Chapter 21 The Theory of Consumer Choice
MULTIPLE CHOICE
1. Which of the following does not represent a tradeoff facing a consumer?
a.
choosing to purchase more of all goods
b.
choosing to spend more time on leisure and less time on work
c.
choosing to spend more now and consume less in the future
d.
choosing to purchase less of one good in order to purchase more of another good
2. How are the following three questions related: 1) Do all demand curves slope downward? 2) How
do wages affect labor supply? 3) How do interest rates affect household saving?
a.
They all relate to macroeconomics.
b.
They all relate to monetary economics.
c.
They all relate to the theory of consumer choice.
d.
They are not related to each other in any way.
3. Just as the theory of the competitive firm provides a more complete understanding of supply, the
theory of consumer choice provides a more complete understanding of
a.
demand.
b.
profits.
c.
production possibility frontiers.
d.
wages.
4. The theory of consumer choice most closely examines which of the following Ten Principles of
Economics?
a.
People face trade-offs.
b.
Governments can sometimes improve market outcomes.
c.
Trade can make everyone better off.
d.
Markets are usually a good way to organize economic activity.
2 ❖ Chapter 21/The Theory of Consumer Choice
5. Which of the following statements is correct?
a.
The theory of consumer choice provides a more complete understanding of supply, just as
the theory of the competitive firm provides a more complete understanding of demand.
b.
The theory of consumer choice provides a more complete understanding of demand, just
as the theory of the competitive firm provides a more complete understanding of supply.
c.
Monetary theory provides a more complete understanding of demand, just as the theory of
the competitive firm provides a more complete understanding of supply.
d.
The theory of public choice provides a more complete understanding of supply, just as the
theory of the competitive firm provides a more complete understanding of demand.
6. When a consumer spends less time enjoying leisure and more time working, she has
a.
lower income and therefore cannot afford more consumption.
b.
lower income and therefore can afford more consumption.
c.
higher income and therefore cannot afford more consumption.
d.
higher income and therefore can afford more consumption.
7. The theory of consumer choice provides the foundation for understanding the
a.
structure of a firm.
b.
profitability of a firm.
c.
demand for a firm’s product.
d.
supply of a firm’s product.
8. The theory of consumer choice examines
a.
the determination of output in competitive markets.
b.
the tradeoffs inherent in decisions made by consumers.
c.
how consumers select inputs into manufacturing production processes.
d.
the determination of prices in competitive markets.
9. The theory of consumer choice examines how
a.
firms make profit-maximizing decisions.
b.
consumers make utility-maximizing decisions.
c.
wages are determined in competitive labor markets.
d.
prices are determined in competitive goods markets.
Chapter 21/The Theory of Consumer Choice ❖ 3
10. The theory of consumer choice illustrates the
a.
importance of property rights in creating efficient markets.
b.
ability of a single economic actor to have a substantial influence on market prices.
c.
the trade-offs that people face in their role as purchasers.
d.
All of the above are correct.
THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD
Figure 21-1
1. Refer to Figure 21-1. Which point in the figure showing a consumer’s budget constraint represents
the consumer’s income divided by the price of a CD?
a.
point A
b.
point C
c.
point D
d.
point E
2. Refer to Figure 21-1. A consumer who chooses to spend all of her income could be at which
point(s) on the budget constraint?
a.
A only
b.
E only
c.
B, C, or D only
d.
A, B, C, or D only
C
A
B
D
E
CDs
Books
4 ❖ Chapter 21/The Theory of Consumer Choice
3. Refer to Figure 21-1. All of the points identified in the figure represent affordable consumption op-
tions with the exception of
a.
A.
b.
E.
c.
A and E.
d.
None. All points are affordable.
Figure 21-2
4. Refer to Figure 21-2. A consumer who chooses to spend all of her income could be at which
point(s) on the budget constraint?
a.
V only
b.
Z only
c.
V, W, X, or Y only
d.
W, X, or Y only
5. Refer to Figure 21-2. Which points are affordable?
a.
W, X, and Y only
b.
Z only
c.
V, W, X, and Y only
d.
V, W, X, Y, and Z
6. Refer to Figure 21-2. Which of the following statements is not correct?
a.
Points W, X, and Y all cost the consumer the same amount of money.
b.
Point Z is unaffordable for the consumer given his budget constraint.
c.
Point V costs less than point Z.
d.
Points W, X, and Y give the consumer the same level of satisfaction.
W
V
X
Y
Z
Pizza
Pepsi
Chapter 21/The Theory of Consumer Choice ❖ 5
7. Refer to Figure 21-2. Which of the following statements is correct?
a.
Points W, X, and Y all cost the consumer the same amount of money.
b.
Point V is unaffordable for the consumer given his budget constraint.
c.
Point Z costs less than point V.
d.
Points W, X, and Y give the consumer the same level of satisfaction.
Figure 21-3
In each case, the budget constraint moves from BC-1 to BC-2.
8. Refer to Figure 21-3. Which of the graphs in the figure reflects a decrease in the price of good X
only?
a.
graph a
b.
graph b
c.
graph c
d.
graph d
BC-1BC-2
(a)
x
y
BC-2BC-1
(b)
x
y
BC-1
BC-2
(c)
x
y
BC-2
BC-1
(d)
x
y
6 ❖ Chapter 21/The Theory of Consumer Choice
9. Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good X
only?
a.
graph a
b.
graph b
c.
graph c
d.
graph d
10. Refer to Figure 21-3. Which of the graphs in the figure reflects a decrease in the price of good Y
only?
a.
graph a
b.
graph b
c.
graph c
d.
graph d
11. Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good Y
only?
a.
graph a
b.
graph b
c.
graph c
d.
graph d
12. Refer to Figure 21-3. Which of the graphs in the figure could reflect a simultaneous decrease in the
prices of both goods?
graph a
graph b
graph c
graph d
a.
(i) only
b.
(iv) only
c.
(ii) or (iii) only
d.
None of the above is correct.
Chapter 21/The Theory of Consumer Choice ❖ 7
13. Refer to Figure 21-3. Which of the graphs in the figure could reflect a simultaneous decrease in the
price of good X and increase in the price of good Y?
graph a
graph b
graph c
graph d
a.
(ii) only
b.
(iii) only
c.
(ii) or (iv) only
d.
None of the above is correct.
Figure 21-4
In each case, the budget constraint moves from BC-1 to BC-2.
14. Refer to Figure 21-4. Which of the graphs in the figure could reflect a simultaneous increase in the
price of good X and decrease in the price of good Y?
a.
graph a
b.
graph b
c.
graph c
d.
graph d
BC-1BC-2
(a)
1 2 3 4 5 6 7 8 x
1
2
3
4
5
6
7
8
y
BC-2BC-1
(b)
1 2 3 4 5 6 7 8 x
1
2
3
4
5
6
7
8
y
BC-1
BC-2
(c)
1 2 3 4 5 6 7 8 x
1
2
3
4
5
6
7
8
y
BC-2
BC-1
(d)
1 2 3 4 5 6 7 8 x
1
2
3
4
5
6
7
8
y
8 ❖ Chapter 21/The Theory of Consumer Choice
15. Refer to Figure 21-4. Which of the graphs in the figure could reflect an increase in income?
a.
graph a
b.
graph b
c.
graph d
d.
None of the above is correct.
16. Refer to Figure 21-4. Which of the graphs in the figure could reflect a decrease in income?
a.
graph a
b.
graph b
c.
graph d
d.
None of the above is correct.
Figure 21-5
(a)
(b)
17. Refer to Figure 21-5. In graph (a), if income is equal to $120, the price of good X is
a.
$3.
b.
$4.
c.
$10.
d.
$12.
18. Refer to Figure 21-5. In graph (a), if income is equal to $120, the price of good Y is
a.
$3.
b.
$4.
c.
$10.
d.
$12.
40
10
x
y
14
42
x
y
Chapter 21/The Theory of Consumer Choice ❖ 9
19. Refer to Figure 21-5. In graph (a), what is the price of good X relative to good Y (i.e., PX/PY)?
a.
1/4
b.
1/3
c.
3
d.
4
20. Refer to Figure 21-5. In graph (a), what is the price of good Y relative to good X (i.e., Py/Px)?
a.
1/4
b.
1/3
c.
3
d.
4
21. Refer to Figure 21-5. In graph (b), if income is equal to $420, the price of good X is
a.
$1.
b.
$3.
c.
$10.
d.
$30.
22. Refer to Figure 21-5. In graph (b), if income is equal to $420, the price of good Y is
a.
$1.
b.
$3.
c.
$10.
d.
$30.
23. Refer to Figure 21-5. In graph (b), what is the price of good X relative to good Y (i.e., Px/Py)?
a.
1/3
b.
1
c.
3
d.
10
10 ❖ Chapter 21/The Theory of Consumer Choice
24. Refer to Figure 21-5. In graph (b), what is the price of good Y relative to good X (i.e., PY/PX)?
a.
1/3
b.
1
c.
3
d.
10
25. Refer to Figure 21-5. Assume that a consumer faces the budget constraint shown in graph (a) in
January and the budget constraint shown in graph (b) in February. If the consumer’s income has re-
mained constant, what has happened to prices between January and February?
a.
The price of X has fallen, but there could not have been a change in the price of Y.
b.
The price of Y has fallen, but there could not have been a change in the price of X.
c.
The price of X has fallen, and the price of Y has risen.
d.
The price of Y has fallen, and the price of X has risen.
Figure 21-6
26. Refer to Figure 21-6. Suppose a consumer has $100 in income, the price of popcorn is $2, and the
value of B is 100. What is the price of Mt. Dew?
a.
$1
b.
$2
c.
$5
d.
$100
A
B
Popcorn
Mt. Dew
Chapter 21/The Theory of Consumer Choice ❖ 11
27. Refer to Figure 21-6. Suppose a consumer has $100 in income, the price of Mt. Dew is $2, and the
value of A is 200. What is the price of popcorn?
a.
$0.50
b.
$1
c.
$2
d.
$4
28. Refer to Figure 21-6. Suppose a consumer has $200 in income, the price of popcorn is $1, and the
price of Mt. Dew is $2. What is the value of A?
a.
200
b.
100
c.
50
d.
25
29. Refer to Figure 21-6. Suppose a consumer has $200 in income, the price of popcorn is $1, and the
price of Mt. Dew is $2. What is the value of B?
a.
200
b.
100
c.
50
d.
25
30. Refer to Figure 21-6. Suppose the price of popcorn is $2, the price of Mt. Dew is $4, the value of
A is 30, and the value of B is 15. How much income does the consumer have?
a.
$120
b.
$80
c.
$60
d.
$30
12 ❖ Chapter 21/The Theory of Consumer Choice
Figure 21-7
31. Refer to Figure 21-7. Suppose a consumer has $500 in income, the price of a book is $10, and the
value of B is 50. What is the price of a DVD?
a.
$5
b.
$10
c.
$50
d.
$100
32. Refer to Figure 21-7. Suppose a consumer has $200 in income, the price of a book is $5, and the
price of a DVD is $10. What is the value of A?
a.
40
b.
20
c.
10
d.
2
33. Refer to Figure 21-7. Suppose a consumer has $200 in income, the price of a book is $5, and the
price of a DVD is $10. What is the value of B?
a.
40
b.
20
c.
10
d.
2
A
B
Books
DVDs
Chapter 21/The Theory of Consumer Choice ❖ 13
34. Refer to Figure 21-7. Suppose the price of a book is $15, the price of a DVD is $10, the value of A
is 5, and the value of B is 7.5. How much income does the consumer have?
a.
$150
b.
$100
c.
$75
d.
$37.50
Figure 21-8
35. Refer to Figure 21-8. You have $36 to spend on good X and good Y. If good X costs $6 and good
Y costs $12, your budget constraint is
a.
AB.
b.
BC.
c.
CD.
d.
DE.
36. Refer to Figure 21-8. You have $300 to spend on good X and good Y. If good X costs $30 and
good Y costs $50, your budget constraint is
a.
AB.
b.
BC.
c.
CD.
d.
DE.
B
A
C
D
E
1 2 3 4 5 6 7 8 9 10 11 12 x
1
2
3
4
5
6
7
8
9
10
y
14 ❖ Chapter 21/The Theory of Consumer Choice
37. Refer to Figure 21-8. You have $600 to spend on good X and good Y. If good X costs $100 and
good Y costs $100, your budget constraint is
a.
AB.
b.
BC.
c.
CD.
d.
DE.
38. Refer to Figure 21-8. If the price of good X is $5, and your budget constraint is DE, what is the
price of good Y?
a.
$10
b.
$5
c.
$2.50
d.
$1.67
39. Refer to Figure 21-8. If the price of good X is $3, and your budget constraint is BC, what is the
price of good Y?
a.
$3.33
b.
$5
c.
$15
d.
$30
Figure 21-9
100
30
Budget constraint
x
y
Chapter 21/The Theory of Consumer Choice ❖ 15
40. Refer to Figure 21-9. If the consumer has $600 in income, what is the price of good X?
a.
$20
b.
$6
c.
$3
d.
$0.33
41. Refer to Figure 21-9. If the consumer has $600 in income, what is the price of good Y?
a.
$20
b.
$6
c.
$3
d.
$0.33
42. Refer to Figure 21-9. If the price of good Y is $5, what is the price of good X?
a.
$500
b.
$150
c.
$16.67
d.
$1.50
43. Refer to Figure 21-9. If the price of good X is $15, what is the price of good Y?
a.
$1,500
b.
$50
c.
$5
d.
$0.50
16 ❖ Chapter 21/The Theory of Consumer Choice
44. The following diagram shows two budget lines: A and B.
Which of the following could explain the change in the budget line from A to B?
a.
a decrease in the price of X
b.
an increase in the price of Y
c.
a decrease in the price of Y
d.
More than one of the above could explain this change.
45. The following diagram shows two budget lines: A and B.
Which of the following could explain the change in the budget line from A to B?
a.
a simultaneous decrease in the price of X and the price of Y
b.
an increase in income
c.
a decrease in income and a decrease in the price of Y
d.
Both a and b are correct.
A
B
1 2 3 4 5 6 7 8 9 10 x
1
2
3
4
5
6
7
8
9
10
y
A
B
1 2 3 4 5 6 7 8 9 x
1
2
3
4
5
6
7
8
9
10 y
Chapter 21/The Theory of Consumer Choice ❖ 17
46. The following diagram shows two budget lines: A and B.
Which of the following could explain the change in the budget line from A to B?
a.
a decrease in income and a decrease in the price of X
b.
a decrease in income and an increase in the price of X
c.
an increase in income and a decrease in the price of X
d.
an increase in income and an increase in the price of X
47. The following diagram shows a budget constraint for a particular consumer.
If the price of X is $10, what is the price of Y?
a.
$15
b.
$25
c.
$35
d.
$70
48. The following diagram shows a budget constraint for a particular consumer.
B
A
1 2 3 4 5 6 7 8 9 x
1
2
3
4
5
6
7
8
9
10 y
10 20 30 40 50 60 70 80 90 x
10
20
30
40
y
10 20 30 40 50 60 70 80 90 x
10
20
30
40
y
18 ❖ Chapter 21/The Theory of Consumer Choice
If the price of X is $5, what is the price of Y?
a.
$2
b.
$10
c.
$30
d.
$300
49. The following diagram shows a budget constraint for a particular consumer.
If the price of X is $5, what is the consumer’s income?
a.
$10
b.
$30
c.
$150
d.
$300
Scenario 21-1
Suppose the price of hot wings is $10, the price of beer is $1, and the consumer’s income is $50. In
addition, suppose the consumer’s budget constraint illustrates hot wings on the horizontal axis and
beer on the vertical axis.
50. Refer to Scenario 21-1. If the price of beer doubles to $2, then the
a.
budget constraint intersects the vertical axis at 25 beers.
b.
slope of the budget constraint rises to -2.
c.
slope of the budget constraint falls to -4.
d.
budget constraint shifts inward in a parallel fashion.
51. Refer to Scenario 21-1. If the consumer’s income rises to $60, then the budget line for hot wings
and beer would
a.
now intersect the horizontal axis at 6 orders of hot wings and the vertical axis at 60 beers.
b.
not change.
c.
now intersect the horizontal axis at 4 orders of hot wings and the vertical axis at 16 beers.
d.
rotate outward along the beer axis.
10 20 30 40 50 60 70 80 90 x
10
20
30
40
y
Chapter 21/The Theory of Consumer Choice ❖ 19
52. A budget constraint illustrates the
a.
prices that a consumer chooses to pay for products he consumes.
b.
purchases made by consumers.
c.
consumption bundles that a consumer can afford.
d.
consumption bundles that give a consumer equal satisfaction.
53. A budget constraint shows
a.
the maximum utility that a consumer can achieve for a given level of income.
b.
a series of bundles that cost the consumer the same amount of money.
c.
a series of bundles that give the consumer the same level of utility.
d.
All of the above are correct.
54. Budget constraints exist for consumers because
a.
their utility from consuming goods eventually reaches a maximum level.
b.
even with unlimited incomes they have to pay for each good they consume.
c.
they have to pay for goods, and they have limited incomes.
d.
prices and incomes are inversely related.
55. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.
Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara
has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels.
Who can afford to purchase 8 gallons of ice cream and 5 paperback novels?
a.
Karen, Tara, and Chelsea
b.
Karen only
c.
Tara and Chelsea but not Karen
d.
none of the women
56. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.
Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara
has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels.
Who can afford to purchase 5 gallons of ice cream and 8 paperback novels?
a.
Karen, Tara, and Chelsea
b.
Karen only
c.
Tara and Chelsea but not Karen
d.
none of the women
20 ❖ Chapter 21/The Theory of Consumer Choice
57. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.
Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara
has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels.
Who can afford to purchase 4 gallons of ice cream and 5 paperback novels?
a.
Karen, Tara, and Chelsea
b.
Karen only
c.
Karen and Tara but not Chelsea
d.
none of the women
58. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.
Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara
has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels.
Which of the following statements is correct?
a.
Each woman faces the same budget constraint.
b.
The slope of the budget constraint is the same for each woman.
c.
The area underneath the budget constraint is larger for Chelsea than for Karen.
d.
All of the above are correct.
59. Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback nov-
els cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and pa-
perback novels. Which consumer(s) can afford to purchase 5 slices of pizza and 3 paperback nov-
els?
a.
Jack only
b.
Diane only
c.
both Jack and Diane
d.
neither Jack nor Diane
60. Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback nov-
els cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and pa-
perback novels. Which consumer(s) can afford to purchase 3 slices of pizza and 4 paperback nov-
els?
a.
Jack only
b.
Diane only
c.
both Jack and Diane
d.
neither Jack nor Diane
61. Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback nov-
els cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and