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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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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
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
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.
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.
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.
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.
