Chapter04TheTheoryofIndividualBehavior

Chapter 04
The Theory of Individual Behavior

MultipleChoiceQuestions

1.SupposetheutilityfunctionforafirmmanagerisU=+bQ,whereQisoutput,is
profit,andbisapositiveconstant.Howwouldthefirm'soutputcomparewithwhatitwould
beifthemanager'sobjectivewastomaximizeprofit?
A.Itwouldbegreaterthantheprofitmaximizingoutput
b.Itwouldbelessthantheprofitmaximizingoutput
c.Itwouldbethesameastheprofitmaximizingoutput
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

2.Supposeaconsumerwithanincomeof$100whoisfacedwithPX=1andPY=1/2.What
isthemarketrateofsubstitutionbetweengoodX(horizontalaxis)andgoodY(vertical
axis)?
a.0.50
b.1.0
C.2.0
d.4.0

Difficulty:Easy

3.Thedifferencebetweenapricedecreaseandanincreaseinincomeisthat
a.Apricedecreasedoesnotaffecttheconsumptionofothergoodswhileanincreasein
incomedoes
B.Anincreaseinincomedoesnotaffecttheslopeofthebudgetlinewhileadecreaseinprice
doeschangetheslope
c.Apricedecreasedecreasesrealincomewhileanincreaseinincomeincreasesrealincome
d.Apricedecreaseleavesrealincomeunchangedwhileanincreaseinincomeincreasesreal
income

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

4.Joeprefersathreepackofsodatoasixpack.Whatpropertiesdoesthispreferenceviolate?
a.Completeness
b.Transitivity
C.Moreisbetter
d.DiminishingMRS

Difficulty:Easy

5.Whichofthefollowingistrue?
a.Indifferencecurvesmayintersect
b.Atapointofconsumerequilibrium,theMRSequals1
c.Ifincomeincreases,aconsumerwillalwaysconsumemoreofagood
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

6.IfthepriceofgoodXis$10andthepriceofgoodYis$5,howmuchofgoodXwouldthe
consumerpurchaseifherincomeis$15?
a.0
b.2
c.3
D.Cannottellbasedontheaboveinformation

Difficulty:Easy

7.Individualswhopurchaseservicesandgoodsforthepurposeofconsumptionare:
A.Consumers
b.Managers
c.Workers
d.Agents

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

8.Whatis/aretheimportantthingsthatmustbedevelopedwhencharacterizingconsumer
behavior?
a.Individualgoalsofthefirm
b.Consumeropportunities
c.Individualgoalsofthefirmandconsumeropportunities
D.Consumerpreferencesandconsumeropportunities

Difficulty:Easy

9.Thepossiblegoodsandservicesaconsumercanaffordtoconsumerepresentsthe:
a.Consumerbehavior
b.Consumerpreferences
c.Consumerstatus
D.Consumeropportunities

Difficulty:Easy

10.Asituationwhereaconsumersayshedoesnotknowhispreferenceorderingforbundles
XandYwouldviolatethepropertyof:
a.Moreisbebetter
B.Completeness
c.Substitutability
d.Complementarity

Difficulty:Medium

11.Theaffordablebundlethatyieldsthegreatestsatisfactiontotheconsumeris:
a.Themaximumbundle
B.Theequilibriumconsumptionbundle
c.Theallowablepurchasingbundle
d.Themostpopularbundle

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

12.Theabsolutevalueoftheslopeoftheindifferencecurveiscalledthe:
a.Marginalrevenue
b.Averagerateofsubstitution
C.Marginalrateofsubstitution
d.Marginalcost

Difficulty:Medium

13.AnincreaseinthepriceofgoodXwillhavewhateffectonthebudgetlineonanormalX
Ygraph?
a.Paralleloutwardshiftoftheline
b.Increasetheverticalintercept
C.Decreasethehorizontalintercept
d.Parallelinwardshiftoftheline

Difficulty:Medium

14.Thepropertythatimpliesthatindifferencecurvesareconvextotheoriginis:
a.Moreisbetter
b.Completeness
c.Transitivity
D.Diminishingmarginalrateofsubstitution

Difficulty:Medium

15.Whichofthefollowingcasesviolatesthepropertyoftransitivity
a.
b.
C.
d.Noneofthestatementsviolatesthetransitivityproperty

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

16.Thepropertythatrulesoutindifferencecurvesthatcrossis:
a.Completeness
B.Transitivity
c.Diminishingmarginalrateofsubstitution
d.Independence

Difficulty:Medium

17.Theideathataconsumerislimitedtoselectingabundleofgoodsthatisaffordableis
capturedbythe:
A.Budgetconstraint
b.Indifferencecurve
c.Consumerequilibrium
d.Pricechanges

Difficulty:Easy

18.ThecombinationsofgoodsXandYthatareaffordabletotheconsumeraredefinedby
the:
a.Consumptionset
b.Incomeline
c.Budgetconstraint
D.Budgetset

Difficulty:Medium

19.WhatisthemaximumamountofgoodYthatcanbepurchasedifXandYaretheonly
twogoodsavailableforpurchaseandPX=$5,PY=$10,X=20,andM=500?
A.40
b.25
c.50
d.75

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

20.Theupperboundaryofthebudgetsetisthe:
a.Indifferencecurve
b.Origin
C.Budgetline
d.Verticalintercept

Difficulty:Easy

21.Giventhatincomeis$200andthepriceofgoodYis$40.Whatistheverticalinterceptof
thebudgetline?
a.8,000
b.20
c.1/5
D.5

Difficulty:Easy

22.Giventhatincomeis$500andPX=$20andPY=$5,whatisthemarketrateof
substitutionbetweengoodsXandY?
a.100
B.4
c.20
d.25

Difficulty:Easy

23.Ifaconsumer'sincomedecreases,whatwillhappentothebudgetline?
a.Itwillshiftoutward
b.Itwillbecomesteeper
c.Itwillbecomeflatter
D.Itwillshiftinward

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

24.IfthepriceofgoodXincreases,whatwillhappentothebudgetline?
a.Itwillshiftoutward
B.Itwillbecomesteeper
c.Itwillbecomeflatter
d.Itwillshiftinward

Difficulty:Medium

25.Atthepointofconsumerequilibriumtheslopeofthebudgetlineisequaltothe:
a.Marketrateofsubstitution
b.Indifferencecurve
C.Marginalrateofsubstitution
d.Consumerpreference

Difficulty:Medium

26.AfterapricedecreaseforgoodX,thenewconsumerequilibriumlevelofgoodXwillbe:
a.Higherthanbeforethepricechange
b.Lowerthanbeforethepricechange
C.Indeterminatewithoutmoreinformation
d.Thesameasbeforethepricechange

Difficulty:Hard

27.Whichofthefollowingpairsofgoodsisprobablynotanexampleofsubstitutes?
a.Raincoatsandumbrellas
b.Chickenandsteak
c.Potatoesandstuffing
D.Hamburgersandketchup

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

28.Ifyouareinthebusinessofsellingchickenandthepriceofsellingchickenandtheprice
ofbeefbothweretodropdramatically,whatshouldyoudowithyourinventorylevelof
chicken?
a.Keepitthesame
b.Decreasetheinventory
C.Increasetheinventory
d.Getintothebeefbusiness

Difficulty:Medium

29.IfanincreaseinincomecausesadecreaseintheconsumptionofgoodYweknowthat
goodYis:
a.Anormalgood
b.Asubstitute
c.Acomplement
D.Aninferiorgood

Difficulty:Easy

30.Whichofthefollowingismostlikelynottobeanexampleofanormalgood?
a.Lobster
b.Sportscars
C.Bustravel
d.Jacuzzis

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

31.Whataretheadvantagestoafirmofsellinggiftcertificates?
a.Greaterquantitysoldifyourgoodisanormalgood
b.Greaterquantityifyourgoodisaninferiorgood
c.Reducedstrainontherefunddepartmentandgreaterquantitysoldifyourgoodisanormal
good
D.Reducedstrainontherefunddepartmentandgreaterquantityifyourgoodisaninferior
good

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

32.HowdoesadecreaseinthepriceofgoodXaffectthemarketrateofsubstitutionbetween
goodsXandY?
a.Itincreases
B.Itdecreases
c.Remainsunchanged
d.Indeterminablewithoutmoreinformation

Difficulty:Medium

33.Thesubstitutionaffectisolatesthechangeintheconsumptionofagoodcausedby:
a.Thelower"real"income
b.Thechangeinconsumerpreferences
C.Thechangeinthemarketrateofsubstitution
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

34.Apriceincreasecausesaconsumer's"real"incometo:
A.Decrease
b.Increase
c.Remainunchanged
d.Varyalongthebudgetline

Difficulty:Medium

35.Ifyouwishtoopenastoreandyoudonotlikerisk,itwouldbewisetosell:
a.Onlynormalgoods
B.Amixofnormalandinferiorgoods
c.Allinferiorgoods
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

36.Ifyouwererunninganadvertisingcampaignfordesignermen'ssuits,youshouldtarget
familieswith:
a.Lowerincomes
B.Higherincomes
c.Poortasteinclothing
d.Similartastesandpreferences

Difficulty:Medium

37.Ifaworkerreceivesafixedpaymentof$100plus$10foreveryhoursheworks,whatis
themaximumtotalearningstheworkercanreceiveiftheyarerestrictedtoamaximumof12
hoursofworkperday?
A.$220
b.$120
c.$340
d.$125

Difficulty:Easy

38.ThetotalearningsofaworkerarerepresentedbyE=100+$10(24L),whereEis
earningsandListhenumberofhoursofleisure.Howmuchwilltheworkerearnifhetakes
14hoursofleisureperday?
a.$150
b.$240
c.$100
D.$200

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

39.ThetotalearningsofaworkerarerepresentedbyE=100+$10(24L),whereEis
earningsandListhenumberofhoursofleisure.Howmanyhoursofleisureareconsumedif
thisworker'stotalearningsare$160?
A.18hours
b.16hours
c.12hours
d.10hours

Difficulty:Medium

40.Aworker'stotalearningsforonedayis$100.Hereceiveda$20fixedpaymentand
consumes14hoursofleisure.Whatisthehourlywagerate?
a.$10
b.$6
c.$4
D.$8

Difficulty:Medium

41.Normallyownersoffirmsshouldtrytoinducetheirmanagerstocare:
a.Solelyaboutoutput
b.Aboutprofitsandoutput
C.Solelyaboutprofits
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

42.SupposeearningsaregivenbyE=$60+$7(24L),whereEisearningsandListhe
hoursofleisure.Howmuchisthispersonworkingiftheirdailyearningsare$116?
a.18hours
B.16hours
c.12hours
d.6hours

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

43.SupposeearningsaregivenbyE=$60+$7(24L),whereEisearningsandListhe
hoursofleisure.Whatisthemaximumthisworkercanearninthree(3)days?
a.$519
b.$417
c.$228
D.$684

Difficulty:Medium

44.SupposeearningsaregivenbyE=$60+$7(24L),whereEisearningsandListhe
hoursofleisure.Thefixedpaymentforthisworkeris:
a.$7
b.$24
C.$60
d.$0

Difficulty:Easy

45.SupposeearningsaregivenbyE=$60+$7(24L),whereEisearningsandListhe
hoursofleisure.Whatisthepricetotheworkerofconsuminganadditionalhourofleisure?
a.$24
B.$7
c.$12
d.$10

Difficulty:Easy

46.Managerscangetworkerstoworklongerhoursby:
A.Offeringovertimepay
b.Offeringahigherflatwagerateonallhoursworked
c.Decreasingthehourlywagescale
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

47.Consumersadjusttheirpurchasingbehaviorsothat:
a.Theypurchaseasmanyscarceresourcesaspossible
b.Marginalrateofsubstitutionismaximized
c.Marginalrateofsubstitutionisminimized
D.Theratioofpricestheypayequalstheirmarginalrateofsubstitution

Difficulty:Medium

48.Thehorizontalinterceptofthebudgetlineis:
a.PX/PY
B.M/PX
c.M/PY
d.PYY

Difficulty:Easy

49.ThemaximumquantityofgoodXthatisaffordableis:
a.M/PY
b.M/X
C.M/PX
d.PYY

Difficulty:Easy

50.Whatisthehorizontalinterceptofthebudgetline,giventhatM=$1,000,PX=$50,and
PY=$40?
a.2000.0
B.20.0
c.25.0
d.11.11

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

51.ABmeans
a.BundleAisnotpreferredtobundleB
B.BundleAispreferredtobundleB
c.BundleAisequallypreferredtobundleB
d.BundleAisgreaterthanbundleB

Difficulty:Easy

52.Bythecompletenessproperty,ifneither
nor
hold,then
A.TheconsumerisindifferentbetweenAandB
b.TheconsumerprefersbundleA
c.TheconsumerprefersbundleB
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

53.Bythepropertyof"moreisbetter,"theconsumerviewstheproductsunderconsideration
as
A.Goods
b.Bads
c.Inferiorgoods
d.Normal

Difficulty:Easy

54.IfbundlesA,BandClieonthesameindifferencecurve,then
a.
b.
c.
D.

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

55.Themarginalrateofsubstitution(MRS)determinestherateatwhichaconsumeris
willingtosubstitutebetweentwogoodsinordertoachieve
a.Ahigherlevelofsatisfaction
b.Alowerlevelofsatisfaction
C.Thesamelevelofsatisfaction
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

56.Alongthesameindifferencecurve,MRSis
a.Constantasmoreofonegoodisobtained
b.Increasingasmoreofonegoodisobtained
C.Decreasingasmoreofonegoodisobtained
d.Varyingirregularlyasmoreofonegoodisobtained

Difficulty:Medium

57.Diminishingmarginalrateofsubstitutionimpliesthat
A.Indifferencecurvesareconvexfromtheorigin
b.Indifferencecurvesareconcavefromtheorigin
c.Indifferencecurvesareeitherconvexorconcavefromtheorigin
d.Indifferencecurvesarestraightline

Difficulty:Medium

58.Bythetransitivitypropertyif
a.
B.
c.
d.

and

then

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

59.Bythepropertyof"moreisbetter"andtransitivity,indifferencecurves
a.Canintersectoneanotheronlyonce
b.Canintersectoneanotheronlytwice
C.Donotintersectoneanother
d.Mayoverlaponeanother

Difficulty:Easy

60.Thepossibilityoftheendlesscyclicalpreferenceiseliminatedbythepropertyof
a.Completeness
b.Moreandbetter
c.Diminishingmarginalrateofsubstitution
D.Transitivity

Difficulty:Medium

61.Someindividualschoosetoundertakeriskyprospectswhileotherschoosesaferones,
becausetheyhavedifferent
a.Degreesoftransitivity
B.Marginalratesofsubstitutionbetweenriskandreward
c.Incomeelasticities
d.Marginalutilities

Difficulty:Medium

62.ThebudgetsetdefinesthecombinationsofgoodXandYthat
a.Aredesirabletotheconsumer
B.Areaffordabletotheconsumer
c.Maximizesconsumer'sutility
d.Maximizessupplier'sprofit

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

63.PXX+PYY=Miscalled
a.Anindifferencecurve
b.Anopportunityset
c.Abudgetset
D.Abudgetline

Difficulty:Easy

64.Theslopeofthebudgetlinerepresents
a.Themarginalrateofsubstitution
B.Themarketrateofsubstitution
c.Thebudgetrateofsubstitution
d.Theopportunityrateofsubstitution

Difficulty:Easy

65.Ifincomeincreases,thebudgetline
A.Shiftstotheright
b.Shiftstotheleft
c.Rotatesclockwise
d.Rotatescounterclockwise

Difficulty:Easy

66.Ifincomedecreases,then
a.Thebudgetlineremainsthesame
B.Theverticalinterceptofthebudgetlineshiftsdownward
c.Thehorizontalinterceptofthebudgetlineshiftsupward
d.Theslopeofthebudgetlinebecomessteeper

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

67.Indifferencecurvesfurtherfromtheoriginimply
A.Ahigherlevelofsatisfaction
b.Alowerlevelofsatisfaction
c.Thesamelevelofsatisfactionasanyothercurve
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

68.Theequilibriumconsumptionbundleis
a.Thebundlewherethebudgetlineandtheindifferencecurvemeet
B.Theaffordablebundlethatyieldsthegreatestsatisfactiontotheconsumer
c.Anybundlethatisthefarthestfromtheorigin
d.Anyaffordablebundleinthebudgetset

Difficulty:Medium

69.Attheequilibriumconsumptionbundle,whichofthefollowingholds?
A.MRSX,Y=PX/PY
b.MRSX,Y=PX/PY
c.MRSX,Y=PY/PX
d.MRSX,Y=PY/PX

Difficulty:Hard

70.Iftheslopeoftheindifferencecurveissteeperthantheslopeofthebudgetline,andXis
onthehorizontalaxis
A.TheconsumeriswillingtogiveupmoreofgoodYtogetanadditionalunitofgoodXthan
isnecessaryunderthecurrentmarketprices
b.MRS<PX/PY
c.MRS<PX/PY
d.TheconsumeriswillingtogiveupmoreofgoodXtogetanadditionalunitofgoodYthan
isnecessaryunderthecurrentmarketprices

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

71.IfanincreaseinthepriceofgoodXleadstoanincreaseintheconsumptionofgoodY,
thengoodsXandYarecalled
A.Substitutes
b.Complements
c.Normalgoods
d.Inferiorgoods

Difficulty:Easy

72.IfanincreaseinthepriceofgoodXleadstoadecreaseintheconsumptionofgoodY,
thengoodsXandYarecalled
a.Substitutes
B.Complements
c.Normalgoods
d.Inferiorgoods

Difficulty:Easy

73.Ifthepriceofagoodrises,thentheequilibriumconsumptionofthatgood
a.Increasesifitisaninferiorgood
B.Decreasesifitisanormalgood
c.Remainsthesame
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

74.Underthebuyone,getonefreeregime,the
a.Budgetlinerotatescounterclockwise
b.Priceisreducedby50%
C.Budgetsetexpands
d.Indifferencecurveischanged

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

75.Ifthepriceofcomputersdecreases,thenthe
A.Salesofasubstitute,suchasatelephone,decreases
b.Salesofasubstitute,suchasatelephone,increases
c.Inventoryofcomputersincreases
d.Inventoryofcomputersoftwareincreases

Difficulty:Medium

76.Ifincomeincreases,thenthe
a.Budgetlinerotatescounterclockwise
b.Budgetlinerotatesclockwise
C.Budgetlineshiftstotheright
d.Opportunitysetcontracts

Difficulty:Easy

77.Aninkindgiftcausesthebudgetlineto
a.Shifttotherightinaparallelfashion
b.Shifttotheleftinaparallelfashion
c.Rotatecounterclockwise
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

78.Acashgiftcausesthebudgetlineto
A.Shifttotherightinaparallelfashion
b.Shifttotheleftinaparallelfashion
c.Rotateclockwise
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

79.Whichismorepreferredbetweenacashgiftandaninkindgift?
A.Acashgift
b.Aninkindgift
c.Bothareequallypreferred
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

80.Ifaconsumerisgivena$10giftcertificate,goodonlyforitemsinstoreXandallitemsin
storeXarenormalgoods,thentheconsumerdesirestoconsume
A.MoregoodsinstoreX
b.LessgoodsinstoreX
c.ThesameamountofgoodsinstoreX
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

81.Ifaconsumerisgivena$10giftcertificate,goodforitemsinstoreXandallitemsin
storeXareinferiorgoods,thenconsumerdesirestoconsume
a.MoregoodsinstoreX
B.LessgoodsinstoreX
c.ThesameamountofgoodsinstoreX
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

82.Ifyousellaninferiorgood,offeringtosellgiftcertificatestothoselookingforagiftmay
resultin
a.Agreaterquantitysoldthanbeforethecustomerisgivenagiftcertificate
B.Agreaterquantitysoldthanifthecustomerresortstogivingacashgift
c.Thesamequantitysoldthanbeforethecustomerisgivenagiftcertificate
d.Thesamequantitysoldasifthecustomerresortstogivingacashgift

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

83.Thesubstitutioneffectreflectshowaconsumerwillreacttoadifferent
a.Marginalrateofsubstitution
B.Marketrateofsubstitution
c.Levelofrealincome
d.Levelofnominalincome

Difficulty:Medium

84.Whenthepriceofagoodincreaseswithotherthingsunchanged,therealincomeofthe
consumer
a.Isunchanged
b.Increases
C.Decreases
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

85.Manygourmetshopsgooutofbusinessduringrecessionssincetheysellalmost
exclusively
a.Inferiorgoods
B.Normalgoods
c.Substitutes
d.Complements

Difficulty:Easy

86.Ifyouincludeinyourofferingssomeinferiorgoods,thedemandfortheseproductswill
increase
A.Duringbadeconomictimes
b.Duringeconomicbooms
c.Whenincomesarehigh
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

87.Runningasupermarketinvolves
A.Alowerlevelofriskthanrunningagourmetshop
b.Ahigherlevelofriskthanrunningagourmetshop
c.Thesamelevelofriskasrunningagourmetshop
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

88.Mostworkersviewleisureandincomeas
A.Goods
b.Bads
c.Goodsandbads,respectively
d.Badsandgoods,respectively

Difficulty:Medium

89.Ifafirmofferstopayaworker$10foreachhourofleisuretheworkergivesupthenthe
opportunitiesconfrontingtheworkerwillbegivenbythe
a.Convexcurvefromtheorigin
b.Concavecurvefromtheorigin
C.Straightlinewithanegativeslope
d.Straightlinewithapositiveslope

Difficulty:Medium

90.Ifafirmofferstopayaworker$10foreachhourofleisuretheworkergivesupthe$10
impliesthe
a.Marginalrateofsubstitutionbetweenleisureandincome
B.Marketrateofsubstitutionbetweenleisureandincome
c.Marketrateoftransformationbetweenleisureandincome
d.Marginalrateoftransformationbetweenleisureandincome

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

91.Supposeaworkerisofferedawageof$8perhour,plusafixedpaymentof$100perday,
andhecanuse24hoursperday.Whatarethemaximumtotalearningstheworkercanearnin
aday?
a.$492
b.$392
c.$192
D.$292

Difficulty:Medium

92.Supposeaworkerisofferedawageof$8perhour,plusafixedpaymentof$100perday,
andhecanuse24hoursperday.Whatistheminimumtheworkercanearninaday?
a.$50
B.$100
c.$192
d.$200

Difficulty:Medium

93.Supposeaworkerisofferedawageof$8perhour,plusafixedpaymentof$100perday,
andhecanuse24hoursperday.Whatisthemarketrateofsubstitutionbetweenleisureand
income?
a.$5
B.$8
c.$10
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

94.Supposeaworkerisofferedawageof$8perhour,plusafixedpaymentof$100perday,
andhecanuse24hoursperday.Whatistheequationfortheworker'sopportunityset?(Eis
totalearningsandLisleisure)
a.E=1008L
b.E=1928L
C.E=2928L
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

95.Thefirmmanagerwithindifferencecurveswhichareconvexfromtheorigin(outputon
thehorizontalaxisandprofitontheverticalaxis)views
a.Onlyprofitstobe"goods."
b.Onlyoutputstobe"goods."
C.Bothprofitsandoutputstobe"goods."
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

96.Afirmmanagerwithverticalindifferencecurves(outputonthehorizontalaxis,profiton
theverticalaxis)views
a.Onlyprofitstobe"goods."
B.Onlyoutputtobe"goods."
c.Bothprofitsandoutputstobe"goods."
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

97.Thefirmmanagerwithhorizontalindifferencecurves(outputonthehorizontalaxis,profit
ontheverticalaxis)views
A.Onlyprofitstobe"goods."
b.Onlyoutputtobe"goods."
c.Bothprofitsandoutputstobe"goods."
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

98.Therevenuesearnedbythefirmfromtheconsumermaybemaximizedunder
a.Theregularpriceoffer
B.Thebuyonegetonefreeoffer
c.50%discountoffer
d.40%discountoffer

Difficulty:Medium

99.Managerscangetworkerstoworklongerhours
a.Byincreasingwagesonallhoursworked
b.Byloweringwagesonallhoursworked
C.Withhigherovertimepayinexcessofregularhourlypay
d.Withlowerovertimepayinexcessofregularhourlypay

Difficulty:Medium

100.Mitchell'smoneyincomeis$150,thepriceofXis$2,andthepriceofYis$2.Given
thesepricesandincome,Mitchellbuys50unitsofXand25unitsofY.Callthiscombination
ofXandYbundleJ.AtbundleJMitchell'sMRSis2.AtbundleJ,ifMitchellincreases
consumptionofYby1unithowmanyunitsofXcanhegiveupandstillreachthesamelevel
ofutility?
A.
b.1
c.2
d.4

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

101.Mitchell'smoneyincomeis$150,thepriceofXis$2,andthepriceofYis$2.Given
thesepricesandincome,Mitchellbuys50unitsofXand25unitsofY.Callthiscombination
ofXandYbundleJ.AtbundleJMitchell'sMRSis2.Giventhesepricesandincome,whatis
Mitchell'sequilibriumconsumptionofX?
a.X<50
b.X=50
C.X>50
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

102.Mitchell'smoneyincomeis$150,thepriceofXis$2,andthepriceofYis$2.Given
thesepricesandincome,Mitchellbuys50unitsofXand25unitsofY.Callthiscombination
ofXandYbundleJ.AtbundleJMitchell'sMRSis2.AtbundleJ,ifMitchellincreases
consumptionofYby1unithowmanyunitsofXmusthegiveupinordertosatisfyhis
budgetconstraint?
a.
B.1
c.2
d.4

Difficulty:Hard

103.Joeconsumes48unitsoffoodand12unitsofclothing.Iffoodisaninferiorgood,
a.Joewouldstrictlypreferreceivinga$10giftcertificateataclothingstoretoreceiving$10
incash
B.Joewouldstrictlypreferreceiving$10incashtoreceivinga$10giftcertificateata
clothingstore
c.Joewouldbeindifferentbetweenreceivinga$10giftcertificateataclothingstoreand
receiving$10incash
d.Uponreceivinga$10giftcertificateataclothingstore,Joewouldconsumelessclothing
andmorefood

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

104.Consideratwogoodworld,withcommoditiesXandY.Whichofthefollowing
statementsiscorrect?
a.BothXandYmustbenormalgoods
b.IfgoodXisanormalgood,goodYmustbeaninferiorgood
C.IfgoodXisaninferiorgood,goodYmustbeanormalgood
d.BothgoodXandgoodYcanbeinferiorgoods

Difficulty:Medium

105.Ifwidgetsandgidgetsarecomplementsandbotharenormalgoods,thenadecreasein
thedemandforwidgetswillresultfrom
a.Anincreaseinthepriceofwidgets
B.Adecreaseinincome
c.Adecreaseinthepriceofgidgets
d.Anincreaseinthepriceofwidgetsandadecreaseinincome

Difficulty:Medium

106.IfsugarandNutrasweetaresubstitutes,thenwecanbecertainthatadecreaseinthe
priceofsugarwillleadtoanincreaseintheconsumptionof
a.Nutrasweet
B.Sugar
c.SugarandNutrasweet
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

107.Ifwidgetsandgidgetsarecomplementsandbotharenormalgoods,thenanincreasein
thedemandforwidgetswillresultfrom
a.Anincreaseinthepriceofwidgets
b.Adecreaseinincome
C.Adecreaseinthepriceofgidgets
d.Anincreaseinthepriceofwidgetsandadecreaseinincome

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

108.SamVoterprefersRonaldtoJoe,JoetoGary,andGarytoRonald.Sam'spreferences
a.Areconsistentwithourassumptionsaboutconsumerbehavior
b.Indicatethatheisaliberal
c.Arenotcomplete
D.Arenottransitive

Difficulty:Easy

109.Ifthepriceofagoodpurchasedbyautilitymaximizingconsumergoesdown,allother
thingsremainthesame,andtheconsumer'sincomeisadjustedsothathecanjustbarelyattain
hispreviouslevelofsatisfaction,andiftheconsumerhadindifferencecurvesoftheusual
shapeitwillbefoundthat
A.Moreofthegoodwillbepurchasedthanbefore
b.Lessofthegoodwillbepurchasedthanbefore
c.Thesameamountofthegoodwillbepurchasedasbefore
d.Theconsumerwillstoppurchasingthegoodatall

Difficulty:Medium

110.Consideratwogoodworld,withcommoditiesXandY.IfYisaninferiorgood,thenan
increaseinconsumerincomecannot
a.DecreasethedemandforY
B.DecreasethedemandforX
c.IncreasethedemandforX
d.Maketheconsumerbetteroff

Difficulty:Hard

111.Atanypointonanindifferencecurve,theslopeindicates
a.Themarketrateofsubstitutionbetweenthetwogoods
b.Thewaytheconsumer'sbudgetisallocatedbetweenthetwogoods
c.Howthetotalsatisfactionoftheconsumerchangeswithdifferentmarketbaskets
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

112.Joeconsumes10unitsoffoodand12unitsofclothing.Sincefoodisaninferiorgood,a
gifttoJoeofa$12giftcertificateataclothingstorewill
A.InduceJoetoeatmorethan10unitsoffood
b.MakeJoebetteroffthanagiftof$12incash
c.MakeJoeworseoffthanagiftof$12incash
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

113.Ifmoneyincomedoublesandthepricesofallgoodstriples,thenthe
a.Budgetlineremainsunchanged
B.Consumerisworseoffduetoinflation
c.Consumerwillbuymoreofnormalgoods
d.Budgetlinewillshiftout

Difficulty:Hard

114.Thedifferencebetweenapriceincreaseandadecreaseinincomeisthat
A.Adecreaseinincomedoesnotaffecttheslopeofthebudgetlinewhileanincreaseinprice
doeschangetheslope
b.Apriceincreasedoesnotaffecttheconsumptionofothergoodswhileadecreaseinincome
does
c.Apriceincreasewillincreaserealincomewhileadecreaseinincomewillincreasereal
income
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

115.Whichcombinationofthepropertiesgivenbelowrulesoutindifferencecurvesthat
intersectoneanother?
a.Completenessanddiminishingmarginalrateofsubstitution
B.Transitivityandmoreisbetter
c.Moreisbetteranddiminishingmarginalrateofsubstitution
d.Completenessandmoreisbetter

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

116.Therateatwhichaconsumeriswillingtosubstituteonegoodforanother,whilestill
maintainingagivenlevelofsatisfactioniscalledthe
a.Marketrateofsubstitution
b.Averagerateofsubstitution
C.Marginalrateofsubstitution
d.Budgetconstraint

Difficulty:Easy

117.AdecreaseinthepriceofgoodYwillhavewhateffectonthebudgetlineonanormal
XYgraph?
A.Increasetheverticalintercept
b.Decreasethehorizontalintercept
c.Paralleloutwardshiftoftheline
d.Parallelinwardshiftoftheline

Difficulty:Medium

118.WhatisthemaximumamountofgoodYthatcanbepurchasedifXandYaretheonly
twogoodsavailableforpurchaseandPX=$10,PY=$15,X=30,andM=600?
a.10
b.15
C.20
d.25

Difficulty:Medium

119.Giventhatincomeis$750andPX=$32andPY=$8,whatisthemarketrateof
substitutionbetweengoodsXandY?
a.0.75
b.3
C.4
d.25

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

120.IfthepriceofgoodXdecreases,whatwillhappentothebudgetline?
a.Itwillhaveaparallelshiftinward
b.Itwillhaveaparallelshiftoutward
c.Itwillbecomesteeper
D.Itwillbecomeflatter

Difficulty:Hard

121.Thesubstitutionaffectisolatesthechangeintheconsumptionofagoodcausedby:
a.Thelower"real"income
B.Thechangeintherelativepricesoftwogoods
c.Thechangeinconsumerpreferences
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

122.Apricedecreasecausesaconsumer's"real"incometo:
A.Increase
b.Decrease
c.Remainunchanged
d.Decreaseorincreasedependingonthesizeofthepricechange

Difficulty:Medium

123.ThetotalearningsofaworkerarerepresentedbyE=150+$12(24L),whereEis
earningsandListhenumberofhoursofleisure.Howmuchwilltheworkerearnifhetakes
16hoursofleisureperday?
a.$96
B.$246
c.$278
d.$342

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

124.SupposeearningsaregivenbyE=$50+$20(24L),whereEisearningsandListhe
hoursofleisure.Whatisthepricetotheworkerofconsuminganadditionalhourofleisure?
a.$30
b.$26
c.$24
D.$20

Difficulty:Easy

125.ThemaximumquantityofgoodYthatisaffordableis:
a.M/PX
b.M/X
C.M/PY
d.M/Y

Difficulty:Easy

126.Giventhatincomeis$300,thepriceofgoodYis$15,andthepriceofgoodXis$20.
Whatistheverticalinterceptofthebudgetline?
a.4,500
b.300
C.20
d.15

Difficulty:Medium

127.SamVoterprefersJacktoRob,RobtoMark,andJacktoMark.Sam'spreferences
a.Arenotconsistentwithourassumptionsaboutconsumerbehavior
b.Indicatethatheisaliberal
c.Arenotcomplete
D.Aretransitive

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

128.Consideratwogoodworld,withcommoditiesXandY.IfXisaninferiorgood,thenan
increaseinconsumerincomecannot
A.DecreasethedemandforY
b.IncreasethedemandforY
c.DecreasethedemandforX
d.Maketheconsumerbetteroff

Difficulty:Hard

129.Whenthepriceofonegoodincreases,theassociatedincomeeffectisrepresentedbya
movefromoneindifferencecurvetoa
a.Lowerindifferencecurvesincerealincomeisnowhigher
B.Lowerindifferencecurvesincerealincomeisnowlower
c.Higherindifferencecurvesincerealincomeisnowhigher
d.Higherindifferencecurvesincerealincomeisnowlower

Difficulty:Easy

130.Whenthepriceofonegooddecreases,theassociatedsubstitutioneffectisrepresentedby
a
a.Movefromoneindifferencetoahigherindifferencecurvesincerealincomeisnowhigher
b.Movefromoneindifferencetoalowerindifferencecurvesincerealincomeisnowlower
C.Movealongagivenindifferencecurveholdingrealincomeconstant
d.Movealongagivenindifferencecurvesincerealincomeincreases

Difficulty:Easy

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Chapter04TheTheoryofIndividualBehavior

131.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumegoodsXandYarenormalgoodsandthepriceofgoodX
decreases.Thenthesubstitutioneffectwillleadconsumerstoconsume
a.MoreofgoodXandmoreofgoodY
b.LessofgoodXandmoreofgoodY
c.LessofgoodXandlessofgoodY
D.MoreofgoodXandlessofgoodY

Difficulty:Medium

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Chapter04TheTheoryofIndividualBehavior

132.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatXisanormalgood,Yisaninferiorgoodandthepriceof
goodXincreases.Thenthesubstitutioneffectwillleadconsumerstoconsume
a.MoreofgoodXandmoreofgoodY
B.LessofgoodXandmoreofgoodY
c.LessofgoodXandlessofgoodY
d.MoreofgoodXandlessofgoodY

Difficulty:Hard

133.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatbothXandYareinferiorgoodsandthepriceofgoodY
increases.Thenthesubstitutioneffectwillleadconsumerstoconsume
a.MoreofgoodXandmoreofgoodY
b.LessofgoodXandmoreofgoodY
c.LessofgoodXandlessofgoodY
D.MoreofgoodXandlessofgoodY

Difficulty:Hard

134.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatbothXandYarenormalgoodsandthatthepriceofgood
Xincreases.Then,whichofthefollowingeffectisknownwithcertainty.
a.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoverallincreasethe
consumptionofgoodX
B.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoveralldecreasethe
consumptionofgoodX
c.Theincomeandsubstitutioneffectwillhavecompetingeffectsleadingtoanindeterminate
impactontheconsumptionofgoodX
d.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodY

Difficulty:Hard

4-39

Chapter04TheTheoryofIndividualBehavior

135.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatbothXandYarenormalgoodsandthatthepriceofgood
Ydecreases.Then,whichofthefollowingeffectisknownwithcertainty.
a.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoverallincreasethe
consumptionofgoodX
b.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoveralldecreasethe
consumptionofgoodX
c.Theincomeandsubstitutioneffectwillhavecompetingeffectsleadingtoanindeterminate
impactontheconsumptionofgoodX
D.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodY

Difficulty:Hard

136.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatbothXandYarenormalgoodsandthatthepriceofgood
Yincreases.Then,whichofthefollowingeffectisknownwithcertainty.
a.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoverallincreasethe
consumptionofgoodX
b.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoveralldecreasethe
consumptionofgoodX
C.TherewillbeanindeterminateeffectontheconsumptionofgoodX
d.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodY

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

137.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatXisanormalgood,Yisaninferiorgoodandthatthe
priceofgoodYincreases.Then,whichofthefollowingeffectisknownwithcertainty.
a.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoveralldecreasethe
consumptionofgoodX
b.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodY
c.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodX
D.Theincomeandsubstitutioneffectwillhavecompetingeffectsleadingtoanindeterminate
impactontheconsumptionofgoodY

Difficulty:Hard

138.Supposethatconsumers'preferencesarewellbehavedinthatproperties4144are
satisfied.Furthermore,assumethatXisanormalgood,Yisaninferiorgoodandthatthe
priceofgoodYdecreases.Then,whichofthefollowingeffectisknownwithcertainty.
A.Theincomeandsubstitutioneffectreinforceoneanotherleadingtoanoveralldecreasethe
consumptionofgoodX
b.Theincomeandsubstitutioneffectwillhavecompetingeffectsleadingtoanindeterminate
impactontheconsumptionofgoodY
c.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodY
d.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoveralldecrease
intheconsumptionofgoodY
e.Theincomeandsubstitutioneffectwillreinforceoneanotherleadingtoanoverallincrease
intheconsumptionofgoodX

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

139.SupposethatthreeconsumersareinthemarketforgoodX.Consumer1's(inverse)PX=
20QX;Consumer2's(inverse)demandisPX=202QX;andConsumer3's(inverse)demand
isPX=204QX.WhenPX=$10,themarketwilldemand
A.17.5unitsandtheinversemarketdemandcurveisPX=200.5714QX
b.30unitsandtheinversemarketdemandcurveisPX=607QX
c.17.5unitsandtheinversemarketdemandcurveisPX=607QX
d.Noneofthestatementsassociatedwiththequestionsarecorrect

Difficulty:Hard

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Chapter04TheTheoryofIndividualBehavior

140.Supposethataconsumer'spreferencesarewellbehavedinthatproperties4144are
satisfiedandtheinitialbudgetconstraintisgivenby300=2X+4Y.Attheinitialbudget
constraint,thisconsumerpurchases100unitsofgoodXand25unitsofgoodY.Supposethe
priceofXincreasesto$4perunitresultinginanewconsumptionbundleconsistingof60
unitsofXand15unitsofY.Then,slopeoftheinversedemandforgoodXoverthis
consumptionrangeis
a.0.05
B.0.05
c.0.267
d.0.444

Difficulty:Easy

141.Supposethataconsumer'spreferencesarewellbehavedinthatproperties4144are
satisfiedandtheinitialequilibriumconsumptionbundleconsistsof100unitsofXand50
unitsofY.IfPXincreasessuchthatthenewequilibriumconsumptionbundleis150unitsofX
and75unitsofY,thengoodsXandYare
A.Complements
b.Substitutes
c.Inferiorgoods
d.Unrelated

Difficulty:Medium

EssayQuestions

142.Airlinesgiveawaymillionsofticketseachyearthroughtheirfrequentflyerprograms,
withthetypicalairlineawardingafreeticketforeach25,000milesflownontheairline.The
averageairlineticketcosts$500andisfora2,500mileroundtrip.Giventhisinformation,
evaluatethefollowingstatement:Airlinescouldhavethesameeffectondemandby
eliminatingtheirfrequentflyerprogramsandsimplyloweringtheaverageticketpriceby10
percent.
Thestatementisfalse.Thefrequentflyerprogramsare,ineffect,a"buy10tickets,getone
free"deal.Thepriceofthefirst10ticketsremainsunchangedunderthedeal,whiletheprice
ofthe11thticketiszero.

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Chapter04TheTheoryofIndividualBehavior

143.Natalieisalwayswillingtogiveup10ouncesoflicoricefor1ounceofchocolate.
Mitchell,ontheotherhand,willalwaysgiveup10ouncesofchocolatefor1ounceof
licorice.Basedonthisinformation,answerthefollowingquestions:
a.DoNatalie'spreferencesexhibitadiminishingmarginalrateofsubstitutionbetween
chocolateandlicorice?Whyorwhynot?
b.AssumingthatNatalieandMitchellhavethesameamountofmoneytospendonchocolate
andlicorice,whowillpurchasethemostlicorice?Why?
a.No,sincesheisalwayswillingtogiveupthesameamountofchocolateforanadditional
ounceoflicorice.
b.Otherthingsequal,Mitchellwillconsumemorelicorice.Moreprecisely,ifwegraph
licoriceonthehorizontalaxisandchocolateontheverticalaxis,Mitchell'sindifference
curvesarealwayssteeperthanNatalie's.Forgivenpricesandincome,thismeansthat
MitchellwillneverconsumelesslicoricethanNatalie.

144.Supposeanindividual'smarginalrateofsubstitutionisthreeslicesofpizzaforonebeer
atthepresentbundleofbeerandpizzasheisconsuming.Ifthepriceofbeeris$1.00andthe
priceofasliceofpizzais$1.50,istheconsumermaximizingherwelfare?Ifnot,howshould
shechangeherconsumption?
Sincetheratioofbeerpricestopizzapricesis$1/$1.5=2/3<3=MRS,theconsumerisnot
maximizingherwelfare.Sheshouldconsumelesspizzabutmorebeertomaximizeher
welfare.

145.Clothingstoresfrequentlyrun"sales"wheretheydiscountclothingpricesbyasmuchas
25percent.Whatimpact,ifany,wouldyouexpectthese"sales"tohaveonastorethat
specializesinsellingshoesproducedbyRockport?
Sinceshoesandclothingareprobablycomplements,"sales"atclothingstoresmostlikelylead
toincreasedshoepurchasesatRockportshoestores.

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Chapter04TheTheoryofIndividualBehavior

146.AstockholdernamedSuemustcastavoteforchairoftheboard.SueprefersMr.Leeto
Ms.Doe,Ms.DoetoMr.James,andMr.JamestoMr.Lee.
a.AreSue'spreferencesconsistentwithourassumptionsaboutconsumerbehavior?Explain.
b.IfallstockholdershadthesamepreferencesasSue,whowouldwintheappointmentas
chairoftheboard?Explain.
a.No,herpreferencesarenotconsistentwithourassumptionsaboutconsumerbehavior.In
particular,thepropertyoftransitivityisnotsatisfied.Accordingtothisaxiom,giventhatshe
prefersMr.LeetoMs.Doe,Ms.DoetoMr.James,thenshemustpreferMr.LeetoMr.
Jamesbutnotthereverse.
b.Iftheyarevotedoninpairs,itwoulddependonwhichpairwasvotedonfirst.For
example,ifLeeandDoewerepairedfirst,Leewouldwinthefirstvote,andJamesthe
second.

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Chapter04TheTheoryofIndividualBehavior

147.Overthepastdecademedicalcostshaveincreasedmorerapidlythanotherprices.In
ordertoillustratehowrisingmedicalcostshaveaffectedconsumeralternatives,letX
representthequantityofmedicalservices,andletYrepresentthequantityofothergoods.
Furthermore,letincome(M)bemeasuredinhundredsofdollars,thepriceofmedicalservices
andothergoodsintermsofdollarsperminute,with
,
,and
a.Graphthebudgetline,anddeterminethemarketrateofsubstitution.
b.Illustratethebudgetset.

c.Showinyourgraphwhathappenstothebudgetconstraintif increasesto$10.
d.Whatisthemeaningoftheslopeofthetwobudgetconstraints?
a.SeeFigure46.
b.Thebudgetsetistheareaabovethexaxis,totheleftoftheyaxis,andbelowthebudget
linewhenM=100,Px=4,andPy=5.
c.SeeFigure46.
d.Theslopesreflectthemarketrateofsubstitutionsundertwodifferentsetsofprices.A
steeperslopemeansyouhavetogiveupalargeramountofYinordertoobtainonemoreunit
ofX.
Figure46

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Chapter04TheTheoryofIndividualBehavior

148.Ataverybasiclevel,foodandshelterconstitutethetwomostimportantgoodsneededto
sustainhumanlife.Accordingly,assumethatapoorpersonmustallocatehisincomesolely
betweenfoodandshelter.
a.Showthatifshelterisaninferiorgood,foodmustbeanormalgood.
b.Iffoodisanormalgood,isshelternecessarilyaninferiorgood?Explain,andshowyour
answergraphically.
a.LetthequantitiesoffoodandshelterbedenotedbyFandS.Thenthebudgetconstraint
impliesPFF+PSS=M.Differentiatingthisequation,holdingPSandPFconstant,reveals
PFdF/dM+PSdS/dM=1.Ifshelterisaninferiorgood,dS/dM<0,thendF/dMmustbe
positive;foodisanormalgoodifshelterisinferior.
b.Itneednotbethecase,asFigure47reveals.ThemovementfromAtoBmeansthat
demandforbothshelterandfoodincreasedduetotheincreaseinincome.
Figure47

149.SupposeyouarethemanagerofafirmthatproducesUltrasweet,asugarsubstitute.
ShowgraphicallytheeffectofareductioninthepriceofSweetandHealthy,acompetitor's
product,onatypicalconsumer'sconsumptionofUltrasweet.
AreductioninthepriceofSweetandHealthyrotatesthebudgetconstraint,andconsumer
equilibriumwillchange.SinceSweetandHealthyandUltrasweetaresubstitutes,atypical
consumerwillconsumemoreSweetandHealthyandlessUltrasweet.

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Chapter04TheTheoryofIndividualBehavior

150.Ifshoesandsocksarecomplementsandbotharenormalgoods,showgraphicallywhat
wouldhappentotheconsumptionofshoesandsocksif
a.Thepriceofshoesdecreased.
b.Consumerincomesincreased.
AsshowninFigure49a,adecreaseinthepriceofshoesrotatesthebudgetconstraintfrom1
to2.Sinceshoesandsockarecomplementsmoreofbothgoodsareconsumedasequilibrium
movesfromAtoB.
Figure49a

b.Sincebothgoodsarenormal,anincreaseinincomeleadstogreaterconsumptionofeach
good,asillustratedbythemovementfromCtoDinFigure49b.

Figure49b

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Chapter04TheTheoryofIndividualBehavior

151.Drawtheopportunitysetofaconsumerwithanincomeof$200whofacespricesof
and

.Whatisthemarketrateofsubstitutionbetweenthetwogoods?

a.SeeFigure410.
b.Themarketrateofsubstitutionis1/2.
Figure410

152.Explainwhatwouldhappentotheequilibriumconsumptionoftwogoods,XandY,if
(a)incomedoubledandallpricestripled,(b)allpricesdoubledandincometripled,and(c)all
pricesandincomedoubled.Ineachcase,showtheeffectswhenbothgoodsarenormalgoods
andwhenonegoodisanormalgoodandtheotheraninferiorgood.
a.Whenbothgoodsarenormal,theconsumptionofbothgoodswilldecline.Whenonegood
isinferior,consumptionoftheinferiorgoodwillincreaseandtheconsumptionofthenormal
goodwilldecrease.
b.Whenbothgoodsarenormal,consumptionofbothgoodswillincrease.Whenoneofthe
goodsisinferior,consumptionofthenormalgoodwillincreaseandconsumptionofthe
inferiorgoodwilldecrease.
c.Nothingwillhappentotheconsumptionofeithergood.

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Chapter04TheTheoryofIndividualBehavior

153.Joeconsumes10unitsoffoodand12unitsofclothing.Iffoodisaninferiorgood,will
Joebeindifferentbetweenreceivinga$12giftcertificateataclothingstoreandreceiving$12
incash?Explainandshowgraphically.
Yes,Joewouldbeindifferentbetweenreceivinga$12giftcertificateataclothingstoreand
receiving$12incash.Asfoodisinferior,ifJoeisawarded$12incash,hewilldefinitely
spenditentirelyonclothing,justashewouldifgivena$12giftcertificateataclothingstore.

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Chapter04TheTheoryofIndividualBehavior

154.Supposeaconsumerderivessatisfactionfromconsumingtwotypesofhamburgers,X
andY.
a.Graphthebudgetlineoftheconsumerundertheassumptionthatheisoffereda"buytwo,
getonefree"dealforburgerX(limitonefreeburger).
b.GraphthebudgetconstraintundertheassumptionthattheproducerofburgerYalsooffers
a"buytwo,getonefree"deal(limitonefreeburger).
c.Explaininwordswhyeachoftheabovebudgetconstraintslooksasitdoes.
a.InFigure413a,ABCDisthebudgetlineundera"buytwogetonefree"dealforaburger
X.
b.InFigure413b,ABCDisthebudgetlineundera"buytwogetonefree"dealfromthe
producerofburgerY.
c.Whenyourconsumptionofthegoodunderaspecialdealislessthanorequaltotwounits,
thedealhasnoeffectonyou.ThisexplainsthesegmentABofyourbudgetline.Asyoubuy
twounitsofthatgood,yougetthethirdfree.ThisexplainsthejumpfromBtoC.Afterthe
thirdone,thedealbecomesineffectiveforyou.Hence,CDhasthesameslopeasABdoes.
Figure413a

Figure413b

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Chapter04TheTheoryofIndividualBehavior

155.Aconsumerhasachoiceofspending$13,000onaHondaor$9,000onaSaturn.Sheis
observedbuyingtheSaturn.DoesthismeantheconsumerpreferstheSaturn?Explainyour
answer.
No.WeconcludethattheconsumerprefersaSaturnand$4,000incash(orothergoods)toa
Honda.ItmaybethecasethatshelikesaHondamuchmorethanaSaturn.

156.SallyConsumer'sindifferencecurvebetweencigarettesandhamburgersisupward
sloping.Basedonthisinformation,canweconcludethatSallyviewscigarettesas"bads"and
hamburgersas"goods"?Explain.
No.Butwecanconcludethateithercigarettesorhamburgersarebads,butnotboth.

157.Aneconomicsprofessorwentouttodinneronenightandobservedoneofherstudents
drinkingheavily.Thenextdaywasafinalexam.Whentheprofessor'shusbandfoundoutthe
studentwasinherclass,hesaidthestudent'sbehaviorwasirrational.Theprofessordisagreed.
Underwhatconditionisbehaviorirrationalaccordingtothepropertiesofconsumerbehavior
discussedinthechapter?Whatsituationscouldmakethestudent'sbehaviorrational?
Itisirrationalif(1)drinkingwillcausethestudenttoearnalowergradethanwouldbeearned
bynotdrinking,and(2)thehighergradeispreferredtodrinkingandreceivingthelower
grade.Thebehaviorisrationalifthestudentprefershavingagoodtimeandreceivingalow
gradetostudyingandreceivingahighergrade.

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158.Whileatadiscountshoestore,acustomeraskedaclerk,"Iseethatyourshoesarebuy
one,getonefreelimitonefreepairpercustomer.'Willyousellmeonepairforhalfprice?"
Theclerkanswered,"Ican'tdothat."Whenthecustomerstartedtoleavethestore,theclerk
hastilyoffered,"However,Iamauthorizedtogiveyoua40percentdiscountonanypairin
thestore."Assumingtheconsumerhas$200tospendonshoes(X)orallothergoods(Y),and
thatshoescost$100perpair,answerthefollowingquestions:
a.Illustratetheconsumer'sopportunitysetwiththe"buyone,getonefree"dealandwitha40
percentdiscount.
b.Whywasthe40percentdiscountofferedonlyaftertheconsumerrejectedthe"buyone,get
onefree"dealandstartedtoleavethestore?
c.Whywastheclerkwillingtooffera"buyone,getonefree"deal,butunwillingtosella
pairofshoesforhalfprice?

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a.ThestraightlineconnectingpointsAandJinFigure417representscombinationsofshoes
andothergoodsthatcostexactly$200dollars.Sincetheconsumercan'tbuyfractionsofpairs
ofshoes,theconsumermustdecidebetweenbundleA(noshoesbut$200worthofother
goods)andbundleB(onepairofshoes,butonly$100worthofothergoods),orbundleJ(two
pairsofshoesbutnoothergoods).Thebuyonepair,getonepairfreedealleavesthepriceof
thefirstpairat$100,butmakesthepriceofthesecondpairzero.Underthebuyone,getone
freeoffer,thecombinationsofshoesandothergoodsthatcostexactly$200isgivenby
ABDH.Sincetheconsumercan'tbuyfractionalpairs,theconsumermustchoosebetween
pointsA,B,D,andH.Ifpairsofshoesweresoldathalfprice,thestraightlineconnecting
pointsAandKwouldrepresentthecombinationsofshoesandothergoodsthatcostexactly
$200.Sincetheconsumercan'tpurchasefractionsofshoes,thechoicesavailabletothe
consumerinthiscasearepointsA,F,D,GandK.
Figure417

b.Theconsumerwasoriginallyofferedthebuyone,getonefreedeal,butaskedtheclerkif
shewouldsellthemathalfprice.Theclerkinitiallysaid"No"tolearnmoreaboutthe
consumer'spreferences.Whentheclerksaid"No,"theconsumerstartedtoleavethestore.
Basedonthis,theclerkconcludedthattheindifferencecurvemustlooksomethinglikethe
onelabeledIinFigure417.Howdidtheclerkknowthis?Bystartingtoleavethestore,the
consumerwas,ineffect,revealingtotheclerkthatBundleAwaspreferredtobundlesB,D
andH(whichwereavailablewiththebuyonegetonefreeoffer,butnotchosen).Basedon
thisnewinformation,theclerkrealizedthat,ifsheofferedtosellshoesathalfprice,the
consumerwouldnotchooseabundlesuchasD,G,orK(sinceindifferencecurvescannot
cross).Infact,theconsumerwouldbuyonlyonepair(bundleF)ifchargedhalfprice.
c.Byaskingforthehalfpricedeal,theconsumerrevealedtotheclerkthatBundleFwas
preferredtobundleA.Basedonthistheclerkconcludedthattheconsumerisindifferent
betweenbundleAandbundleNinFigure417.Byofferingtheconsumerthe40percent
discountonasinglepairofshoes,thebudgetlineisAM,andtheconsumerwouldjustassoon

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Chapter04TheTheoryofIndividualBehavior

buyapairofshoesfor$60asleavethestore.Thepurchaseyieldsthestore$60inrevenuefor
thepairofshoes,whichisgreaterthanthe$50itwouldhaveearnediftheclerkletthe
consumerbuyapairofshoesathalfprice.

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159.Useindifferencecurveandconstraintanalysistoanalyzethebehaviorofemployeeswho
arepaid
a.Anhourlywagerateof$4perhour.
b.Afixedhourwageof$4perhour;plusanovertimebonusof$4foreveryhourworkedin
excessofeighthours.
c.Afixedsalaryof$40perday,plus$4foreachhourworked.
d.Whichoftheaboveschemeswouldyieldthelargestnumberofhoursworked?Explain.
a.Thisisshownastheopportunitysetthrough96,A,24inFigure418.Aswehavedrawnit,
theconsumerconsumes16hoursofleisureandearns$32.
b.Thisisshownastheopportunityset160,A,24inFigure418.Thisconsumerchooses12
hoursofleisureandearns$64.
c.Shownastheopportunitysetthrough136,C,24inFigure418.Thisconsumerconsumes
17hoursofleisureandearns$68.
d.Givenscheme(a),Aistheequilibriumbundle.Consequently,scheme(b)mustdefinitely
increasethequantityoflaborsupplied(themovementfromAtoBinvolveslessleisureand
morework).Ontheotherhand,scheme(c)willdefinitelydecreasethelaborsupplycompared
withscheme(a)ifbothmoneyandleisurearenormalgoods.
Figure418

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160.Inordertoencourageenergyconservation,manypubicutilitycompaniescharge
consumersahigherrateonunitsofelectricityconsumedinexcessofsomethresholdamount.
Incontrast,acommonmarketingploybyotherfirmsistooffer"quantitydiscounts"to
consumerswhopurchaselargequantitiesofagood.Toillustratehowthesepricingschemes
alterthetypicalconsumer'sopportunityset,supposeincome=$100,
consumerbuyslessthan40unitsofX,

ifthe

iftheconsumerbuysmorethan40unitsofX,

and
.Drawthebudgetconstraint.Howwouldthebudgetconstraintchangeifthe
pricedecreasedto$1after40unitsofXwereconsumed?
Figure419arepresentsthebudgetconstraintforthefirstpartofthisquestion;Figure419b
forthesecondpart.
Figure419a

Figure419b

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161.Supposeaworkerispaidaccordingtothefollowingpayscheme:Foreveryunit
produced,theworkergets$8.Assumeaworkercanproducethreeunitsperhour.
a.Expresstheworker'searningsasafunctionofhoursworked.
b.Graphtheequationforearnings.
c.Graphicallydepictequilibrium,andshowtheearningsandhoursworkedbytheemployee.
d.Doyouthinkthatfromthefirm'spointofview,thisschemeisbetter,worse,orthesameas
payingtheworkerawageof$24perhour?Explaincarefully.
a.Earningsare$24timesthehoursworked.
b.SeeFigure420.
c.SeeFigure420.
Figure420

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