True / False
1. The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of Economics.
a.
True
b.
False
2. A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes good X relative to
good Y.
a.
True
b.
False
3. The slope of the budget constraint reveals the relative price of good X compared to good Y.
a.
True
b.
False
4. The slope of a consumer’s budget constraint is unaffected by a change in income.
a.
True
b.
False
5. If a consumer experiences a decrease in income, the new budget constraint will have the same slope as the old budget
constraint.
a.
True
b.
False
6. A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles
that are equally affordable to a consumer.
a.
True
b.
False
7. For a typical consumer, most indifference curves are bowed inward.
a.
True
b.
False
8. For a typical consumer, most indifference curves are downward sloping.
a.
True
b.
False
9. For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.
a.
True
b.
False
10. A typical indifference curve is upward sloping.
a.
True
b.
False
11. When two goods are perfect complements, the indifference curves are right angles.
a.
True
b.
False
12. The indifference curves for left shoes and right shoes are right angles.
a.
True
b.
False
13. The indifference curves for left gloves and right gloves are straight lines.
a.
True
b.
False
14. The indifference curves for perfect substitutes are right angles.
a.
True
b.
False
15. The indifference curves for perfect substitutes are straight lines.
a.
True
b.
False
16. The indifference curves for nickels and dimes are straight lines.
a.
True
b.
False
17. If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant.
a.
True
b.
False
18. The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute
one good for the other.
a.
True
b.
False
19. The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.
a.
True
b.
False
20. The marginal rate of substitution is the slope of the budget constraint.
a.
True
b.
False
21. The marginal rate of substitution is the slope of the indifference curve.
a.
True
b.
False
22. When indifference curves are downward sloping, the marginal rate of substitution is usually constant.
a.
True
b.
False
23. When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference
curve.
a.
True
b.
False
24. A consumer’s optimal choice is affected by income, prices of goods, and preferences.
a.
True
b.
False
25. At a consumer’s optimal choice, the consumer chooses the combination of goods that equates the marginal rate of
substitution and the price ratio.
a.
True
b.
False
26. At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio of the marginal
utilities equals the ratio of the prices.
a.
True
b.
False
27. If consumers purchase more of a good when their income rises, the good is a normal good.
a.
True
b.
False
28. If a consumer purchases more of good B when his income rises, good B is an inferior good.
a.
True
b.
False
29. A typical consumer consumes both coffee and donuts. After the consumer’s income decreases, the consumer
consumes more coffee but fewer donuts than before. For this consumer, coffee is a normal good, but donuts are an inferior
good.
a.
True
b.
False
30. A typical consumer consumes both coffee and donuts. After the consumer’s income decreases, the consumer
consumes more coffee but fewer donuts than before. For this consumer, donuts are a normal good, but coffee is an inferior
good.
a.
True
b.
False
31. If a consumer purchases more of good X and good Y after her income increases, then neither good X nor good Y is an
inferior good for her.
a.
True
b.
False
32. If a consumer purchases more of good A when her income falls, good A is an inferior good.
a.
True
b.
False
33. The income effect of a price change is unaffected by whether the good is a normal or inferior good.
a.
True
b.
False
34. The income effect of a price change is the change in consumption that results from the movement to a new
indifference curve.
a.
True
b.
False
35. The direction of the substitution effect is not influenced by whether the good is normal or inferior.
a.
True
b.
False
36. The substitution effect of a price change is the change in consumption that results from the movement to a new
indifference curve.
a.
True
b.
False
37. All points on a demand curve are optimal consumption points.
a.
True
b.
False
38. Giffen goods violate the law of demand.
a.
True
b.
False
39. Giffen goods are inferior goods for which the income effect dominates the substitution effect.
a.
True
b.
False
40. Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of
Hunan.
a.
True
b.
False
41. Katie wins $3 million in her state’s lottery. If Katie drastically reduces the number of hours she works after she wins
the money, we can infer that the income effect is larger than the substitution effect for her.
a.
True
b.
False
42. Susie wins $2 million in her state’s lottery. If Susie keeps working after she wins the money, we can infer that the
income effect is larger than the substitution effect for her.
a.
True
b.
False
43. Shelley wins $1 million in her state’s lottery. If Shelley keeps working after she wins the money, we can infer that the
substitution effect must exactly offset the income effect for her.
a.
True
b.
False
44. A rational person can have a negatively-sloped labor supply curve.
a.
True
b.
False
45. The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which
tends to make the labor-supply curve slope upward.
a.
True
b.
False
46. The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to
make the labor-supply curve slope backward.
a.
True
b.
False
47. A worker with a backward-bending labor supply curve responds to an increase in wages by working more hours.
a.
True
b.
False
48. A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect
outweighs the income effect.
a.
True
b.
False
49. A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect
outweighs the income effect.
a.
True
b.
False
50. The theory of consumer choice is representative of how consumers make decisions but is not intended to be a literal
account of the process.
a.
True
b.
False
51. An increase in the interest rate today leading to a decrease in consumption today violates the law of demand.
a.
True
b.
False
52. A decrease in the price of the good on the horizontal axis rotates the budget constraint counterclockwise.
a.
True
b.
False
53. A consumer maximizes utility at a point where multiple indifference curves intersect the budget line.
a.
True
b.
False
54. Consumers face tradeoffs except at the point where the indifference curve is tangent to the budget line.
a.
True
b.
False
55. Consumer will always consume more of a good if their income increases.
a.
True
b.
False
