Question 1

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

Accepted Answer

Since DVDs and trips to the movie theater are perfect substitutes, when the price of DVDs doubles, Emily will switch completely to trips to the movie theater. This means there will be no substitution effect, as Emily is already consuming as much of this good as possible. The income effect will still occur, however, as her purchasing power has decreased due to the increased price of DVDs. Therefore, the correct answer is C, as there will be no substitution effect.

Question 2

Which of the following descriptions best depicts the substitution effect?

Accepted Answer

The substitution effect is when a consumer changes their consumption of a good due to a change in its price while maintaining the same level of satisfaction. Thus, option C - "the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant" - best depicts the substitution effect. Option A refers to the income effect, which is the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant. Option B is not a valid description of any economic concept. Option D describes a combination of the income and substitution effects, but it does not solely depict the substitution effect.

Question 3

Figure 21-23 
-Refer to Figure 21-23. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from

Accepted Answer

The answer of Figure 21-23 
-Refer to Figure 21-23. When...

Question 4

Cashews and asparagus are normal goods. When the price of asparagus falls, the substitution effect by itself causes

Accepted Answer

When the price of asparagus falls, asparagus becomes relatively cheaper compared to cashews, leading consumers to substitute asparagus for cashews, thus buying less cashews.

Question 5

Given a consumer's indifference map, the demand curve for a good can

Accepted Answer

The demand curve for a good can be derived from a consumer's indifference map by moving the budget constraint as the market price of one good changes. This is because a change in the price of a good alters the budget constraint and shifts the consumer's optimal consumption bundle, resulting in a new demand quantity for the good.

Question 6

An individual's demand curve for a good is derived by varying the

Accepted Answer

An individual's demand curve for a good is derived by varying the price of that good and observing the resulting quantities demanded of that good. This allows for the creation of a graph that shows the relationship between the price of the good and the quantity demanded at each price, resulting in a downward sloping demand curve.

Question 7

Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will

Accepted Answer

The substitution effect occurs when the relative price of a good changes, causing consumers to shift their consumption towards the now cheaper good. In this case, the price of good Y has fallen, making it relatively cheaper compared to good X. As a result, the consumer will substitute good Y for good X and buy more of good Y and less of good X. Therefore, the correct answer is A.

Question 8

Figure 21-23 
-Refer to Figure 21-23. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The substitution effect can be illustrated as the movement from

Accepted Answer

When the price of X decreases, the consumer will substitute X for Y. This leads to a movement along the indifference curve from D to C, which represents the substitution effect. Since the consumer still prefers bundle C to bundle E, the best choice remains D.

Question 9

Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution?

Accepted Answer

The substitution effect is the effect of a price change that moves the consumer along the same indifference curve to a point with a new marginal rate of substitution, meaning that the consumer is substituting one good for another to maintain the same level of satisfaction, given the new prices. The budget effect refers to the change in purchasing power due to a change in price, while the preference effect and income effect are not relevant to this scenario.

Question 10

The substitution effect of a price change is depicted by a

Accepted Answer

The substitution effect is shown by a movement along the original indifference curve to a point where the marginal rate of substitution equals the new price ratio, reflecting the change in relative prices while keeping utility constant.

Question 11

When we derive the demand curve for a good, we should remember that the

Accepted Answer

The income effect and substitution effect can work together or in opposite directions depending on the elasticity of the good and the consumer's preferences. If the good is elastic, meaning that consumers can easily find substitutes, the substitution effect will be greater than the income effect, and vice versa. Therefore, the income effect and substitution effect may work in the same direction or in opposite directions.

Question 12

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

Accepted Answer

When the price of good X falls, it becomes relatively cheaper compared to good Y, causing Dave to substitute away from Y and increase his consumption of X. This is the substitution effect. However, the decrease in the price of X also increases Dave's real income, allowing him to purchase more of both goods. This is the income effect. The overall effect depends on the magnitude of the substitution and income effects. In this case, we can predict with certainty that the substitution effect will be positive for good X and negative for good Y (choice B), but we cannot be sure about the net effect on Dave's consumption of X and Y.

Question 13

A consumer consumes two normal goods, sandwiches and milk. When the price of milk is $0.50 per glass, the consumer purchases 40 glasses. When the price rises to $0.65 per glass, the consumer purchases 30 glasses. We can use the information provided by the consumer's optimum choices to derive the

Accepted Answer

We can use the information provided to find the quantity demanded of milk at two different prices. With this information, we can plot two points on a demand curve and find the slope, giving us the equation of the demand curve. Therefore, the answer is (A) demand curve for milk.

Question 14

Consumer theory provides the foundation for understanding demand curves because

Accepted Answer

Consumer theory is based on the idea that consumers make rational choices in order to maximize their satisfaction or utility, given their budget constraint. Each point on a demand curve represents an optimal choice point where the consumer has chosen the combination of goods that makes them the most satisfied given their budget constraint. Therefore, consumer theory provides the foundation for understanding demand curves because it explains why consumers make the choices they do and how these choices are reflected in the demand curve.

Question 15

Pepsi and pizza are normal goods. When the price of pizza rises, the substitution effect causes Pepsi to be relatively

Accepted Answer

When the price of pizza rises, consumers will substitute away from pizza to other goods, making Pepsi relatively less expensive compared to pizza, leading to an increase in the quantity of Pepsi demanded.

Question 16

A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The substitution effect, by itself, suggests that the consumer will consume

Accepted Answer

The substitution effect suggests that when the price of Pepsi rises, consumers will substitute away from Pepsi (because it has become relatively more expensive) and towards popcorn (which has become relatively cheaper in comparison), leading to more consumption of popcorn and less consumption of Pepsi.

Question 17

Figure 21-23 
-Refer to Figure 21-23. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The demand curve can be illustrated as the movement from

Accepted Answer

When the price of X decreases from $80 to $20, the consumer can afford more of good X, leading to a new optimal choice. The movement from D to E on the demand curve illustrates this change in quantity demanded due to the price decrease.

Question 18

You can think of an indifference curve as an

Accepted Answer

An indifference curve represents a set of bundles of goods between which a consumer is indifferent, meaning each bundle provides the same level of utility or satisfaction.

Question 19

Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect by itself will cause a

Accepted Answer

When the price of pizza falls, the substitution effect will lead consumers to substitute away from Pepsi towards pizza, causing a movement along the indifference curve. As a result, consumers will buy less Pepsi. Therefore, the correct answer is D.

Question 20

The income effect of a price change is depicted by

Accepted Answer

The income effect of a price change is depicted by a parallel shift of the budget constraint at the new set of prices, reflecting the change in purchasing power due to the price change.

Quiz 21: The Theory of Consumer Choice