Chapter 21: The Theory of Consumer Choice

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.
ANSWER: c. the trade-offs inherent in decisions made by consumers.

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.
ANSWER: a. shows the consumption bundles that a consumer can afford.

3. 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.

4. Consumer preferences are typically represented by

a. cost curves.
b. supply curves.
c. indifference curves.
d. budget constraints.
ANSWER: c. indifference curves.

5. 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.

6. 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.
7. When economists describe preferences, they sometimes use the concept of
a. income.
b. utility.
c. prices.
d. markets.
ANSWER: b. utility.

8. 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.

9. A budget constraint shows

a. consumption bundles that makes a consumer equally satisfied.
b. the prices a consumer must pay for two products he consumes.
c. the rate at which a consumer is willing to trade one good for another.
d. the various consumption bundles that a consumer can afford with a given income.
ANSWER: d. the various consumption bundles that a consumer can afford with a given
income.

10. A point outside a consumer’s budget constraint

a. cannot be reached given the consumer’s current income.
b. shows that the consumer is not spending all of her income.
c. would represent the consumer’s optimum.
d. means that one of the two goods must be an inferior good.
ANSWER: a. cannot be reached given the consumer’s current income.

11. When a consumer reaches the highest indifference curve possible, she has maximized
her
a. income.
b. utility.
c. preferences.
d. substitution effect.
ANSWER: b. utility.