Chapter 21
The Theory of Consumer Choice
TRUE/FALSE
1.
The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten
Principles of Economics.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
2.
A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes
good X relative to good Y.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
3.
REF: 21-2
NAT: Analytic
TOP: Indifference curves
For a typical consumer, most indifference curves are downward sloping.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
7.
REF: 21-1 | 21-2
NAT: Analytic
TOP: Budget constraint
For a typical consumer, most indifference curves are bowed inward.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
6.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve
illustrates bundles that are equally affordable to a consumer.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
5.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
The slope of the budget constraint reveals the relative price of good X compared to good Y.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
4.
REF: 21-0
NAT: Analytic
TOP: Consumer choice
REF: 21-2
NAT: Analytic
TOP: Indifference curves
For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1837
1838  Chapter 21/The Theory of Consumer Choice
8.
When two goods are perfect complements, the indifference curves are right angles.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
9.
REF: 21-2
NAT: Analytic
TOP: Perfect complements
The indifference curves for left shoes and right shoes are right angles.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect complements
10. The indifference curves for perfect substitutes are straight lines.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
11. The indifference curves for nickels and dimes are straight lines.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
12. When two goods are perfect substitutes, the indifference curves are right angles.
ANS: F
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect complements | Perfect substitutes
13. If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B
is constant.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution | Perfect substitutes
14. The slope at any point on an indifference curve equals the absolute price at which a consumer is
willing to substitute one good for the other.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
15. The marginal rate of substitution between goods A and B measures the price of A relative to the
price of B.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
Chapter 21/The Theory of Consumer Choice  1839
16. The marginal rate of substitution is the slope of the budget constraint.
ANS: F
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
17. The marginal rate of substitution is the slope of the indifference curve.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
18. At a consumer’s optimal choice, the consumer chooses the combination of goods that equates the
marginal rate of substitution and the price ratio.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
19. At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio
of the marginal utilities equals the ratio of the prices.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
20. If consumers purchase more of a good when their income rises, the good is a normal good.
ANS: T
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Normal goods | Inferior goods
21. If a consumer purchases more of good B when his income rises, good B is an inferior good.
ANS: F
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Normal goods | Inferior goods
22. If a consumer purchases more of good A when her income falls, good A is an inferior good.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Inferior goods
23. The income effect of a price change is unaffected by whether the good is a normal or inferior good.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Income effect
1840  Chapter 21/The Theory of Consumer Choice
24. The income effect of a price change is the change in consumption that results from the movement to
a new indifference curve.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Income effect
25. The direction of the substitution effect is not influenced by whether the good is normal or inferior.
ANS: T
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
KEY: Substitution effect
26. The substitution effect of a price change is the change in consumption that results from the
movement to a new indifference curve.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Substitution effect
27. All points on a demand curve are optimal consumption points.
ANS: T
DIF: 3
LOC: Utility and consumer choice
REF: 21-3
TOP: Demand
NAT: Analytic
MSC: Analytical
28. Economists use the term Giffen good to describe a good that violates the law of demand.
ANS: T
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Interpretive
29. Giffen goods are inferior goods for which the income effect dominates the substitution effect.
ANS: T
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
30. Economists have found evidence of a Giffen good when studying the consumption of rice in the
Chinese province of Hunan.
ANS: T
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Applicative
31. Katie wins $1 million in her state’s lottery. If Katie drastically reduces the number of hours she
works after she wins the money, we can infer that the income effect is larger than the substitution
effect for her.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
Chapter 21/The Theory of Consumer Choice  1841
32. Susie wins $1 million in her state’s lottery. If Susie keeps working after she wins the money, we
can infer that the income effect is larger than the substitution effect for her.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
33. A rational person can have a negatively-sloped labor supply curve.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
34. The substitution 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 upward.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
35. 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.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
36. Some economists have advocated reducing the taxation of interest and other capital income, arguing
that such a policy change would raise the after-tax interest rate that savers can earn and would
thereby encourage people to save more.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
37. A rise in the interest rate will generally result in people consuming more when they are old if the
substitution effect outweighs the income effect.
ANS: T
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
38. 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.
ANS: F
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
1842  Chapter 21/The Theory of Consumer Choice
SHORT ANSWER
1.
Answer the following questions based on the table. A consumer is able to consume the following
bundles of rice and beans when the price of rice is $2 and the price of beans is $3.
RICE
12
6
0
a.
b.
c.
d.
BEANS
0
4
8
How much is this consumer's income?
Draw a budget constraint given this information. Label it B.
Construct a new budget constraint showing the change if the price of rice falls $1. Label this C.
Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this
consumer's income increased to $48. Label this D.
ANS:
a. $24
b.
c.
d.
DIF: 2
REF: 21-1
TOP: Budget constraint
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
Chapter 21/The Theory of Consumer Choice  1843
2. Draw a budget constraint that is consistent with the following prices and income.
Income = 200
PY = 50
PX = 25
a. Demonstrate how your original budget constraint would change if income increases to
500.
b. Demonstrate how your original budget constraint would change if PY decreases to 20.
c. Demonstrate how your original budget constraint would change if PX increases to 40.
ANS:
DIF: 2
REF: 21-1
TOP: Budget constraint
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
1844  Chapter 21/The Theory of Consumer Choice
3.
Assume that a consumer faces the following budget constraints.
a.
b.
c.
d.
Assuming that income is the same on both occasions, describe the difference in relative
prices between Panel A and Panel B.
If income in Panel B is $126, what is the price of good X?
If income in Panel A is $84, what is the price of good Y?
Assuming that the price of good X is the same on both occasions, describe the
difference in income and price of good Y between Panel A and Panel B.
ANS:
a. The price of good Y is relatively higher in Panel A than Panel B. Said another way, the
price of X is relatively lower in Panel A than Panel B.
b. $9
c. $12
d. Income in Panel A is twice the income in Panel B, and the price of "Y" in Panel B is
1/18 the price of "Y" in Panel A.
DIF: 2
REF: 21-1
TOP: Budget constraint
4.
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
Evaluate the following statement, "Warren Buffet is the second richest person in the world. He
doesn't face any constraint on his ability to purchase commodities he wants."
ANS:
Everyone faces scarcity of resources, regardless of how rich they are because wants are assumed to be
infinite.
DIF: 1
REF: 21-1
TOP: Budget constraint
NAT: Analytic
MSC: Interpretive
LOC: Utility and consumer choice
Chapter 21/The Theory of Consumer Choice  1845
5.
List and briefly explain each of the four properties of indifference curves.
ANS:
1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of
something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve
reflects the rate at which the consumer is willing to substitute one good for another. If the quantity of one
good is reduced, the quantity of the other good must increase in order for the consumer to be equally
happy. 3: Indifference curves do not cross. If indifference curves did cross, the same point could be on
two different curves, thus contradicting the assumption that consumers prefer more of both goods to less.
4: Indifference curves are bowed inward. This is because people are more willing to trade away goods
that they have in abundance and less willing to trade away goods of which they have less.
DIF: 1
REF: 21-2
TOP: Indifference curves
6.
NAT: Analytic
MSC: Interpretive
LOC: Utility and consumer choice
Draw indifference curves that reflect the following preferences.
a. pencils with white erasers and pencils with pink erasers
b. left shoes and right shoes
c. potatoes and rice
d. income and polluted water
ANS:
(a)
(b)
white
left
pink
right
(c)
(d)
rice
income
Increasing
utility
potatoes
DIF: 2
REF: 21-2
TOP: Indifference curves
polluted
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
1846  Chapter 21/The Theory of Consumer Choice
7.
Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all
curves and axes.
ANS:
y
M /Py
MRS=P x/P y
M /Px
x
Where M=Income
DIF: 1
REF: 21-3
TOP: Optimization
8.
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
Explain the relationship between the budget constraint and indifference curve at a consumer’s
optimum.
ANS:
Since the budget constraint is tangent to the indifference curve at a consumer’s optimum, the slope of the
budget constraint (relative market prices) and the slope of the indifference curve (the marginal rate of
substitution) are equal at the optimal consumption point.
DIF: 1
REF: 21-3
TOP: Consumer choice
NAT: Analytic
MSC: Interpretive
LOC: Utility and consumer choice
Chapter 21/The Theory of Consumer Choice  1847
9.
Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the
consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. Carefully
label all curves and axes. What will happen to consumption if Coke is a normal good? What will
happen to consumption if Coke is an inferior good? (Remember to explain the possible change when
the income effect dominates and when the substitution effect dominates.)
ANS:
If Coke is a normal good, the consumption of Coke will increase when the price decreases. If Coke is an
inferior good and the substitution effect dominates, the consumption of Coke will increase when the price
decreases. If Coke is an inferior good and the income effect dominates, the consumption of Coke will
decrease when the price decreases. If consumption decreases, the demand curve is upward sloping, and
Coke would be a Giffen good. Giffen goods are very rare in the real world, and Coke is not likely to be
one.
DIF: 2
REF: 21-3
TOP: Consumer choice
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
1848  Chapter 21/The Theory of Consumer Choice
10. Using the graph shown, construct a demand curve for M&M's given an income of $10.
ANS:
DIF: 3
TOP: Demand
REF: 21-3
MSC: Analytical
NAT: Analytic
LOC: Utility and consumer choice
Chapter 21/The Theory of Consumer Choice  1849
11. Using indifference curves and budget constraints, graphically illustrate the substitution and income
effect that would result from a change in the price of a normal good.
ANS:
The graph above illustrates a price decrease for potato chips. Moving from point A to point B illustrates
the substitution effect, while moving from point B to point C illustrates the income effect.
DIF: 3
REF: 21-3
TOP: Income effect | Substitution effect
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
12. Explain the difference between inferior and normal goods. As a developing economy experiences
increases in income (measured by GDP), what would you predict to happen to demand for inferior
goods?
ANS:
Normal goods are those for which consumption increases as income rises. Inferior goods are those for
which consumption decreases as income rises. We would expect the demand for inferior goods to
decrease as developing countries experience increases in income.
DIF: 2
REF: 21-3
TOP: Inferior goods | Normal goods
NAT: Analytic
MSC: Interpretive
LOC: Utility and consumer choice
1850  Chapter 21/The Theory of Consumer Choice
13. Janet knows that she will ultimately face retirement. Assume that Janet will experience two periods
in her life, one in which she works and earns income, and one in which she is retired and earns no
income. Janet can earn $250,000 during her working period and nothing in her retirement period.
She must both save and consume in her work period and can earn 10 percent interest on her savings.
a. Use a graph to demonstrate Janet's budget constraint.
b. On your graph, show Janet at an optimal level of consumption in the work period equal
to $150,000. What is the implied optimal level of consumption in her retirement period?
c. Now, using your graph from part b above, demonstrate how Janet will be affected by an
increase in the interest rate on savings to 14 percent. Discuss the role of income and
substitution effects in determining whether Janet will increase, or decrease her savings in
the work period.
ANS:
a.
b.
c.
see graph below
see graph below
see graph below
Substitution effect: Retirement spending becomes less costly, so she should increase saving.
Income effect: As income increases she should increase consumption in both periods (thus reducing her
saving in the work period.)
DIF: 3
REF: 21-4
TOP: Consumption-saving decision
NAT: Analytic
MSC: Applicative
LOC: Utility and consumer choice
Chapter 21/The Theory of Consumer Choice  1851
Sec 00 - 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 leisure time and less working time
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
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
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.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
3.
REF: 21-0
NAT: Analytic
TOP: Consumer choice
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.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
4.
REF: 21-0
NAT: Analytic
TOP: Consumer choice
REF: 21-0
NAT: Analytic
TOP: Consumer choice
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.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-0
NAT: Analytic
TOP: Consumer choice
1852  Chapter 21/The Theory of Consumer Choice
5.
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.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
6.
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.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
7.
REF: 21-0
NAT: Analytic
TOP: Consumer choice
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.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
8.
REF: 21-0
NAT: Analytic
TOP: Consumer choice
REF: 21-0
NAT: Analytic
TOP: Consumer choice
The theory of consumer choice most closely examines which of the following Ten Principles of
Economics?
a. People face trade-offs.
b. The cost of something is what you give up to get it.
c. Trade can make everyone better off.
d. Markets are usually a good way to organize economic activity.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-0
NAT: Analytic
TOP: Consumer choice
Chapter 21/The Theory of Consumer Choice  1853
Sec 01- The Theory of Consumer Choice - The Budget Constraint: What the Consumer
Can Afford
MULTIPLE CHOICE
1.
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
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
2.
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
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
3.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
REF: 21-1
NAT: Analytic
TOP: Budget constraint
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
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1854  Chapter 21/The Theory of Consumer Choice
4.
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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
5.
Suppose a consumer has an income of $800 per month and that she spends her entire income each
month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4.
Which of the following combinations of beers and bratwursts represents a point that would lie to the
interior of the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b. 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d. 160 beers and 0 bratwursts
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
6.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Suppose a consumer has an income of $800 per month and that she spends her entire income each
month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4.
Which of the following combinations of beers and bratwursts represents a point that would lie to the
exterior of the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b. 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d. 160 beers and 0 bratwursts
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
7.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Suppose a consumer has an income of $800 per month and that she spends her entire income each
month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4.
Which of the following combinations of beers and bratwursts represents a point that would lie
directly on the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b. 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d. 80 beers and 0 bratwursts
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1855
8.
Consider two goods, books and hamburgers. The slope of the consumer's budget constraint is
measured by the
a. consumer's income divided by the price of hamburgers.
b. relative price of books and hamburgers.
c. consumer's marginal rate of substitution.
d. number of books purchased divided by the number of hamburgers purchased.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
9.
REF: 21-1
NAT: Analytic
TOP: Budget constraint
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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
10. When the price of a shirt falls, the
a. quantity of shirts demanded falls.
b. quantity of shirts demanded rises.
c. quantity of shirts supplied rises.
d. demand for shirts falls.
ANS: B
DIF: 1
LOC: Utility and consumer choice
REF: 21-1
TOP: Demand
NAT: Analytic
MSC: Analytical
11. 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.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-1
NAT: Analytic
TOP: Budget constraint
12. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1856  Chapter 21/The Theory of Consumer Choice
13. Assume that a college student spends her income on mac-n-cheese and CDs. The price of one box of
mac-n-cheese is $1, and the price of one CD is $12. If she has $100 of income, she could choose to
consume
a. 15 boxes of mac-n-cheese and 6 CDs.
b. 20 boxes of mac-n-cheese and 7 CDs.
c. 10 boxes of mac-n-cheese and 8 CDs.
d. 30 boxes of mac-n-cheese and 6 CDs.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
14. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-1
NAT: Analytic
TOP: Budget constraint
15. An increase in income will cause a consumer's budget constraint to
a. shift outward, parallel to its initial position.
b. shift inward, parallel to its initial position.
c. pivot around the horizontal axis.
d. pivot around the vertical axis.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1857
Figure 21-1
Books
B
E
A
C
D
CDs
16. 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
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
17. Refer to Figure 21-1. A consumer that 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
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
18. Refer to Figure 21-1. All of the points identified in the figure represent affordable consumption
options with the exception of
a. A.
b. E.
c. A and E.
d. None. All points are affordable.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1858  Chapter 21/The Theory of Consumer Choice
Figure 21-2
Pepsi
X
Z
V
W
Y
Pizza
19. Refer to Figure 21-2. A consumer that 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
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
20. 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
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
21. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1859
22. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Figure 21-3
In each case, the budget constraint moves from BC-1 to BC-2.
y
y
(b)
(a)
BC-2
BC-1
BC-1
BC-2
x
x
y
y
(c)
(d)
BC-1
BC-2
BC-2
BC-1
x
x
23. 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
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1860  Chapter 21/The Theory of Consumer Choice
24. 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
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
25. Refer to Figure 21-3. Which of the graphs in the figure could reflect a decrease in the prices of both
goods?
a. graph a
b. graph b
c. graph c
d. None of the above is correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
26. The following diagram shows two budget lines: A and B.
y
10
B
9
8
7
6
5
A
4
3
2
1
1
2
3
4
5
6
7
8
9
10
x
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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1861
27. The following diagram shows two budget lines: A and B.
10
y
9
8
B
7
6
5
A
4
3
2
1
1
2
3
4
5
6
7
8
9
x
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. an increase in income and a decrease in the price of Y
d. Both a and b are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1862  Chapter 21/The Theory of Consumer Choice
28. The following diagram shows two budget lines: A and B.
10
y
9
8
7
B
6
5
A
4
3
2
1
1
2
3
4
5
6
7
8
9
x
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
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
29. The slope of the budget constraint is determined by the
a. relative price of the goods measured on the axes.
b. relative price of the goods measured on the axes and the consumer’s income.
c. endowment of productive resources.
d. preferences of the consumer.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-1
NAT: Analytic
TOP: Budget constraint
30. The slope of the budget constraint is all of the following except
a. the relative price of two goods.
b. the rate at which a consumer can trade one good for another.
c. the marginal rate of substitution.
d. constant.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1863
Figure 21-4
(a)
(b)
y
y
40
12
10
x
42
x
31. Refer to Figure 21-4. In graph (a), if income is equal to $120, the price of good Y is
a. $1
b. $2
c. $3
d. $4
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
32. Refer to Figure 21-4. In graph (a), what is the price of good Y relative to good X (i.e., Py/Px)?
a. 1/3
b. 1/4
c. 3
d. 4
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
33. Refer to Figure 21-4. In graph (b), what is the price of good X relative to good Y (i.e., Px/Py)?
a. 2/7
b. 3/6
c. 7/2
d. 7
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1864  Chapter 21/The Theory of Consumer Choice
34. Refer to Figure 21-4. Assume that a consumer faces both budget constraints in graph (a) and graph
(b) on two different occasions. If her income has remained constant, what has happened to prices?
a. The price of X in graph (a) is higher than the price of X in graph (b).
b. The price of Y in graph (a) is higher than the price of Y in graph (b).
c. The prices of both X and Y are lower in graph (a).
d. None of the above is true.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
35. Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has
$200 to allocate to these two goods, the price of a CD is $10, and the price of a DVD is $20. What
is the maximum number of CDs the consumer can purchase?
a. 10
b. 20
c. 40
d. 50
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
36. Suppose a consumer spends her income on two goods: iTunes music downloads and books. The
consumer has $100 to allocate to these two goods, the price of a downloaded song is $1, and the
price of a book is $20. What is the maximum number of books the consumer can purchase?
a. 100
b. 20
c. 10
d. 5
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
37. Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is
$8, and the price of a DVD is $20. If we graph the budget constraint by placing the quantity of CDs
purchased on the horizontal axis, what is the slope of the budget constraint?
a. -5.0
b. -2.5
c. -0.4
d. The slope of the budget constraint cannot be determined without knowing the income the
consumer has available to spend on the two goods.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1865
38. Suppose a consumer is currently spending all of her available income on two goods: music CDs and
DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs
and 5 DVDs, what is the consumer's income?
a. $90
b. $180
c. $270
d. $360
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
39. 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
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
40. The following diagram shows a budget constraint for a particular consumer.
y
40
30
20
10
10
20
30
40
50
60
70
80
90
x
If the price of X is $10, what is the price of Y?
a. $15
b. $25
c. $35
d. $70
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1866  Chapter 21/The Theory of Consumer Choice
41. The following diagram shows a budget constraint for a particular consumer.
y
40
30
20
10
10
20
30
40
50
60
70
80
90
x
If the price of X is $5, what is the price of Y?
a. $2
b. $10
c. $30
d. $300
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
42. The following diagram shows a budget constraint for a particular consumer.
y
40
30
20
10
10
20
30
40
50
60
70
80
90
x
If the price of X is $5, what is the consumer’s income?
a. $2
b. $10
c. $30
d. $300
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
43. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1867
44. A family on a trip budgets $800 for meals and gasoline. If the price of a meal for the family is $50,
how many meals can the family buy if they do not buy any gasoline?
a. 8
b. 16
c. 24
d. 32
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
45. A family on a trip budgets $800 for meals and hotel accommodations. Suppose the price of a meal is
$40. In addition, suppose the family could afford a total of 8 nights in a hotel if they don’t buy any
meals. How many meals could the family afford if they gave up two nights in the hotel?
a. 1
b. 2
c. 5
d. 8
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
46. If the price of bread is zero, the budget constraint between bread (on the vertical axis) and cheese
(on the horizontal axis) would
a. be vertical.
b. coincide with the vertical axis.
c. coincide with the horizontal axis.
d. be horizontal.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
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.
47. 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. budget constraint intersects the vertical axis at 100 beers.
d. budget constraint shifts inward in a parallel fashion.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1868  Chapter 21/The Theory of Consumer Choice
48. 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.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
49. An increase in a consumer's income
a. increases the slope of the consumer's budget constraint.
b. has no effect on the slope of the consumer's budget constraint.
c. decreases the slope of the consumer's budget constraint.
d. has no effect on the consumer's budget constraint.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
50. A decrease in a consumer's income
a. increases the slope of the consumer's budget constraint.
b. has no effect on the consumer's budget constraint.
c. decreases the slope of the consumer's budget constraint.
d. has no effect on the slope of the consumer's budget constraint.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
51. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9
per bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed
fixed at $46 per week. Since the price changes, Mark has been buying 4 bottles of gin and 2 jars of
cocktail olives per week. At the original prices, 4 bottles of gin and 2 jars of cocktail olives would
have
a. exactly exhausted his income.
b. cost more than his income.
c. cost less than his income.
d. could have maximized his satisfaction given his budget constraint.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1869
52. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9
per bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed
fixed at $46 per week. If you illustrate gin on the vertical axis and cocktail olives on the horizontal
axis, then the budget constraint
a. is steeper after the price changes.
b. is flatter after the price changes.
c. is the same after the price changes.
d. shifts in a parallel fashion to the old budget constraint after the price changes.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
53. 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.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
54. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1870  Chapter 21/The Theory of Consumer Choice
55. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Figure 21-5
Mt. Dew
B
A
Popcorn
56. Refer to Figure 21-5. 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
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
57. Refer to Figure 21-5. 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
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1871
58. Refer to Figure 21-5. 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
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Figure 21-6
DVDs
B
A
Books
59. Refer to Figure 21-6. 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
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
60. Refer to Figure 21-6. 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
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
1872  Chapter 21/The Theory of Consumer Choice
61. Refer to Figure 21-6. 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
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-1
NAT: Analytic
TOP: Budget constraint
Sec 02 - The Theory of Consumer Choice - Preferences: What the Consumer Wants
MULTIPLE CHOICE
1.
An indifference curve illustrates
a. a firm’s profits.
b. a consumer’s budget.
c. a consumer’s preferences.
d. the prices of two goods.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
2.
Economists represent a consumer's preferences using
a. demand curves.
b. budget constraints.
c. indifference curves.
d. supply curves.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
3.
REF: 21-2
NAT: Analytic
TOP: Indifference curves
REF: 21-2
NAT: Analytic
TOP: Indifference curves
If two bundles of goods give a consumer the same satisfaction, the consumer must be
a. on her budget constraint.
b. in a position of equilibrium.
c. indifferent between the bundles.
d. Both a and c are correct.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Chapter 21/The Theory of Consumer Choice  1873
4.
Indifference curves graphically represent
a. an income level sufficient to allow an individual to achieve a given level of satisfaction.
b. the constraints faced by individuals.
c. an individual's preferences.
d. the relative price of commodities.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
5.
A consumer
a. is equally satisfied with any indifference curve.
b. prefers indifference curves with positive slopes.
c. prefers higher indifference curves to lower indifference curves.
d. prefers indifference curves that are straight lines to indifference curves that are right
angles..
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
6.
REF: 21-2
NAT: Analytic
TOP: Indifference curves
A consumer's preferences provide a
a. ranking of the set of bundles that happen to fall on indifference curves.
b. relative ranking of bundles that provide more of all goods.
c. framework for evaluating market equilibriums.
d. complete ranking of all possible consumption bundles.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
7.
REF: 21-2
NAT: Analytic
TOP: Indifference curves
REF: 21-2
NAT: Analytic
TOP: Indifference curves
If Walter has one hour of leisure time in which to watch a sporting event on television, his
preferences are as follows: Walter prefers watching football to watching baseball, but he prefers
watching baseball to watching basketball. He is indifferent between watching baseball and watching
hockey. Bundle A contains one hour of football and zero hours of all other sports. Bundle B
contains one hour of baseball and zero hours of all other sports. Bundle C contains one hour of
basketball and zero hours of all other sports. Bundle D contains one hour of hockey and zero hours
of all other sports. If we were to graph Walter’s preferences using indifference curves, which of the
following bundles would be on the same indifference curve?
a. A, B, and C only
b. B and D only
c. A and D only
d. There is no combination of the sports that could be drawn on the same indifference curve.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1874  Chapter 21/The Theory of Consumer Choice
8.
Diana and Sarah each like jewelry and music by the Rolling Stones. If we were to graph an
indifference curve with jewelry on the horizontal axis and cd’s by the Rolling Stones on the vertical
axis, then
a. Diana and Sarah would have identical indifference curves.
b. Diana’s indifference curve would be higher than Sarah’s indifference curve.
c. Sarah’s indifference curve would be higher than Diana’s indifference curve.
d. Because we do not know the intensity of each woman’s preferences, we do not have
enough information to compare their indifference curves.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
9.
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Both Diana and Sarah like jazz music and music by the Beatles. Diana likes music by the Beatles
much better than jazz music, whereas Sarah prefers jazz music to music by the Beatles. If we were
to graph an indifference curve with cd’s by the Beatles on the horizontal axis and jazz cd’s on the
vertical axis, then
a. Diana and Sarah would have identical indifference curves.
b. Diana’s indifference curve would be steeper than Sarah’s indifference curve.
c. Sarah’s indifference curve would be steeper than Diana’s indifference curve.
d. We do not have enough information to compare their indifference curves.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
10. Alicia is a vegetarian, so she does not eat beef. That is, beef provides no additional utility to Alicia.
She loves potatoes, however. If we illustrate Alicia’s indifference curves by drawing beef on the
horizontal axis and potatoes on the vertical axis, her indifference curves will
a. slope downward.
b. be vertical straight lines.
c. slope upward.
d. be horizontal straight lines.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
11. Irene is a vegetarian, so she does not eat pork. That is, pork provides no additional utility to Irene.
She loves broccoli, however. If we illustrate Irene’s indifference curves by drawing broccoli on the
horizontal axis and pork on the vertical axis, her indifference curves will
a. slope downward.
b. be vertical straight lines.
c. slope upward.
d. be horizontal straight lines.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Chapter 21/The Theory of Consumer Choice  1875
Figure 21-7
Donuts
A
E
B
D
C
Indifference Curve 3
Indifference Curve 2
Indifference Curve 1
Cake
12. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
13. Refer to Figure 21-7. When comparing bundle B to bundle C, the consumer
a. prefers bundle B because it contains more donuts.
b. is indifferent between the two bundles.
c. prefers bundle C because it contains more cake.
d. In order to compare bundle B to bundle C, we must know the prices of cake and donuts.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
14. Refer to Figure 21-7. A person that chooses to consume bundle C is likely to
a. receive higher total satisfaction at bundle C than at bundle A.
b. spend more on bundle C than bundle A.
c. receive higher marginal utility from cake than from donuts.
d. receive higher marginal utility from donuts than from cake.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1876  Chapter 21/The Theory of Consumer Choice
15. Refer to Figure 21-7. Which of the following statements is correct?
a. Bundle A is preferred equally to bundle E.
b. Bundle A is preferred equally to bundle C.
c. Bundle B contains more cake than bundle C.
d. The bundles along indifference curve Indifference Curve 2 are preferred to those along
indifference curve Indifference Curve 3.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
16. Refer to Figure 21-7. Which of the following statements is correct?
a. If a consumer moves from bundle C to bundle A, her loss of cake cannot be compensated
for by an increase in donuts.
b. Bundle E is preferred to all other points identified in the figure.
c. Since more is preferred to less, bundle C may be preferred to bundle E in some
circumstances for this consumer.
d. Even though bundle E has more of both goods than bundle B, we could draw a different
set of indifference curves in which bundle B is preferred to bundle E.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
17. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
18. Refer to Figure 21-7. Which of the following statements is not correct?
a. Bundles on Indifference Curve 3 are preferred to bundles on Indifference Curve 1.
b. The consumer is indifferent between bundles A and E because they contain the same
number of donuts.
c. The consumer is indifference between bundles B and C.
d. The consumer prefers bundle C to bundle D.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Chapter 21/The Theory of Consumer Choice  1877
19. Refer to Figure 21-7. Which of the following comparisons is correct regarding the marginal rate of
substitution (MRS) of donuts for cake?
a. The MRS is greater between bundles A and B than between bundles B and C.
b. The MRS is greater between bundles B and C than between bundles A and B.
c. The MRS is the same between bundles A and B and bundles B and C because all three
bundles lie on the same indifference curve.
d. The MRS is greater between bundles E and B than between bundles B and D.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
20. Each of the following are characteristics of an indifference curve map except
a. moving northeast to a new indifference curve will increase utility.
b. points on the same indifference curve yield equal utility.
c. the axes represent levels of utility for each of the goods.
d. indifference curves cannot cross.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Indifference curves
21. Bundle A contains 10 units of good X and 5 units of good Y. Bundle B contains 5 units of good X
and 10 units of good Y. Bundle C contains 10 units of good X and 10 units of good Y. The
consumer is indifferent between bundle A and bundle B. Assume that the consumer’s preferences
satisfy the four properties of indifference curves. Which of the following statements is correct?
a. The consumer must prefer bundle C to either bundle A or B.
b. Bundle A and bundle B lie on the same indifference curve.
c. The consumer must prefer bundle B to bundle C.
d. Both a) and b) are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1878  Chapter 21/The Theory of Consumer Choice
22. A consumer has preferences over two goods: books and movies. The two bundles shown in the table
below lie on the same indifference curve for the consumer.
Bundle
A
B
Books
2
3
Movies
3
2
Which of the following bundles could not lie on the same indifference curve with A and B and satisfy the
four properties of indifference curves?
a. 1 movie and 5 books
b. 3 movies and 3 books
c. 5 movies and 1 book
d. 1 movie and 7 books
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
23. A consumer has preferences over two goods: books and movies. The three bundles shown in the
table below lie on the same indifference curve for the consumer.
Bundle
A
B
C
Books
2
4
3
Movies
4
2
3
Which of the following properties of indifference curves would this consumer's preferences violate?
a. Indifference curves are downward sloping.
b. Indifference curves do not cross.
c. Indifference curves are bowed inward.
d. These bundles do not violate any of the properties of indifference curves.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
24. Laura consumes only beer and chips. Her indifference curves are all bowed inward. Consider the
bundles (2,6), (4,4), and (6,2). If Laura is indifferent between (2,6) and (6,2), then Laura must
a. prefer (4,4) to (6,2).
b. be indifferent between (4,4) and (6,2).
c. prefer (6,2) to (4,4).
d. prefer (2,6) to (4,4).
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Chapter 21/The Theory of Consumer Choice  1879
25. Which of the following is a property of indifference curves?
a. Indifference curves usually intersect.
b. Indifference curves have positive slopes.
c. Indifference curves are downward sloping and always linear.
d. Indifference curves are bowed in toward the origin.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
26. All of the following are properties of indifference curves except
a. higher indifference curves are preferred to lower ones.
b. indifference curves are downward sloping.
c. indifference curves do not cross.
d. indifference curves are bowed outward.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
27. Which of the following is a property of a typical indifference curve?
a. upward sloping
b. bowed away from the origin
c. do not intersect
d. lower ones are preferred to higher ones
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
28. Which of the following is a property of a typical indifference curve?
a. upward sloping
b. bowed away from the origin
c. they often intersect
d. higher ones are preferred to lower ones
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
29. Which of the following is not a property of a typical indifference curve?
a. downward sloping
b. bowed away from the origin
c. do not intersect
d. higher ones are preferred to lower ones
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1880  Chapter 21/The Theory of Consumer Choice
30. Higher indifference curves are preferred to lower ones as long as the
a. marginal rate of substitution is diminishing.
b. products in the bundle are “bads” not “goods.”
c. products in the bundle are “goods” not “bads.”
d. budget constraint does not shift.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
31. Janet prefers cashews to almonds. She prefers macadamia nuts to peanuts, but she is indifferent
between almonds and peanuts. Which of the following statements can we say for sure?
a. Janet prefers cashews to macadamia nuts.
b. Janet prefers peanuts to cashews.
c. Janet prefers macadamia nuts to almonds.
d. Janet prefers almonds to macadamia nuts.
ANS: C
DIF: 2
LOC: Utility and consumer choice
REF: 21-2
TOP: Transitivity
NAT: Analytic
MSC: Applicative
32. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
REF: 21-2
TOP: Transitivity
NAT: Analytic
MSC: Analytical
33. Which of the following is not correct?
a. Indifference curves are downward sloping.
b. Indifference curves that are closer to the origin are preferred to indifference curves that are
further from the origin.
c. Indifference curves are bowed in toward the origin.
d. Indifference curves do not cross.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
34. When indifference curves are bowed in toward the origin,
a. consumers are less inclined to trade away goods they are lacking.
b. consumers' willingness to trade away goods they have in abundance diminishes.
c. an increase in income will shift the indifference curve away from the origin.
d. a decrease in income will shift the indifference curve away from the origin.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
Chapter 21/The Theory of Consumer Choice  1881
35. Indifference curves tend to be bowed inward because of diminishing
a. marginal rates of substitution.
b. demand for the good as prices rise.
c. income.
d. Both a and b are correct.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
36. The slope of an indifference curve is
a. the rate of change of consumer's preferences.
b. the marginal rate of preference.
c. the marginal rate of substitution.
d. always equal to the slope of the budget constraint.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
37. The rate at which a consumer is willing to exchange one good for another, and maintain a constant
level of satisfaction, is called the
a. relative expenditure ratio.
b. value of marginal product.
c. marginal rate of substitution.
d. relative price ratio.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
38. The marginal rate of substitution is
a. the slope of a budget constraint.
b. always constant.
c. the slope of an indifference curve.
d. the point at which the budget constraint and the indifference curve are tangent.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
39. The rate at which a consumer is willing to trade one good for another to maintain the same level of
satisfaction is affected by the
a. prices of the products.
b. amount of each good the consumer is currently consuming.
c. consumer’s income.
d. marginal value product.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
1882  Chapter 21/The Theory of Consumer Choice
40. Bob enjoys fishing and hunting. He divides his leisure hours between the two outdoor activities.
Suppose we were to draw Bob’s indifference curves for the two activities, placing fishing on the
horizontal axis and hunting on the vertical axis. If Bob’s indifference curves are bowed inward, then
a. the rate at which he is willing to give up an hour of hunting for an hour of fishing changes
depending on how many hours of each activity he has done. For example, if Bob has
already fished a lot in one week, he will be more willing to give up an hour of fishing for
an hour of hunting than if he has only fished a little that week.
b. the rate at which he is willing to give up an hour of hunting for an hour of fishing is
constant because he must derive the same enjoyment out of each activity.
c. the rate at which he is willing to give up an hour of hunting for an hour of fishing changes
depending on how many hours of each activity he has done. For example, if Bob has
already fished a lot in one week, he will be less willing to give up an hour of fishing for an
hour of hunting than if he has only fished a little that week.
d. Bob’s indifference curves will not cross. When indifference curves are bowed outward,
the indifference curves must cross.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
41. The marginal rate of substitution
a. varies along an indifference curve if the curve is bowed inward.
b. is constant along an indifference curve if the curve is a straight line.
c. is greater when a consumer has more of two goods rather than less of two goods.
d. Both a and b are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
42. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
Chapter 21/The Theory of Consumer Choice  1883
43. Assume that a consumer’s indifference curve is bowed inward and satisfies the other three properties
of indifference curves. As the consumer moves from left to right along the horizontal axis, the
consumer’s marginal rate of substitution
a. increases.
b. decreases.
c. remains constant.
d. increases, then decreases.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
44. Assume that a consumer’s indifference curve is bowed outward but satisfies the other three
properties of indifference curves. As the consumer moves from left to right along the horizontal
axis, the consumer’s marginal rate of substitution
a. increases.
b. decreases.
c. remains constant.
d. increases, then decreases.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
45. Assume that a consumer’s indifference curve is a downward-sloping straight line. As the consumer
moves from left to right along the horizontal axis, the consumer’s marginal rate of substitution
a. increases.
b. decreases.
c. remains constant.
d. increases, then decreases.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
46. If an indifference curve is bowed in toward the origin, the marginal rate of substitution is
a. not likely to reflect the relative value of goods.
b. likely to be constant for all bundles along the indifference curve.
c. likely to be identical to the price ratio for each bundle along the indifference curve.
d. different for each bundle along the indifference curve.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
1884  Chapter 21/The Theory of Consumer Choice
47. As long as a consumer remains on the same indifference curve,
a. she is indifferent to all points that lie on any other indifference curve.
b. her preferences will not affect the marginal rate of substitution.
c. she is unable to decide which bundle of goods to choose.
d. she is indifferent among the points on that curve.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
48. The bowed shape of the indifference curve reflects the consumer's
a. unwillingness to give up a good that he already has in large quantity.
b. unwillingness to purchase a good that he already has in large quantity.
c. greater willingness to give up a good that he already has in large quantity.
d. greater willingness to purchase a good that he already has in large quantity.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Indifference curves
49. The following diagram shows one indifference curve representing the preferences for goods X and
Y for one consumer.
10
y
9
8
7
6
A
5
4
3
B
2
1
1
2
3
4
5
6
7
8
9
x
What is the marginal rate of substitution between points A and B?
a. 2/5
b. 1
c. 5/2
d. 3
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
Chapter 21/The Theory of Consumer Choice  1885
50. The following diagram shows one indifference curve representing the preferences for goods X and
Y for one consumer.
10
y
9
8
7
A
6
5
B
4
3
2
1
1
2
3
4
5
6
7
8
x
9
What is the marginal rate of substitution between points A and B?
a. 1/2
b. 4/3
c. 2
d. 3
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Marginal rate of substitution
Figure 21-8
y
(a)
y
x
(b)
y
(c)
x
x
51. Refer to Figure 21-8. Which of the graphs shown may represent indifference curves?
a. graph a
b. graph b
c. graph c
d. All of the above are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
1886  Chapter 21/The Theory of Consumer Choice
52. Refer to Figure 21-8. Which of the graphs shown represent indifference curves for perfect
complements?
a. graph a
b. graph b
c. graph c
d. All of the above are correct.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect complements
53. Refer to Figure 21-8. Which of the graphs shown represent indifference curves for perfect
substitutes?
a. graph a
b. graph b
c. graph c
d. All of the above are correct.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
54. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes | Perfect complements
55. Refer to Figure 21-8. Which of the following statements is correct?
a. The indifference curves represented in graph a are perfect substitutes.
b. The indifference curves represented in graph b are perfect complements.
c. The indifference curves represented in graph c are neither perfect substitutes not perfect
complements.
d. All of the above are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes | Perfect complements
Chapter 21/The Theory of Consumer Choice  1887
56. When two goods are perfect substitutes, the marginal rate of substitution
a. is constant along the indifference curve.
b. decreases as the scarcity of one good increases.
c. increases as the scarcity of one good increases.
d. changes to reflect the consumer’s changing preferences for the goods.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
57. Consider the indifference curve map for nickels and quarters. Assume nickels are on the vertical axis
and quarters are on the horizontal axis. The indifference curves for nickels and quarters are
a. straight lines with slope of -1/5
b. straight lines with a slope of -1.
c. straight lines with a slope of -5.
d. L shaped.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
58. A consumer’s preferences for $1 bills and $20 bills can be represented by indifference curves that
are
a. bowed out from the origin
b. bowed in toward the origin
c. straight lines
d. right angles
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
59. When two goods are perfect substitutes, the indifference curve is
a. a horizontal straight line.
b. bowed outward.
c. a downward-sloping straight line.
d. a right angle.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
60. When two goods are perfect substitutes, the
a. indifference curve is a horizontal straight line.
b. marginal rate of substitution is constant.
c. indifference curve is a vertical straight line.
d. Both a and b are correct.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
1888  Chapter 21/The Theory of Consumer Choice
61. When two goods are perfect substitutes, the
a. indifference curve is a downward-sloping straight line.
b. marginal rate of substitution is constant.
c. indifference curve is a vertical straight line.
d. Both a and b are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
Chapter 21/The Theory of Consumer Choice  1889
62. Suppose Caroline is indifferent between tea and coffee as long as she consumes an equivalent
amount of caffeine. Suppose that coffee has twice as much caffeine as tea. Which graph would
illustrate a representative indifference curve?
Tea
a.
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 Coffee
b.
Tea
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 Coffee
c.
Tea
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 Coffee
d.
Tea
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 Coffee
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect substitutes
1890  Chapter 21/The Theory of Consumer Choice
63. A set of indifference curves that are only slightly bowed inward represent goods that could best be
described as
a. perfect substitutes.
b. perfect complements.
c. very close substitutes.
d. very close complements.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Indifference curves
64. When two goods are perfect complements, the indifference curve is
a. a horizontal straight line.
b. bowed outward.
c. a downward-sloping straight line.
d. a right angle.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect complements
65. A consumer’s preferences for right shoes and left shoes can be represented by indifference curves
that are
a. bowed out from the origin
b. bowed in toward the origin
c. straight lines
d. right angles
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect complements
66. When two goods are perfect complements, the indifference curves will
a. have a positive slope.
b. be right angles.
c. have a constant marginal rate of substitution.
d. Both b and c are correct.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect complements
67. "Left" gloves and "right" gloves provide a good example of
a. perfect substitutes.
b. perfect complements.
c. negatively sloped indifference curves.
d. positively sloped indifference curves.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Perfect complements
Chapter 21/The Theory of Consumer Choice  1891
68. When two goods are perfect complements, the indifference curves are
a. positively sloped.
b. negatively sloped.
c. straight lines.
d. right angles.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-2
NAT: Analytic
TOP: Perfect complements
69. Suppose Rich always uses two packets of sugar with his coffee. Rich's indifference curves for sugar
and coffee are
a. bowed inward.
b. bowed outward.
c. straight lines.
d. L shaped.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-2
NAT: Analytic
TOP: Perfect complements
70. A consumer has preferences over two goods: pizza and beer. The four bundles shown in the table
below lie on the same indifference curve for the consumer.
Bundle
A
B
C
D
Pizza
2
2
9
6
Beer
8
2
2
2
Which of the following statements regarding these bundles is correct?
a. The goods are perfect substitutes for this consumer.
b. The goods are perfect complements for this consumer.
c. These bundles violate the property that indifference curves are bowed inward.
d. These bundles violate the property that indifference curves do not cross.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-2
NAT: Analytic
TOP: Perfect complements
1892  Chapter 21/The Theory of Consumer Choice
Sec 03 - The Theory of Consumer Choice - Optimization: What the Consumer Chooses
MULTIPLE CHOICE
1.
The goal of the consumer is to
a. maximize utility.
b. be on the highest indifference curve.
c. maximize satisfaction.
d. All of the above are the goals of the consumer.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
2.
The goal of the consumer is to
a. maximize utility.
b. minimize expenses.
c. spend more income in the current time period than in the future.
d. All of the above are the goals of the consumer.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
3.
REF: 21-3
NAT: Analytic
TOP: Optimization
When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget
constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice
point shows that it occurs
a. along the highest attainable indifference curve.
b. where the indifference curve is tangent to the budget constraint.
c. where the marginal utility per dollar spent is the same for both X and Y.
d. All of the above are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
4.
REF: 21-3
NAT: Analytic
TOP: Optimization
REF: 21-3
NAT: Analytic
TOP: Optimization
When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget
constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice
point shows that it occurs
a. along the highest indifference curve.
b. along the lowest budget constraint.
c. where the indifference curve is tangent to the budget constraint.
d. All of the above are correct.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1893
5.
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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
6.
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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
7.
(i)
(ii)
(iii)
(iv)
REF: 21-3
NAT: Analytic
TOP: Optimization
Carlos goes to the movies every Sunday afternoon. The movie theater offers 4 combinations of
popcorn 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 “valuecombo” 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
8.
REF: 21-3
NAT: Analytic
TOP: Optimization
REF: 21-3
NAT: Analytic
TOP: Optimization
Which of the following equations corresponds to an optimal choice point?
MRS = PX/PY
MUX/MUY = PX/PY
MUX/PX = MUY/PY
MUX/PY = MUY/PX
a.
b.
c.
d.
(i) only
(i), (ii), and (iii) only
(ii) and (iv) only
(i), (ii), (iii), and (iv)
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
1894  Chapter 21/The Theory of Consumer Choice
9.
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
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
10. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
11. 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.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
12. The relationship between the marginal utility that Wendy gets from eating hamburgers and the
number of hamburgers she eats per month is as follows:
Hamburgers
Marginal Utility
1
20
2
16
3
12
4
8
5
4
6
0
Wendy receives 3 units of utility from the last dollar spent on each of the other goods she consumes. If
hamburgers cost $4 each, how many hamburgers will she consume per month if she maximizes utility?
a. 2
b. 3
c. 4
d. 5
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1895
13. Wilbur consumes two goods, bacon and eggs. He has maximized his utility given his income. Eggs
costs $2 per dozen, and he consumes them to the point where the marginal utility he receives is 6.
Bacon cost $4 per serving, and the relationship between the marginal utility that Wilbur gets from
eating bacon and the number of servings he eats per month is as follows:
Servings of Bacon
Marginal Utility
1
20
2
16
3
12
4
8
5
4
6
0
How many servings of bacon does Wilbur buy each month?
a. 1
b. 2
c. 3
d. 4
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
14. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
15. If the consumer's income and all prices simultaneously double, then the optimum consumption
bundle will
a. shift outward relative to the old optimum.
b. move leftward along the old budget constraint.
c. not change.
d. shift inward relative to the old optimum.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
16. If the consumer's income and all prices simultaneously decrease by one-half, then the optimum
consumption will
a. shift outward relative to the old optimum.
b. move leftward along the old budget constraint.
c. shift inward relative to the old optimum.
d. not change.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
1896  Chapter 21/The Theory of Consumer Choice
17. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
18. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
19. When the indifference curve is tangent to the budget constraint,
a. a consumer cannot be made better off without increasing her income.
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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
20. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
21. At the consumer's optimum
a. the budget constraint will have a slope of MUx/Px.
b. the slope of the indifference curve is equal to the slope of the budget constraint.
c. the indifference curve will intersect the budget constraint at the midpoint of the budget
constraint.
d. Both b and c are correct.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1897
Figure 21-9
22. Refer to Figure 21-9. Given the budget constraint depicted in the graph, the consumer will choose
bundle
a. B.
b. C.
c. D.
d. E.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
23. Refer to Figure 21-9. It would be possible for the consumer to reach I2 if
a. the price of Y decreases.
b. the price of X decreases.
c. income increases.
d. All of the above would be correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
24. Refer to Figure 21-9. Bundle B represents a point where
a. MRSxy > Py/Px.
b. MRSxy = Px/Py.
c. MRSxy < Px/Py.
d. MRSxy > Px/Py.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
1898  Chapter 21/The Theory of Consumer Choice
25. Refer to Figure 21-9. Bundle C represents a point where
a. MRSxy > Py/Px.
b. MRSxy = Px/Py.
c. MRSxy < Px/Py.
d. MRSxy > Px/Py.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
26. Refer to Figure 21-9. Bundle D represents a point where
a. MRSxy > Py/Px.
b. MRSxy = Px/Py.
c. MRSxy < Px/Py.
d. MRSxy < Py/Px.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
27. The consumer's optimum is where
a. MUx/MUy = Py/Px.
b. MUx/Py = MUy/Px.
c. Px/MUx = Py/MUy.
d. MUx/MUy = Px/Py.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1899
Figure 21-10
28. 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 a consumption
bundle where the marginal rate of substitution is
a. 2.
b. 2/3.
c. 1/2.
d. 1/3.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Marginal rate of substitution
29. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
1900  Chapter 21/The Theory of Consumer Choice
30. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $50. The
price of Skittles is $5 and the price of M&M's is $5. This consumer will choose a consumption
bundle where the marginal rate of substitution is
a. 10.
b. 5.
c. 1.
d. 1/5.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Marginal rate of substitution
31. 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 $2. This consumer will choose to optimize by
purchasing bundle
a. A.
b. B.
c. C.
d. D.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
32. Refer to Figure 21-10. Assume that the consumer depicted in the figure faces prices and income
such that she optimizes at point B. According to the graph, which of the following would cause the
consumer to move to point A?
a. a decrease in the price of Skittles
b. a decrease in the price of M&M's
c. an increase in the price of Skittles
d. an increase in the price of M&M's
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1901
Figure 21-11
33. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40, the
price of a bag of marshmallows is $2, and the price of a bag of chocolate chips is $2. The optimizing
consumer will choose to purchase which bundle of marshmallows and chocolate chips?
a. A
b. B
c. C
d. D
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
34. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $100 and
currently optimizes at bundle A. When the price of marshmallows decreases to $5, which bundle
will the optimizing consumer choose?
a. A
b. B
c. C
d. D
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
1902  Chapter 21/The Theory of Consumer Choice
35. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40. If
the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer
would choose to purchase
a. 9 marshmallows and 6 chocolate chips.
b. 10 marshmallows and 10 chocolate chips.
c. 5 marshmallows and 5 chocolate chips.
d. 3 marshmallows and 9 chocolate chips.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
36. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $80. If
the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer
would choose to purchase
a. 9 marshmallows and 6 chocolate chips.
b. 10 marshmallows and 10 chocolate chips.
c. 5 marshmallows and 5 chocolate chips.
d. 3 marshmallows and 9 chocolate chips.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
37. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40.
Based on the information available in the graph, which of the following price-quantity combinations
would be on her demand curve for marshmallows if the price of chocolate chips is $4?
a. P=$2, Q=3
b. P=$2, Q=9
c. P=$4, Q=3
d. P=$4, Q=9
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
38. Refer to Figure 21-11. Assume that the consumer depicted the figure has an income of $50. Based
on the information available in the graph, which of the following price-quantity combinations would
be on her demand curve for marshmallows if the price of chocolate chips is $2.50?
a. P=$2.50, Q=6
b. P=$2.50, Q=10
c. P=$5.00, Q=3
d. P=$5.00, Q=5
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1903
39. 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
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
40. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's
preferences (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 greater than the slope of the budget constraint. We can conclude that the consumer
a. is currently maximizing satisfaction.
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.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
41. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's
preferences (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.
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.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
42. Suppose a consumer has preferences over two goods, X and Y, which are perfect substitutes. In
particular, 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. 12 units of X and 6 units of Y
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
1904  Chapter 21/The Theory of Consumer Choice
43. Ken consumes two goods, Sprite and potato chips. Sprite costs $2 per can, and he consumes it to the
point where the marginal utility he receives from his last Sprite is 4. Potato chips cost $3 per bag,
and the relationship between the marginal utility he gets from eating a bag of potato chips and the
number of bags he eats per month is as follows:
Bags of potato chips
Marginal utility
1
30
2
20
3
12
4
6
5
2
6
0
If Ken is maximizing his utility, how many bags of potato chips does he buy each month?
a. 2
b. 3
c. 4
d. 5
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
44. Ken consumes two goods, Sprite and potato chips. Sprite costs $1 per can, and he consumes it to the
point where the marginal utility he receives from his last Sprite is 3. Potato chips cost $2 per bag,
and the relationship between the marginal utility he gets from eating a bag of potato chips and the
number of bags he eats per month is as follows:
Bags of potato chips
Marginal utility
1
30
2
20
3
12
4
6
5
2
6
0
If Ken is maximizing his utility, how many bags of potato chips does he buy each month?
a. 2
b. 3
c. 4
d. 5
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
Chapter 21/The Theory of Consumer Choice  1905
45. Ken consumes two goods, Sprite and potato chips. Sprite costs $1 per can, and he consumes it to the
point where the marginal utility he receives from his last Sprite is 3. Potato chips cost $2 per bag,
and the relationship between the marginal utility he gets from eating a bag of potato chips and the
number of bags he eats per month is as follows:
Bags of potato chips
Marginal utility
1
30
2
20
3
12
4
6
5
2
6
0
If Ken is maximizing his utility, how much does he spend on potato chips each month?
a. $2
b. $6
c. $8
d. $12
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
46. Jeffrey spends all of his income on warm-up suits and running shoes, and the price of a pair of shoes
is four times the price of a warm-up suit. In order to maximize total utility, Jeffrey should
a. buy four times as many warm-up suits as pairs of running shoes.
b. buy four times as many pairs of running shoes as warm-up suits.
c. buy both items until the marginal utility of a pair of running shoes is four times the
marginal utility of a warm-up suit.
d. buy both items until the marginal utility of a warm-up suit is four times the marginal
utility of a pair of running shoes.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
47. Amy spends all of her income on jewelry and jeans, and the price of a pair of jeans is three times the
price of jewelry. In order to maximize total utility, Amy should
a. buy three times as much jewelry as pairs of jeans.
b. buy three times as many pairs of jeans as jewelry.
c. buy both items until the marginal utility of jewelry 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 jewelry.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
1906  Chapter 21/The Theory of Consumer Choice
48. Jane 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
49. 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.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Optimization
50. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Optimization
51. When economists describe preferences, they often use the concept of
a. markets.
b. income.
c. utility.
d. prices.
ANS: C
DIF: 1
LOC: Utility and consumer choice
REF: 21-3
TOP: Utility
NAT: Analytic
MSC: Interpretive
52. 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.
ANS: B
DIF: 1
LOC: Utility and consumer choice
REF: 21-3
TOP: Utility
NAT: Analytic
MSC: Definitional
Chapter 21/The Theory of Consumer Choice  1907
53. A rational consumer maximizes her
a. preferences.
b. marginal rate of substitution.
c. utility.
d. budget constraint.
ANS: C
DIF: 1
LOC: Utility and consumer choice
REF: 21-3
TOP: Utility
NAT: Analytic
MSC: Interpretive
54. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Marginal utility
55. 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 since 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.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Marginal utility
56. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Marginal rate of substitution
57. 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.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Budget constraint
1908  Chapter 21/The Theory of Consumer Choice
58. 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.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Budget constraint
59. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Budget constraint
60. If we observe that Rae’s budget constraint has shifted 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Budget constraint
61. If we observe that Rae’s budget constraint has shifted inward, then we know for certain that
a. her income must have decreased.
b. she will be indifferent between goods X and Y.
c. the price of one or both of the goods must have increased.
d. her utility will decrease.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Budget constraint
Chapter 21/The Theory of Consumer Choice  1909
62. If we observe that a consumer’s budget constraint has shifted outward, we can assume that the
consumer 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Normal goods | Inferior goods
63. If we observe that a consumer’s budget constraint has shifted inward, we can assume that the
consumer 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Normal goods | Inferior goods
64. When Sam has an income of $1,000, he consumes 30 units of good A and 50 units of good B. After
Sam’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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Normal goods | Inferior goods
65. Jaime is currently consuming some of good X and some of good Y. If good Y is a normal good for
this consumer, a rise in her income will definitely cause her to
a. increase her consumption of X.
b. increase her consumption of Y.
c. decrease her consumption of X.
d. decrease her consumption of Y.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Normal goods
1910  Chapter 21/The Theory of Consumer Choice
66. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Normal goods
67. 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 definitely consume more of both goods since his real income has risen.
b. the substitution effect will be positive for good X and negative for good Y.
c. may consume more or less of good X and he will definitely consume less of good Y.
d. the substitution effect will offset the income effect for good X.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Normal goods
68. A normal good is one in which
a. the average consumer chooses to consume at a normal level.
b. the average consumer chooses to consume the good over other similar goods.
c. an increase in income increases consumption of the good.
d. an increase in income decreases consumption of the good.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Normal goods
69. 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.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Inferior goods
70. Which of the following is most likely an inferior good?
a. an antique car
b. gasoline
c. a bus ticket
d. an airline ticket
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Inferior goods
Chapter 21/The Theory of Consumer Choice  1911
71. 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.
ANS: A
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Inferior goods
72. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Inferior goods
73. Suppose the price of good X falls. As a result, the quantity demanded for good X increases for a
particular 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.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Inferior goods
74. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Optimization
1912  Chapter 21/The Theory of Consumer Choice
75. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
76. 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
a. the substitution effect and income effect both cause an increase in the consumption of X.
b. the substitution effect 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. the substitution effect 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. the substitution effect and income effect both cause a decrease in the consumption of X.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Normal goods | Income effect | Substitution effect
77. A consumer consumes two normal goods, pretzels and Mt. Dew. The price of pretzels rises. The
income effect, by itself, suggests that the consumer will consume
a. more pretzels and more Mt. Dews.
b. fewer pretzels and fewer Mt. Dews.
c. more pretzels and fewer Mt. Dews.
d. fewer pretzels and more Mt. Dews.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Income effect
78. 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.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Inferior goods | Substitution effect | Income effect
Chapter 21/The Theory of Consumer Choice  1913
79. 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
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Income effect | Substitution effect
80. 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect | Substitution effect
81. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect | Substitution effect
82. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect | Substitution effect
1914  Chapter 21/The Theory of Consumer Choice
83. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect | Substitution effect
84. A decrease in the price of DVD players leads consumers to buy more DVD players. From this
information we can conclude that DVD players
a. are normal goods.
b. are inferior goods.
c. are luxury goods.
d. None of the above is correct.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Income effect
85. 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.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
86. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
Chapter 21/The Theory of Consumer Choice  1915
87. Assume that a college student purchases only coffee and Snickers bars. If coffee is an inferior good
and Snickers bars are a normal good, then the income effect associated with an increase in the price
of a Snickers bar will result in
a. a decrease in the consumption of Snickers bars and a decrease in the consumption of
coffee.
b. a decrease in the consumption of Snickers bars and an increase in the consumption of
coffee.
c. an increase in the consumption of Snickers bars and an increase in the consumption of
coffee.
d. an increase in the consumption of Snickers bars and a decrease in the consumption of
coffee.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
88. Assume that a college student purchases only coffee and Snickers bars. If both coffee and Snickers
bars are normal goods, then the income effect associated with a decrease in the price of a Snickers
bar will result in
a. a decrease in the consumption of Snickers bars and an increase in the consumption of
coffee.
b. a decrease in the consumption of Snickers bars and a decrease in the consumption of
coffee.
c. an increase in the consumption of Snickers bars and a decrease in the consumption of
coffee.
d. an increase in the consumption of Snickers bars and an increase in the consumption of
coffee.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
89. A consumer consumes two normal goods, pretzels and Mt. Dew. The price of Mt. Dew rises. The
substitution effect, by itself, suggests that the consumer will consume
a. more pretzels and more Mt. Dews.
b. fewer pretzels and fewer Mt. Dews.
c. more pretzels and fewer Mt. Dews.
d. fewer pretzels and more Mt. Dews.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Substitution effect
1916  Chapter 21/The Theory of Consumer Choice
90. 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.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
91. Assume that a college student purchases only coffee and Snickers bars. The substitution effect
associated with a decrease in the price of a Snickers bar will result in
a. an increase in the consumption of coffee only.
b. a decrease in the consumption of coffee only.
c. an increase in the consumption of Snickers bars and a decrease in the consumption of
coffee.
d. a decrease in the consumption of Snickers bars and an increase in the consumption of
coffee.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
92. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the
substitution effect by itself will
a. cause the consumer to buy more of good Y and less of good X.
b. cause the consumer to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that the consumer buys.
d. result in an upward-sloping demand for good Y if the substitution effect is positive.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
93. Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect causes a
a. shift to a lower indifference curve and the consumer buys less Pepsi.
b. shift to a higher indifference curve and the consumer buys more Pepsi.
c. movement along the indifference curve and the consumer buys more Pepsi.
d. movement along the indifference curve and the consumer buys less Pepsi.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
Chapter 21/The Theory of Consumer Choice  1917
94. Beer and pretzels are normal goods. When the price of beer falls, the substitution effect causes
a. the consumer to feel richer, so the consumer buys more pretzels.
b. the consumer to feel richer, so the consumer buys less pretzels.
c. pretzels to be relatively more expensive, so the consumer buys less pretzels.
d. pretzels to be relatively less expensive, so the consumer buys more pretzels.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
95. 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.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
96. Which effect of a price change moves the consumer along the same indifference curve to a point
with a new marginal rate of substitution?
a. the budget effect
b. the preference effect
c. the substitution effect
d. the income effect
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Substitution effect
97. The substitution effect of a price change is depicted by a
a. movement along the budget constraint holding satisfaction constant.
b. shift in the budget constraint at the old prices.
c. movement along the consumer’s new indifference curve at the new prices.
d. movement along the original indifference curve to the point where the marginal rate of
substitution equals the price ratio for the new set of prices.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
1918  Chapter 21/The Theory of Consumer Choice
98. Which of the following descriptions best depicts the substitution effect?
a. the change in consumption resulting from a change in the consumer's income, holding the
prices of the goods constant
b. the change in consumption resulting from a change in the consumer's income, holding the
consumer's level of satisfaction constant
c. the change in consumption resulting from a change in the price of one good, holding the
consumer's level of satisfaction constant
d. the change in consumption resulting from a change in the price of one good, allowing the
consumer's level of satisfaction to change
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Substitution effect
99. If the price of hamburgers increases, the substitution effect works to
a. decrease the quantity of hamburgers supplied.
b. increase the number of hamburger buns demanded.
c. decrease the quantity of hamburgers demanded.
d. increase the number of hamburger buns supplied.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Substitution effect
100. The change in consumption that results when a price change moves the consumer along a given
indifference curve to a point with a new marginal rate of substitution is called the
a. income effect.
b. substitution effect.
c. Giffen good effect.
d. inferior good effect.
ANS: B
DIF: 1
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-3
NAT: Analytic
TOP: Substitution effect
101. Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently,
Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles, the
substitution effect will
a. be two times the income effect.
b. be half the income effect.
c. be zero.
d. always increase the number of trips to the movie theater Emily makes.
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Perfect substitutes | Substitution effect
Chapter 21/The Theory of Consumer Choice  1919
Figure 21-12
102. Refer to Figure 21-12. 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.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Substitution effect
103. Refer to Figure 21-12. If the consumer was 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.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Income effect
104. Refer to Figure 21-12. 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.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-3
NAT: Analytic
TOP: Income effect
1920  Chapter 21/The Theory of Consumer Choice
105. Suppose the price of good X falls and the consumption of good X increases. From this we can infer
that X is a(n)
a. normal good.
b. inferior good.
c. Giffen good.
d. None of the above is correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Demand curve
106. A consumer consumes two normal goods, pretzels and Mt. Dew. When the price of Mt. Dew is
$0.50 per can, the consumer purchases 40 cans. When the price rises to $0.65 per can, the consumer
purchases 30 cans. We can use the information provided by the consumer’s optimum choices to
derive the
a. demand curve.
b. supply curve.
c. production possibilities frontier.
d. labor-leisure tradeoff.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Demand curve
107. When we derive the demand curve for a good, we should remember that the
a. income effect must be greater than the substitution effect.
b. substitution effect must be greater than the income effect.
c. substitution effect must be in the same direction as the income effect.
d. income effect and the substitution effect may work in the same or in opposite directions.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Demand curve
108. Given a consumer's indifference map, the demand curve for a good can
a. be derived by moving a consumer's budget constraint as her income falls.
b. be derived by moving a consumer's budget constraint as her income rises.
c. be derived by moving a consumer's budget constraint as the market price of one good
changes.
d. not be derived from consumer theory.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Demand curve
Chapter 21/The Theory of Consumer Choice  1921
109. An individual's demand curve for a good is derived by varying the
a. income level and observing the resulting total utility derived from both goods.
b. price of one good and observing the resulting quantities of the other good.
c. budget line to the left and calculating the loss in total utility.
d. price of one good and observing the resulting quantities demanded of that good.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-3
NAT: Analytic
TOP: Demand curve
110. Consumer theory provides the foundation for understanding demand curves because
a. each point on a demand curve represents an optimal choice point.
b. consumers purchase more inferior goods than normal goods.
c. increases in income cause the budget constraint to rotate inward along one axis, which
changes the consumer’s purchases.
d. increases in income cause the budget constraint to rotate outward along one axis, which
changes the consumer’s purchases.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-3
NAT: Analytic
TOP: Demand curve
Sec 04 - The Theory of Consumer Choice - Three Applications
MULTIPLE CHOICE
1.
We can use the theory of consumer choice to analyze
a. why most demand curves slope downward.
b. the tradeoff between work and leisure
c. how interest rates affect household saving.
d. All of the above are correct.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
2.
REF: 21-4
NAT: Analytic
TOP: Consumer choice
If a good is a Giffen good, then
a. the supply curve slopes down.
b. the demand curve slopes up.
c. the demand curve is horizontal.
d. there is no optimal level of consumption for the consumer.
ANS: B
DIF: 1
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
1922  Chapter 21/The Theory of Consumer Choice
3.
A Giffen good is a good for which an increase in the price
a. decreases the quantity supplied.
b. increases the quantity supplied.
c. decreases the quantity demanded.
d. increases the quantity demanded.
ANS: D
DIF: 1
LOC: Utility and consumer choice
4.
NAT: Analytic
MSC: Definitional
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
A Giffen good is a good for which
a. a decrease in the price decreases the quantity demanded.
b. the income effect outweighs the substitution effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
7.
REF: 21-4
TOP: Giffen good
A Giffen good is a good for which
a. a decrease in the price decreases the quantity demanded.
b. the substitution effect outweighs the income effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
ANS: A
DIF: 2
LOC: Utility and consumer choice
6.
NAT: Analytic
MSC: Definitional
A Giffen good is a good for which
a. an increase in the price raises the quantity demanded.
b. the income effect outweighs the substitution effect.
c. an increase in the price decreases the quantity demanded.
d. Both a) and b) are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
5.
REF: 21-4
TOP: Giffen good
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
When a consumer experiences a price increase for an inferior good, it is possible that the income
effect is
a. greater than the substitution effect, and the demand curve will be downward sloping.
b. greater than the substitution effect, and the demand curve will be upward sloping.
c. less than the substitution effect, and the demand curve will be upward sloping.
d. less than the substitution effect but that the substitution effect is positive, and the demand
curve will be upward sloping.
ANS: B
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
Chapter 21/The Theory of Consumer Choice  1923
8.
When a consumer experiences a price decrease for an inferior good, it is possible that the income
effect is
a. less than the substitution effect, and the demand curve will be downward sloping.
b. greater than the substitution effect, and the demand curve will be upward sloping.
c. less than the substitution effect, and the demand curve will be upward sloping.
d. both a and b are correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
9.
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
Consider the indifference curve map and budget constraint for two goods, beef and potatoes.
Suppose the good on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical
axis and is a normal good. When the price of potatoes increases,
a. the substitution effect causes an increase in the consumption of potatoes, and the income
effect causes a decrease in the consumption of potatoes. The substitution effect is less than
the income effect.
b. the substitution effect causes a decrease in the consumption of potatoes, and the income
effect causes an increase in the consumption of potatoes. The substitution effect is greater
than the income effect.
c. the substitution effect causes an increase in the consumption of potatoes, and the income
effect causes a decrease in the consumption of potatoes. The substitution effect is greater
than the income effect.
d. the substitution effect causes a decrease in the consumption of potatoes, and the income
effect causes an increase in the consumption of potatoes. The substitution effect is less
than the income effect.
ANS: D
DIF: 3
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
10. A Giffen good is one in which the quantity demanded rises as the price rises because the income
effect
a. reinforces the substitution effect.
b. reinforces and is greater than the substitution effect.
c. counteracts but is smaller than the substitution effect.
d. counteracts and is greater than the substitution effect.
ANS: D
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Interpretive
11. Violations of the law of demand are assumed to occur
a. regularly.
b. only when goods are Giffen goods.
c. only when the substitution effect dominates the income effect.
d. All of the above are correct.
ANS: B
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Interpretive
1924  Chapter 21/The Theory of Consumer Choice
12. Giffen goods have positively-sloped demand curves because they are
a. inferior goods with no substitution effect.
b. normal goods with no substitution effect.
c. inferior goods for which the substitution effect outweighs the income effect.
d. inferior goods for which the income effect outweighs the substitution effect.
ANS: D
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
13. Giffen goods have positively-sloped demand curves because they are
a. normal goods for which the income effect outweighs the substitution effect.
b. normal goods for which the substitution effect outweighs the income effect.
c. inferior goods for which the income effect outweighs the substitution effect.
d. inferior goods for which the substitution effect outweighs the income effect.
ANS: C
DIF: 2
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Definitional
14. Which of the following statements is not correct?
a. Reducing taxes on interest income might encourage people to save more.
b. Reducing taxes on interest income might reduce saving.
c. A price increase will create income and substitution effects that will both always work to
reduce consumption of the good.
d. Utility is maximized when the marginal rate of substitution between any two goods equals
the relative prices of the two goods.
ANS: C
DIF: 3
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
15. Which of the following is an example of a Giffen good?
a. potatoes during the Irish potato famine
b. rice in the Chinese province of Hunan
c. fish in Japan
d. Both a and b are correct.
ANS: D
DIF: 3
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
16. Which of the following is an example of a Giffen good?
a. fish in Japan
b. rice in the Chinese province of Hunan
c. pork in India
d. Both a and b are correct.
ANS: B
DIF: 3
LOC: Utility and consumer choice
REF: 21-4
TOP: Giffen good
NAT: Analytic
MSC: Analytical
Chapter 21/The Theory of Consumer Choice  1925
17. The two “goods” used when economists analyze labor supply are
a. work and leisure.
b. work and consumption.
c. saving and consumption.
d. leisure and consumption.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
18. Economic theory predicts that an increase in wages
a. will cause a wage earner to work more.
b. will cause a wage earner to work less.
c. will cause a wage earner to be more productive.
d. might cause a wage earner to work more or work less.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
19. The substitution effect of a wage decrease in the work-leisure model results in the worker choosing
to
a. work less than before.
b. work more than before.
c. possibly work more or less than before.
d. work more with a higher level of consumption.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
20. In the work-leisure model, suppose consumption and leisure are both normal goods. The income
effect of a wage increase results in the worker choosing to
a. work less than before.
b. work more than before.
c. possibly work more or less than before.
d. work more than before with a higher level of consumption.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
1926  Chapter 21/The Theory of Consumer Choice
Scenario 21-2
Fred has recently graduated from college with a degree in journalism and economics. He has decided to
pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically
awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends
writing, he can earn $75. Fred is such a good writer that he can get paid for as many hours of writing as
he chooses to work.
21. Refer to Scenario 21-2. If Fred decides to spend 80 hours a week playing volleyball on the beach,
and the rest of his time writing, how much income will he have available to spend on consumption
goods?
a. $900
b. $1,500
c. $2,400
d. $3,000
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
22. Refer to Scenario 21-2. If Fred’s wage increases to $90 per hour of writing, which of the following
points would fall on his budget constraint?
a. 75 hours of leisure, $2,775 of consumption
b. 80 hours of leisure, $2,400 of consumption
c. 85 hours of leisure, $2,430 of consumption
d. 90 hours of leisure, $1,650 of consumption
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
23. The labor supply curve may have a backward bending portion because at higher wages the
a. income effect is smaller than the substitution effect.
b. income effect is larger than the substitution effect.
c. income effect is negative.
d. Any of the above could result in a backward-bending supply curve.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Labor supply
24. When leisure is a normal good, the income effect from a decrease in wages is evident in
a. a desire to consume more leisure.
b. a desire to consume less leisure.
c. an upward-sloping labor supply curve.
d. a shift in labor demand.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
Chapter 21/The Theory of Consumer Choice  1927
25. The substitution effect from an increase in wages is evident in a
a. decrease in labor demand.
b. desire to consume less leisure.
c. desire to consume more leisure.
d. backward-bending labor supply curve.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
26. If leisure were an inferior good, then labor supply curves
a. would all be negatively sloped.
b. would all be positively sloped.
c. would all be vertical.
d. could still be positively or negatively sloped.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
27. A consumer has preferences over consumption and leisure, both of which are normal goods. When
the wage decreases, the consumer chooses to consume less leisure. For this consumer the labor
supply curve will
a. slope upward.
b. slope backward.
c. be horizontal.
d. be vertical.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
28. Suppose that Stacy’s hourly wage increases, and she decides to work fewer hours. For her, the
substitution effect of the wage change is
a. only partially offset by the income effect.
b. more than offset by the income effect.
c. exactly offset by the income effect.
d. We do not have enough information with which to answer the question..
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
29. In the upward-sloping portion of the individual labor supply curve, the substitution effect is
a. greater than the income effect.
b. less than the income effect.
c. equal to the income effect.
d. exactly offset by the income effect.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
1928  Chapter 21/The Theory of Consumer Choice
30. Tom experiences an increase in his wages. The hours of labor that he supplies to the market would
increase if
a. the income effect is larger than the substitution effect.
b. the substitution effect is larger than the income effect.
c. neither the income effect nor the substitution effect apply to Tom’s labor-leisure tradeoff.
d. Tom views both labor and leisure as inferior goods.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
31. Harry experiences an increase in his wages. The hours of labor that he supplies to the market would
decrease if
a. the income effect is larger than the substitution effect.
b. the substitution effect is larger than the income effect.
c. neither the income effect nor the substitution effect apply to Harry’s labor-leisure tradeoff.
d. Harry views both labor and leisure as inferior goods.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
32. Which of the following statements is not correct?
a. If Jane gets a higher wage and works more, the substitution effect is greater than the
income effect for her.
b. If Spencer experiences a wage decrease and works less, the income effect is greater than
the substitution effect for him.
c. If the substitution effect is greater than the income effect, the labor-supply curve is upward
sloping.
d. If the income effect is greater than the substitution effect, the labor-supply curve is
downward sloping.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Labor supply
33. Economic studies of lottery winners and people who have inherited large amounts of money show
that
a. the income effect likely outweighs the substitution effect for most people.
b. the substitution effect likely outweighs the income effect for most people.
c. most people view leisure as an inferior good.
d. most people’s labor supply is unaffected by changes in wealth.
ANS: A
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Labor supply
Chapter 21/The Theory of Consumer Choice  1929
34. Jake faces tradeoffs between consuming in the current period when he is young and consuming in a
future period when he is old. Jake experiences a decrease in the current interest rate he earns on his
savings. Jake will save
a. less in the current period if the substitution effect is greater than the income effect.
b. less in the current period if the income effect is greater than the substitution effect.
c. more in the current period if the substitution effect is greater than the income effect.
d. more in the current period, regardless of the sizes of the income and substitution effects.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
35. When considering household saving, the relative price between consuming when young and
consuming when old is the
a. consumption rate.
b. interest rate that individuals can earn on their private savings.
c. prime rate.
d. federal funds rate.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
36. If the interest rate rises, an individual could choose to
a. increase consumption when young.
b. increase consumption when old.
c. decrease consumption when young.
d. Any of the above could be correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
37. The substitution effect of an increase in the interest rate will result in an increase in
a. consumption when young and increase in savings when young.
b. consumption when old and an increase in savings when young.
c. consumption when young and an increase in savings when old.
d. savings when old and an increase in consumption when old.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
1930  Chapter 21/The Theory of Consumer Choice
38. Assume that consumption when young and consumption when old are both normal goods. The
income effect of an increase in the interest rate will result in
a. an increase in saving when young.
b. an increase in saving when old.
c. a decrease in saving when young.
d. a decrease in saving when old.
ANS: C
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
Scenario 21-3
Diane knows that she will ultimately face retirement. Assume that Diane will experience two periods in
her life, one in which she works and earns income, and one in which she is retired and earns no income.
Diane can earn $250,000 during her working period and nothing in her retirement period. She must both
save and consume in her work period with an interest rate of 10 percent on savings.
39. Refer to Scenario 21-3. Assume that Diane decides to consume $100,000 in the work period. How
much money will she have available for consumption in her retirement period?
a. $100,000
b. $110,000
c. $150,000
d. $165,000
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
40. Refer to Scenario 21-3. If the interest rate on savings increases, it is possible that
a. Diane will decrease her savings in the work period.
b. Diane will increase her savings in the work period.
c. Diane will not change her consumption in the work period.
d. All of the above are possible.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
41. Refer to Scenario 21-3. If the interest rate on savings increases,
a. Diane will decrease her savings in the work period if the income effect is greater than the
substitution effect for her.
b. Diane will increase her savings in the work period if the income effect is greater than the
substitution effect for her.
c. Diane will increase her savings in the work period if the substitution effect is greater than
the income effect for her.
d. Both a and c are correct.
ANS: D
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
Chapter 21/The Theory of Consumer Choice  1931
42. Jonathan is planning ahead for retirement and must decide how much to spend and how much to
save while he's working in order to have money to spend when he retires. When the income effect
dominates the substitution effect, an increase in the interest rate on savings will cause him to
a. decrease his savings rate.
b. increase his savings rate.
c. continue saving at the current rate.
d. Any of the above could be correct.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
43. Jonathan is planning ahead for retirement and must decide how much to spend and how much to
save while he's working in order to have money to spend when he retires. When the substitution
effect dominates the income effect, an increase in the interest rate on savings will cause him to
a. increase his savings rate.
b. decrease his savings rate.
c. continue saving at the same rate.
d. Any of the above are possible.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
44. John is planning ahead for retirement in a two-period world. When John is young he will earn $1
million, and when John is old and retired he will be given $50,000 from Social Security. If the
interest rate between the two time periods is 7 percent, what is the slope of John's budget constraint
when considering the consumption possibilities between the two periods if consumption when
young is graphed on the horizontal axis and consumption when old is graphed on the vertical axis?
a. -0.89
b. -1.05
c. -1.07
d. -1.12
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
1932  Chapter 21/The Theory of Consumer Choice
45. Suppose Olivia is planning for retirement in a two-period world. In the first period Olivia is young
and earns $1 million, and in the second period Olivia is old and retired and earns nothing. The
interest rate is initially 10 percent, but then it falls to 7 percent. Which of the following statements is
correct?
a. After the interest rate falls, the substitution effect will induce Olivia to consume more
when she is young.
b. After the interest rate falls, the substitution effect will induce Olivia to consume less when
she is young.
c. After the interest rate falls, the income effect will induce Olivia to consume more when
she is young.
d. A change in interest rates affects the substitution effect but not the income effect.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
46. One of the primary research results in tax policy analysis over the last 20 years is that
a. an increase in interest rates will increase saving.
b. an increase in interest rates will decrease saving.
c. lowering taxes on interest income will increase saving.
d. None of the above is correct.
ANS: D
DIF: 2
LOC: Utility and consumer choice
MSC: Interpretive
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
47. The opportunity cost of current household consumption is the
a. wage rate.
b. market interest rate.
c. price of the goods consumed.
d. explicit cost of consumption.
ANS: B
DIF: 2
LOC: Utility and consumer choice
MSC: Definitional
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
48. Suppose that you have $100 today and expect to receive $100 one year from today. Your money
market account pays an annual interest rate of 25%, and you may borrow money at that interest rate.
If you save all your money, how much money will you have one year from today?
a. $100
b. $125
c. $200
d. $225
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
Chapter 21/The Theory of Consumer Choice  1933
49. Suppose that you have $100 today and expect to receive $100 one year from today. Your money
market account pays an annual interest rate of 25%, and you may borrow money at that interest rate.
Suppose that you borrow $60 and spend $160 today. After you repay your loan one year from today,
how much money will you have available for consumption one year from today?
a. $0
b. $25
c. $50
d. $75
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
50. Suppose that you have $100 today and expect to receive $100 one year from today. Your money
market account pays an annual interest rate of 25%, and you may borrow money at that interest rate.
Consider the budget constraint between “spending today” on the horizontal axis and “spending a
year from today” on the vertical axis. What is the slope of this budget constraint?
a. -0.75
b. -1.00
c. -1.25
d. -2.25
ANS: C
DIF: 3
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
51. Consider the budget constraint between “spending today” on the horizontal axis and “spending a
year from today” on the vertical axis. Suppose that you have $100 today and expect to receive $100
one year from today. Your money market account pays an annual interest rate of 25%, and you may
borrow money at that interest rate. Suppose now that the interest rate increases to 40%. What
happens to the slope of your budget constraint relative to when the interest rate was $25%? The
slope
a. becomes steeper.
b. becomes flatter.
c. doesn't change because the budget constraint shifts in parallel to the original budget
constraint.
d. doesn't change because the budget constraint shifts out parallel to the original budget
constraint.
ANS: A
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
1934  Chapter 21/The Theory of Consumer Choice
52. Consider the budget constraint between “spending today” on the horizontal axis and “spending a
year from today” on the vertical axis. Suppose that you have $100 today and expect to receive $100
one year from today. Your money market account pays an annual interest rate of 25%, and you may
borrow money at that interest rate. Suppose now that the interest rate decreases to 10%. What
happens to the slope of your budget constraint relative to when the interest rate was $25%? The
slope
a. becomes steeper.
b. becomes flatter.
c. doesn't change because the budget constraint shifts in parallel to the original budget
constraint.
d. doesn't change because the budget constraint shifts out parallel to the original budget
constraint.
ANS: B
DIF: 3
LOC: Utility and consumer choice
MSC: Analytical
REF: 21-4
NAT: Analytic
TOP: Consumption-saving decision
Sec 05 - The Theory of Consumer Choice - Conclusion
MULTIPLE CHOICE
1.
The theory of consumer choice explains how people choose between
a. textbooks and energy drinks.
b. labor and leisure.
c. spending now and spending in the future.
d. All of the above are correct.
ANS: D
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
2.
REF: 21-5
NAT: Analytic
TOP: Consumer choice
The theory of consumer choice provides a(n)
a. literal account of how people make decisions.
b. unrealistic picture of how people make decisions.
c. model that is consistent with how people make decisions.
d. in-depth model that is based more in psychology than in economics.
ANS: C
DIF: 1
LOC: Utility and consumer choice
MSC: Applicative
REF: 21-5
NAT: Analytic
TOP: Consumer choice
Chapter 22
Frontiers of Microeconomics
TRUE/FALSE
1.
The science of economics is a finished jewel, perfect and unchanging.
ANS: F
NAT: Analytic
TOP: economics
2.
DIF: 1
REF: 22-0
LOC: The Study of economics, and definitions in economics
MSC: Definitional
In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.
ANS: F
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional
3.
Informational asymmetry may apply to a hidden action or hidden characteristic where the informed
party may be reluctant to reveal relevant information.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative
4.
An example of asymmetric information is when a seller of a house knows more than the buyer about
the house’s condition.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative
5.
Economists have found that asymmetric information is not very prevalent.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive
6.
An example of an information asymmetry is when a worker knows more than his employer about his
work effort.
ANS: T
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
7.
The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and
Adelphia are an example of moral hazard.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Applicative
1935
1936  Chapter 22/Frontiers of Microeconomics
8.
The problem of moral hazard is a problem of hidden action.
ANS: T
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
9.
The problem that arises when one person performs a task on behalf of another person is called the
lemons problem.
ANS: F
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
10. One of the things that employers can do to lessen the moral hazard problem involving their
employees is to pay them in advance for their work.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
11. In the employer-worker relationship, the employer is regarded as the "principal" and the worker is
regarded as the "agent."
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Definitional
12. The moral hazard problem and the desire of firms to lessen that problem serve as a plausible
explanation for a firm paying above-equilibrium wages to its workers.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
13. The classic example of adverse selection is the market for used cars.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
14. The two major problems caused by asymmetric information are the moral-hazard problem and the
principal-agent problem.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1937
15. Signaling is an action taken by an uninformed party to induce an informed party to reveal
information.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Screening | Signaling
MSC: Definitional
16. An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey
his love for her.
ANS: T
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative
17. Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers
A to C.
ANS: T
NAT: Analytic
TOP: Transitivity
DIF: 1
REF: 22-2
LOC: Understanding and applying economic models
MSC: Definitional
18. The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not always
obey the property of transitivity.
ANS: F
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
19. The Condorcet paradox implies that the order in which items are voted on under majority rule is
unimportant.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
20. Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
21. The Condorcet paradox demonstrates that the order in which people vote on choices may influence
the final outcome.
ANS: T
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
1938  Chapter 22/Frontiers of Microeconomics
22. Borda count is a voting method often used in polls that rank sports teams.
ANS: T
NAT: Analytic
TOP: Borda count
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Interpretive
23. Arrow’s impossibility theorem demonstrates the impossibility of the median voter theorem.
ANS: F
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
24. Arrow's impossibility theorem shows that it is impossible to find a better voting system than
pairwise majority voting.
ANS: F
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
25. Majority rule will produce the outcome most preferred by the median voter.
ANS: T
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Definitional
26. According to the median voter theorem, majority rule will produce an outcome that is inconsistent
with transitive preferences.
ANS: F
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
27. An implication of the median voter theorem is that Republicans and Democrats will try to align their
views with those of the median voter.
ANS: T
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
28. Political leaders are always aiming for an optimal combination of efficiency and equality.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1939
29. In the field of study called political economy, economists make use of insights from the field of
psychology.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Definitional
30. A "satisficer" is a person whose decisionmaking is the same as that predicted by mainstream
economic models.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Definitional
31. Researchers have found that the systematic mistakes that people make in their decisionmaking
include a lack of confidence in their own abilities.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
32. Most economic models incorporate the assumption of rational behavior on the part of economic
actors.
ANS: T
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
33. Studies of human decision-making have found that people do not give enough weight to a small
number of vivid observations.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Behavioral economics
MSC: Interpretive
34. Studies of human decision making have found that people are reluctant to change their minds.
ANS: T
DIF: 2
REF: 22-3
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Behavioral economics
MSC: Interpretive
35. Evidence from experiments in which real people play the ultimatum game supports the idea that
people care about fairness as well as about maximization of their personal wealth.
ANS: T
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
1940  Chapter 22/Frontiers of Microeconomics
36. Based on studies of human decision making, many people care more about the fairness of a game
than about their personal winnings.
ANS: T
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
37. The tendency of many people to procrastinate supports the view that people are consistent over time.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
SHORT ANSWER
1.
Explain what is meant by "asymmetric information." Identify and explain the two basic types of
problems that arise when there is asymmetric information.
ANS:
Asymmetric information is present when there is a difference in access to relevant information. Examples
include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an
insured person and his insurer. The two basic types of problems are (1) moral hazard, which is a problem
of hidden actions and ordinarily involves a principal and an agent, and (2) adverse selection, which is a
problem of hidden characteristics or "lemons."
PTS: 1
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Definitional
2.
NAT: Analytic
TOP: Asymmetric information
Explain how the presence of asymmetric information in car insurance markets may lead people who
are good drivers or even average drivers to choose not to buy car insurance unless the law requires
it.
ANS:
Drivers (buyers and potential buyers of car insurance) know more about their driving habits than do the
insurance companies (sellers of car insurance). The price of car insurance is likely to reflect the
information asymmetry in that it incorporates more of a risk component than is really necessary to insure
good and average drivers. Consequently, good and average drivers are priced out of the market and they
rationally choose not to buy the insurance unless they are required to do so.
PTS: 1
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
NAT: Analytic
TOP: Asymmetric information
Chapter 22/Frontiers of Microeconomics  1941
3.
Explain the Condorcet paradox. To which type of voting system does it apply?
ANS:
The Condorcet paradox applies directly to pairwise majority voting. It shows that even if individual
voters' preferences exhibit transitivity, that property does not follow through to outcomes of pairwise
majority voting. Consequently, the order in which choices are put up, in pairwise fashion, affects the final
outcome. Using choices A, B, and C, it may be the case, for example, that under pairwise voting voters
choose A over B and B over C, but then they may choose C over A. This result can obtain even when
individual voters' preferences are transitive; hence, the paradox.
PTS: 1
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Definitional
4.
NAT: Analytic
TOP: Condorcet paradox
Assume there are two major political parties: the Conservatives and the Liberals. What does the
median voter theorem imply about the nature of the platforms (that is, policy stances) of the
Conservatives and Liberals?
ANS:
The median voter theorem implies that political parties will set their platforms so as to appeal to the
median ("middle of the distribution") voter. Therefore, rather than adopting extreme views, the
Conservatives and Liberals will both adopt platforms that are toward the "middle of the road."
PTS: 1
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Interpretive
5.
NAT: Analytic
TOP: Median voter theorem
How have insights from the field of psychology influenced the thinking of economists in recent
years?
ANS:
Insights from psychology have led some economists to question the assumption of rationality that
pervades mainstream economic models. Evidence from experimental economics does raise serious
questions about the rationality assumption. For example, most people may be concerned with the fairness
of outcomes, in addition to the impact of those outcomes on their own well-being. An open question is: If
the rationality assumption does not really reflect the behavior of real economic actors, then how important
is it that we model other motivations, such as the desire for fairness, the tendency to procrastinate,
overconfidence, etc.?
PTS: 1
DIF: 2
REF: 22-3
LOC: Understanding and applying economic models
MSC: Interpretive
NAT: Analytic
TOP: Behavioral economics
1942  Chapter 22/Frontiers of Microeconomics
Sec00
MULTIPLE CHOICE
1.
Which of the following is not correct?
a. Economics is a study of the choices that people make and the resulting interactions they
have with one another.
b. Economists are not interested in finding new areas to study and new phenomena to
explain.
c. Economists are trying to expand their understanding of human behavior and society.
d. The economics of asymmetric information, political economy, and behavioral economics
are all topics at the frontier of microeconomics.
ANS: B
DIF: 2
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive
2.
Asymmetric information, political economy, and behavioral economics
a. are topics at the frontier of microeconomics.
b. are topics that economists no longer research.
c. are being studied as economists try to expand their understanding of human behavior and
society.
d. both a and c are correct.
ANS: D
DIF: 1
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive
3.
When markets fail, which of the following is true?
a. Government intervention can always improve outcomes.
b. Government intervention can potentially improve outcomes.
c. Government intervention can never improve outcomes.
d. Markets do not fail.
ANS: B
DIF: 1
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1943
Sec01-Asymmetric Information
MULTIPLE CHOICE
1.
In economics, a difference in access to relevant knowledge is called a(n)
a. relevancy frontier.
b. knowledge gap.
c. information asymmetry.
d. information equilibrium.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional
2.
Informational asymmetry is a difference in
a. efficiency.
b. equality.
c. relevant knowledge.
d. signaling.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Definitional
3.
Information asymmetry refers to
a. the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise
undesirable behavior.
b. the tendency for the mix of unobserved attributes to become undesirable from the
standpoint of an uninformed party.
c. an action taken by an informed party to reveal private information to an uninformed party.
d. a difference in access to relevant knowledge.
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional
4.
The 2001 Nobel prize in economics was awarded to George Akerlof, Michael Spence, and Joseph
Stiglitz for their work on
a. asymmetric information.
b. political economy.
c. behavioral economics.
d. growth theory.
ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive
1944  Chapter 22/Frontiers of Microeconomics
5.
Which of the following relationships involves asymmetric information?
a. An employee knows more than his employer knows about his work effort.
b. A borrower knows more than the lender about his ability to repay the loan.
c. The seller of a 30-year-old house knows more than the buyer about the condition of the
house.
d. All of the above are correct.
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Analytical
6.
Which of the following relationships involves asymmetric information?
a. Patients can look up information regarding certain prescription drugs giving them the
same information as their doctors.
b. Consumer Reports allows customers of DVD players to know as much about the quality of
various players as the store salesperson.
c. Car Fax allows car buyers to obtain used-vehicle histories providing them with the same
information as the dealership salesperson.
d. The batter in a baseball game must guess whether the pitcher is going to throw a fastball,
curveball, or change-up.
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
7.
A driver knows more than his auto insurer about how cautiously he drives. This is an example of
a. a hidden action.
b. a hidden characteristic.
c. adverse selection.
d. the Condorcet Paradox.
ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
8.
Frequently it is the case that: (1) A worker knows more than his employer about how much effort he
puts into his job, and (2) the seller of a used car knows more than the buyer about the car's
condition.
a. Neither (1) nor (2) serves as an example of asymmetric information.
b. Both (1) and (2) serve as examples of asymmetric information.
c. Neither (1) nor (2) serves as an example of a hidden action.
d. Both (1) and (2) serve as examples of hidden action.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Analytical
Chapter 22/Frontiers of Microeconomics  1945
9.
Asymmetric information
a. is not an area of current research in economics.
b. can take the form of a hidden action or a hidden characteristic.
c. explains Arrow’s impossibility theorem.
d. is uncommon in corporate management.
ANS: B
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Analytical
10. Government action in cases of asymmetric information may not be an ideal solution because
a. the private market can sometimes deal with information asymmetries on its own.
b. the government tends to have more information than private parties.
c. both (a) and (b).
d. None of the above is correct.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
11. Which of the following is an example of informational asymmetry?
a. A seller of a house knows more about its true condition than does a potential buyer.
b. A salesperson knows more about her efforts than does her manager.
c. A child knows more about how much time he spent playing video games while he was
alone in his bedroom than do his parents.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative
12. When asymmetric information affects a relationship between two parties, it is always the case that
a. neither party is well informed.
b. one party is better informed than the other party.
c. both parties are equally well informed.
d. the government is better informed than either of the two parties.
ANS: B
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive
1946  Chapter 22/Frontiers of Microeconomics
13. Which of the following statements is correct?
a. Hidden actions and hidden characteristics are both associated with the moral-hazard
problem.
b. Hidden actions and hidden characteristics are both associated with the adverse-selection
problem.
c. Hidden actions are associated with the moral-hazard problem, whereas hidden
characteristics are associated with the adverse-selection problem.
d. Hidden actions are associated with the adverse-selection problem, whereas hidden
characteristics are associated with the moral-hazard problem.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional
14. The problem that arises when one person performs a task on behalf of another person is called
a. the hidden characteristics problem.
b. the lemons problem.
c. moral hazard.
d. adverse selection.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Moral hazard
MSC: Definitional
15. Which of the following is not an example of a principal-agent relationship?
a. a soccer player and her coach
b. a man and his neighbor
c. an construction worker and his foreman
d. a driver and her insurance agent
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Principals; agents
MSC: Applicative
16. Which of the following is not an example of a principal trying to solve the moral-hazard problem?
a. the principal conducts an extensive interview of the agent
b. the principal installs hidden cameras to monitor the agent’s behavior
c. the principal pays the agent efficiency wages
d. the principal pays the agent a year-end bonus
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Applicative
Chapter 22/Frontiers of Microeconomics  1947
17. Which of the following would be an example of a principal trying to deal with a moral hazard
problem?
a. The parents of an infant secretly place video cameras in their house before the baby-sitter
arrives.
b. An insurance company checks police records to determine if its policyholders have
received traffic citations.
c. An employer examines his workers' output on a daily basis.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
18. Which of the following offers an explanation as to why the principal-agent problem exists for a
firm?
a. The firm cares less about profit and more about cost when there are many competitors in
the market.
b. The firm offers an employee-incentive program in which employees share in the firm’s
profits.
c. The firm operates in a market with many competitors forcing the firm to pay its employees
more to keep them from switching to another firm.
d. The firm operates to maximize profit while the employees attempt to work as little as
possible to earn their paychecks.
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
19. Which of the following practices would indicate that an employer is trying to overcome a moralhazard problem with his employees?
a. The employer pays his workers wages that are unusually high for the industry and region.
b. The employer has voluntarily removed video cameras from the factory floor.
c. The employer has discontinued the practice of giving his employees' year-end bonuses.
d. Both A and B are correct.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
20. Which of the following is not an example of moral hazard?
a. a person with car insurance drives recklessly
b. a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20
minutes per day
c. a thief steals a car
d. All of the above are examples of moral hazard.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Applicative
1948  Chapter 22/Frontiers of Microeconomics
21. In the case of a moral-hazard problem, which of the following is not a way for the principal to
encourage the agent to act more responsibly?
a. the principal could better monitor the agent
b. the principal could pay the agent above-equilibrium wages
c. the principal could delay payment to the agent
d. the principal could pay the agent below-equilibrium wages
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
22. Which of the following is not an example of a moral hazard problem?
a. A manager stays late one evening so that her employee can leave early to attend his child’s
music recital.
b. A small child takes an extra cookie from the cookie jar when he thinks his mom isn’t
watching him closely.
c. An employee plays solitaire on her computer at 4:30 p.m. on a Friday when her boss has
left for the day.
d. A customer whose new eyeglasses come with a “60-day insurance policy in case of
breakage” leaves her glasses out where her new puppy can chew on them.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Applicative
23. Moral hazard occurs when
a. an employer closely monitors an employee.
b. two people consider a trade with each other and one person has relevant information about
some aspect of the product's quality that the other person lacks.
c. an employee lacks an incentive to promote the best interests of the employer, and the
employer cannot observe the actions of the employee.
d. an employee closely monitors the actions of her employer.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Definitional
24. The temptation of imperfectly-monitored workers to shirk their responsibilities is
a. an example of the moral hazard problem.
b. an example of the adverse selection problem.
c. an example of screening.
d. an example of signaling.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1949
25. Employers can try to overcome the moral-hazard problem involving their employees by
a. paying their employees more often.
b. paying their employees below-equilibrium wages since the employees will likely shirk
some of their responsibilities.
c. better monitoring their employees' work efforts.
d. requiring their employees to take a pre-employment work effort test.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
26. Ed was recently hired as a salesman for a national consulting firm. His job involves spending a
significant portion of his time out of the office visiting prospects and attending conferences. His
firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his
income in quarterly bonuses based on how much he sells.
a. The consulting firm is trying to prevent adverse selection with its compensation strategy.
b. Ed has an incentive to go golfing with his buddies rather than conducting sales meetings.
c. The consulting firm is responding to the moral hazard problem with its compensation
strategy.
d. Ed should quit this job and take a job where he gets paid an equilibrium wage more
frequently.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
27. Ed was recently hired as a salesman for a national consulting firm. His job responsibilities involve
spending a significant portion of his time out of the office visiting prospects and attending
conferences. Which of the following is strategy the consulting firm may employ to discourage Ed
from shirking his responsibilities?
a. Tell Ed that the shareholders want to earn a large profit this year.
b. Pay Ed commissions on what he sells after the work has been completed.
c. Allow Ed to set his own schedule and work from home frequently.
d. Pay Ed a lower wage than he would earn in a similar job at another firm.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
28. Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to
a. efficiency-wage theories.
b. equilibrium wage theories.
c. screening theories.
d. signaling theories.
ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Definitional
1950  Chapter 22/Frontiers of Microeconomics
29. An efficiency wage
a. gives an employee an incentive to shirk his duties.
b. is lower than the equilibrium wage for that position and region.
c. is higher than the equilibrium wage for that position and region.
d. both a and b are correct.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Definitional
30. Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its
workers?
a. It increases the probability that a worker who shirks will be caught.
b. It discourages workers from shirking out of fear of losing their high-paying job.
c. The Condorcet Paradox suggests that paying high wages will result in greater effort by
employees.
d. By paying a high wage, employers solve this adverse selection problem and motivate the
employees to work harder.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
31. Jason buys automobile insurance from No Wreck Insurance Company. If Jason avoids having an
accident for three years, No Wreck will reduce the price he has to pay for his insurance.
Nevertheless, he routinely drives fast and with reckless abandon.
a. This is an adverse selection problem which should be corrected with government
intervention.
b. Jason is a principal and No Wreck is an agent in this principal-agent problem.
c. This is a moral hazard problem.
d. There is no way for No Wreck to determine whether Jason is a cautious or risky driver.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
32. Robert borrowed some money from Granite Bank, telling the loan officer that he intended to use the
money to make repairs to his home. After getting the loan, Robert and his girlfriend immediately
took the money and headed to the nearest riverboat casino for a weekend of gambling and
entertainment.
a. This is an example of adverse selection since banks have difficulty selecting their
customers.
b. This is a typical example of the Condorcet Paradox.
c. From the given information, Robert is the principal and his girlfriend is the agent.
d. From the given information, Granite Bank is the principal and Robert is the agent.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1951
33. When a night watchman only performs two walk-throughs per night when he is being paid to
perform five walk-throughs per night, it is an example of
a. both moral hazard and adverse selection.
b. neither moral hazard nor adverse selection.
c. moral hazard, but not adverse selection.
d. adverse selection, but not moral hazard.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard | adverse selection
MSC: Applicative
34. A radio story reported a study on the makes and models of cars that were observed going through
intersections in the Washington, D.C. area without stopping at the stop signs. According to the story,
Volvos were heavily overrepresented; the fraction of cars running stop signs that were Volvos was
much greater than the fraction of Volvos in the total population of cars in the D.C. area. This is
initially surprising because Volvo has built a reputation as an especially safe car that appeals to
sensible, safety-conscious drivers. How is this observation best explained?
a. Volvo drivers are not willing to take risks that they would take in another, less safe car.
Driving a Volvo leads to a propensity to run stop signs.
b. Volvo drivers are not willing to take risks that they would take in another, less safe car.
Driving a Volvo reduces the propensity to run stop signs.
c. Volvo drivers are willing to take risks that they would not take in another, less safe car.
Driving a Volvo reduces the propensity to run stop signs.
d. Volvo drivers are willing to take risks that they would not take in another, less safe car.
Driving a Volvo leads to a propensity to run stop signs.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Analytical
35. Suppose you are covered under health insurance or belong to a Health Maintenance Organization
(HMO), and you are insured against all or most of the costs of visits to the doctor. As a result you
are likely to make greater use of medical services of all kinds. This tendency of people with
insurance to change their behavior in a way that leads to more claims against the insurance company
is called
a. adverse selection.
b. moral hazard.
c. screening
d. signaling.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
1952  Chapter 22/Frontiers of Microeconomics
36. Bill owns a small business in Milwaukee. He travels frequently, meeting with important customers,
and attending conferences. Bill hired Nicole to work in the Milwaukee office as the day-to-day
general manager of the business.
a. This is a moral hazard problem since Nicole may not work as hard as Bill would like when
she is not monitored.
b. Bill choosing to hire Nicole is an example of adverse selection since it is possible that
Nicole will not work as hard as Bill expects.
c. Bill will most likely pay Nicole a lower salary than normal since Bill will not be there to
monitor Nicole’s work effort, and since Nicole will not likely work hard knowing Bill
cannot monitor her effort.
d. The Condorcet Paradox implies that Nicole will not work as hard as Bill would like even
though he will likely pay her an above equilibrium wage.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
37. When new professors are hired, their job performance is monitored closely. If they meet their
institution's standards, they will eventually receive tenure. After receiving tenure, professors' job
performance is less closely monitored, and they become difficult to fire. Tenure thus creates
a. adverse selection.
b. a Condorcet paradox.
c. a screening problem.
d. moral hazard.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
38. Carlos, who knows nothing about construction, paid Joe to remodel a room in his house. Two years
later, one wall in the remodeled room crumbled because Joe used poor-quality materials. This
illustrates which economic problem?
a. Adverse selection
b. Screening
c. Moral hazard
d. Signaling
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
39. John goes to work 8 hours per day, but while he is at work he spends most of his time visiting
internet sites that provide him with information on his favorite hobby. This is an example of
a. the Condorcet Paradox.
b. signaling.
c. moral hazard.
d. screening.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1953
40. In corporations, a principal-agent problem can arise when
a. the shareholders are the principal and the managers are the agent.
b. the board of directors is the principal and the managers are the agent.
c. the shareholders are the principal and the board of directors is the agent.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
41. In corporations, which of the following are agents but not principals?
a. shareholders
b. the board of directors
c. managers
d. workers
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
42. In corporations, which of the following are principals but not agents?
a. shareholders
b. the board of directors
c. managers
d. workers
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
43. Insurance companies charge annual premiums to collect revenue, which they then use to pay
customers who file claims for damages they incur. As a result of the moral hazard problem (1) what
is the percentage of policy holders making claims, and (2) what is the average premium charged
when compared to a world with no moral hazard problem?
a. The percentage of policy holders making claims is higher; average annual premiums are
lower.
b. The percentage of policy holders making claims is lower; average annual premiums are
lower.
c. The percentage of policy holders making claims is higher; average annual premiums are
higher.
d. The percentage of policy holders making claims is lower; average annual premiums are
higher.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Analytical
1954  Chapter 22/Frontiers of Microeconomics
44. Insurance companies charge annual premiums to collect revenue, which they then use to pay
customers who file claims for damages they incur. Because of the moral hazard problem insurance
companies separate customers into groups. Group 1: customers who file few claims & Group 2:
customers that file a lot of claims. After creating these groups, what happens to the average annual
premium within a group?
a. Group 1: average annual premium increases
Group 2: average annual premium increases
b. Group 1: average annual premium decreases
Group 2: average annual premium increases
c. Group 1: average annual premium increases
Group 2: average annual premium decreases
d. Group 1: average annual premium decreases
Group 2: average annual premium decreases
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Analytical
45. Which of the following is a characteristic of a corporation but not of a small family-owned business?
a. The firm buys inputs in markets for the factors of production.
b. The firm sells output in markets for goods and services.
c. The firm is guided in its decisions by the objective of profit maximization.
d. The firm faces a principal-agent problem created by the separation of ownership and
control.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
46. Adverse selection is
a. the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise
undesirable behavior.
b. an action taken by an uninformed party to induce an informed party to reveal information.
c. the failure of majority voting to produce transitive preferences for society.
d. the tendency for the mix of unobserved attributes to become undesirable from the
standpoint of an uninformed party.
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Definitional
Chapter 22/Frontiers of Microeconomics  1955
47. When homeowners sell a house, part of the paperwork they complete is a statement of disclosure on
which the homeowners are supposed to reveal everything that they know is wrong with the house.
The purpose of the statement of disclosure is to try to solve the
a. principal-agent problem.
b. moral-hazard problem.
c. adverse-selection problem.
d. signaling problem.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Applicative
48. Steve is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his
house to cover up water stains from his leaking roof so that potential buyers will be unaware of this
problem. This is an example of
a. moral hazard.
b. screening.
c. adverse selection.
d. the principal-agent problem.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
49. Adverse selection may lead to
a. owners of used cars choosing to keep them rather than sell them at the low price that
skeptical buyers are willing to pay.
b. wages being stuck above the level that balances supply and demand, resulting in
unemployment.
c. buyers with low risk choosing to remain uninsured because the policies they are offered
fail to reflect their true characteristics.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
50. Which of the following is not correct?
a. An example of adverse selection is man who tries to sell his used car without disclosing
that it needs a new transmission.
b. The “invisible hand” of a free market will always fix the problems of adverse selection
and moral hazard.
c. An employer may try to prevent a moral hazard problem by paying her workers an
efficiency wage.
d. One interpretation of gift giving is that it reflects asymmetric information and signaling.
ANS: B
DIF: 3
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection, moral hazard, signaling
MSC: Interpretive
1956  Chapter 22/Frontiers of Microeconomics
51. The buyer runs a risk of being sold a good of low quality when there is
a. a principal-agent problem.
b. a moral-hazard problem.
c. a problem involving hidden actions.
d. a problem involving hidden characteristics.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Interpretive
52. When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest
quality, she is engaging in
a. both moral hazard and adverse selection.
b. neither moral hazard nor adverse selection.
c. moral hazard, but not adverse selection.
d. adverse selection, but not moral hazard.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard | adverse selection
MSC: Applicative
53. A life insurance company requires new applicants to have a medical exam prior to writing the
insurance policy. This requirement is an example of
a. signaling.
b. screening.
c. moral hazard.
d. adverse selection.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
54. Which of the following is an example of an adverse selection problem?
a. A customer purchases four apples, two of which are inedible.
b. A card shop puts its Halloween merchandise on sale on November 1st.
c. A young worker is fired after she is late for work three times in one month.
d. A man whose father had a heart attack wants to increase his life insurance coverage.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Applicative
55. The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of
a. hidden actions.
b. adverse selection.
c. principals and agents.
d. moral hazard.
ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1957
56. When the buyer knows less than the seller about the characteristics of the good being sold, there is
a. a principal-agent problem.
b. a moral hazard problem.
c. an adverse selection problem.
d. a signaling problem.
ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Definitional
57. The classic example of adverse selection is the
a. market for used cars.
b. market for new cars.
c. relationship between shareholders and managers.
d. relationship between a coach and an athlete.
ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
58. The fact that someone with a high risk of medical problems is likely to buy a large amount of health
insurance is an example of
a. adverse selection.
b. monitoring.
c. moral hazard.
d. screening.
ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
59. The adverse selection problem is a likely explanation for the fact that
a. a few months after a new car is purchased, its value decreases very little.
b. some corporate managers were recently sent to prison for enriching themselves at the
expense of shareholders.
c. people in average health may be discouraged from buying health insurance by the high
price.
d. gifts can be interpreted as signals.
ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
1958  Chapter 22/Frontiers of Microeconomics
60. Because people with hidden health problems are more likely to buy health insurance than are other
people,
a. the price of health insurance reflects the costs of a sicker-than-average person.
b. the price of health insurance is too low, relative to the socially-optimal price.
c. people in average health may be encouraged to buy too much health insurance, relative to
the socially-optimal quantity.
d. the Condorcet Paradox suggests that people who are sicker than average will ultimately
buy more health insurance.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
61. Severe adverse-selection problems may result in
a. too few good used cars being offered for sale.
b. wages that are too low relative to equilibrium levels.
c. too many good drivers buying too much automobile insurance.
d. people with average health buying too much health insurance.
ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
62. "Signaling" refers to actions by an informed party for the sole purpose of
a. telling another party that the signaler has information to reveal, without actually revealing
that information.
b. conveying false information.
c. confusing another party.
d. credibly revealing private information.
ANS: D
NAT: Analytic
TOP: Signaling
DIF: 1
REF: 22-1
LOC: The Study of economics, and definitions in economics
MSC: Definitional
63. Effective signals
a. convey useful information from informed parties to uninformed parties.
b. impose little or no cost on the signaler.
c. cannot be conveyed accurately when there is an information asymmetry.
d. can be used by employers to alleviate the moral hazard problem in the workplace.
ANS: A
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1959
64. Which of the following is not an example of signaling?
a. screening
b. advertising
c. getting an education
d. gift giving
ANS: A
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative
65. A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a
a. moral hazard problem.
b. screening device.
c. signal of how much she cares for him.
d. All of the above are correct.
ANS: C
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
66. A brand of wine is priced at only $5 per bottle, far below the market price of most high quality
wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive wine
because they interpret the low price to mean that the wine is of poor quality. The company decides
to change the label on the wine to show that it has won awards for quality. This label change is an
example of
a. signaling.
b. screening.
c. selecting.
d. All of the above are correct.
ANS: A
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
67. If the seller of a used car offers a limited warranty, the warranty is an example of a(n)
a. signal.
b. screen.
c. efficiency wage.
d. agent.
ANS: A
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative
1960  Chapter 22/Frontiers of Microeconomics
68. A firm with a very good product
a. has a higher cost of signaling (advertising) than does a firm with an inferior product.
b. has more to gain by signaling (advertising) than does a firm with an inferior product.
c. does not need to signal (advertise) because the product’s quality speaks for itself.
d. will signal (advertise) effectively if signaling is free.
ANS: B
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
69. Which of the following is an example of signaling?
a. Graduates of highly-respected universities highlight that fact on their resumes.
b. Magazine advertisements include the phrase "as seen on TV."
c. Advertisements for universities include the phrase "fully accredited."
d. All of the above are correct.
ANS: D
NAT: Analytic
TOP: Signaling
DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
70. Which of the following events best exemplifies the concept of signaling?
a. A college student's parents, having learned that their child is short of money, send her a
check for $1,000.
b. A woman, who is trying to win the love of a certain man, buys him a very personal gift.
c. A grocery store maintains a policy of examining the driver's license of everyone who
writes a personal check to purchase his groceries.
d. A university maintains a policy of considering for admission only those students who
graduated among the top ten percent of their high school class.
ANS: B
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
71. Joe's Computers builds and sells computers for the local retail market. Since Joe's business does not
have the name recognition of some of the bigger computer retailers, Joe advertises a "One-Year
Money Back Guarantee" to indicate to buyers that his product is of high quality. This guarantee is an
example of
a. screening.
b. signaling.
c. the seller's curse.
d. the principal-agent problem.
ANS: B
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1961
72. Which of the following is an example of signaling?
a. John is considering the purchase of a used car. Before making the purchase he has the car
checked by an auto mechanic.
b. Steve is applying for a new life insurance policy. Before writing the policy, the insurance
company requires Steve to be examined by a doctor.
c. Traci is applying for a new job. Before hiring her, the firm requires Traci to take a drug
test.
d. Ray is planning to ask for Honna's hand in marriage. Before asking her, he buys her a box
of her favorite chocolates and takes her to dinner at her favorite restaurant.
ANS: D
NAT: Analytic
TOP: Signaling
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
73. Screening occurs when
a. an informed party acts to reveal his private information.
b. an informed party acts to conceal his private information.
c. an uninformed party acts to induce the informed party to reveal private information.
d. one informed party acts to prevent another informed party from revealing private
information.
ANS: C
NAT: Analytic
TOP: Screening
DIF: 1
REF: 22-1
LOC: The Study of economics, and definitions in economics
MSC: Definitional
74. An insurance company that writes automobile policies tries to separate safe drivers from risky
drivers by offering policies that feature different deductibles and different premiums. This practice is
best described as an example of
a. screening.
b. behavioral economics.
c. the Condorcet Paradox.
d. signaling.
ANS: A
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
75. A safe driver would likely choose an auto insurance policy with a
a. low premium and a high deductible.
b. high premium and a high deductible.
c. high premium and a low deductible.
d. high premium and no deductible.
ANS: A
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
1962  Chapter 22/Frontiers of Microeconomics
76. An unhealthy person would likely choose a medical insurance policy with a
a. low premium and a high deductible.
b. high premium and a high deductible.
c. high premium and no deductible.
d. The unhealthy person would choose not to be insured.
ANS: C
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
77. An airline knows that business travelers have more inelastic demand for travel than vacationers.
That is, business travelers are often willing to pay more for airline tickets than vacationers. The
airline also knows that business travelers do not like to travel over weekends. When customers
request airline tickets that do not involve travel over a weekend, the airline determines that a traveler
is likely a business traveler and charges a higher price. This is an example of
a. moral hazard.
b. signaling.
c. screening.
d. adverse selection.
ANS: C
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive
78. Suppose that an economics department is offering a student exchange program with a university in
Moscow, Russia. If the department requires students to submit an essay in order to be considered
for the program, the essay may be an example of a(n)
a. signal.
b. screen.
c. efficiency wage.
d. principal.
ANS: B
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative
79. On car insurance policies, State Ranch Insurance Company offers drivers an option: Policy 1
features a deductible of $1,000, and it requires a driver to pay an annual premium of $500. Policy 2
features a deductible of $500, and it requires a driver to pay an annual premium of $750.
a. In offering these two policies, State Ranch is engaging in illegal price discrimination.
b. In offering these two policies, State Ranch is screening drivers.
c. Policy 1 is more of a burden for safe drivers than it is for risky drivers.
d. In offering these two policies, State Ranch is signaling their quality to drivers.
ANS: B
NAT: Analytic
TOP: Screening
DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Analytical
Chapter 22/Frontiers of Microeconomics  1963
80. In view of the possible need for government action in markets where asymmetric information is a
problem, which of the following is a valid concern?
a. The government rarely has more information than the private parties.
b. Private markets can sometimes deal with information asymmetries on their own.
c. The government is itself an imperfect institution.
d. All of the above are valid concerns.
ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
Sec02-Political Economy
MULTIPLE CHOICE
1.
The field of political economy
a. casts aside most of the standard methods of economic analysis.
b. is also referred to as the field of public choice.
c. is also referred to as the field of macroeconomics.
d. produces the conclusion that democratic principles rarely lead to desirable economic
outcomes.
ANS: B
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Definitional
2.
Which of the following sets of preferences can not satisfy the property of transitivity?
a. Plan A is preferred to plan D. Plan D is preferred to plan B. Plan C is preferred to plan B.
b. Plan A is preferred to plan B. Plan B is preferred to plan C. Plan A is preferred to plan C.
c. Plan C is preferred to plan A. Plan B is preferred to plan A. Plan C is preferred to plan B.
d. Plan D is preferred to plan C. Plan C is preferred to plan B. Plan B is preferred to plan D.
ANS: D
NAT: Analytic
TOP: Transitivity
3.
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative
The Condorcet paradox
a. demonstrates that the order in which one votes on options may influence the outcome.
b. demonstrates that majority voting by itself may not reveal the outcome that society wants.
c. disproves Arrow’s impossibility theorem.
d. Both a and b are correct.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
1964  Chapter 22/Frontiers of Microeconomics
4.
Suppose that residents of a town are asked to vote on the best way to improve the safety of an
intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. When the mayor
asks the residents to choose between a stoplight and a 4-way stop, the residents choose a 4-way stop.
Then, when the mayor asks them to choose between a 4-way stop and a 2-way stop, they choose a 2way stop. However, if the mayor firsts asks the residents to choose between a 4-way stop and a 2way stop, they choose a 2-way stop. Then, when the mayor asks the residents to choose between a
2-way stop and a stoplight, they choose a stoplight. What does this example illustrate?
a. Arrow’s impossibility theorem
b. the Condorcet paradox
c. a Borda count
d. the median voter theorem
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
5.
Suppose that residents of a town are asked to vote on the best day to improve the safety of an
intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. The mayor asks the
residents to assign 3 points to their first choice, 2 points to their second choice, and 1 point to their
last choice. The intersection will be controlled by the method that receives the most points. This
voting scheme is called
a. Arrow’s impossibility theorem.
b. the Condorcet paradox.
c. a Borda count.
d. the median voter theorem.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
6.
Which of the following sets of preferences satisfies the property of transitivity?
a. Cookies are preferred to brownies. Brownies are preferred to ice cream. Ice cream is
preferred to cookies.
b. Cookies are preferred to pie. Brownies are preferred to pie. Pie is preferred to cookies.
c. Cookies are preferred to ice cream. Ice cream is preferred to brownies. Cookies are
preferred to brownies.
d. Cookies are preferred to pie. Ice cream is preferred to cookies. Pie is preferred to ice
cream.
ANS: C
NAT: Analytic
TOP: Transitivity
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative
Chapter 22/Frontiers of Microeconomics  1965
Table 22-1
Three friends -- Tricia, Sarah, and Katie -- are deciding where to go together for vacation. They all agree
that they should go to one of three places: Ireland, Italy, or Greece. They also agree that they will have
two pairwise votes to determine where to go on vacation, with the majority determining the outcome on
each vote. The first, second, and third choices for each person are as indicated in the table below.
First choice
Second choice
Third choice
7.
Tricia
Ireland
Italy
Greece
Sarah
Italy
Greece
Ireland
Katie
Greece
Ireland
Italy
Refer to Table 22-1. If the first vote pits Ireland against Italy and the second vote pits Greece
against the winner of the first vote, then the outcome is as follows:
a. Ireland wins the first vote and Greece wins the second vote, so they go to Greece.
b. Ireland wins the first vote and Ireland wins the second vote, so they go to Ireland.
c. Italy wins the first vote and Italy wins the second vote, so they go to Italy.
d. Italy wins the first vote and Greece wins the second vote, so they go to Greece.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
8.
Refer to Table 22-1. If the first vote pits Ireland against Greece and the second vote pits Italy
against the winner of the first vote, then the outcome is as follows:
a. Ireland wins the first vote and Italy wins the second vote, so they go to Italy.
b. Ireland wins the first vote and Ireland wins the second vote, so they go to Ireland.
c. Greece wins the first vote and Greece wins the second vote, so they go to Greece.
d. Greece wins the first vote and Italy wins the second vote, so they go to Italy.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
9.
Refer to Table 22-1. If the first vote pits Italy against Greece and the second vote pits Ireland
against the winner of the first vote, then the outcome is as follows:
a. Italy wins the first vote and Ireland wins the second vote, so they go to Ireland.
b. Italy wins the first vote and Italy wins the second vote, so they go to Italy.
c. Greece wins the first vote and Greece wins the second vote, so they go to Greece.
d. Greece wins the first vote and Ireland wins the second vote, so they go to Ireland.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
1966  Chapter 22/Frontiers of Microeconomics
10. Refer to Table 22-1. Depending on the order of the pairwise voting,
a. the friends could go to either Ireland, Greece, or Italy.
b. the friends could go to either Ireland or Greece, but they will not go to Italy.
c. the friends could go to either Greece or Italy, but they will not go to Ireland.
d. the friends could go to either Ireland or Italy, but they will not go to Greece.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
11. Refer to Table 22-1. If the friends change their minds and decide to choose a vacation destination
using a Borda count, then
a. the friends will go to Ireland.
b. the friends will go to Italy.
c. the friends will go to Greece.
d. A Borda count will not result in a single winner in this case.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
12. Which of the following is not correct?
a. Pairwise voting never produces transitive preferences.
b. The order of pairwise voting can affect the result.
c. Majority voting by itself does not tell us what outcome a society really wants.
d. No voting system can satisfy all of the following properties: unanimity, transitivity,
independence of irrelevant alternatives, and no dictators.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
13. The field of political economy
a. applies the methods of political science to microeconomics.
b. applies the methods of political science to macroeconomics.
c. is relevant to the issue of how active government should be in economic matters.
d. integrates psychological insights to better understand individual choices.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Interpretive
14. Recent developments in political economy
a. render much of the traditional field of political science obsolete.
b. render much of the traditional field of economics obsolete.
c. illustrate the resolute nature of democracy.
d. point to the fact that government is a less-than-perfect institution.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1967
15. The Condorcet voting paradox applies to situations in which voters
a. decide between exactly two possible outcomes.
b. decide among more than two possible outcomes.
c. as a group have transitive preferences.
d. choose the inferior candidate even though the majority preferred the better candidate.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
16. The Condorcet paradox
a. proved that the Arrow impossibility theorem is wrong.
b. was proved wrong by the Arrow impossibility theorem.
c. serves as an example of the Arrow impossibility theorem.
d. pertains to voting systems, whereas Arrow's Impossibility Theorem does not.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
17. Normally, we expect voters' preferences to exhibit a property called
a. transitivity.
b. transversality.
c. normality.
d. universality.
ANS: A
NAT: Analytic
TOP: Transitivity
DIF: 1
REF: 22-2
LOC: The Study of economics, and definitions in economics
MSC: Interpretive
18. If preferences exhibit the property of transitivity, then
a. the preferences are irrational.
b. individuals prefer more government involvement in private markets than do people whose
preferences are not transitive.
c. preferences change over time more quickly than when preferences are not transitive.
d. preferences satisfy one of the properties assumed to be desireable by Kenneth Arrow in
Social Choice and Individual Values.
ANS: D
NAT: Analytic
TOP: Transitivity
DIF: 2
REF: 22-2
LOC: The Study of economics, and definitions in economics
MSC: Interpretive
1968  Chapter 22/Frontiers of Microeconomics
19. Which of the following statements captures the meaning of transitivity of preferences?
a. If A is preferred to B, then B is less preferred than A.
b. If A is preferred to B, and B is preferred to C, then A is preferred to C.
c. If A is preferred to B and B is preferred to C, then the preference for A over B is stronger
than the preference for B over C.
d. If A is preferred to C, then there exists B such that A is preferred to B and C is preferred to
A.
ANS: B
NAT: Analytic
TOP: Transitivity
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Definitional
20. The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the
property of
a. narrowness of preferences.
b. concavity of preferences.
c. asymmetry of preferences.
d. transitivity of preferences.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
21. The Condorcet paradox shows that
a. allocations of resources based on majority rule are always inefficient.
b. problems in counting votes can negate legitimate democratic outcomes.
c. the order on which things are voted can affect the result.
d. transitive preferences are inconsistent with rationality.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
22. Under majority rule, the order in which items are voted on is
a. unimportant, and this is a lesson of the Condorcet paradox.
b. unimportant, and this is a lesson of Arrow’s impossibility theorem.
c. important, and this is a lesson of the Condorcet paradox.
d. important, and this is a lesson of Arrow’s impossibility theorem.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1969
Table 22-2
Three longtime friends-Fred, Barney, and Wilma-are deciding how they will spend their Sunday
afternoon. They all agree that they should do one of three things: go to a movie, go to the beach, or go to a
museum. They also agree that they will have two pairwise votes to determine how to spend their evening,
with the majority determining the outcome on each vote. The first, second, and third choices for each
person are as indicated in the table below.
First choice
Second choice
Third choice
Fred
Museum
Beach
Movie
Barney
Beach
Movie
Museum
Wilma
Movie
Museum
Beach
23. Refer to Table 22-2. If (1) the first vote pits "museum" against "movie," and (2) the second vote
pits "beach" against the winner of the first vote, then the outcome is as follows:
a. "Museum" wins the first vote and "museum" wins the second vote, so they go to a
museum.
b. "Museum" wins the first vote and "beach" wins the second vote, so they go to the beach.
c. "Movie" wins the first vote and "movie" wins the second vote, so they go to a movie.
d. "Movie" wins the first vote and "beach" wins the second vote, so they go to the beach.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
24. Refer to Table 22-1. If (1) the first vote pits "museum" against "beach," and (2) the second vote pits
"movie" against the winner of the first vote, then
a. "Museum" wins the first vote and "museum" wins the second vote, so they go to a
museum.
b. "Museum" wins the first vote and "movie" wins the second vote, so they go to a movie.
c. "Beach" wins the first vote and "beach" wins the second vote, so they go to the beach.
d. "Beach" wins the first vote and "movie" wins the second vote, so they go to a movie.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
25. Refer to Table 22-2. Which of the following statements is correct?
a. In a pairwise election, "movie" beats "beach."
b. In a pairwise election, "beach" beats "museum."
c. In a pairwise election, "museum" beats "movie."
d. None of the above is correct.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
1970  Chapter 22/Frontiers of Microeconomics
26. Refer to Table 22-1. Which of the following statements is correct?
a. In a pairwise election, "beach" beats "movie."
b. In a pairwise election, "museum" beats "beach."
c. In a pairwise election, "movie" beats "museum."
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
27. Refer to Table 22-2. Which of the following statements is correct regarding the Condorcet paradox
and the results of pairwise voting by Fred, Barney, and Wilma?
a. The paradox implies that pairwise voting never produces transitive preferences, and so the
voting by Fred, Barney, and Wilma fails to produce transitive preferences.
b. The paradox implies that pairwise voting sometimes (but not always) produces transitive
preferences, and the voting by Fred, Barney, and Wilma does produce transitive
preferences.
c. The paradox implies that pairwise voting sometimes (but not always) fails to produce
transitive preferences, and the voting by Fred, Barney, and Wilma fails to produce
transitive preferences.
d. The paradox does not apply to the case at hand, because Barney's preferences are not
individually transitive.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
28. Refer to Table 22-2. If Fred, Barney, and Wilma use a Borda count, rather than pairwise majority
voting, to decide how to spend their afternoon, then they will go
a. to a movie.
b. to a concert.
c. out to dinner.
d. None of the above is correct; a Borda count fails to produce a winner in this instance.
ANS: D
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
Chapter 22/Frontiers of Microeconomics  1971
Table 22-3
The citizens of Paradoxopolis will decide whether to build a new school, build a new park, or build a new
road. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting,
with the majority determining the outcome on each vote. The preferences of the voters are summarized in
the table below.
Percent of Electorate
First choice
Second choice
Third choice
Type 1
25
School
Park
Road
Voter Type
Type 2
35
Park
Road
School
Type 3
40
Road
School
Park
29. Refer to Table 22-3. If (1) the first vote pits "school" against "park," and (2) the second vote pits
"road" against the winner of the first vote, then the outcome is as follows:
a. "School" wins the first vote and "school" wins the second vote, so they build a school.
b. "School" wins the first vote and "road" wins the second vote, so they build a road.
c. "Park" wins the first vote and "park" wins the second vote, so they build a park.
d. "Park" wins the first vote and "road" wins the second vote, so they build a road.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
30. Refer to Table 22-3. If (1) the first vote pits "school" against "road," and (2) the second vote pits
"park" against the winner of the first vote, then the outcome is as follows:
a. "School" wins the first vote and "school" wins the second vote, so they build a school.
b. "School" wins the first vote and "park" wins the second vote, so they build a park.
c. "Road" wins the first vote and "road" wins the second vote, so they build a road.
d. "Road" wins the first vote and "park" wins the second vote, so they build a park.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
31. Refer to Table 22-3. Which of the following statements is correct?
a. In a pairwise election, "school" beats "road."
b. In a pairwise election, "road" beats "park."
c. In a pairwise election, "school" beats "park."
d. All of the above are correct.
ANS: C
DIF: 2
TOP: Condorcet paradox
REF: 22-2
MSC: Applicative
1972  Chapter 22/Frontiers of Microeconomics
32. Refer to Table 22-3. Which of the following statements is correct?
a. In a pairwise election, "road" beats "school."
b. In a pairwise election, "school" beats "park."
c. In a pairwise election, "park" beats "road."
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
33. Refer to Table 22-3. Which of the following statements is correct regarding the Condorcet paradox
and the results of pairwise voting in Paradoxopolis?
a. The paradox implies that pairwise voting never produces transitive preferences, and so the
voting in Paradoxopolis fails to produce transitive preferences.
b. The paradox implies that pairwise voting sometimes (but not always) produces transitive
preferences, and the voting in Paradoxopolis does produce transitive preferences.
c. The paradox implies that pairwise voting sometimes (but not always) fails to produce
transitive preferences, and the voting in Paradoxopolis fails to produce transitive
preferences.
d. The paradox does not apply to the case at hand, because the preferences of Type 3 voters
are not individually transitive.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
34. Refer to Table 22-3. If the citizens of Paradoxopolis use a Borda count, rather than pairwise
majority voting, to decide what to build, then they will build a new
a. school.
b. park.
c. road.
d. None of the above is correct; a Borda count fails to produce a winner in this instance.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
35. As an alternative to pairwise majority voting, each voter could be asked to rank the possible
outcomes, giving 1 point to her lowest choice, 2 points to her second-lowest choice, 3 points to her
third-lowest choice, and so on. This voting method is called a(n)
a. median vote.
b. pairwise minority vote.
c. Borda count.
d. Arrow count.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Borda counts
MSC: Definitional
Chapter 22/Frontiers of Microeconomics  1973
36. Economist Kenneth Arrow wrote a famous book in 1951 in which he took up the question,
a. Is there a perfect voting system?
b. Are preferences transitive?
c. Is a dictatorship a good form of government?
d. Should the president of the United States be elected to a single, six-year term?
ANS: A
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
37. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow defined a "perfect" voting
system. That system includes which of the following features?
a. unanimity
b. transitivity
c. absence of a dictator
d. All of the above are correct.
ANS: D
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Definitional
38. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow used the term "unanimity"
to mean
a. A beats B only if everyone prefers A to B.
b. if everyone prefers A to B, then A beats B.
c. if A beats B and B beats C, then A must best C.
d. everyone who is eligible to vote must vote; otherwise, the outcome is invalid.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Definitional
39. Arrow’s impossibility theorem shows that no voting system can satisfy which of the following
properties?
a. unanimity and transitivity only
b. transitivity and independence of irrelevant alternatives only
c. no dictators and transitivity only
d. unanimity, transitivity, independence of irrelevant alternatives, and no dictators
ANS: D
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Definitional
1974  Chapter 22/Frontiers of Microeconomics
40. One property of Kenneth Arrow's "perfect" voting system is that the ranking between any two
outcomes A and B should not depend on whether some third outcome C is also available. Arrow
called this property
a. transitivity.
b. pairwise perfection.
c. independence of irrelevant alternatives.
d. irrelevance of social choices.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Definitional
41. Kenneth Arrow proved that the voting system that satisfied all of the properties of his "perfect"
voting system was
a. one in which a single person (a "dictator") imposes his preferences on everyone else.
b. pairwise majority voting.
c. majority voting that is not pairwise.
d. None of the above is correct. Arrow proved that no voting system can satisfy all of the
properties of his "perfect" system.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
42. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system?
a. no dictator
b. unanimity
c. transitivity
d. independence of irrelevant alternatives
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
43. The Arrow impossibility theorem shows that
a. democracy should be abandoned as a form of government.
b. it is impossible to improve upon democratic voting methods as a mechanism for social
choice.
c. all voting systems are flawed as a mechanism for social choice.
d. the median voter’s preferences will always win in a two-way vote.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1975
44. Majority rule will produce the outcome most preferred by the median voter, as demonstrated by the
a. Arrow impossibility theorem.
b. Condorcet paradox.
c. pairwise voting proposition.
d. median voter theorem.
ANS: D
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
45. When each voter has a most-preferred outcome for the expenditure on a particular government
program, majority rule will produce the outcome
a. preferred by the mean (average) voter.
b. preferred by the median voter.
c. that causes the political party in power to increase its power.
d. defined by Arrow’s Impossibility Theorem.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
46. Assume there are nine voters in a certain small town and let x = the preferred number of dollars
spent per person per month on garbage collection. For Voters 1, 2, and 3, x = $10; for Voter 4, x =
$15; for Voter 5, x = $18; and for Voters 6, 7, 8 and 9, x = $20. The median voter is
a. Voter 3.
b. Voter 4.
c. Voter 5.
d. Voter 6.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
47. The median voter
a. is the voter exactly in the middle of the distribution.
b. is the voter whose preferred outcome beats any other proposal in a two-way race.
c. always has more than half the votes on his side in a two-way race.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Definitional
48. If the median voter theorem holds,
a. a Borda count will violate the principle of transitivity.
b. the Condorcet paradox also holds.
c. minority views will not receive much consideration.
d. All of the above are correct.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
1976  Chapter 22/Frontiers of Microeconomics
49. The assertion that the median voter is "king" refers directly to the result established by the
a. Arrow impossibility theorem.
b. Condorcet paradox.
c. median voter theorem.
d. Borda mechanism.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Median voter theorem
MSC: Definitional
50. According to the median voter theorem, majority rule will
a. always produce an inconclusive outcome.
b. produce the outcome least preferred by the median voter.
c. produce the outcome most preferred by the median voter.
d. produce an outcome that is inconsistent with transitive preferences.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Definitional
51. Arrow's impossibility theorem is "disturbing" in the sense that it proves that
a. no voting system is perfect.
b. only a dictator can produce a desirable social outcome.
c. the preferences of the wealthy should be given more weight than the preferences of the
poor.
d. the centuries-old Condorcet paradox was not a paradox after all.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
52. The median voter's preferred outcome is the same as the
a. average preferred outcome.
b. outcome preferred by the greatest number of voters.
c. outcome produced by majority rule.
d. outcome preferred by Arrow’s “perfect” voter.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1977
Scenario 22-1
At issue in a particular city vote is how much to spend, per person, on road repair next year. Among the
10,000 voters, 1,500 prefer to spend $300 per person, but no more; 2,800 prefer to spend $450 per person,
but no more; 3,500 prefer to spend $800 per person, but no more; and 2,200 prefer to spend $1500 per
person, but no more.
53. Refer to Scenario 22-1. The median voter is one who prefers to spend
a. $300.
b. $450.
c. $800.
d. $1500.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
54. Refer to Scenario 22-1. If there is a vote on whether to spend $600 per person or $800 per person,
the median voter will vote to spend
a. $600 per person and the voting outcome will be $600 per person.
b. $600 per person and the voting outcome will be $800 per person.
c. $800 per person and the voting outcome will be $600 per person.
d. $800 per person and the voting outcome will be $800 per person.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
55. Refer to Scenario 22-1. If there is a vote on whether to spend $800 per person or $1100 per person,
the median voter will vote to spend
a. $800 per person and the voting outcome will be $800 per person.
b. $800 per person and the voting outcome will be $1100 per person.
c. $1100 per person and the voting outcome will be $800 per person.
d. $1100 per person and the voting outcome will be $1100 per person.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
56. An implication of the median voter theorem is that, in a race between Republicans and Democrats,
a. if Republicans want to win, they will take a “middle-of-the-road” stance on many issues.
b. if Democrats want to win, they will take an extreme stance on many issues.
c. Republicans and Democrats go to extremes to differentiate themselves from one another.
d. Republicans and Democrats work hard to identify the fringe voters.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
1978  Chapter 22/Frontiers of Microeconomics
57. When Republicans and Democrats offer similar platforms in an election campaign, a likely
explanation is the
a. Arrow impossibility theorem.
b. Condorcet paradox.
c. median voter theorem.
d. fact that politicians are more interested in the national interest than their own self-interest.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
58. In American politics, we often observe that during a campaign, the Democratic and Republican
positions on many issues are similar, which illustrates
a. Arrow’s impossibility theorem.
b. the Condorcet paradox.
c. a Borda count.
d. the median voter theorem.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
59. An implication of the median voter theorem is that
a. minority views and majority views are given equal weight.
b. platforms of the major political parties will not differ greatly.
c. the logic of democracy is fundamentally flawed.
d. behavioral economics plays a signficant role in voting outcomes.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1979
Table 22-4
Five voters must choose from among four options: A, B, C, or D. Each voter’s preferences are
summarized in the table below. Options higher in the table are more preferred by the voter.
Preferences
1st Choice
2nd Choice
3rd Choice
4th Choice
Voter 1
D
A
B
C
Voter 2
C
B
A
D
Voter 3
B
A
D
C
Voter 4
C
D
B
A
Voter 5
A
D
C
B
60. Refer to Table 22-4. If the vote were conducted according to a Borda count system where each
person's first choice receives 4 points, second choice 3 points, third choice 2 points and fourth
choice 1 point, the result would be
a. that A would win.
b. that B would win.
c. that C would win.
d. a tie between A and D.
ANS: D
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
61. Refer to Table 22-4. If the vote were conducted according to a modified Borda count system where
each person's first choice receives 10 points, second choice 5 points, third choice 3 points and fourth
choice 1 point, the result would be
a. that A would win.
b. that B would win.
c. that C would win.
d. that D would win.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
62. Refer to Table 22-4. Which pairwise voting scheme would result in outcome B?
a. First, choose between A and B. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and D.
b. First, choose between B and C. Second, voters choose between the winner of the first vote
and A. Third, voters choose between the winner of the second vote and D.
c. First, choose between B and D. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and A.
d. First, choose between C and D. Second, voters choose between the winner of the first vote
and A. Third, voters choose between the winner of the second vote and B.
ANS: D
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
1980  Chapter 22/Frontiers of Microeconomics
63. Refer to Table 22-4. Which pairwise voting scheme would result in outcome D?
a. First, choose between A and B. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and D.
b. First, choose between B and D. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and A.
c. First, choose between C and D. Second, voters choose between the winner of the first vote
and A. Third, voters choose between the winner of the second vote and B.
d. First, choose between C and D. Second, voters choose between the winner of the first vote
and B. Third, voters choose between the winner of the second vote and A.
ANS: A
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
64. Refer to Table 22-4. Which pairwise voting scheme would result in outcome A?
a. First, choose between A and B. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and D.
b. First, choose between A and C. Second, voters choose between the winner of the first vote
and B. Third, voters choose between the winner of the second vote and D.
c. First, choose between B and D. Second, voters choose between the winner of the first vote
and C. Third, voters choose between the winner of the second vote and A.
d. First, choose between C and D. Second, voters choose between the winner of the first vote
and A. Third, voters choose between the winner of the second vote and B.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
Table 22-5
The 500 voters of Appleton are deciding by majority rule how much to spend on a new library.
$0
$1 million
$2 million
$3 million
$4 million
Number of voters who most prefer this amount of spending
65
60
100
75
200
65. Refer to Table 22-5. The median voter prefers to spend
a. $2 million.
b. $2.57 million.
c. $3 million.
d. $4 million.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
Chapter 22/Frontiers of Microeconomics  1981
Table 22-6
Percent of electorate
First choice
Second choice
Third choice
Type 1
55
X
Y
Z
Voter Type
Type 2
25
Y
Z
X
Type 3
20
Z
Y
X
66. Refer to Table 22-6. The table shows the preferences of three types of voters over three possible
outcomes: X, Y, and Z. In addition, the table shows the percentage of voters of each type. Based on
this information, which of the following statements is true?
a. As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for
society.
b. As Arrow's Impossibility Theorem demonstrates, it is impossible from this information to
determine which outcome the voters prefer.
c. The median voter theorem allows us to conclude that in a vote between X and Y, Y will
win since the Type 2 voter is the median voter.
d. While the Condorcet Paradox predicts that majority rule may not produce transitive
preferences for society as a whole, society's preferences in this case are transitive.
ANS: D
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
67. Refer to Table 22-6. The table shows the preferences of three types of voters over three possible
outcomes: X, Y, and Z. The table also shows the percentage of voters of each type. Based on this
information, which voter type is the median voter?
a. Type 1
b. Type 2
c. Type 3
d. The median voter cannot be determined without knowing the pair of outcomes from which
the voters will be choosing.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Analytical
68. Refer to Table 22-6. The table shows the preferences for three types of voters over three possible
outcomes: X, Y, and Z. The table also shows the percentage of voters of each type. Based on this
information, which of the following statements is true?
a. In a vote between X and Y, X loses since only the Type 1 voters prefer X to Y.
b. In a vote between Y and Z, Y wins getting 80% of the total vote.
c. In a vote between X and Z, X loses getting only 45% of the total vote.
d. Both a and b.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
1982  Chapter 22/Frontiers of Microeconomics
Table 22-7
Number of People
4
7
10
13
15
26
Preferred Budget
$20
$30
$ 0
$40
$10
$50
69. Refer to Table 22-7. The table shows the most preferred budget of 75 voters. In an election, each
voter will select the budget closest to his or her most preferred budget. Using this information, what
is the most preferred budget of the median voter?
a. $10
b. $20
c. $30
d. $40
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Analytical
70. Refer to Table 22-7. The table shows the most preferred budget of 75 voters. In an election, each
voter will select the budget closest to his or her most preferred budget. Which of the following
statements regarding this information is true?
a. In an election between a $33 budget and a $37 budget, the $33 budget will win.
b. Since the median voter theorem implies that the budget of the median voter will win the
election, we would expect the overall best budget to be $25, the median of the available
budgets.
c. In an election between a $10 budget and a $40 budget, the $40 budget will win.
d. Both b and c.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Analytical
Chapter 22/Frontiers of Microeconomics  1983
Table 22-8
Percent of electorate
First choice
Second choice
Third choice
Fourth choice
Type 1
32
W
X
Y
Z
Voter Type
Type 2
Type 3
20
15
X
Z
Z
W
W
Y
Y
X
Type 4
33
Y
W
Z
X
71. Refer to Table 22-8. The table shows the preferences of four types of voters over four possible
outcomes: W, X, Y, and Z. In addition, the table shows the percentage of voters of each type. Based
on this information, which of the following statements is false?
a. Outcome W is preferred to outcome X overall.
b. Outcome X is preferred to outcome Y overall.
c. Outcome Y is preferred to outcome W overall.
d. Outcome W is preferred to outcome Z overall.
ANS: C
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Analytical
72. Refer to Table 22-8. The table shows the preferences of four types of voters over four possible
outcomes: W, X, Y, and Z. In addition, the table shows the percentage of voters of each type.
Suppose a Borda count election is held in which each voter ranks the four outcomes, giving 1 point
to last place, 2 points to second to last, 3 points to the second best, and 4 points to the best. In this
case, which outcome would win?
a. W
b. X
c. Y
d. Z
ANS: A
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Analytical
73. Refer to Table 22-8. The table shows the preferences of four types of voters over four possible
outcomes: W, X, Y, and Z. In addition, the table shows the percentage of voters of each type.
Suppose that, for some reason, W is eliminated as a possible option. Using a Borda count election,
with 3 points for the best choice, 2 points for the second best choice, and 1 point for the last choice,
which outcome would win this election?
a. X
b. Y
c. Z
d. There would be a three-way tie.
ANS: B
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Analytical
1984  Chapter 22/Frontiers of Microeconomics
Table 22-9
# Voters
First choice
Second choice
Third choice
Type 1
40
C
B
A
Voter Type
Type 2
15
B
A
C
Type 3
45
A
C
B
74. Refer to Table 22-9. The table shows the preferences of 100 voters over three possible outcomes:
A, B, and C. If a Borda count election were held among these voters, giving three points to each
voter's first choice, two points to the second choice, and one point to the last choice, which outcome
would win the election?
a. Outcome A
b. Outcome B
c. Outcome C
d. Either outcome A or outcome C since these have the same total score.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Analytical
75. Refer to Table 22-9. The table shows the preferences of 100 voters over three possible outcomes:
A, B, and C. Which of the following statements is true?
a. In pairwise majority voting, B is preferred to A, A is preferred to C, and B is preferred to
C.
b. In pairwise majority voting, C is preferred to B, B is preferred to A, and C is preferred to
A.
c. In pairwise majority voting, B is preferred to A, A is preferred to C, and C is preferred to
B.
d. In pairwise majority voting, A is preferred to C, C is preferred to B, and A is preferred to
B.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Analytical
76. Suppose that in a Borda count election, outcome X is preferred to outcome Y, and outcome Y is
preferred to outcome Z, when outcomes X, Y, and Z are all available options. When Y is removed as
an option, however, outcome Z is preferred to outcome X. This would violate Arrow's assumption
that voting systems should satisfy
a. unanimity.
b. transitivity.
c. the independence of irrelevant alternatives.
d. no dictators.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1985
77. Which of the following would violate transitivity?
a. John likes A more than B, C more than B, and C more than A.
b. Steve likes C more than B, A more than B, B more than D, and C more than D.
c. Sarah likes C more than A, B more than D, A more than B, and D more than C.
d. Mitch likes C more than B, C more than D, and B more than D.
ANS: C
NAT: Analytic
TOP: Transitivity
DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Analytical
78. Suppose that there are 175 voters in an election and that 80 of them prefer a $100 budget while the
remainder prefer a $150 budget. Which of the following statements is true?
a. The Condorcet Paradox predicts that the $100 budget will win even though fewer people
prefer that budget.
b. The median voter theorem predicts that the winning budget will be $125, the median of
the preferences of the two types of voters.
c. Arrow's impossibility theorem says that the winning budget cannot be determined in this
election since there is no unanimity.
d. None of the above.
ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Analytical
1986  Chapter 22/Frontiers of Microeconomics
Scenario 22-2
The following table shows the preferences for the five voters in a city regarding how to deal with the
city’s diseased trees.
Voter #
1st choice
2nd choice
3rd choice
4th choice
1
B
C
D
A
2
B
C
A
D
3
C
D
A
B
4
D
C
A
B
5
A
C
D
B
A = do nothing
B = Follow the expert's advice to remove every tree
C = remove every 4th tree now and perhaps more later
D = use an untested spraying alternative
79. Refer to Scenario 22-2. Consider the public policy for dealing with the diseased trees. Using
pairwise majority voting with A versus B, then the winner of that vote versus C, then the winner of
that vote versus D, which policy wins?
a. A
b. B
c. C
d. D
ANS: C
NAT: Analytic
TOP: Voting
DIF: 3
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative
80. What is the name of the mathematical result showing that no voting system can simultaneously
satisfy the properties of unanimity, transitivity, independence of irrelevant alternatives, and no
dictators?
a. The fundamental theorem of behavioral economics
b. Arrow's impossibility theorem
c. The fundamental theorem of voting
d. The median voter theorem
ANS: B
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Definitional
81. One implication of the Condorcet paradox is
a. that the order in which things are voted on can affect the result.
b. that the order in which things are voted on is irrelevant.
c. that you do not want to be in charge of arranging which items are voted upon first.
d. that when there are only two items being voted on the order matters.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1987
82. Which voter is the voter whose views on a policy issue are in the middle of the spectrum, with half
of the voters on one side of this voter's view and half on the other side.
a. Average voter
b. Mean voter
c. Modal voter
d. Median voter
ANS: D
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Definitional
83. A community has five voters who are interested in only one issue: the government’s spending on
local parks. If Anthony would like the government to spend $12,000 on parks, Bob prefers $7,000,
Carey prefers $4,000, Diane prefers $2,000, and Elaine prefers $0, how much spending would a
politician seeking to win the election select when running against one opponent?
a. $2,000
b. $4,000
c. $7,000
d. $12,000
ANS: B
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Analytical
84. The median-voter theorem explains why
a. politicians take extreme stands on issues.
b. voters are attracted to political outsiders.
c. two opposing politicians tend to take opposite sides of each issues.
d. politicians tend to take middle-of-the-road positions.
ANS: D
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
Scenario 22-3
Three candidates, Frank, Brian, and Wanda, are running for office. There are three voters in the upcoming
election: Henry, Diane, and Linda. Henry prefers Brian over Frank and Frank over Wanda. Diane prefers
Wanda over Brian and Brian over Frank. Linda prefers Frank over Brian and Brian over Wanda.
85. Refer to Scenario 22-3. If the voters were given a choice of Frank versus Brian first, then the
winner was in a second election versus Wanda, who would win?
a. Frank
b. Brian
c. Wanda
d. There is not enough information to answer this question.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
1988  Chapter 22/Frontiers of Microeconomics
86. Refer to Scenario 22-3. If the voters were given a choice of Frank versus Wanda first, then the
winner was in a second election versus Brian, who would win?
a. Frank
b. Brian
c. Wanda
d. There is not enough information to answer this question.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
87. Refer to Scenario 22-3. If the voters were given a choice of Brian versus Wanda first, then the
winner was in a second election versus Frank, who would win?
a. Frank
b. Brian
c. Wanda
d. There is not enough information to answer this question.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative
Scenario 22-4
Suppose that residents of a town are asked to vote on the best way to improve the safety of an
intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. The voters are divided
into three groups based on their preferences.
Voter Type
Type 1
Type 2
Type 3
40
40
20
Percent of Electorate
4-way stop
stoplight
2-way stop
1st Choice
2-way stop
4-way stop
4-way stop
2nd Choice
stoplight
2-way stop
stoplight
3rd Choice
88. Refer to Scenario 22-4. If the first vote pits a stoplight against a 4-way stop and the second vote
pits a 2-way stop against the winner of the first vote, then the outcome is as follows:
a. 4-way stop wins the first vote and 4-way stop wins the second vote, so the town installs a
4-way stop.
b. 4-way stop wins the first vote and 2-way stop wins the second vote, so the town installs a
2-way stop.
c. Stoplight wins the first vote and stoplight wins the second vote, so the town installs a
stoplight.
d. Stoplight wins the first vote and 2-way stop wins the second vote, so the town installs a 2way stop.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
Chapter 22/Frontiers of Microeconomics  1989
89. Refer to Scenario 22-4. If the first vote pits a 2-way stop against a 4-way stop and the second vote
pits a stoplight against the winner of the first vote, then the outcome is as follows:
a. 2-way stop wins the first vote and 2-way stop wins the second vote, so the town installs a
2-way stop.
b. 2-way stop wins the first vote and stoplight wins the second vote, so the town installs a
stoplight.
c. 4-way stop wins the first vote and 4-way stop wins the second vote, so the town installs a
4-way stop.
d. 4-way stop wins the first vote and stoplight wins the second vote, so the town installs a
stoplight.
ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
90. Refer to Scenario 22-4. If the first vote pits a 2-way stop against a stoplight and the second vote
pits a 4-way stop against the winner of the first vote, then the outcome is as follows:
a. 2-way stop wins the first vote and 2-way stop wins the second vote, so the town installs a
2-way stop.
b. 2-way stop wins the first vote and 4-way stop wins the second vote, so the town installs a
4-way stop.
c. Stoplight wins the first vote and stoplight wins the second vote, so the town installs a
stoplght.
d. Stoplight wins the first vote and 4-way stop wins the second vote, so the town installs a 4way stop.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Pairwise voting
MSC: Applicative
91. Refer to Scenario 22-4. Which of the following statements is correct regarding the Condorcet
paradox and the results of pairwise voting on how to improve the safety of the intersection?
a. The paradox implies that pairwise voting never produces transitive preferences, and so the
voting in the town fails to produce transitive preferences.
b. The paradox implies that pairwise voting sometimes (but not always) fails to produce
transitive preferences, but the voting in the town does produce transitive preferences.
c. The paradox implies that pairwise voting sometimes (but not always) fails to produce
transitive preferences, and the voting in the town fails to produce transitive preferences.
d. The paradox implies that pairwise voting always produces transitive preferences, and so
the voting in the town produces transitive preferences.
ANS: B
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
1990  Chapter 22/Frontiers of Microeconomics
92. Refer to Scenario 22-4. If the vote were conducted according to a Borda count system where each
person's first choice receives 3 points, second choice 2 points, and third choice 1 point, the result
would be
a. a 2-way stop.
b. a 4-way stop.
c. a stoplight
d. a tie between a 2-way stop and a stoplight.
ANS: B
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda counts
MSC: Applicative
93. Refer to Scenario 22-4. Based on the information in the table, which of the following statements is
true?
a. In a vote between a 2-way stop and a stoplight, stoplight wins because 40% of voters have
stoplight as their 1st choice.
b. In a vote between a 2-way stop and a 4-way stop, the 4-way stop wins getting 80% of the
total vote.
c. In a vote between a 4-way stop and a stoplight, there is a tie because each gets 40% of the
vote.
d. None of the above are true.
ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Applicative
94. Economic policy that appears to be ideal in an economics textbook may not be the final policy that
is approved by elected politicians because
a. sometimes a politician’s self interest may conflict with the national interest.
b. economics professors have a notoriously low voting rate.
c. only policies advocated by the President’s Council of Economic Advisors receive enough
national attention to interest politicians.
d. Economists cannot explain why politicians do not implement the ideas from their
textbooks.
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
95. Economic theory assumes that voters, politicians, and other political participants are largely
motivated by
a. personal self-interest.
b. altruism.
c. a desire to promote the general welfare.
d. a desire to promote allocative economic efficiency.
ANS: A
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1991
96. Which of the following statements is not true about the 2002 Farm Security Act?
a. The Act provides funding to improve national security.
b. The stated purpose of the Act is to provide farmers with price stability.
c. The “farmers” receiving money from the Act include Ted Turner and Charles Schwab.
d. The Act provides subsidies to farmers of mohair, chickpeas, and lentils.
ANS: A
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
97. One likely motivation for politicians to pass the 2002 Farm Security Act was
a. to improve national security.
b. to provide price stability for farmers.
c. votes from constituents who benefit from the Act.
d. Both b and c are correct.
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
Sec03-Behavioral Economics
MULTIPLE CHOICE
1.
Economists use basic psychological insights in the field of study called
a. psychological economics.
b. transitional economics.
c. behavioral economics.
d. social economics.
ANS: C
DIF: 1
REF: 22-3
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Behavioral economics
MSC: Definitional
2.
Most economic models
a. incorporate the assumption of rational behavior on the part of economic actors.
b. incorporate the notion that people are usually reluctant to change their minds.
c. are meant to precisely duplicate reality.
d. assume that people often make sub-optimal choices.
ANS: A
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
1992  Chapter 22/Frontiers of Microeconomics
3.
When economists assume that people are rational, they assume that
a. consumers maximize profits.
b. firms maximize revenues.
c. consumers maximize utility.
d. firms maximize output.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
4.
Conventional economic theory assumes that people
a. care a great deal about fairness.
b. are inconsistent over time in their decisionmaking.
c. are rational.
d. are satisficers.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
5.
Herbert Simon suggested that people are not rational maximizers but satisficers, meaning that they
choose a course of action that is
a. personally satisfying, with a greater emphasis on personal consumption than on fairness.
b. socially satisfying, with a greater emphasis on fairness than on personal consumption.
c. good enough.
d. risk averse.
ANS: C
NAT: Analytic
TOP: Satisficers
6.
DIF: 2
REF: 22-3
LOC: Understanding and applying economic models
MSC: Definitional
A "satisficer" is a person who
a. always chooses the best course of action.
b. often chooses the worst course of action.
c. makes decisions that are merely good enough.
d. studies both economics and psychology.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Definitional
7.
A person who makes decisions that are "merely good enough" is called a(n)
a. optimizer.
b. rational person.
c. satisficer.
d. maxi-minimizer.
ANS: C
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Definitional
Chapter 22/Frontiers of Microeconomics  1993
8.
The suggestion that people are "satisficers" is similar to the view that people
a. are wealth-maximizers.
b. exhibit "bounded rationality."
c. go to a lot of trouble to weigh costs and benefits before choosing a course of action.
d. change their minds often.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
9.
Which of the following is an example of satisficing behavior?
a. You continue studying for your economics exam until you believe you’ll get a perfect
score.
b. You spend time looking over the lettuce at the grocery store in order to make sure you get
the best head of lettuce.
c. You briefly clean your room because that's all it takes to get it "clean enough."
d. You carefully plan your day in order to get "the most out of life."
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
10. Which of the following students exhibits satisficing behavior?
a. Alex studies his economics notes every night so that he can be sure to earn a perfect score
on his exam.
b. Brody studies his economics notes for a few hours the night before the test because he will
be satisfied with a C on his exam.
c. Camilla studies extensively as she will only be satisfied with a very high score.
d. None of these students exhibits satisficing behavior.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
11. Studies of human decision-making show that
a. firms are less likely to maximize profits than consumers are to maximize utility.
b. firms are more likely to maximize profits than consumers are to maximize utility.
c. people are irrational more often than they are rational.
d. people are reluctant to change their minds.
ANS: D
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
1994  Chapter 22/Frontiers of Microeconomics
12. Based on the studies of human decision making, which of the following statements is correct?
a. Most people are not bothered by perceived unfairness as long as they receive some
compensation, even if the amount is very small.
b. Most people are very willing to change their minds.
c. Many people’s preferences are inconsistent over time.
d. All of the above are correct.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
13. Studies of human decision-making have detected systematic mistakes that people make. Which of
the following have been detected?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above
ANS: D
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
14. Some of the systematic mistakes that people make include
a. being overconfident.
b. placing too much weight on events that are more vivid compared to those with greater
statistical probability.
c. being generally unwilling to change their minds.
d. All of the above are correct.
ANS: D
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
15. Economic theory assumes people are always rational. Yet observation indicates that people do not
always behave rationally. Which of the following is not a systematic mistake people make in their
decisionmaking?
a. People often interpret information to fit beliefs already held.
b. People place too much emphasis in their decisionmaking on a few extreme situations of
which they are aware.
c. People tend to view current prices differently than they view future prices.
d. People are too sure of their own abilities.
ANS: C
NAT: Analytic
TOP: Rationality
DIF: 2
REF: 22-3
LOC: Understanding and applying economic models
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1995
16. Denzel travels a great deal, and over the past several years he has read dozens of reviews of hotel
chains, all of which rave about the clean rooms and great service at Stay Here hotels. Last month,
Denzel checked into a room at a Stay Here hotel for the first time, only to find the room filthy and
the service lousy. He decided the Stay Here chain is inferior to other hotel chains.
a. Denzel was irrational to have believed the reviews that he had read.
b. Denzel was rational to have changed his mind about Stay Here hotels based on his one
experience.
c. Denzel is an example of someone who gives too much weight to a small number of vivid
observations.
d. Denzel is an example of someone who is reluctant to change his mind.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
17. A survey of 1,500 frequent restaurant patrons revealed that, Julio’s, a local Mexican restaurant
offers high-quality food at low prices. Based on one dining experience, a restaurant critic gave
Julio’s a poor review, saying the food was not very good. As a result, you decide not to dine at
Julio’s. This decision is an example of which of the following systematic mistakes that people make
when making decisions?
a. People are overconfident.
b. People give too much weight to a small number of vivid observations.
c. People are reluctant to change their minds.
d. All of the above.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
18. Evidence from studies of workers' choices on whether to participate in 401(k) plans
suggests that the workers' behavior appears to exhibit
a. indifference.
b. ignorance.
c. inertia.
d. indecision.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
19. Neuro-economists
a. study how emotions influence peoples’ choices.
b. have found that people are more likely to take a foolish risk when they are in a “positive
arousal state.”
c. have found that brains assess risk and return separately.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
1996  Chapter 22/Frontiers of Microeconomics
20. The frontier field of economics that studies how emotions influence peoples’ choices is known as
a. emotive-economics.
b. neuro-economics.
c. brain-economics.
d. feeling-economics.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
21. People interpret evidence to confirm beliefs they already hold. This statement is an example of
which of the following systematic mistakes that people make?
a. people are overconfident
b. people give too much weight to a small number of vivid observations
c. people are reluctant to change their minds
d. All of the above
ANS: C
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
22. Bob is a contestant on a trivia quiz show. For every state capital he can correctly identify, he will
win $1,000. However, before identifying any capitals, he must decide how many he thinks he can
correctly identify. If he cannot identify as many as he has wagered, Bob will not win any money.
Suppose Bob says that he can correctly identify 42 state capitals for a potential payoff of $42,000.
According to studies of human decision-making, what is most likely to happen?
a. Bob will be able to identify 42 state capitals and he will win $42,000.
b. Bob will be able to identify fewer than 42 state capitals and will not win any money.
c. Bob will not be able to identify any state capitals and will not win any money.
d. Bob will choose to save all of the money he wins on the quiz show for his retirement.
ANS: B
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
23. Suppose a group of people read an article on capital punishment. Prior to reading the article, 60% of
the members of the group were opposed to capital punishment, while 40% of the members of the
group were in favor of capital punishment. According to studies of human decision-making, which
of the following is likely?
a. After reading the article, all members of the group oppose capital punishment.
b. After reading the article, all members of the group are in favor of capital punishment.
c. After reading the article, 60% of the members of the group are opposed and 40% of the
members of the group are in favor of capital punishment.
d. The members of the group would elect a representative in favor of capital punishment.
ANS: C
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
Chapter 22/Frontiers of Microeconomics  1997
24. Students of microeconomic principles often say they are going to study "tonight," because the only
way to pass the exam is to study some every night. When "tonight" comes, some students choose to
do something else. Come exam-day, these students do not do well on their exam. This observation is
an example of how people
a. are inconsistent over time.
b. are consistent over time.
c. are mainly interested in fairness.
d. are rational.
ANS: A
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
25. Conventional economic theory suggests that in the ultimatum game, the player proposing a split of
$100 will propose that she get $99 and that the other player get $1. By the same reasoning, if the
amount to be split is $200, the player proposing the split will propose that she gets
a. $100 and that the other player gets $100.
b. $198 and that the other player gets $2.
c. $199 and that the other player gets $1.
d. $200 and that the other player gets nothing.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
26. The results of the ultimatum game illustrate the fact that
a. people's behavior is often driven by an innate sense of fairness.
b. homo economicus is a good description of people's behavior.
c. self-interest brings out the most efficient economic outcome.
d. Both b and c are correct.
ANS: A
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
27. Experiments show that when real people play the ultimatum game, starting with $100,
a. Player A usually proposes giving Player B more than $50.
b. Player B usually accepts Player A's proposal if Player A proposes giving Player B $30 or
$40.
c. players show themselves to be rational wealth-maximizers.
d. Both B and C are correct.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
1998  Chapter 22/Frontiers of Microeconomics
28. Evidence points to the fact that, in the real world, people appear to care about fairness
a. only when it coincides with their own self-interest.
b. only when it coincides with their determination to be consistent over time.
c. even when it does not coincide with their own self-interest.
d. not at all.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
29. Evidence from experiments in which real people play the ultimatum game supports the idea that
people
a. are rational wealth-maximizers.
b. tend to be driven by fairness, without regard for their own self-interest.
c. are driven by both fairness and self-interest.
d. have trouble calculating their own levels of wealth.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
30. Suppose that an economics professor selects two students, Rudy and Rhonda, to participate in a
classroom experiment. The professor gives Rudy ten $1 bills. Rudy must pick an allocation of the
ten $1 bills to offer to Rhonda. If Rhonda accepts the allocation, each student keeps his or her
portion of the money. If Rhonda rejects the allocation, the professor keeps the $10, and each student
receives nothing. Rudy selects $9 for himself and $1 for Rhonda. Based on the studies of human
decision making, which of the following statements is correct?
a. If Rhonda accepts the offer, she is behaving rationally.
b. If Rhonda rejects the offer, she may value fairness more than $1.
c. If Rhonda rejects the offer, Rudy made a bad choice by trying to keep $9 for himself.
d. Any of the above could be correct.
ANS: D
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
31. Brian and Andrea are playing the ultimatum game, starting with $100. The coin flip results in Brian
being the one to propose a division of the $100. Brian proposes that he gets $99 and Andrea gets $1.
a. Because the 99-1 split isn’t fair, Brian should not make this offer.
b. Conventional economic theory predicts that Brian will propose a 99-1 split, just as he did.
c. Experimental evidence suggests that Andrea will accept the 99-1 split because, even
though it isn’t fair, it’s better than nothing.
d. Economic theory predicts that Brian should choose a 60-40 split to maximize his payoff.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Analytical
Chapter 22/Frontiers of Microeconomics  1999
32. Eli and Peyton are playing the ultimatum game, starting with $100. The coin flip results in Eli being
the one to propose a division of the $100. If Eli acts as economic theory assumes, he should propose
that
a. he gets $30 and Peyton gets $70.
b. he gets $50 and Peyton gets $50.
c. he gets $60 and Peyton gets $40.
d. he gets $99 and Peyton gets $1.
ANS: D
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Analytical
33. The ultimatum game reveals that
a. it does not make sense to try to maximize profits.
b. people may have an innate sense of fairness that economic theory does not capture.
c. offering someone a wildly unfair outcome is usually ok since people tend to make
decisions using a "something is better than nothing" philosophy.
d. Both a and b.
ANS: B
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Ultimatum game
MSC: Interpretive
34. In a dictator game, player A must divide $100 between player A and player B. In this game, player
B does not have the opportunity to reject an offer — they go home with whatever player A offers.
Experiments have observed that when player A splits the $100, he or she consistently offers over
$10 to player B. Which of the following comments fits best.
a. Although player A is acting as economic theory usually assumes, he or she makes such
offers because they seem more fair.
b. Although player A is acting as economic theory usually assumes, he or she makes such
offers although they are not fair.
c. Although player A is not acting as economic theory usually assumes, he or she makes such
offers because they seem more fair.
d. Although player A is not acting as economic theory usually assumes, he or she makes such
offers because they are not fair.
ANS: C
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
35. Betty knows that she needs to save 20% of her annual income for retirement. However, she spends
90% of her income each year. This is an indication that Betty's preferences are
a. irrational.
b. inconsistent over time.
c. satisficing rather than maximizing.
d. undefined.
ANS: B
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
2000  Chapter 22/Frontiers of Microeconomics
36. According to one survey 76 percent of Americans said they were not saving enough for retirement.
This example of inconsistency over time
a. is rational behavior.
b. likely occurs because saving requires a sacrifice in the present for a reward in the distant
future.
c. likely occurs because Americans don’t care about retirement.
d. definitely would not happen if Americans earned a greater return on their investments.
ANS: B
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
37. Behavioral economics
a. integrates psychological insights into economic models.
b. relies on the assumption that homo economicus describes economic decision-making.
c. assumes that economic agents have full information about the conditions surrounding their
decisions.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics
MSC: Interpretive
38. Which of the following statements is correct?
a. Based on studies of human decision making, most people are overconfident in their own
abilities.
b. Arrow’s impossibility theorem disproves the median voter theorem.
c. Romantic gifts are an example of adverse selection.
d. An efficiency wage encourages workers to shirk.
ANS:
NAT:
TOP:
MSC:
A
DIF: 2
REF: 22-3, 22-2, 22-1
Analytic
LOC: Understanding and applying economic models
Behavioral economics, political economy, asymmetric information
Analytical
39. Which of the following statements is not correct?
a. Based on studies of human decision making, most people value fairness.
b. Based on studies of human decision making, some people’s preference are inconsistent
over time.
c. Government intervention is the best remedy for the problems caused by asymmetric
information.
d. Advertising can be an example of a company signaling the quality of its products.
ANS:
NAT:
TOP:
MSC:
C
DIF: 2
REF: 22-3, 22-2, 22-1
Analytic
LOC: Understanding and applying economic models
Behavioral economics, political economy, asymmetric information
Analytical
Chapter 22/Frontiers of Microeconomics  2001
40. Which of the following statements is not correct?
a. Majority rule explains why politicians appeal to the middle of the voting distribution.
b. Based on studies of human decision making, most people prefer to procrastinate, both in
the immediate future and in the distant future.
c. Screening refers to an uninformed party trying to extract information from an informed
party.
d. Advertising can be an example of a company signaling the quality of its products.
ANS:
NAT:
TOP:
MSC:
B
DIF: 2
REF: 22-3, 22-2, 22-1
Analytic
LOC: Understanding and applying economic models
Behavioral economics, political economy, asymmetric information
Analytical