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Exam 21: The Theory of Consumer Choice

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Question 101

True/False

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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

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Question 102

Multiple Choice

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A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her current consumption bundle, she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a CD?

A) $4
B) $8
C) $12
D) $20

E) C) and D)
F) None of the above

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Question 103

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In order to represent a consumer's choices on a graph, we draw her budget constraint as well as her __________ curves.

A consumer's indifference curves are straight lines when, for the consumer, the goods in question are __________.

The slope of the budget constraint reveals the relative price of good X compared to good Y.

Consider the indifference curve map for nickels and quarters. Assume nickels are on the horizontal axis and quarters are on the vertical axis. The indifference curves for nickels and quarters are

If Priscilla regards cheese and crackers as perfect complements, then

Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.

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.

Figure 21-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. ​ -Refer to Figure 21-18. If the price of a shirt is $20 and point B is Kevin's optimum, then what is Kevin's income?

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. -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?

Figure 21-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. ​ -Refer to Figure 21-18. If Kevin's income is $1,260, then what is the price of a sweater?

If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant.

Thomas faces prices of $6 for a unit of good X and $30 for a unit of good Y. At his optimum, Thomas is willing to give up 1 unit of good Y for __________ units of good X.

An increase in the interest rate today leading to a decrease in consumption today violates the law of demand.​

​A decrease in the price of the good on the horizontal axis rotates the budget constraint counterclockwise.

If goods X and Y are both normal goods for Brenda, then an increase in Brenda's income will lead her to __________.

The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.

Scenario 21-1 Suppose the price of nachos is $12, the price of water is $3, and the consumer's income is $216. In addition, suppose the consumer's budget constraint illustrates nachos on the horizontal axis and water on the vertical axis. -Refer to Scenario 21-1. If the price of water doubles to $6, then the

Figure 21-10 -Refer to Figure 21-10. It would be possible for the consumer to reach I₃ if