Ch. 16 Consumer Demand Theory
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for
CDs and DVDs will
a. shift outward, parallel to the original budget constraint.
b. shift inward, parallel to the original budget constraint.
c. rotate outward along the CD axis because he can afford more CDs.
d. rotate outward along the DVD axis because he can afford more DVDs.
____
2. Assume that a college student spends her income on books and pizza. The price of a pizza is $8, and the price
of a book is $15. If she has $100 of income, she could choose to consume
a. 8 pizzas and 4 books.
b. 4 pizzas and 5 books.
c. 9 pizzas and 3 books.
d. 4 pizzas and 3 books.
____
3. A consumer who doesn't spend all of her income
a. would be at a point outside of her budget constraint.
b. would be at a point inside her budget constraint.
c. must not be consuming positive quantities of all goods.
d. must be consuming at a point where her budget constraint touches one of the axes.
Figure 21-2
Pepsi
X
Z
V
W
Y
Pizza
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4. 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
____
5. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and
cheese sell for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income
of $100. One day the price of wine falls to $5 a bottle and the price of cheese increases to $20 a pound, while
his income does not change. The bundle of wine and cheese that he purchased at the old prices now costs
a. the same amount at the new prices.
b. less than Brett's income at the new prices.
c. more than Brett's income at the new prices.
d. We do not have enough information to answer the question.
____
6. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and
cheese sell for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income
of $100. One day the price of wine falls to $5 a bottle, and the price of cheese increases to $20 a pound, while
his income does not change. If you illustrate wine on the vertical axis and cheese on the horizontal axis, then
a. the slope of Brett's budget has not changed.
b. the slope of Brett's budget constraint is flatter at the new prices.
c. the slope of Brett's budget constraint is steeper at the new prices.
d. Brett's budget constraint has shifted in a parallel fashion to the budget constraint with the
old prices.
____
7. If the relative price of a concert ticket is three times the price of a meal at a good restaurant, then the
opportunity cost of a concert ticket can be measured by the
a. slope of the budget constraint.
b. slope of an indifference curve.
c. marginal rate of substitution.
d. income effect.
Figure 21-7
Donuts
A
E
B
D
C
Indifference Curve 3
Indifference Curve 2
Indifference Curve 1
Cake
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8. Refer to Figure 21-7. When comparing bundle A to bundle E, the consumer
a. prefers bundle A because it contains more donuts.
b. prefers bundle E because it lies on a higher indifference curve.
c. prefers bundle E because it contains more donuts.
d. is indifferent between the two bundles.
____
9. Refer to Figure 21-7. Which of the following statements is not true for a consumer who moves from bundle
B to bundle C?
a. At bundle C the consumer would be willing to give up a larger amount of cake in
exchange for a donut than at bundle B.
b. The marginal rate of substitution at bundles B and C are the same since the points lie on
the same indifference curve.
c. The consumer is willing to sacrifice donuts to obtain cake.
d. The consumer receives the same level of satisfaction at bundles B and C.
____ 10. Indifference curves that cross would suggest that
a. the consumer does not prefer more to less.
b. the consumer is likely to prefer a redistribution of income from rich to poor.
c. different individuals have different preferences for the same goods.
d. the marginal rate of substitution is the same for both indifference curves.
____ 11. Bundle L contains 10 units of good X and 20 units of good Y. Bundle M contains 8 units of good X and 21
units of good Y. The consumer is indifferent between bundle L and bundle M. Assume that the consumer’s
preferences satisfy the four properties of indifference curves. Which of the following correctly expresses the
marginal rate of substitution of good X for good Y between these two points?
a. The consumer will give up 1 unit of good X to gain 2 units of good Y.
b. The consumer will give up 2 units of good X to gain 1 unit of good Y.
c. The price of good X is twice as large as the price of good Y.
d. The price of good X is half as large as the price of good Y.
Figure 21-8
y
(a)
y
(b)
x
y
(c)
x
x
____ 12. Refer to Figure 21-8. Which of the following statements is correct?
a. The indifference curves represented in graph a are perfect complements.
b. The indifference curves represented in graph b are perfect substitutes.
c. The indifference curves represented in graph c are neither perfect substitutes not perfect
complements.
d. All of the above are correct.
____ 13. 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.
____ 14. Refer to Figure 21-9. Bundle D represents a point where
a.
b.
c.
d.
MRSxy > Py/Px.
MRSxy = Px/Py.
MRSxy < Px/Py.
MRSxy < Py/Px.
Figure 21-10
____ 15. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $20. The price of
Skittles is $2 and the price of M&M's is $4. This consumer will choose consumption bundle
a. A.
b. B.
c. C.
d. D.
____ 16. 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.
____ 17. 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.
____ 18. Pepsi and pizza are normal goods. When the price of pizza rises, the substitution effect causes Pepsi to be
relatively
a. more expensive, so the consumer buys more Pepsi.
b. more expensive, so the consumer buys less Pepsi.
c. less expensive, so the consumer buys more Pepsi.
d. less expensive, so the consumer buys less Pepsi.