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Chapter 21/The Theory of Consumer Choice ❖ 61
27. A consumer chooses an optimal consumption point where the
a.
marginal rate of substitution equals the relative price ratio.
b.
slope of the indifference curve equals the slope of the budget constraint.
c.
ratio of the marginal utilities equals the ratio of the prices.
d.
All of the above are correct.
28. A consumer chooses an optimal consumption point where the
a.
marginal rate of substitution equals the relative price ratio.
b.
slope of the indifference curve exceeds the slope of the budget constraint.
c.
ratios of all the marginal utilities are equal.
d.
All of the above are correct.
29. A consumer chooses an optimal consumption point where the
a.
marginal rate of substitution exceeds the relative price ratio.
b.
slope of the indifference curve equals the slope of the budget constraint.
c.
ratio of the prices equals one.
d.
All of the above are correct.
30. A consumer chooses an optimal consumption point where the
a.
marginal rate of substitution is maximized.
b.
slope of the indifference curve exceeds the slope of the budget constraint by the greatest
amount.
c.
ratio of the marginal utilities equals the ratio of the prices.
d.
All of the above are correct.
31. Carlos goes to the movies every Sunday afternoon. The movie theater offers 4 combinations of pop-
corn and beverages: the “mini-combo” costs $5 and includes a small popcorn and a small drink, the
“medium-combo” costs $7 and includes a medium popcorn and a medium drink, the “value-combo”
also costs $7 and includes a small popcorn and a large drink, and the “large-combo” costs $9 and
includes a large popcorn and a large drink. Carlos always purchases the “value-combo.” We can
conclude that
a.
Carlos cannot afford the “large-combo.”
b.
Carlos cannot afford the “medium-combo.”
c.
Carlos prefers a combo with a larger popcorn-to-beverage ratio.
d.
Carlos prefers a combo with a smaller popcorn-to-beverage ratio.
62 ❖ Chapter 21/The Theory of Consumer Choice
32. Which of the following equations corresponds to an optimal choice point?
(i)
MRS = PX/PY
(ii)
MUX/MUY = PX/PY
(iii)
MUX/PX = MUY/PY
(iv)
MUX/PY = MUY/PX
a.
(i) only
b.
(i), (ii), and (iii) only
c.
(ii) and (iv) only
d.
(i), (ii), (iii), and (iv)
33. Bundle J contains 10 units of good X and 5 units of good Y. Bundle K contains 5 units of good X
and 10 units of good Y. Bundle L contains 10 units of good X and 10 units of good Y. Assume that
the consumer’s preferences satisfy the four properties of indifference curves. The price of X is $1,
the price of Y is $2, and the consumer has an income of $20. Which bundle will the consumer
choose?
a.
bundle J
b.
bundle K
c.
bundle L
d.
either bundle J or bundle K
34. A consumer chooses an optimal consumption point where the
a.
marginal rate of substitution is maximized.
b.
rate at which the consumer is willing to trade one good for another equals the price ratio.
c.
price ratio is minimized.
d.
All of the above are correct.
35. When considering her budget, the highest indifference curve that a consumer can reach is the
a.
one that is tangent to the budget constraint.
b.
indifference curve farthest from the origin
c.
indifference curve that intersects the budget constraint in at least two places.
d.
None of the above is correct.
Chapter 21/The Theory of Consumer Choice ❖ 63
36. The relationship between the marginal utility that David gets from eating ice cream sundaes and the
number of ice cream cones he eats per week is as follows:
Ice Cream Sundaes
1
2
3
4
5
6
Marginal Utility
20
16
12
8
4
0
David receives 3 units of utility from the last dollar spent on each of the other goods he consumes. If
ice cream sundaes cost $4 each, how many ice cream sundaes will he consume per month if he
maximizes utility?
a.
2
b.
3
c.
4
d.
5
37. Casey consumes two goods, hamburgers and ice cream sandwiches. He has maximized his utility
given his income. Ice cream sandwiches costs $2, and he consumes them to the point where the
marginal utility he receives is 6. Hamburgers cost $4, and the relationship between the marginal util-
ity that Casey gets from eating hamburgers and the number he eats per month is as follows:
Hamburgers
1
2
3
4
5
6
Marginal Utility
20
16
12
8
4
0
How many hamburgers does Casey buy each month?
a.
1
b.
2
c.
3
d.
4
38. An optimizing consumer will select a consumption bundle in which
a.
income is maximized, and prices are minimized.
b.
utility is maximized, and prices are minimized.
c.
utility is maximized, subject to budget constraints.
d.
utility is maximized, and indifference curves are linear.
39. If the consumer's income and all prices simultaneously double, then the optimum consumption bun-
dle will
a.
shift outward relative to the original optimum.
b.
move leftward along the original budget constraint.
c.
not change.
d.
shift inward relative to the original optimum.
64 ❖ Chapter 21/The Theory of Consumer Choice
40. If the consumer's income and all prices simultaneously decrease by one-half, then the optimum con-
sumption will
a.
shift outward relative to the original optimum.
b.
move leftward along the original budget constraint.
c.
shift inward relative to the original optimum.
d.
not change.
41. The consumer's optimum choice is represented by
a.
MUx/MUy = Px/Py.
b.
MUx/Px = MUy/Py.
c.
MRSxy = Px/Py.
d.
All of the above are correct.
42. An optimizing consumer will select the consumption bundle in which the
a.
ratio of total utilities is equal to the relative price ratio.
b.
ratio of income to price equals the marginal rate of substitution.
c.
marginal rate of substitution is equal to the relative price ratio of the goods.
d.
marginal rate of substitution is equal to marginal utility.
43. An optimizing consumer will select the consumption bundle in which the marginal rate of substitu-
tion
a.
is equal to the relative price ratio of the goods.
b.
exceeds the marginal utility of each good by the greatest amount.
c.
is less than the slope of the budget constraint.
d.
All of the above are correct.
44. An optimizing consumer will select the consumption bundle in which the marginal rate of substitu-
tion
a.
is equal to the price of the least-expensive good.
b.
exceeds the marginal utility of each good by the greatest amount.
c.
is less than the slope of the budget constraint.
d.
None of the above is correct.
Chapter 21/The Theory of Consumer Choice ❖ 65
45. When the indifference curve is tangent to the budget constraint,
a.
a consumer cannot be made better off without an increase in her income or a price
decrease in one of the goods she consumes.
b.
the consumer is likely to be at a sub-optimal level of consumption.
c.
income is at its optimum for a consumer.
d.
indifference curves are likely to intersect.
46. At the consumer's optimum
a.
the budget constraint will have a slope of MUx/Px.
b.
it is still possible for the consumer to increase his consumption of both goods.
c.
the indifference curve will intersect the budget constraint at the midpoint of the budget
constraint.
d.
the slope of the indifference curve is equal to the slope of the budget constraint.
47. At the consumer's optimum the
a.
budget constraint will have a slope of MUx/Px.
b.
slope of the indifference curve is equal to the slope of the budget constraint.
c.
indifference curve will intersect the budget constraint at the midpoint of the budget
constraint.
d.
Both b and c are correct.
48. The consumer's optimum is where
a.
MUx/MUy = Py/Px.
b.
MUx/Py = MUy/Px.
c.
MUx/MUy = Px/Py.
d.
None of the above is correct.
49. Which of the following represents a consumer's optimum?
a.
MUx/MUy = Py/Px
b.
MUx/Py = MUy/Px
c.
MUx/Px = MUy/Py
d.
MUy/MUx = Px/Py
50. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's prefer-
ences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram
with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption
66 ❖ Chapter 21/The Theory of Consumer Choice
bundle, the consumer is spending all available income, and the marginal rate of substitution is
greater than the slope of the budget constraint. We can conclude that the consumer
a.
is currently maximizing satisfaction subject to the budget constraint.
b.
could increase satisfaction by consuming more X and less Y.
c.
could increase satisfaction by consuming less X and more Y.
d.
could purchase more X and more Y and increase total satisfaction.
51. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's prefer-
ences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram
with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption
bundle, the consumer is spending all available income, and the marginal rate of substitution is less
than the slope of the budget constraint. We can conclude that the consumer
a.
is currently maximizing satisfaction subject to the budget constraint.
b.
could increase satisfaction by consuming more X and less Y.
c.
could increase satisfaction by consuming less X and more Y.
d.
could purchase more X and more Y and increase total satisfaction.
52. Suppose a consumer has preferences over two goods, X and Y, which are perfect substitutes. In par-
ticular, two units of X is equivalent to one unit of Y. If the price of X is $1, the price of Y is $3, and
the consumer has $30 of income to allocate to these two goods, how much of each good should the
consumer purchase to maximize satisfaction?
a.
30 units of X and 0 units of Y
b.
0 units of X and 10 units of Y
c.
15 units of X and 5 units of Y
d.
15 units of X and 0 units of Y
53. Traci consumes two goods, lemonade and pretzels. Lemonade costs $2 per glass, and she consumes
it to the point where the marginal utility she receives from her last glass of lemonade is 4. Pretzels
cost $3 per bag. The relationship between the marginal utility Traci gets from eating a bag of pret-
zels and the number of bags she eats per month is as follows:
Bags of pretzels
1
2
3
4
5
6
Marginal utility
30
20
12
6
2
0
If Traci is maximizing her utility, how many bags of potato chips does she buy each month?
a.
3
b.
4
c.
5
d.
6
Chapter 21/The Theory of Consumer Choice ❖ 67
54. Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes
it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels
cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pret-
zels and the number of bags she eats per month is as follows:
Bags of potato chips
1
2
3
4
5
6
Marginal utility
30
20
12
6
2
0
If Traci is maximizing his utility, how many bags of potato chips does he buy each month?
a.
3
b.
4
c.
5
d.
6
55. Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes
it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels
cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pret-
zels and the number of bags she eats per month is as follows:
Bags of potato chips
1
2
3
4
5
6
Marginal utility
30
20
12
6
2
0
If Traci is maximizing his utility, how much does she spend on potato chips each month?
a.
$2
b.
$6
c.
$8
d.
$12
56. Kristi spends all of her income on tank tops and running shoes, and the price of a pair of running
shoes is four times the price of a tank top. In order to maximize total utility, Kristi should buy
a.
four times as many tank tops as pairs of running shoes.
b.
four times as many pairs of running shoes as tank tops.
c.
both items until the marginal utility of a pair of running shoes is four times the marginal
utility of a tank top.
d.
both items until the marginal utility of a tank top is four times the marginal utility of a pair
of running shoes.
68 ❖ Chapter 21/The Theory of Consumer Choice
57. Billie spends all of her income on soccer balls and jeans, and the price of a pair of jeans is three
times the price of soccer balls. In order to maximize total utility, Billie should
a.
buy three times as many soccer balls as pairs of jeans.
b.
buy three times as many pairs of jeans as soccer balls.
c.
buy both items until the marginal utility of soccer balls is three times the marginal utility
of a pair of jeans.
d.
buy both items until the marginal utility of a pair of jeans is three times the marginal
utility of soccer balls.
58. Angie is maximizing total utility while consuming food and clothing. Her marginal utility from food
is 50, and her marginal utility from clothing is 25. If clothing is priced at $10 per unit, the price of
food per unit must be
a.
$2.
b.
$2.50.
c.
$5.
d.
$20.
59. Suppose at the consumer’s current consumption bundle the marginal rate of substitution of cheese
for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the
price of a bottle of wine is $10. The consumer should increase his consumption of
a.
cheese, decrease his consumption of wine, and move to a lower indifference curve.
b.
cheese, decrease his consumption of wine, and move to a higher indifference curve.
c.
wine, decrease consumption of cheese, and move to a higher indifference curve.
d.
cheese, decrease consumption of wine, and remain on the same indifference curve.
60. The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X is
a.
equal to the marginal utility per dollar saved on good X.
b.
greater than the marginal utility per dollar spent on good Y.
c.
equal to the marginal utility per dollar spent on good Y.
d.
less than the marginal utility per dollar spent on good Y.
61. When the price of a good increases, all else equal, the higher price
a.
reduces the consumer's set of buying opportunities.
b.
leads to a parallel shift of the budget constraint.
c.
will necessarily lead to an increase in the consumption of goods whose price did not
change.
d.
generally discourages the consumption of inferior goods.
Chapter 21/The Theory of Consumer Choice ❖ 69
62. A consumer’s optimal choice occurs when the
a.
consumer’s valuation of the two goods equals the market’s valuation of the two goods.
b.
consumer minimizes her expenditures.
c.
consumer attains the highest indifference curve.
d.
consumer’s valuation of the two goods exceeds the market’s valuation of the two goods.
63. If a consumer consumes two goods, X and Y, and has indifference curves that are bowed inward, the
consumer’s optional choice occurs when
a.
he consumes that maximum affordable quantity of good X.
b.
he consumes that maximum affordable quantity of good Y.
c.
his indifference curve is tangent to his budget constraint.
d.
his indifference curve lies entirely above his budget constraint.
64. When economists describe preferences, they often use the concept of
a.
markets.
b.
income.
c.
utility.
d.
prices.
65. Utility measures the
a.
income a consumer receives from consuming a bundle of goods.
b.
satisfaction a consumer receives from consuming a bundle of goods.
c.
satisfaction a consumer places on her budget constraint.
d.
All of the above are correct.
66. A rational consumer maximizes her
a.
preferences.
b.
marginal rate of substitution.
c.
utility.
d.
budget constraint.
70 ❖ Chapter 21/The Theory of Consumer Choice
67. As more units of an item are purchased, everything else equal, marginal satisfaction from consuming
additional units will tend to
a.
decrease at the same rate for all consumers.
b.
decrease but at different rates for different people.
c.
increase at the same rate for all consumers.
d.
increase but at a decreasing rate for all consumers.
68. If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the
candy bar is $1.50, then
a.
this is the last candy bar John will purchase since the marginal utility is less than the price.
b.
the opportunity cost of the candy bar is less than $1.50.
c.
if John purchases and consumes the candy bar his total satisfaction will go down because
the marginal utility is less than the price.
d.
there is not enough information to determine if John will or will not purchase the candy
bar.
69. The marginal rate of substitution between two goods always equals the
a.
marginal utility of one divided by the marginal utility of the other.
b.
marginal utility of one times the marginal utility of the other.
c.
price of one good divided by the price of the other.
d.
Both a and c are correct.
70. If income increases and prices are unchanged, the consumer’s budget constraint
a.
remains the same.
b.
shifts outward.
c.
shifts inward.
d.
rotates outward along the horizontal axis.
71. If income decreases and prices are unchanged, the consumer’s budget constraint
a.
remains the same.
b.
shifts outward.
c.
shifts inward.
d.
rotates outward along the horizontal axis.
Chapter 21/The Theory of Consumer Choice ❖ 71
72. Which of the following is not correct?
a.
An increase in income shifts a consumer’s budget constraint outward.
b.
An increase in the price of good X causes a consumer’s budget constraint to rotate inward
along the X axis.
c.
A decrease in the price of good Y causes a consumer’s budget constraint to rotate outward
along the Y axis.
d.
Changes in income affect the slope of the budget constraint as well as its location on a
graph.
73. If we observe that Jamie’s budget constraint has moved outward, then we know for certain that
a.
her income must have increased.
b.
she will be indifferent between goods X and Y.
c.
the price of one or both of the goods must have decreased.
d.
she can reach a higher indifference curve.
74. If we observe that William’s budget constraint has moved inward, then we know for certain that
a.
his income must have decreased.
b.
he will be indifferent between goods X and Y.
c.
the price of one or both of the goods must have increased.
d.
his utility will decrease.
75. 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
76. If we observe that a consumer’s budget constraint has shifted outward, we can assume that the con-
sumer will buy
a.
fewer normal goods and more inferior goods.
b.
more normal goods and fewer inferior goods.
c.
more normal goods and more inferior goods.
d.
fewer normal goods and fewer inferior goods.
72 ❖ Chapter 21/The Theory of Consumer Choice
77. If we observe that a consumer’s budget constraint has shifted inward, we can assume that the con-
sumer will buy
a.
fewer normal goods and more inferior goods.
b.
more normal goods and fewer inferior goods.
c.
more normal goods and more inferior goods.
d.
fewer normal goods and fewer inferior goods.
78. When Stanley has an income of $1,000, he consumes 30 units of good A and 50 units of good B.
After Stanley’s income increases to $1,500, he consumes 60 units of good A and 45 units of good B.
Which of the following statements is correct?
a.
Both goods A and B are normal goods.
b.
Both goods A and B are inferior goods.
c.
Good A is a normal good, and good B is an inferior good.
d.
Good A is an inferior good, and good B is a normal good.
79. When Matt has an income of $2,000, he consumes 30 units of good A and 50 units of good B. After
Matt’s income increases to $3,000, he consumes 25 units of good A and 95 units of good B. Which
of the following statements is correct?
a.
Both goods A and B are normal goods.
b.
Both goods A and B are inferior goods.
c.
Good A is a normal good, and good B is an inferior good.
d.
Good A is an inferior good, and good B is a normal good.
80. When Ryan has an income of $2,000, he consumes 30 units of good A and 50 units of good B. Af-
ter Ryan’s income decreases to $1,500, he consumes 23 units of good A and 55 units of good B.
Which of the following statements is correct?
a.
Both goods A and B are normal goods.
b.
Both goods A and B are inferior goods.
c.
Good A is a normal good, and good B is an inferior good.
d.
Good A is an inferior good, and good B is a normal good.
Chapter 21/The Theory of Consumer Choice ❖ 73
81. When Jamar has an income of $2,000, he consumes 30 units of good A and 50 units of good B. Af-
ter Jamar’s income decreases to $1,500, he consumes 33 units of good A and 45 units of good B.
Which of the following statements is correct?
a.
Both goods A and B are normal goods.
b.
Both goods A and B are inferior goods.
c.
Good A is a normal good, and good B is an inferior good.
d.
Good A is an inferior good, and good B is a normal good.
82. 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.
83. When Phil’s income increases, he purchases fewer spaghetti dinners than he did before his income
increased. For Phil, spaghetti dinners are a(n)
a.
normal good.
b.
inferior good.
c.
optimal good.
d.
luxury good.
84. Josh is currently consuming some of good X and some of good Y. If good Y is a normal good for
Josh, an increase in his income will definitely cause him to
a.
increase his consumption of X.
b.
increase his consumption of Y.
c.
decrease his consumption of X.
d.
decrease his consumption of Y.
85. A normal good is one
a.
the average consumer chooses to consume at a normal level.
b.
the average consumer chooses to consume over other similar goods.
c.
for which an increase in income increases consumption of the good.
d.
for which an increase in income decreases consumption of the good.
74 ❖ Chapter 21/The Theory of Consumer Choice
86. Which of the following is most likely an inferior good?
a.
an antique car
b.
gasoline
c.
a bus ticket
d.
an airline ticket
87. A good is an inferior good if the consumer buys less of it when
a.
his income rises.
b.
the price of the good rises.
c.
the price of a substitute good falls.
d.
his income falls.
88. A good is an inferior good if the consumer buys more of it when
a.
his income rises.
b.
the price of the good falls.
c.
the price of a substitute good rises.
d.
his income falls.
89. 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.
90. An inferior good is one in which
a.
the average consumer chooses not to consume.
b.
the good is not equally valued by all consumers.
c.
an increase in income increases consumption of the good.
d.
an increase in income decreases consumption of the good.
Chapter 21/The Theory of Consumer Choice ❖ 75
91. Suppose the price of good X falls. As a result, the quantity demanded for good X increases for a par-
ticular 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.
92. 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.
Figure 21-20
93. Refer to Figure 21-20. Suppose that a consumer is originally at point R. Then the price of good X
decreases. Which of the following represents the income effect of the price decrease?
a.
the movement from point R to point S
b.
the movement from point R to point T
c.
the movement from point T to point S
d.
None of the above is correct.
R
S
T
x
y
76 ❖ Chapter 21/The Theory of Consumer Choice
94. Refer to Figure 21-20. Suppose that a consumer is originally at point R. Then the price of good X
decreases. Which of the following represents the substitution effect of the price decrease?
a.
the movement from point R to point S
b.
the movement from point R to point T
c.
the movement from point T to point S
d.
None of the above is correct.
95. What are the two effects of a change in a price that a consumer experiences?
a.
the income effect and the budget effect
b.
the complement effect and the substitute effect
c.
the price effect and the preference effect
d.
the income effect and the substitution effect
96. Consider the indifference curve map and budget constraint for two goods, X and Y. Suppose the
good on the horizontal axis, X, is normal. When the price of X increases, the substitution effect
a.
and income effect both cause an increase in the consumption of X.
b.
causes a decrease in the consumption of X, and the income effect causes an increase in the
consumption of X. However, the substitution effect is greater than the income effect.
c.
causes an increase in the consumption of X, and the income effect causes a decrease in the
consumption of X. However, the substitution effect is greater than the income effect.
d.
and income effect both cause a decrease in the consumption of X.
97. 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.
98. 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.
Chapter 21/The Theory of Consumer Choice ❖ 77
99. 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.
100. 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.
101. 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.
102. 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.
78 ❖ Chapter 21/The Theory of Consumer Choice
Figure 21-21
103. Refer to Figure 21-21. 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.
104. Refer to Figure 21-21. 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.
105. Refer to Figure 21-21. 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.
Chapter 21/The Theory of Consumer Choice ❖ 79
106. 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.
107. A consumer consumes two normal goods, coffee and chocolate. The price of coffee rises. The in-
come 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.
108. A decrease in the price of DVD players leads consumers to buy more DVD players. From this infor-
mation 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.
109. 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.
110. 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.
80 ❖ Chapter 21/The Theory of Consumer Choice
111. 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.
112. 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.
113. 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.
114. 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.
