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Test bank for principles of economics 2nd by mankiw chapter 21a

 Chapter 21/The Theory of Consumer Choice ❖ 231 

Chapter 21
The Theory of Consumer Choice
Test A
1

.

The theory of consumer choice examines
a. The determination of output in competitive markets.
b. The determination of prices in competitive markets.
c. The tradeoffs inherent in decisions made by consumers.
d. How consumers select inputs into manufacturing production processes.

2

.

A budget constraint
a. shows the consumption bundles that a consumer can afford.

b. reflects the desire by consumers to increase their income.
c. represents the bundles of consumption that make a consumer equally happy.
d. shows the prices that a consumer chooses to pay for products he consumes.

3

.

Which of the points on the graph shown reflects the choice of a consumer that chooses not to spend
her entire income?
Point A
Point B
Point D
Point E

a.
b.
c.
d.

Copyright © Harcourt, Inc.


232 ❖ Chapter 21/The Theory of Consumer Choice

4

.

5

.

Which of the graphs shown reflects a decrease in the price of good X only?
a. panel A
b. panel B
c. panel C
d. panel D

Which of the graphs shown reflects an increase in income?


a. panel A
b. panel B
c. panel C
d. panel D
ANSWER: d. panel D
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION INSTRUCTION: 3
RANDOM: N

Copyright © Harcourt, Inc.


 Chapter 21/The Theory of Consumer Choice ❖ 233 
6

.

7

.

8

.

The slope of the budget constraint is determined by the
a. level of income of the consumer.
b. relative price of commodities represented on the axes.
c. preferences of a consumer.
d. endowment of productive resources.
ANSWER: b. relative price of commodities represented on the axes.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
Consumer preferences are typically represented by
a. cost curves.
b. supply curves.
c. indifference curves.
d. budget constraints.
ANSWER: c. indifference curves.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y

Based on the figure shown which of the following statements is correct?
a. Point A is valued the same as point C.
b. Point B is valued the same as point E.
c. The bundles along indifference curve I1 are preferred to those along indifference curve I 2.
d. The bundle associated with point D contains more Ho-Ho’s than that associated with point C.
ANSWER: a. Point A is valued the same as point C.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION INSTRUCTION: 5
RANDOM: N

Copyright © Harcourt, Inc.


234 ❖ Chapter 21/The Theory of Consumer Choice
9

.

Based on the figure shown, which of the following statements is true for a consumer that moves from
point C to point D?
a. The consumer is indifferent between point C and point D.
b. The consumer is definitely worse off.
c. It is difficult to compare the level of consumer satisfaction between points D and C.
d. The consumer is likely to place a higher relative value on Ho-Ho’s at point C than at point D.
ANSWER: b. The consumer is definitely worse-off.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M QUESTION INSTRUCTION: 6
RANDOM: N
10

The slope of an indifference curve is
a. constant.
b. positive, since indifference curves slope upward.
c. equal to the marginal rate of substitution.
d. the same as the slope of the budget constraint at every point.
ANSWER: c. equal to the marginal rate of substitution.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
11

.

.

The amount of a good an individual has
a. is only affected by prices.
b. is only affected by income.
c. will not affect the marginal rate of substitution.
d. affects the rate at which she is willing to trade.
ANSWER: d. affects the rate at which she is willing to trade.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
12

.

13

.

14

.

As long as a consumer is on the same indifference curve
a. she is unable to decide which bundle of goods to choose.
b. she is indifferent among the points on that indifference curve.
c. her preferences will not affect the marginal rate of substitution.
d. she is indifferent to all points which lie on any other indifference curves.
ANSWER: b. she is indifferent among the points on that indifference curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
When indifference curves are bowed inward toward the origin,
a. it is unlikely that consumers will be willing to engage in trade.
b. people can only increase satisfaction by consuming more of all commodities.
c. people are less inclined to trade away goods that they have an abundance of.
d. the marginal rate of substitution decreases as a consumer moves down an indifference curve.
ANSWER: d. the marginal rate of substitution decreases as a consumer moves down an indifference
curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
The highest indifference curve that a consumer can reach is the one
a. farthest from the origin.
b. that intersects the budget constraint in at least two places.
c. that is tangent to the budget constraint.
d. all of the above.
ANSWER: c. that is tangent to the budget constraint.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

Copyright © Harcourt, Inc.


 Chapter 21/The Theory of Consumer Choice ❖ 235 
15

.

16

.

17

.

18

.

19

.

20

.

Which of the following is NOT a property of indifference curves?
a. Lower indifference curves are preferable to higher indifference curves.
b. Indifference curves are bowed inward toward the origin.
c. Indifference curves do not cross.
d. Indifference curves are downward sloping.
ANSWER: a. Lower indifference curves are preferable to higher indifference curves.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
When two goods are perfect substitutes they will have
a. linear indifference curves.
b. indifference curves that cross.
c. indifference curves that are right angles.
d. indifference curves with a positive slope.
ANSWER: a. linear indifference curves.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
When economists describe preferences, they sometimes use the concept of
a. income.
b. utility.
c. prices.
d. markets.
ANSWER: b. utility.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
An optimizing consumer will select a consumption bundle in which the
a. utility exceeds price.
b. marginal rate of substitution is equal to income.
c. ratio of expenditure shares equals the marginal rate of substitution.
d. marginal rate of substitution is equal to the relative price.
ANSWER: d. marginal rate of substitution is equal to the relative price.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
At the optimum
a. the budget constraint would have a slope of 1.
b. it is still possible for the consumer to increase his consumption of both goods.
c. the slope of the indifference curve is equal to the slope of the budget constraint.
d. the indifference curve would intersect the budget constraint at its center.
ANSWER: c. the slope of the indifference curve is equal to the slope of the budget constraint.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
When a budget constraint shifts out
a. the consumer is worse off.
b. the consumer can now reach a higher indifference curve.
c. it could only have been caused by an increase in income.
d. it could only have been caused by an increase in the price of one of the goods.
ANSWER: b. the consumer can now reach a higher indifference curve.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y

Copyright © Harcourt, Inc.


236 ❖ Chapter 21/The Theory of Consumer Choice

21

.

Assume that the consumer depicted in the graph has an income of $10. The price of Skittles is $1
and the price of M&M’s is $2. This consumer will choose to optimize by consuming
a. bundle A.
b. bundle B.
c. bundle C.
d. bundle D.
ANSWER: a. bundle A.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N

Copyright © Harcourt, Inc.


 Chapter 21/The Theory of Consumer Choice ❖ 237 

22

.

23

.

24

.

If the consumer is currently at point B on the graph shown, a change to point C as a result of a
decrease in the price of potato chips would show the
a. price effect.
b. budget effect.
c. income effect.
d. substitution effect.
ANSWER: c. income effect.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
Assume that a college student purchases Diet Coke and Snickers. The substitution effect associated
with a decrease in the price of a Snickers will result in
a. only a decrease in the consumption of Diet Coke.
b. only an increase in the consumption of Snickers.
c. a decrease in the consumption of Snickers and an increase in the consumption of Diet Coke.
d. an increase in the consumption of Snickers and a decrease in the consumption of Diet Coke.
ANSWER: d. an increase in the consumption of Snickers and a decrease in the consumption of Diet
Coke.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
Violations to the law of demand are assumed to occur
a. only when goods are Giffen goods.
b. commonly.
c. only when the substitution effect dominates the income effect.
d. All of the above are possible answers.
ANSWER: a. only when goods are Giffen goods.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y

Copyright © Harcourt, Inc.


238 ❖ Chapter 21/The Theory of Consumer Choice
25

.

If an in-kind transfer forces the recipient to consume more of the good than he would choose with a
cash transfer of equal value, then the recipient
a. would prefer the in-kind transfer over a cash transfer of equal dollar value.
b. would prefer a cash transfer of equal dollar value.
c. is indifferent between a cash transfer and an in-kind transfer.
d. Not enough information about the consumer is given to answer this question.
ANSWER: b. would prefer a cash transfer of equal dollar value.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 6 RANDOM: Y

Copyright © Harcourt, Inc.


1

ANSWER: c. the trade­offs inherent in decisions made by consumers.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y 
2

ANSWER: a.shows the consumption bundles that a consumer can afford.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y 
3

ANSWER: c. Point D
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION  INSTRUCTION: 2 
RANDOM: N 
4

ANSWER: b.panel B
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION  INSTRUCTION: 3 
RANDOM: N 
5

ANSWER: d.
panel D
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION INSTRUCTION: 3 
RANDOM: N 
6

ANSWER: b.relative price of commodities represented on the axes.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y 
7

ANSWER: c. indifference curves.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y 
8

ANSWER: a.Point A is valued the same as point C.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION INSTRUCTION: 5 
RANDOM: N 
9

ANSWER: b.The consumer is definitely worse­off.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M QUESTION INSTRUCTION: 6 
RANDOM: N 
10

ANSWER: c. equal to the marginal rate of substitution.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
11

ANSWER: d.
affects the rate at which she is willing to trade.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
12

ANSWER: b.she is indifferent among the points on that indifference curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
13

ANSWER: d.
the marginal rate of substitution decreases as a consumer moves 
down an indifference curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y 


14

ANSWER: c. that is tangent to the budget constraint.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
15

ANSWER: a.Lower indifference curves are preferable to higher indifference curves.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
16

ANSWER: a.linear indifference curves.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
17

ANSWER: b.utility.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y 
18

ANSWER: d.
marginal rate of substitution is equal to the relative price.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y 
19

ANSWER: c. the slope of the indifference curve is equal to the slope of the budget 
constraint.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y 
20

ANSWER: b.the consumer can now reach a higher indifference curve.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y 
21

ANSWER: a.bundle A.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1 
RANDOM: N 
22

ANSWER: c. income effect.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y 
23

ANSWER: d.
an increase in the consumption of Snickers and a decrease in the 
consumption of Diet Coke.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y 
24

ANSWER: a.only when goods are Giffen goods.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y 
25

ANSWER: b.would prefer a cash transfer of equal dollar value.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 6 RANDOM: Y 



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