Question 1

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.
-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?

Accepted Answer

Diane saves $150,000 during her working period ($250,000 - $100,000). With a 10% interest rate, her savings grow to $165,000 in the retirement period ($150,000 * 1.10).

Question 2

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

Accepted Answer

An increase in the interest rate will increase the opportunity cost of spending money now, making saving more attractive. As both consumption when young and consumption when old are normal goods, an increase in saving when young will result in an increase in consumption when old. Therefore, the income effect of an increase in the interest rate will lead to a decrease in saving when young because people will choose to save less and consume more in the present, with the intention of consuming more in the future when they are old.

Question 3

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

Accepted Answer

In the upward-sloping portion of the individual labor-supply curve, the substitution effect is greater than the income effect. This is because as the wage rate increases, the opportunity cost of leisure increases, incentivizing individuals to work more (substitution effect). However, as income increases with higher wages, individuals may choose to consume more leisure instead of work more (income effect). However, in the upward-sloping portion of the curve, the substitution effect dominates, leading to an overall increase in labor supply.

Question 4

Tom experiences an increase in his wages.The hours of labor that he supplies to the market would increase if

Accepted Answer

According to the substitution effect, as Tom's wages increase, the opportunity cost of leisure increases, making leisure relatively more expensive than work. As a result, Tom will choose to work more hours to take advantage of the higher wages. This substitution effect dominates the income effect, which suggests that as Tom's wage increases, he can afford to work less and enjoy more leisure time. Therefore, if the substitution effect is larger than the income effect, Tom will choose to work more, leading to an increase in the hours of labor that he supplies to the market.

Question 5

Which of the following statements is not correct?

Accepted Answer

The answer of Which of the following statements is not...

Question 6

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.
-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?

Accepted Answer

When Fred's wage increases to $90 per hour of writing, his budget constraint shifts outward, and he can afford to consume more and work less. Choice C falls on the new budget constraint where Fred works for 27 hours (112-85=27) and earns $2,430 (27 x $90) from writing. He can then use this money to consume $2,430 of goods and services while enjoying 85 hours of leisure. Choices A,B, and D are all points on the old budget constraint, which is no longer valid once Fred's wage increases.

Question 7

If leisure were an inferior good,then labor supply curves

Accepted Answer

If leisure were an inferior good, people would demand less leisure as their income increases. This means they would supply more labor, resulting in a positively sloped labor supply curve. Therefore, the correct option is B.

Question 8

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.
-Refer to Scenario 21-3.If the interest rate on savings increases,it is possible that

Accepted Answer

An increase in the interest rate on savings can lead to different behaviors. Diane might save more to take advantage of higher returns (B), save less if she feels she can achieve her retirement goals with less saving due to higher returns (A), or maintain her current consumption pattern if her preferences or needs dictate (C).

Question 9

Harry experiences an increase in his wages.The hours of labor that he supplies to the market would decrease if

Accepted Answer

If the income effect is larger than the substitution effect, Harry will choose to work fewer hours because the additional income allows him to enjoy more leisure time.

Question 10

The substitution effect of an increase in the interest rate will result in an increase in

Accepted Answer

The answer of The substitution effect of an increase in...

Question 11

When considering household saving,the relative price between consuming when young and consuming when old is the

Accepted Answer

The interest rate that individuals can earn on their private savings determines the relative price between consuming when young and consuming when old. A higher interest rate makes it more attractive to save for the future and consume less when young, while a lower interest rate may encourage individuals to consume more and save less, which can impact their ability to maintain their desired standard of living in old age.

Question 12

Suppose that Stacy's hourly wage increases,and she decides to work fewer hours.For her,the substitution effect of the wage change is

Accepted Answer

The substitution effect suggests that as the wage increases, individuals will substitute towards more leisure time as the opportunity cost of leisure becomes lower. Therefore, if Stacy's hourly wage increases, it will encourage her to work fewer hours (substitution effect). However, the income effect suggests that as the wage increases, her income will increase, which will encourage her to work more hours (income effect). If Stacy decides to work fewer hours despite the increase in her hourly wage, it suggests that the income effect is more than offset by the substitution effect, leading to the overall choice of working fewer hours.

Question 13

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

Accepted Answer

The answer of A consumer has preferences over consumption and...

Question 14

The substitution effect from an increase in wages is evident in a

Accepted Answer

The substitution effect states that when wages increase, individuals will substitute work for leisure since the cost of leisure has increased. Therefore, the desire to consume less leisure is evident in the substitution effect.

Question 15

If the interest rate rises,an individual could choose to

Accepted Answer

The answer of If the interest rate rises,an individual could...

Question 16

The labor supply curve may have a backward bending portion because at higher wages the

Accepted Answer

At higher wages, the income effect becomes larger than the substitution effect, causing individuals to potentially decrease their labor supply as they are already earning enough income to fulfill their desired consumption levels. This leads to the backward bending portion of the labor supply curve.

Question 17

When leisure is a normal good,the income effect from a decrease in wages is evident in

Accepted Answer

The answer of When leisure is a normal good,the income...

Question 18

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.
-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?

Accepted Answer

If Fred spends 80 hours playing volleyball, he will have 32 hours (112-80) left for writing. 
Therefore, his weekly income from writing will be: 
32 hours x $75/hour = $2,400. 
This is his available income to spend on consumption goods.

Question 19

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

Accepted Answer

If the substitution effect is greater than the income effect, Jake will save less because the lower interest rate makes future consumption relatively more expensive compared to current consumption.

Question 20

Economic studies of lottery winners and people who have inherited large amounts of money show that

Accepted Answer

The income effect likely outweighs the substitution effect for most people because when people receive a large sum of money, they often choose to work less and enjoy more leisure, indicating that the increase in wealth leads to a preference for leisure over labor.

Quiz 21: The Theory of Consumer Choice