Question 1

In a two-year period,suppose Gloria has $10,000 in income in year 1 and $4,300 in income in year 2.In order to maintain her optimal consumption of $8,000 in year 1 and $6,500 in year 2,she can borrow or lend at a rate of 10 percent.If Gloria's income stream changes such that she earns $3,000 in Year 1 and $12,000 in Year 2,the budget line will:
A)shift out away from the origin.
B)pivot about the endowment point.
C)pivot about the intercept on the axis representing year 2 income.
D)remain unchanged.

Accepted Answer

The answer of In a two-year period,suppose Gloria has $10,000...

Question 2

Consider an individual for whom consumption in two periods is a normal good.Other things remaining the same,if the interest rate increases,then:
A)he is worse off.
B)he is better off.
C)he will spend more in each period.
D)he will choose to save more.

Accepted Answer

The answer of Consider an individual for whom consumption in...

Question 3

A family's preferences toward schooling,before and after a fixed-quantity subsidy,are shown in Figure 5-5.Prior to the subsidy,the family is in equilibrium at point J.Assume that public schooling cannot be supplemented with private tutoring. 
-Refer to Figure 5-5.Public schooling provided in the amount of B0 causes the family to consume _____ of other goods.
A)MC
B)MH
C)M0
D)CH

Accepted Answer

At point B0, the family is consuming M0 of other goods.

Question 4

All-you-can-eat restaurants charge a fixed price that permits unlimited access to prepared food.Suppose food consumption is on the horizontal axis and all other goods on the vertical axis.If the restaurant charges $10 per meal while the price of all other goods is $20,restaurant patrons will consume to a point on their indifference curve where their marginal rate of substitution of food for all other goods is equal to _____.
A)2
B)1/2
C)10
D)0

Accepted Answer

The answer of All-you-can-eat restaurants charge a fixed price that...

Question 5

Compared to a system of providing education free of cost at government schools,a voucher program that provides the means for parents to send their school-age children to private schools at government expense:
A)will allow families to consume a higher quantity and better quality of education.
B)will lower the quality of education provided.
C)will not affect the quantity and quality of education.
D)will result in a lower quantity of education consumed.

Accepted Answer

A voucher program would allow families to use government funds to send their children to private schools, which may offer higher quality education and learning environments than some government schools. This would also increase the quantity of education consumed, as parents would have more options and ability to choose the best school for their child's needs. Therefore, a voucher program is likely to result in higher quality and quantity of education being consumed.

Question 6

Suppose a local government decides to increase taxes on its residents and use that money to provide meals to each individual in the community.The scheme provides each individual with a small frozen dinner.Compared to a voucher system that allows individuals to purchase meals at a private restaurant,the frozen dinner scheme:
A)will decrease both quantity and quality of meals consumed.
B)will not affect the quality or quantity of meals.
C)will give individuals greater variety and choice of meals.
D)will increase both quantity and quality of meals consumed.

Accepted Answer

The answer of Suppose a local government decides to increase...

Question 7

Other things remaining the same,in the intertemporal consumer choice model a change in the endowment point:
A)produces a parallel shift in the consumer's budget line.
B)alters the relative cost of future and present consumption.
C)pivots the budget line.
D)reduces the cost of current consumption.

Accepted Answer

The answer of Other things remaining the same,in the intertemporal...

Question 8

Consider the income and consumption of an individual between two time periods.If consumption in period 2 (C₂)is on the horizontal axis,consumption in period 1 (C₁)is on the vertical axis,and the interest rate is 11 percent,the slope of the budget constraint must be _____. A)0.11 B)0.9 C)1.11 D)11

Accepted Answer

The formula for the slope of the budget constraint is:

Slope = -(1+r)

where r is the interest rate. Plugging in r=0.11, we get:

Slope = -(1+0.11) = -1.11

However, we need to note that the slope for consumption in period 2 is on the horizontal axis, which is reversed from the usual convention where the slope is on the vertical axis. Therefore, we need to take the negative reciprocal of the slope, which is:

Slope = 1/(-1.11) = -0.9

Since the budget constraint is downward sloping, the slope has a negative value. Hence, the correct answer is B.

Question 9

Suppose consumption in year 2 (C₂)is on the horizontal axis and consumption in year 1 (C₁)is on the vertical axis.An increase in the interest rate: A)makes borrowers better off and lenders worse off. B)causes more people to shift their consumption from year 2 to year 1. C)causes the budget line to rotate outward along the horizontal axis. D)will reduce savings in year 2.

Accepted Answer

The answer of Suppose consumption in year 2 (C₂)is on...

Question 10

An individual is considering consumption in two periods.He has decided to borrow $1,000 in period 1,given his endowment and the interest rate.Other things remaining the same,if the interest rate increases,he will:
A)borrow less than $1,000.
B)continue to borrow $1,000.
C)borrow more than $1,000.
D)borrow more or less depending upon whether or not the substitution effect of the change is greater than the income effect.

Accepted Answer

If the interest rate increases, the cost of borrowing also increases. Therefore, the individual may find it more expensive to borrow $1,000 and may choose to borrow less than $1,000 in period 1.

Question 11

A reduction in an individual's future income will cause:
A)consumption to fall in both time periods because consumption in both years are normal goods.
B)a fall in consumption in the future period but not the current period since the price of future consumption relative to current consumption did not change.
C)consumption to fall in the future period and rise in the current period as the consumer substitutes more current consumption for the future consumption.
D)an increase in current consumption if interest rates are high enough to induce consumption.

Accepted Answer

A reduction in future income affects consumption in both periods because individuals typically smooth their consumption over time, considering their lifetime income. When future income decreases, individuals adjust their consumption downward in both the present and the future to maintain a balanced consumption pattern over their lifetime. This behavior is consistent with the theory of intertemporal choice, which suggests that consumption in both periods are normal goods, and a decrease in income will lead to a decrease in consumption of these goods.

Question 12

Which of the following groups are better off under an annual fee system of garbage disposal?
A)Households that generate the average amount of trash
B)Households that generate less than the average amount of trash
C)All households that opt for the annual fee system
D)Households that generate more than the average amount of trash

Accepted Answer

Households that generate more than the average amount of trash benefit from an annual fee system because they pay the same amount as everyone else despite disposing of more garbage, effectively reducing their per-unit cost of disposal.

Question 13

An increase in the price per unit for trash disposal from zero to a positive quantity causes the budget line to change from:
A)a vertical line to a horizontal line.
B)having a zero slope to a negative slope.
C)having a negative slope to a positive slope.
D)a horizontal line to a vertical line.

Accepted Answer

When the price per unit for trash disposal increases from zero to a positive quantity, it means that there is now a cost associated with disposing of trash, where previously disposing of trash was free. This change introduces a trade-off between disposing of trash and other goods or services, represented by a budget line with a negative slope, indicating that more of one good (or service) can only be obtained by giving up some of another good (or service). Initially, with no cost for trash disposal, the budget line would not accurately reflect a trade-off between trash disposal and other goods, implying an infinite or undefined slope.

Question 14

In the intertemporal consumer choice model,an increase in _____ will alter the slope of the budget line.
A)saving
B)the interest rate
C)future income
D)borrowing

Accepted Answer

According to the intertemporal consumer choice model, the equation for the budget line is given by:
C = Y - (1+r)A
where C is consumption, Y is current income, r is the interest rate, and A is current assets (savings or borrowing).

An increase in the interest rate (r) will increase the opportunity cost of current consumption relative to future consumption, making it more expensive to borrow and increasing the return on savings. This will result in a steeper slope for the budget line, reflecting the higher cost of current consumption and the greater reward for delaying consumption to the future. Therefore, option B, the interest rate, is the correct choice.

Question 15

A family's preferences toward schooling,before and after a fixed-quantity subsidy,are shown in Figure 5-5.Prior to the subsidy,the family is in equilibrium at point J.Assume that public schooling cannot be supplemented with private tutoring. 
-Refer to Figure 5-5.Suppose the government offers education vouchers of value $B0 instead of a fixed-quantity subsidy.The budget line will become _____.
A)MATN
B)AS
C)MN
D)MAS

Accepted Answer

The answer of A family's preferences toward schooling,before and after...

Question 16

One of the possible explanations for why more trash is generated in cities is that _____.
A)cities have a low population density.
B)trash collection services in cities are expensive.
C)trash disposal is an inferior good
D)most city dwellers do not have to pay per unit of trash generated

Accepted Answer

Most cities have a system of residential trash collection that is either included in property taxes or a flat fee for all households, regardless of the amount of trash generated. This means that there is no direct financial incentive to reduce the amount of waste produced, leading to more waste being generated in cities.

Question 17

Consider a two-year period where a consumer has an income of $10,000 in year 1 and $8,000 in year 2.The consumer can borrow or lend at a rate of 10 percent.If the consumer decides to save $1,000 in year 1,it means:
A)his consumption will be equal in both years.
B)he will have a higher consumption in year 2 than in year 1.
C)he considers consumption in year 1 as an inferior good.
D)the cost of future consumption will increase.

Accepted Answer

If the consumer saves $1,000 in year 1, he will have $9,000 to consume in that year. At a rate of 10 percent, this amount will grow to $9,900 by the end of year 2. If he chooses to consume all of his income in year 1, he will have nothing left to consume in year 2. Therefore, by saving in year 1, he will have a higher consumption in year 2 than in year 1.

Question 18

Which of the following policies would work best towards reducing traffic jams?
A)Relaxation of government restrictions on the number of cars being produced and sold
B)A reduction in interest rates on car loans
C)The imposition of a marginal fee to use certain roads during peak traffic hours
D)A levy of a fixed annual payment by car owners as traffic congestion fees

Accepted Answer

Imposing a marginal fee to use certain roads during peak traffic hours (congestion pricing) directly targets the issue of traffic jams by discouraging unnecessary trips during busy times, effectively reducing congestion.

Question 19

Assume an indifference map with other goods on the vertical axis and health on the horizontal axis.The government provides families with $400 vouchers that can be redeemed for healthcare services at any hospital,public or private.The budget line for a family that avails this voucher scheme will:
A)be negatively sloped.
B)be positively sloped up to $400 and then have a zero slope.
C)have a zero slope up to $400 and then have a negative slope.
D)be a straight line with an infinite slope.

Accepted Answer

Since the family has $400 in vouchers that can only be redeemed for healthcare services, their budget line will be a vertical line at $400 for healthcare spending (assuming no other income or subsidies). This means they can only choose between different levels of healthcare (i.e. different quantities of healthcare services) and cannot vary their spending on other goods. Therefore, up to $400, the budget line will have a slope of zero, indicating that they can fully substitute healthcare for other goods without having to reduce their healthcare spending. Beyond $400, the slope will be negative, indicating that they will have to reduce their spending on other goods in order to increase their healthcare spending.

Question 20

An individual who is considering consumption between two time periods (year 1 and year 2)has an endowment of $20,000 in year 1 and $15,000 in year 2.If the interest rate is 5 percent,what is the maximum approximate amount that can be spent on consumption in year 1?
A)$35,000
B)$20,000
C)$35,750
D)$34,250

Accepted Answer

The individual can either consume all $20,000 in year 1 and have no consumption in year 2, or save some of it and consume some of it in year 2. To determine the maximum amount that can be consumed in year 1, we need to calculate the present value of the endowment in year 2, which is $15,000/(1+0.05) = $14,285. Finally, we add the present values of the endowment in year 1 and year 2 to get the maximum approximate amount that can be spent on consumption in year 1: $20,000 + $14,285 = $34,285. Rounded to the nearest hundred, this is $34,250, which is answer choice D.

Quiz 5: Using Consumer Choice Theory

Consider an individual for whom consumption in two periods is a normal good.Other things remaining the same,if the interest rate increases,then:

Compared to a system of providing education free of cost at government schools,a voucher program that provides the means for parents to send their school-age children to private schools at government expense:

Other things remaining the same,in the intertemporal consumer choice model a change in the endowment point:

Consider the income and consumption of an individual between two time periods.If consumption in period 2 (C₂) is on the horizontal axis,consumption in period 1 (C₁) is on the vertical axis,and the interest rate is 11 percent,the slope of the budget constraint must be _____.

Suppose consumption in year 2 (C₂) is on the horizontal axis and consumption in year 1 (C₁) is on the vertical axis.An increase in the interest rate:

An individual is considering consumption in two periods.He has decided to borrow $1,000 in period 1,given his endowment and the interest rate.Other things remaining the same,if the interest rate increases,he will:

A reduction in an individual's future income will cause:

Which of the following groups are better off under an annual fee system of garbage disposal?

An increase in the price per unit for trash disposal from zero to a positive quantity causes the budget line to change from:

In the intertemporal consumer choice model,an increase in _____ will alter the slope of the budget line.

One of the possible explanations for why more trash is generated in cities is that _____.

Consider a two-year period where a consumer has an income of $10,000 in year 1 and $8,000 in year 2.The consumer can borrow or lend at a rate of 10 percent.If the consumer decides to save $1,000 in year 1,it means:

Which of the following policies would work best towards reducing traffic jams?

Assume an indifference map with other goods on the vertical axis and health on the horizontal axis.The government provides families with $400 vouchers that can be redeemed for healthcare services at any hospital,public or private.The budget line for a family that avails this voucher scheme will:

An individual who is considering consumption between two time periods (year 1 and year 2) has an endowment of $20,000 in year 1 and $15,000 in year 2.If the interest rate is 5 percent,what is the maximum approximate amount that can be spent on consumption in year 1?