Question 1

Which of the following does NOT occur when the price of a good increases?
A) The good becomes more expensive relative to all other goods
B) The consumer's purchasing power increases
C) Consumers shift their purchases away from the more expensive good
D) The consumer is effectively poorer than before the increase in price

Accepted Answer

When the price of a good increases, the consumer's purchasing power does not increase; instead, it decreases because they can now buy less of the good with the same amount of money. Choices A, C, and D are all consequences of a price increase.

Question 2

-Refer to Figure above. The substitution effect is shown by the movement
A) From bundle A to bundle C
B) From bundle A to bundle B
C) From bundle B to bundle C
D) From bundle C to bundle B

Accepted Answer

The substitution effect is the change in the consumption of a good due to a change in the relative price of that good. In this case, the relative price of good X has decreased, so consumers will substitute good X for good Y. This is shown by the movement from bundle A to bundle B.

Question 3

-Refer to Figure above. The income effect is shown by the movement
A) From bundle A to bundle C
B) From bundle A to bundle B
C) From bundle B to bundle C
D) From bundle C to bundle B

Accepted Answer

D

Question 4

The effect of a compensated price change is known as:
A) The price effect of a price change
B) The income effect of a price change
C) The substitution effect of a price change
D) The replacement effect of a price change

Accepted Answer

The substitution effect of a price change refers to the change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute away from more expensive goods towards cheaper ones.

Question 5

Which of the following does NOT describe a compensating variation?
A) The amount of money that exactly compensates a consumer for a change in economic circumstances
B) The amount of money that produces an equivalent effect on a consumer's well-being
C) The most some one (someone) is willing to pay to experience something beneficial
D) The least someone is willing to pay to experience something harmful

Accepted Answer

The answer of Which of the following does NOT describe...

Question 6

-Refer to Figure above. Suppose the price of pizza is $8.50. Then the consumer will purchase _____ pizzas and the net benefit is ______.
A) 5; $9.50
B) 4; $8.00
C) 5; $3.50
D) 4; $9.50

Accepted Answer

At a price of $8.50, the consumer will purchase up to the point where the price equals their marginal benefit. The graph (not visible here) likely shows that the marginal benefit of the 4th pizza is equal to or just above $8.50, making 4 pizzas the quantity purchased. The net benefit (consumer surplus) is the area above the price and below the demand curve up to the quantity purchased, which, based on the given options, is correctly represented as $8.00 for 4 pizzas.

Question 7

-Refer to Figure above. Suppose the price of pizza is $9.75. Then consumer surplus is ______.
A) $3.75
B) $3.50
C) $29.25
D) $33.00

Accepted Answer

Consumer surplus is the difference between the price consumers are willing to pay for a good and the price they actually pay. In this case, consumers are willing to pay $13.50 for a pizza, but they only have to pay $9.75. Therefore, consumer surplus is $13.50 - $9.75 = $3.75.

Question 8

-Refer to Figure above. If the price is $1,500, then consumer surplus is equal to
A) $175,000
B) $535,000
C) $1,000
D) $262,500

Accepted Answer

Consumer surplus is the difference between the price consumers are willing to pay for a good and the price they actually pay. In this case, the price consumers are willing to pay is $1,750 (the point where the demand curve intersects the vertical axis), and the price they actually pay is $1,500. Therefore, consumer surplus is $1,750 - $1,500 = $250.

Question 9

Suppose a consumer's nominal income is $50,000 and the cost-of-living index is 1.3. The consumer's real income is
A) $50,000
B) $65,000
C) $53,000
D) $38, 462

Accepted Answer

Real income is calculated by dividing the nominal income by the cost-of-living index. Therefore, $50,000 / 1.3 = $38,461.54, which rounds to $38,462.

Question 10

For low wages, the leisure demand curve slopes ______; for higher wages it slopes ______.
A) Upward; downward
B) Downward; upward
C) Downward; downward
D) Upward; upward

Accepted Answer

For low wages, individuals are more inclined to value leisure time over work since the opportunity cost of leisure (foregone wages) is lower, leading to a downward slope in the leisure demand curve. As wages increase, the opportunity cost of leisure increases, making work more attractive and causing the leisure demand curve to slope upward.

Question 11

A consumer's budget constraint is determined by
A) The consumer's income
B) The consumer's income and preferences
C) The consumer's income and the prices of the goods they buy
D) The consumer's preferences and the prices of the goods they buy

Accepted Answer

A consumer's budget constraint is determined by the consumer's income and the prices of the goods they buy. This constraint outlines the combination of goods and services the consumer can afford given their income level and the prices of those goods and services. Preferences affect choices within the budget constraint but do not determine the constraint itself.

Question 12

-Refer to Figure above. Which graph represents an increase in the consumer's income?
A) A
B) B
C) C
D) D

Accepted Answer

The answer of 
-Refer to Figure above. Which graph represents...

Question 13

Whenever a consumer purchases good X but not good Y, then A) MRS_XY >= P_X/P_Y at the chosen bundle B) MRS_XY <= P_X/P_Y at the chosen bundle C) MRS_XY = P_X/P_Y at the chosen bundle D) MRS_XY = -P_X/P_Y at the chosen bundle

Accepted Answer

When a consumer purchases good X but not good Y, it indicates that the marginal rate of substitution (MRS) of X for Y is greater than or equal to the price ratio, meaning the consumer values X more relative to Y than the market does.

Question 14

Stewie spends all of his income on movie rentals (R) and noodles (N). His marginal rate of substitution for rentals with noodles is given by MRS_RN = 20/√ R. Suppose that movies rent for $2 and noodles cost $1. Plot his income-consumption curve, his Engle curve for movie rentals and his Engel curve for noodles.

Accepted Answer

The answer of Stewie spends all of his income on...

Quiz 2: From Demand to Welfare, Constraints, Choices, and Demand

Which of the following does NOT occur when the price of a good increases?

-Refer to Figure above. The substitution effect is shown by the movement

-Refer to Figure above. The income effect is shown by the movement

The effect of a compensated price change is known as:

Which of the following does NOT describe a compensating variation?

-Refer to Figure above. Suppose the price of pizza is $8.50. Then the consumer will purchase _ pizzas and the net benefit is __.

-Refer to Figure above. Suppose the price of pizza is $9.75. Then consumer surplus is ______.

-Refer to Figure above. If the price is $1,500, then consumer surplus is equal to

Suppose a consumer's nominal income is $50,000 and the cost-of-living index is 1.3. The consumer's real income is

For low wages, the leisure demand curve slopes ; for higher wages it slopes .

A consumer's budget constraint is determined by

-Refer to Figure above. Which graph represents an increase in the consumer's income?

Whenever a consumer purchases good X but not good Y, then