
d. We do not have enough information with which to answer the question.
5312 The Theory of Consumer Choice
42. In the upward-sloping portion of the individual labor-supply curve, the substitution effect is
a. greater than the income effect.
b. less than the income effect.
c. equal to the income effect.
d. exactly offset by the income effect.
43. Ryan experiences an increase in his wages. The hours of labor that he supplies to the market
would increase if
a. the income effect is larger than the substitution effect.
b. the substitution effect is larger than the income effect.
c. neither the income effect nor the substitution effect apply to Tom’s labor-leisure tradeoff.
d. Ryan views both labor and leisure as inferior goods.
The Theory of Consumer Choice 5313
44. Jake experiences an increase in his wages. The hours of labor that he supplies to the market
would decrease if
a. the income effect is larger than the substitution effect.
b. the substitution effect is larger than the income effect.
c. neither the income effect nor the substitution effect apply to Harry’s labor-leisure tradeoff.
d. Jake views both labor and leisure as inferior goods.
45. Which of the following statements is not correct?
a. If Fiona gets a higher wage and works more, the substitution effect is greater than the income
effect for her.
b. If Miguel experiences a wage decrease and works less, the income effect is greater than the
substitution effect for him.
c. If the substitution effect is greater than the income effect, the labor-supply curve is upward
sloping.
d. If the income effect is greater than the substitution effect, the labor-supply curve is downward
sloping.
5314 The Theory of Consumer Choice
46. Economic studies of lottery winners and people who have inherited large amounts of money show
that
a. the income effect of winning the lottery or inheriting large amounts of money likely outweighs
the substitution effect for most people.
b. the substitution effect of winning the lottery or inheriting large amounts of money likely
outweighs the income effect for most people.
c. most people view leisure as an inferior good.
d. most people’s labor supply is unaffected by changes in wealth.
47. Which of the following examples would illustrate a backward-sloping labor supply-curve?
a. An increase in a person’s wages results in the person working fewer hours per week.
b. A decrease in a person’s wages results in the person working more hours per week.
c. An increase in a person’s wages results in the person working more hours per week.
d. Both a and b are correct.
The Theory of Consumer Choice 5315
Scenario 21-3
Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods
in his life, one in which he works and earns income, and one in which he is retired and earns no
income. Scott can earn $250,000 during his working period and nothing in his retirement period.
He must both save and consume in his work period with an interest rate of 10 percent on savings.
48. Refer to Scenario 21-3. Assume that Scott decides to consume $100,000 in the work period.
How much money will he have available for consumption in his retirement period?
a. $100,000
b. $110,000
c. $150,000
d. $165,000
49. Refer to Scenario 21-3. If the interest rate on savings increases, it is possible that
a. Scott will decrease his savings in the work period.
b. Scott will increase his savings in the work period.
c. Scott will not change his consumption in the work period.
d. All of the above are possible.
5316 The Theory of Consumer Choice
50. Refer to Scenario 21-3. If the interest rate on savings increases,
a. Scott will decrease his savings in the work period if the income effect is greater than the
substitution effect for him.
b. Scott will increase his savings in the work period if the income effect is greater than the
substitution effect for him.
c. Scott will increase his savings in the work period if the substitution effect is greater than the
income effect for him.
d. Both a and c are correct.
Figure 21-28
The figure below illustrates the preferences for a representative consumer, Christopher.
The Theory of Consumer Choice 5317
51. Refer to Figure 21-28. Interest rates increase by 3 percent. Christopher’s optimal choice point
moves from A to B Christopher consumes
a. less while he is younger and saves more than he did before interest rates increased.
b. more while he is younger and saves more than he did before interest rates increased.
c. less while he is younger and saves less than he did before interest rates increased.
d. more while he is younger and saves less than he did before interest rates increased.
Figure 21-29
The figure below illustrates the preferences of a representative consumer, Nathaniel.
5318 The Theory of Consumer Choice
52. Refer to Figure 21-29. A change in Nathaniel’s optimum from point A to point B results from
a. a change in Nathaniel’s preferences.
b. an increase in the income Nathaniel receives when he is young.
c. an increase in the interest rate.
d. a decrease in the interest rate.
53. Refer to Figure 21-29. Interest rates increase by 4 percent. Nathaniel’s optimal choice point
moves from A to B. Nathaniel consumes
a. less while he is younger and saves more than he did before interest rates increased.
b. more while he is younger and saves more than he did before interest rates increased.
c. less while he is younger and saves less than he did before interest rates increased.
d. more while he is younger and saves less than he did before interest rates increased.
The Theory of Consumer Choice 5319
54. Michael faces tradeoffs between consuming in the current period when he is young and
consuming in a future period when he is old. Michael experiences a decrease in the current
interest rate he earns on his savings. Michael will save
a. less in the current period if the substitution effect is greater than the income effect.
b. less in the current period if the income effect is greater than the substitution effect.
c. more in the current period if the substitution effect is greater than the income effect.
d. more in the current period, regardless of the sizes of the income and substitution effects.
55. When considering household savings, the relative price between consuming when young and
consuming when old is the
a. consumption rate.
b. interest rate that individuals can earn on their private savings.
c. prime rate.
d. federal funds rate.
5320 The Theory of Consumer Choice
56. If the interest rate rises, an individual could choose to
a. increase consumption when young.
b. increase consumption when old.
c. decrease consumption when young.
d. Any of the above could be correct.
57. The substitution effect of an increase in the interest rate will result in an increase in
a. consumption when young and increase in savings when young.
b. consumption when old and an increase in savings when young.
c. consumption when young and an increase in savings when old.
d. savings when old and an increase in consumption when old.
The Theory of Consumer Choice 5321
58. Assume that consumption when young and consumption when old are both normal goods. The
income effect of an increase in the interest rate will result in
a. an increase in saving when young.
b. an increase in saving when old.
c. a decrease in saving when young.
d. a decrease in saving when old.
59. Jordan is planning ahead for retirement and must decide how much to spend and how much to
save while he's working in order to have money to spend when he retires. When the income effect
dominates the substitution effect, an increase in the interest rate on savings will cause him to
a. decrease his savings rate.
b. increase his savings rate.
c. continue saving at the current rate.
d. Any of the above could be correct.
5322 The Theory of Consumer Choice
60. Calvin is planning ahead for retirement and must decide how much to spend and how much to
save while he's working in order to have money to spend when he retires. When the substitution
effect dominates the income effect, an increase in the interest rate on savings will cause him to
a. increase his savings rate.
b. decrease his savings rate.
c. continue saving at the same rate.
d. Any of the above are possible.
61. John is planning ahead for retirement in a two-period world. When John is young he will earn $1
million, and when John is old and retired he will be given $50,000 from Social Security. If the
interest rate between the two time periods is 7 percent, what is the slope of John's budget
constraint when considering the consumption possibilities between the two periods if consumption
when young is graphed on the horizontal axis and consumption when old is graphed on the vertical
axis?
a. -0.89
b. -1.05
c. -1.07
d. -1.12
