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Chapter 21 The Theory of Consumer Choice

Test B
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The theory of consumer choice provides a more complete understanding of demand by examining a. the tradeoffs people face in their role as consumers. b. the role of suppliers and how they attempt to maximize profits. c. individuals who are unaware of how to maximize their well-being. d. individuals who make irrational consumption decisions. AN !"#$ a. the tradeoffs people face in their role as consumers. T%&"$ ' ("%1$ ) ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %
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A budget constraint shows a. consumption bundles that makes a consumer e3ually satisfied. b. the prices a consumer must pay for two products he consumes. c. the rate at which a consumer is willing to trade one good for another. d. the various consumption bundles that a consumer can afford with a given income. AN !"#$ d. the various consumption bundles that a consumer can afford with a given income. T%&"$ ' ("%1$ 1 ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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A point outside a consumer5s budget constraint a. cannot be reached given the consumer5s current income. b. shows that the consumer is not spending all of her income. c. would represent the consumer5s optimum. d. means that one of the two goods must be an inferior good. AN !"#$ a. cannot be reached given the consumer5s current income. T%&"$ ' ("%1$ ) ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ % NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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!hich of the following leads to a parallel shift of the budget line6 a. a 17 percent increase in the price of both goods b. a 27 percent reduction in the price of both goods c. a 47 percent increase in income d. a 17 percent increase in the price of one of the goods only AN !"#$ c. a 47 percent increase in income T%&"$ ' ("%1$ ) ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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The relative price of two goods e3uals a. the marginal rate of substitution. b. the slope of an indifference curve. c. the slope of the budget constraint. d. consumer optimum. AN !"#$ c. the slope of the budget constraint. T%&"$ ' ("%1$ 1 ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %

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>iven the graphs shown; if a consumer5s income remains constant from .une to .uly; what has happened to the prices of ? and %6 a. The prices of both ? and % increased in .uly. b. The prices of both ? and % decreased in .uly. c. The price of ? has increased and the price of % has decreased. d. The price of % has increased and the price of ? has decreased. AN !"#$ d. The price of % has increased and the price of ? has decreased. T%&"$ ' ("%1$ > ")T*+N$ 1 +-.")T*/"$ 1 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ , #AN1+'$ N
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@or a consumer; any point on the same indifference curve yields a. different levels of satisfaction. b. constraints faced by the consumer. c. the same level of satisfaction. d. an income level sufficient to make an individual happy. AN !"#$ c. the same level of satisfaction. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 1 #AN1+'$ %

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>iven the graph shown; which of the following would be a true statement6 a. &oints 1 and ) will yield the same level of satisfaction for this consumer. b. *f this consumer moves from &oint - to &oint 1 her utility will increase. c. &oint A is preferred to all other points identified in the figure. d. *f this consumer chooses point ) over point - it is obvious that she prefers )1s over books. AN !"#$ c. &oint A is preferred to all other points identified in the figure. T%&"$ ' ("%1$ > ")T*+N$ 2 +-.")T*/"$ 2 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 0 #AN1+'$ N
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A consumer who reduces his consumption of one good will remain on the same indifference curve only if he a. doesn5t change his consumption of another good. b. reduces his consumption of another good. c. increases his consumption of another good. d. :e will not be able to stay on the same indifference curve if he reduces his consumption of one good. AN !"#$ c. increases his consumption of another good. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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The marginal rate of substitution a. measures the rate at which a consumer is willing to trade one good for another. b. is always constant. c. is the slope of a consumer5s budget constraint. d. identifies the point where the budget constraint and the indifference curve are tangent. AN !"#$ a. measures the rate at which a consumer is willing to trade one good for another. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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-ecause consumers prefer more consumption to less; they a. prefer indifference curves with positive slopes. b. prefer lower indifference curves to higher indifference curves. c. prefer higher indifference curves to lower indifference curves. d. are generally unable to place all consumption bundles on an indifference curve. AN !"#$ c. prefer higher indifference curves to lower indifference curves. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %

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*ndifference curves are bowed inward because people are a. unwilling to substitute one good for another. b. more willing to give up goods that they have in abundance. c. less willing to give up goods that they have in abundance. d. generally willing to consume more of one good over another. AN !"#$ b. more willing to give up goods that they have in abundance. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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Two goods that are perfect complements will have indifference curves that are a. right angles. b. intersecting. c. straight lines. d. upward sloping. AN !"#$ a. right angles. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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!hen a consumer reaches the highest indifference curve possible; she has maximized her a. income. b. utility. c. preferences. d. substitution effect. AN !"#$ b. utility. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ % NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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The consumer5s optimum occurs where the a. highest attainable indifference curve is Eust tangent to the budget line. b. consumer maximizes his satisfaction and has some income left over. c. consumer buys e3ual amounts of both goods. d. consumer will be on the indifference curve lying closest to the origin. AN !"#$ a. highest attainable indifference curve is Eust tangent to the budget line. T%&"$ ' ("%1$ ) ")T*+N$ 4 +-.")T*/"$ 4 #AN1+'$ %

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>iven the graph shown; what must occur for this consumer to be able to reach *26 a. The price of hot dogs must decrease. b. The price of hamburgers must decrease. c. The consumer5s income must increase. d. Any of the above would allow the consumer to reach *2. AN !"#$ d. Any of the above would allow the consumer to reach *2. T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ 4 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ C #AN1+'$ N
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An inferior good is any good that a. is of lesser 3uality than a normal good. b. an increase in income increases consumption of the good. c. an increase in income decreases consumption of the good. d. a rational consumer would not generally choose to buy. AN !"#$ c. an increase in income decreases consumption of the good. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ , #AN1+'$ %

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According to the graph shown; if this consumer is currently at point -; what change allows her to move to point A6 a. a decrease in the price of nickers b. an increase in the price of nickers c. an increase in the price of 'ilky !ays d. a decrease in the price of 'ilky !ays AN !"#$ d. a decrease in the price of 'ilky !ays T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ , >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 1 #AN1+'$ N

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According to the graph shown; a consumer currently at &oint 1 would be a. maximizing her utility and spending her entire income. b. maximizing her utility; but not spending her entire income. c. not maximizing her utility; but spending her entire income. d. not maximizing her utility because she is not spending her entire income. AN !"#$ c. not maximizing her utility; but spending her entire income. T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ , >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 1 #AN1+'$ N

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"conomic theory suggests that demand curves can sometimes slope upward a. if a good is a strongly inferior good with a dominant income effect. b. when the supply curve for the good is downward sloping. c. when consumers no longer prefer more to less. d. if a good is a normal good with a dominant income effect. AN !"#$ a. if a good is a strongly inferior good with a dominant income effect. T%&"$ ' ("%1$ ) ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %

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+n the graph shown; if the consumer is currently at point ); a change to point - would show the a. income effect. b. budget effect. c. price effect. d. substitution effect. AN !"#$ d. substitution effect. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ % NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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A >iffen good has a. an upward-sloping demand curve. b. a downward-sloping demand curve. c. a horizontal demand curve. d. a vertical demand curve. AN !"#$ a. an upward-sloping demand curve. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %
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The theory of consumer choice can be used to a. understand producers5 response to demand. b. derive a demand curve. c. clarify why consumers generally prefer less of a good to more. d. show how individuals5 activities determine the preferences of a society. AN !"#$ b. derive a demand curve. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %

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*f an individual5s labor supply curve is backward bending this would suggest that he will a. work more as wage rates rise. b. work less as wage rates rise. c. work the same no matter what the wage rate. d. demand more leisure as wage rates fall. AN !"#$ b. work less as wage rates rise. T%&"$ ' ("%1$ 1 ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %
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#ational consumers who are saving for retirement may choose to save less when interest rates rise if a. they are likely to inherit a large sum of money. b. they realize that they will need much less money after retirement to maintain the same standard of living. c. the substitution effect dominates the income effect. d. the income effect dominates the substitution effect. AN !"#$ d. the income effect dominates the substitution effect. T%&"$ ' ("%1$ ) ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %

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AN !"#$ a. the tradeoffs people face in their role as consumers. T%&"$ ' ("%1$ ) ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %
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AN !"#$ d. the various consumption bundles that a consumer can afford with a given income. T%&"$ ' ("%1$ 1 ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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AN !"#$ a. cannot be reached given the consumer5s current income. T%&"$ ' ("%1$ ) ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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AN !"#$ c. a 47 percent increase in income T%&"$ ' ("%1$ ) ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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AN !"#$ c. the slope of the budget constraint. T%&"$ ' ("%1$ 1 ")T*+N$ 1 +-.")T*/"$ 1 #AN1+'$ %
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AN !"#$ d. The price of % has increased and the price of ? has decreased. T%&"$ ' ("%1$ > ")T*+N$ 1 +-.")T*/"$ 1 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ , #AN1+'$ N
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AN !"#$ c. the same level of satisfaction. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 1 #AN1+'$ %
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AN !"#$ c. &oint A is preferred to all other points identified in the figure. T%&"$ ' ("%1$ > ")T*+N$ 2 +-.")T*/"$ 2 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 0 #AN1+'$ N
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AN !"#$ c. increases his consumption of another good. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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AN !"#$ a. measures the rate at which a consumer is willing to trade one good for another. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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AN !"#$ c. prefer higher indifference curves to lower indifference curves. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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AN !"#$ b. more willing to give up goods that they have in abundance. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %
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AN !"#$ a. right angles. T%&"$ ' ("%1$ 1 ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %


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AN !"#$ b. utility. T%&"$ ' ("%1$ ) ")T*+N$ 2 +-.")T*/"$ 2 #AN1+'$ %


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AN !"#$ a. highest attainable indifference curve is Eust tangent to the budget line.

T%&"$ ' ("%1$ ) ")T*+N$ 4 +-.")T*/"$ 4 #AN1+'$ %


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AN !"#$ d. Any of the above would allow the consumer to reach *2. T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ 4 >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ C #AN1+'$ N
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AN !"#$ c. an increase in income decreases consumption of the good. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ , #AN1+'$ %
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AN !"#$ d. a decrease in the price of 'ilky !ays T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ , >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 1 #AN1+'$ N
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AN !"#$ c. not maximizing her utility; but spending her entire income. T%&"$ ' ("%1$ > ")T*+N$ 4 +-.")T*/"$ , >#A&: @+#'AT$ ' AB" T*+N *N T#B)T*+N$ 1 #AN1+'$ N
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AN !"#$ a. if a good is a strongly inferior good with a dominant income effect. T%&"$ ' ("%1$ ) ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %
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AN !"#$ d. substitution effect. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %


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AN !"#$ a. an upward-sloping demand curve. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %
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AN !"#$ b. derive a demand curve. T%&"$ ' ("%1$ 1 ")T*+N$ 4 +-.")T*/"$ 8 #AN1+'$ %
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AN !"#$ b. work less as wage rates rise. T%&"$ ' ("%1$ 1 ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %
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AN !"#$ d. the income effect dominates the substitution effect. T%&"$ ' ("%1$ ) ")T*+N$ , +-.")T*/"$ 0 #AN1+'$ %