Baye 9e_chapter 04_tb

Chapter 04 - The Theory of Individual Behavior

Chapter 04 The Theory of Individual Behavior Multiple Choice Questions 1. Suppose the utility function for a firm manager is U = π + bQ, where Q is output, π is profit, and b is a positive constant. How would the firm's output compare with what it would be if the manager's objective was to maximize profit? A. It would be greater than the profit-maximizing output. B. It would be less than the profit-maximizing output. C. It would be the same as the profit-maximizing output. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

2. Suppose a consumer with an income of $100 is faced with Px = 1 and Py = 1/2. What is the market rate of substitution between good X (horizontal axis) and good Y (vertical axis)? A. 0.50 B. -1.0 C. -2.0 D. -4.0 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

3. The difference between a price decrease and an increase in income is that A. A price decrease does not affect the consumption of other goods, while an increase in income does. B. An increase in income does not affect the slope of the budget line, while a decrease in price does change the slope. C. A price decrease decreases real income, while an increase in income increases real income. D. A price decrease leaves real income unchanged, while an increase in income increases real income. Answer: B Learning Objective: 04-03 Topic: Comparative Statics 4-1 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

4. Joe prefers a three-pack of soda to a six-pack. What properties does this preference violate? A. Completeness B. Transitivity C. More is better D. Diminishing MRS Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

5. Which of the following is true? A. Indifference curves may intersect. B. At a point of consumer equilibrium, the MRS always equals 1. C. If income increases, a consumer will always consume more of a good. D. None of the preceding statements is correct. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

6. If the price of good X is $10 and the price of good Y is $5, how much of good X will the consumer purchase if her income is $15? A. 0 B. 2 C. 3 D. Cannot tell based on the above information. Answer: D Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 01 Easy

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Chapter 04 - The Theory of Individual Behavior

7. Individuals who purchase services and goods for the purpose of consumption are: A. consumers. B. managers. C. workers. D. agents. Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

8. What is/are the important things that must be developed when characterizing consumer behavior? A. Individual goals of the firm B. Consumer opportunities C. Individual goals of the firm and consumer opportunities D. Consumer preferences and consumer opportunities Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

9. The possible goods and services a consumer can afford to consume represents the: A. consumer behavior. B. consumer preferences. C. consumer status. D. consumer opportunities. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

10. A situation where a consumer says he does not know his preference ordering for bundles X and Y would violate the property of: A. more is better. B. completeness. C. substitutability. D. complementarity.

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Chapter 04 - The Theory of Individual Behavior Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

11. The affordable bundle that yields the greatest satisfaction to the consumer is: A. the maximum bundle. B. the equilibrium consumption bundle. C. the allowable purchasing bundle. D. the most popular bundle. Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

12. The absolute value of the slope of the indifference curve is called the: A. marginal revenue. B. average rate of substitution. C. marginal rate of substitution. D. marginal cost. Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

13. An increase in the price of good X will have what effect on the budget line on a normal XY graph? A. A parallel outward shift of the line B. An increase in the vertical intercept C. A decrease in the horizontal intercept D. A parallel inward shift of the line Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

14. The property that implies that indifference curves are convex to the origin is: A. more is better. B. completeness. C. transitivity. D. diminishing marginal rate of substitution. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 02 Medium

15. Which of the following cases violates the property of transitivity? A. A∽B, B∽C, A∽C. B. A≻B, B≻C, A≻C. C. A≻B, B≻C, C≻A. D. None of the statements violates the transitivity property. Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

16. The property that rules out indifference curves that cross is: A. completeness. B. transitivity. C. diminishing marginal rate of substitution. D. independence. Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

17. The idea that a consumer is limited to selecting a bundle of goods that is affordable is captured by the: A. budget constraint. B. indifference curve. C. consumer equilibrium. D. price changes.

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Chapter 04 - The Theory of Individual Behavior Answer: A Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

18. The combinations of goods X and Y that are affordable to the consumer are defined by the: A. consumption set. B. income line. C. budget constraint. D. budget set. Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

19. What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $5, Py = $10, X = 20, and M = 500? A. 40 B. 25 C. 50 D. 75 Answer: A Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

20. The upper boundary of the budget set is the: A. indifference curve. B. origin. C. budget line. D. vertical intercept. Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

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Chapter 04 - The Theory of Individual Behavior

21. Given that income is $200 and the price of good Y is $40, what is the vertical intercept of the budget line? A. 8,000 B. 20 C. 1/5 D. 5 Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

22. Given that income is $500 and PX = $20 and PY = $5, what is the market rate of substitution between goods X and Y? A. 100 B. -4 C. -20 D. 25 Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

23. If a consumer's income decreases, what will happen to the budget line? A. It will shift outward. B. It will become steeper. C. It will become flatter. D. It will shift inward. Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

24. If the price of good X increases, what will happen to the budget line? A. It will shift outward. B. It will become steeper. C. It will become flatter. D. It will shift inward.

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Chapter 04 - The Theory of Individual Behavior Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

25. At the point of consumer equilibrium, the slope of the budget line is equal to the: A. market rate of indifference. B. indifference curve. C. marginal rate of substitution. D. consumer preference. Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

26. After a price decrease for good X, the new consumer equilibrium level of good X will be: A. higher than before the price change. B. lower than before the price change. C. indeterminate without more information. D. the same as before the price change. Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

27. Which of the following pairs of goods is probably NOT an example of substitutes? A. Raincoats and umbrellas B. Chicken and steak C. Potatoes and stuffing D. Hamburgers and ketchup Answer: D Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

28. If you are in the business of selling chicken and the price of chicken and the price of beef both were to drop dramatically, what should you do with your inventory level of chicken? A. Keep it the same. B. Decrease the inventory. C. Increase the inventory. D. Get into the beef business. Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

29. If an increase in income causes a decrease in the consumption of good Y, we know that good Y is: A. a normal good. B. a substitute. C. a complement. D. an inferior good. Answer: D Learning Objective: 04-03 Topic: Comparative Statics Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

30. Which of the following is most likely NOT an example of a normal good? A. Lobster B. Sports cars C. Bus travel D. Jacuzzis Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

31. What are the advantages to a firm of selling gift certificates? A. Greater quantity sold if your good is a normal good. B. Greater quantity sold if your good is an inferior good. C. Reduced strain on the refund department and greater quantity sold if your good is a normal good. D. Reduced strain on the refund department and greater quantity sold if your good is an inferior good. 4-9 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Answer: D Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

32. How does a decrease in the price of good X affect the market rate of substitution between goods X and Y? A. It increases. B. It decreases. C. It remains unchanged. D. Indeterminable without more information. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty:0 2 Medium

33. The substitution effect isolates the change in the consumption of a good caused by: A. the lower "real" income. B. the change in consumer preferences. C. the change in the market rate of substitution. D. None of the preceding statements is correct. Answer: C Learning Objective: 04-04 Topic: Comparative Statics Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

34. A price increase causes a consumer's "real" income to: A. decrease. B. increase. C. remain unchanged. D. vary along the budget line. Answer: A Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

35. If you wish to open a store and you do not like risk, it would be wise to sell: A. only normal goods. B. a mix of normal and inferior goods. C. all inferior goods. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

36. If you were running an advertising campaign for designer men's suits, you should target families with: A. lower incomes. B. higher incomes. C. poor taste in clothing. D. similar tastes and preferences. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

37. If a worker receives a fixed payment of $100 plus $10 for every hour she works, what is the maximum total earnings the worker can receive if she is restricted to a maximum of 12 hours of work per day? A. $220 B. $120 C. $340 D. $125 Answer: A Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

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Chapter 04 - The Theory of Individual Behavior

38. The total earnings of a worker are represented by E = 100 + $10(24 − L), where E is earnings and L is the number of hours of leisure. How much will the worker earn if he takes 14 hours of leisure per day? A. $150 B. $240 C. $100 D. $200 Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

39. The total earnings of a worker are represented by E = 100 + $10(24 − L), where E is earnings and L is the number of hours of leisure. How many hours of leisure are consumed if this worker's total earnings are $160? A. 18 hours B. 16 hours C. 12 hours D. 10 hours Answer: A Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

40. A worker's total earnings for one day is $100. He received a $20 fixed payment and consumes 14 hours of leisure. What is the hourly wage rate? A. $10 B. $6 C. $4 D. $8 Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

41. Normally, owners of firms should try to induce their managers to care: A. solely about output. B. about profits and output. C. solely about profits. D. None of the statements associated with this question is correct. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

42. Suppose earnings are given by E = $60 + $7(24 − L), where E is earnings and L is the hours of leisure. How much is this person working if her daily earnings are $116? A. 18 hours B. 16 hours C. 12 hours D. 8 hours Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

43. Suppose earnings are given by E = $60 + $7(24 − L), where E is earnings and L is the hours of leisure. What is the maximum this worker can earn in three (3) days? A. $519 B. $417 C. $228 D. $684 Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

44. Suppose earnings are given by E = $60 + $7(24 − L), where E is earnings and L is the hours of leisure. The fixed payment for this worker is: A. $7. B. $24. C. $60. D. $0. 4-13 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

45. Suppose earnings are given by E = $60 + $7(24 − L), where E is earnings and L is the hours of leisure. What is the price to the worker of consuming an additional hour of leisure? A. $24 B. $7 C. $12 D. $10 Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

46. Managers can get workers to work longer hours by: A. offering overtime pay. B. offering a higher flat wage rate on all hours worked. C. decreasing the hourly wage scale. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

47. Consumers adjust their purchasing behavior so that: A. they purchase as many scarce resources as possible. B. marginal rate of substitution is maximized. C. marginal rate of substitution is minimized. D. the ratio of prices they pay equals their marginal rate of substitution. Answer: D Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

48. The horizontal intercept of the budget line is: A. -PX/PY. B. M/PX. C. M/PY. D. PYY. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

49. The maximum quantity of good X that is affordable is: A. M/PY. B. M/X. C. M/PX. D. PYY. Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

50. What is the horizontal intercept of the budget line, given that M = $1,000, PX = $50, and PY = $40? A. 2000.0 B. 20.0 C. 25.0 D. 11.11 Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

51. A≻B means: A. bundle A is not preferred to bundle B. B. bundle A is preferred to bundle B. C. bundle A is equally preferred to bundle B. D. bundle A is greater than bundle B. Answer: B Learning Objective: 04-01 4-15 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

52. By the completeness property, if neither A ≻ B nor B ≻ A hold, then: A. the consumer is indifferent between A and B. B. the consumer prefers bundle A. C. the consumer prefers bundle B. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

53. By the property of "more is better," the consumer views the products under consideration as: A. goods. B. bads. C. inferior goods. D. normal. Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

54. If bundles A, B, and C lie on the same indifference curve, then: A. A ≻ B ≻ C. B. B ≻ C ≻ A. C. A ∽ B ≻ C. D. A ∽ B ∽ C. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

55. The marginal rate of substitution (MRS) determines the rate at which a consumer is willing to substitute between two goods in order to achieve: A. a higher level of satisfaction. B. a lower level of satisfaction. C. the same level of satisfaction. D. None of the preceding statements is correct. Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

56. Along the same indifference curve, MRS is ________ as more of one good is obtained. A. constant B. increasing C. decreasing D. varying irregularly Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

57. Diminishing marginal rate of substitution implies that indifference curves are: A. convex from the origin. B. concave from the origin. C. either convex or concave from the origin. D. straight line. Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 02 Medium

58. By the transitivity property, if A ≻ B and B ≻ C then: A. A ≺ C B. A ≻ C C. A ∽ C D. B ∽ C 4-17 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

59. By the property of "more is better" and transitivity, indifference curves: A. can intersect one another only once. B. can intersect one another only twice. C. do not intersect one another. D. may overlap one another. Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

60. The possibility of the endless cyclical preference is eliminated by the property of: A. completeness. B. more and better. C. diminishing marginal rate of substitution. D. transitivity. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

61. Some individuals choose to undertake risky prospects while others choose safer ones because they have different: A. degrees of transitivity. B. marginal rates of substitution between risk and reward. C. income elasticities. D. marginal utilities. Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

62. The budget set defines the combinations of good X and Y that: A. are desirable to the consumer. B. are affordable to the consumer. C. maximize the consumer's utility. D. maximize the supplier's profit. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 02 Medium

63. PXX + PYY = M is called: A. an indifference curve. B. an opportunity set. C. a budget set. D. a budget line. Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

64. The slope of the budget line represents: A. the marginal rate of substitution. B. the market rate of substitution. C. the budget rate of substitution. D. the opportunity rate of substitution. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

65. If income increases, the budget line: A. shifts to the right. B. shifts to the left. C. rotates clockwise. D. rotates counterclockwise. Answer: A Learning Objective: 04-02 Topic: Constraints Blooms: Remember 4-19 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Knowledge Application Difficulty: 01 Easy

66. If income decreases, then: A. the budget line remains the same. B. the vertical intercept of the budget line shifts downward. C. the horizontal intercept of the budget line shifts upward. D. the slope of the budget line becomes steeper. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

67. Indifference curves further from the origin imply: A. a higher level of satisfaction. B. a lower level of satisfaction. C. the same level of satisfaction as any other curve. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

68. The equilibrium consumption bundle is: A. the bundle where the budget line and the indifference curve meet. B. the affordable bundle that yields the greatest satisfaction to the consumer. C. any bundle that is the farthest from the origin. D. any affordable bundle in the budget set. Answer: B Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

69. At the equilibrium consumption bundle, which of the following holds? A. MRSX,Y = PX /PY. B. MRSX,Y = −PX /PY. C. MRSX,Y = −PY /PX. D. MRSX,Y = PY /PX. 4-20 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: A Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

70. If the slope of the indifference curve is steeper than the slope of the budget line, and X is on the horizontal axis: A. the consumer is willing to give up more of good Y to get an additional unit of good X than is necessary under the current market prices. B. MRS < PX /PY. C. MRS < −PX /PY. D. the consumer is willing to give up more of good X to get an additional unit of good Y than is necessary under the current market prices. Answer: A Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

71. If an increase in the price of good X leads to an increase in the consumption of good Y, then goods X and Y are called: A. substitutes. B. complements. C. normal goods. D. inferior goods. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

72. If an increase in the price of good X leads to a decrease in the consumption of good Y, then goods X and Y are called A. substitutes. B. complements. C. normal goods. D. inferior goods. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Remember 4-21 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Knowledge Application Difficulty: 01 Easy

73. If the price of a good rises, then the equilibrium consumption of that good: A. increases if it is an inferior good. B. decreases if it is a normal good. C. remains the same. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

74. Under the buy one, get one free regime, the: A. budget line rotates counterclockwise. B. price is reduced by 50 percent. C. budget set expands. D. indifference curve is changed. Answer: C Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Remember AACSB: Knowledge Application Difficulty: 03 Hard

75. If the price of computers decreases, then the: A. sales of a substitute, such as a telephone, decrease. B. sales of a substitute, such as a telephone, increase. C. inventory of computers increases. D. inventory of computer software increases. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

76. If income increases, then the: A. budget line rotates counterclockwise. B. budget line rotates clockwise. C. budget line shifts to the right. D. opportunity set contracts. 4-22 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

77. An in-kind gift causes the budget line to: A. shift to the right in a parallel fashion. B. shift to the left in a parallel fashion. C. rotate counterclockwise. D. None of the preceding statements is correct. Answer: D Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

78. A cash gift causes the budget line to: A. shift to the right in a parallel fashion. B. shift to the left in a parallel fashion. C. rotate clockwise. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

79. Which is more preferred between a cash gift and an in-kind gift? A. A cash gift. B. An in-kind gift. C. Both are equally preferred. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

80. If a consumer is given a $10 gift certificate good only for items in store X, and all items in store X are normal goods, then the consumer desires to consume: A. more goods in store X. B. fewer goods in store X. C. the same amount of goods in store X. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

81. If a consumer is given a $10 gift certificate good for items in store X, and all items in store X are inferior goods, then the consumer desires to consume: A. more goods in store X. B. fewer goods in store X. C. the same amount of goods in store X. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

82. If you sell an inferior good, offering to sell gift certificates to those looking for a gift may result in: A. a greater quantity sold than before the customer is given a gift certificate. B. a greater quantity sold than if the customer resorts to giving a cash gift. C. a smaller quantity sold than before the customer is given a gift certificate. D. a smaller quantity sold than if the customer resorts to giving a cash gift. Answer: B Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

83. The substitution effect reflects how a consumer will react to a different: A. marginal rate of substitution. B. market rate of substitution. C. level of real income. D. level of nominal income. 4-24 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: B Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

84. When the price of a good increases with other things unchanged, the real income of the consumer: A. is unchanged. B. increases. C. decreases. D. None of the preceding statements is correct. Answer: C Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

85. Many gourmet shops go out of business during recessions since they sell almost exclusively: A. inferior goods. B. normal goods. C. substitutes. D. complements. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Remember AACSB: Knowledge Application Difficulty: 1 Easy

86. If you include in your offerings some inferior goods, the demand for these products will increase: A. during bad economic times. B. during economic booms. C. when incomes are high. D. All of the statements associated with this question are correct. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium 4-25 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

87. Running a supermarket involves: A. a lower level of risk than running a gourmet shop. B. a higher level of risk than running a gourmet shop. C. the same level of risk as running a gourmet shop. D. All of the statements associated with this question are correct. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

88. Most workers view leisure and income as: A. goods. B. bads. C. goods and bads, respectively. D. bads and goods, respectively. Answer: A Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

89. If a firm offers to pay a worker $10 for each hour of leisure the worker gives up, then the opportunities confronting the worker will be given by the: A. convex curve from the origin. B. concave curve from the origin. C. straight line with a negative slope. D. straight line with a positive slope. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

90. If a firm offers to pay a worker $10 for each hour of leisure the worker gives up, the $10 implies the: A. marginal rate of substitution between leisure and income. B. market rate of substitution between leisure and income. C. market rate of transformation between leisure and income. D. marginal rate of transformation between leisure and income.

4-26 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

91. Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per day, and he can use 24 hours per day. What are the maximum total earnings the worker can earn in a day? A. $492 B. $392 C. $192 D. $292 Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

92. Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per day, and he can use 24 hours per day. What is the minimum the worker can earn in a day? A. $50 B. $100 C. $192 D. $200 Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

93. Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per day, and he can use 24 hours per day. What is the market rate of substitution between leisure and income? A. $5 B. $8 C. $10 D. None of the preceding statements is correct. Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply 4-27 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Analytical Thinking Difficulty: 02 Medium

94. Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per day, and he can use 24 hours per day. What is the equation for the worker's opportunity set? (E is total earnings and L is leisure.) A. E = 100 − 8L B. E = 192 − 8L C. E = 292 − 8L D. None of the preceding statements is correct. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

95. The firm manager with indifference curves which are convex from the origin (output on the horizontal axis and profit on the vertical axis) views: A. only profits to be "goods." B. only outputs to be "goods." C. both profits and outputs to be "goods." D. None of the preceding statements is correct. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

96. A firm manager with vertical indifference curves (output on the horizontal axis, profit on the vertical axis) views: A. only profits to be "goods." B. only output to be "goods." C. both profits and outputs to be "goods." D. None of the preceding statements is correct. Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

4-28 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

97. The firm manager with horizontal indifference curves (output on the horizontal axis, profit on the vertical axis) views: A. only profits to be "goods." B. only output to be "goods." C. both profits and outputs to be "goods." D. None of the preceding statements is correct. Answer: A Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

98. Managers can get workers to work longer hours: A. by increasing wages on all hours worked. B. by lowering wages on all hours worked. C. with higher overtime pay in excess of regular hourly pay. D. with lower overtime pay in excess of regular hourly pay. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

99. Mitchell's money income is $150, the price of X is $2, and the price of Y is $2. Given these prices and income, Mitchell buys 50 units of X and 25 units of Y. Call this combination of X and Y bundle J. At bundle J, Mitchell's MRS is 2. At bundle J, if Mitchell increases consumption of Y by 1 unit, how many units of X can he give up and still reach the same level of utility? A. ½ B. 1 C. 2 D. 4 Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Apply AACSB: Analytical Thinking

100. Mitchell's money income is $150, the price of X is $2, and the price of Y is $2. Given these prices and income, Mitchell buys 50 units of X and 25 units of Y. Call this combination of X and Y bundle J. At bundle J, Mitchell's MRS is 2. Given these prices and income, what is Mitchell's equilibrium consumption of X? 4-29 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

A. X < 50 B. X = 50 C. X > 50 D. None of the preceding statements is correct. Answer: C Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

101. Mitchell's money income is $150, the price of X is $2, and the price of Y is $2. Given these prices and income, Mitchell buys 50 units of X and 25 units of Y. Call this combination of X and Y bundle J. At bundle J, Mitchell's MRS is 2. At bundle J, if Mitchell increases consumption of Y by 1 unit, how many units of X must he give up in order to satisfy his budget constraint? A. ½ B. 1 C. 2 D. 4 Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

102. Joe consumes 48 units of food and 12 units of clothing. If food is an inferior good: A. Joe would strictly prefer receiving a $10 gift certificate at a clothing store to receiving $10 in cash. B. Joe would strictly prefer receiving $10 in cash to receiving a $10 gift certificate at a clothing store. C. Joe would be indifferent between receiving a $10 gift certificate at a clothing store and receiving $10 in cash. D. upon receiving a $10 gift certificate at a clothing store, Joe would consume less clothing and more food. Answer: B Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

103. Consider a two-good world, with commodities X and Y. Which of the following statements is correct?

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Chapter 04 - The Theory of Individual Behavior

A. Both X and Y must be normal goods. B. If good X is a normal good, good Y must be an inferior good. C. If good X is an inferior good, good Y must be a normal good. D. Both good X and good Y can be inferior goods. Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

104. If widgets and gidgets are complements and both are normal goods, then a decrease in the demand for widgets will result from: A. an increase in the price of widgets. B. a decrease in income. C. a decrease in the price of gidgets. D. a decrease in the price of gidgets and a decrease in income. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

105. If sugar and Nutrasweet are substitutes, then we can be certain that a decrease in the price of sugar will lead to an increase in the consumption of: A. Nutrasweet only. B. sugar only. C. sugar and Nutrasweet. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

106. If widgets and gidgets are complements and both are normal goods, then an increase in the demand for widgets will result from: A. an increase in the price of widgets. B. a decrease in income. C. a decrease in the price of gidgets. D. an increase in the price of widgets and a decrease in income. Answer: C 4-31 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

107. Sam Voter prefers Ronald to Joe, Joe to Gary, and Gary to Ronald. Sam's preferences: A. are consistent with our assumptions about consumer behavior. B. indicate that he is a liberal. C. are not complete. D. are not transitive. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

108. If the price of a good purchased by a utility-maximizing consumer goes down, all other things remain the same, and the consumer's income is adjusted so that he can just barely attain his previous level of satisfaction, and if the consumer has indifference curves of the usual shape, it will be found that: A. more of the good will be purchased than before. B. less of the good will be purchased than before. C. the same amount of the good will be purchased as before. D. the consumer will stop purchasing the good at all. Answer: A Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

109. Consider a two-good world, with commodities X and Y. If Y is an inferior good, then an increase in consumer income CANNOT: A. decrease the demand for Y. B. decrease the demand for X. C. increase the demand for X. D. make the consumer better off. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

110. At any point on an indifference curve, the slope indicates: 4-32 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

A. the market rate of substitution between the two goods. B. the way the consumer's budget is allocated between the two goods. C. how the total satisfaction of the consumer changes with different market baskets. D. None of the preceding statements is correct. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

111. Joe consumes 10 units of food and 12 units of clothing. Since food is an inferior good, a gift to Joe of a $12 gift certificate at a clothing store will: A. induce Joe to eat more than 10 units of food. B. definitely make Joe better off than a gift of $12 in cash. C. definitely make Joe worse off than a gift of $12 in cash. D. None of the preceding statements is correct. Answer: D Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

112. If money income doubles and the prices of all goods triples, then the: A. budget line remains unchanged. B. consumer is worse off due to inflation. C. consumer will buy more of normal goods. D. budget line will shift out. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

113. The difference between a price increase and a decrease in income is that: A. a decrease in income does not affect the slope of the budget line, while an increase in price does change the slope. B. a price increase does not affect the consumption of other goods, while a decrease in income does. C. a price increase will increase real income, while a decrease in income will increase real income. D. None of the preceding statements is correct. 4-33 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

114. Which combination of the following properties rules out indifference curves that intersect one another? A. Completeness and diminishing marginal rate of substitution B. Transitivity and more-is-better C. More-is-better and diminishing marginal rate of substitution D. Completeness and more-is-better Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

115. The rate at which a consumer is willing to substitute one good for another, while still maintaining a given level of satisfaction, is called the A. market rate of substitution. B. average rate of substitution. C. marginal rate of substitution. D. budget constraint. Answer: C Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

116. A decrease in the price of good Y will have what effect on the budget line on a normal X-Y graph? A. Increase the vertical intercept B. Decrease the horizontal intercept C. Parallel outward shift of the line D. Parallel inward shift of the line Answer: A Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium 4-34 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

117. What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $15, X = 30, and M = 600? A. 10 B. 15 C. 20 D. 25 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

118. Given that income is $750 and PX = $32 and PY = $8, what is the market rate of substitution between goods X and Y? A. -0.75 B. -3 C. -4 D. -25 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

119. If the price of good X decreases, what will happen to the budget line? A. It will have a parallel shift inward. B. It will have a parallel shift outward. C. It will become steeper. D. It will become flatter. Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

120. The substitution effect isolates the change in the consumption of a good caused by: A. the lower "real" income. B. the change in the relative prices of two goods. C. the change in consumer preferences. D. None of the preceding statements is correct. Answer: B 4-35 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

121. A price decrease causes a consumer's "real" income to: A. increase. B. decrease. C. remain unchanged. D. decrease or increase depending on the size of the price change. Answer: A Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

122. The total earnings of a worker are represented by E = 150 + $12(24 − L), where E is earnings and L is the number of hours of leisure. How much will the worker earn if he takes 16 hours of leisure per day? A. $96 B. $246 C. $278 D. $342 Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

123. Suppose earnings are given by E = $50 + $20(24 − L), where E is earnings and L is the hours of leisure. What is the price to the worker of consuming an additional hour of leisure? A. $30 B. $26 C. $24 D. $20 Answer: D Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

4-36 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

124. The maximum quantity of good Y that is affordable is: A. M/PX. B. M/X. C. M/PY. D. M/Y. Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

125. Given that income is $300, the price of good Y is $15, and the price of good X is $20, what is the vertical intercept of the budget line? A. 4,500 B. 300 C. 20 D. 15 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

126. Sam Voter prefers Jack to Rob, Rob to Mark, and Jack to Mark. Sam's preferences: A. are not consistent with our assumptions about consumer behavior. B. indicate that he is a liberal. C. are not complete. D. are transitive. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

127. Consider a two-good world, with commodities X and Y. If X is an inferior good, then an increase in consumer income cannot: A. decrease the demand for Y. B. increase the demand for Y. C. decrease the demand for X. D. make the consumer better off. 4-37 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

128. When the price of one good increases, the associated income effect is represented by a move from one indifference curve to a: A. lower indifference curve since real income is now higher. B. lower indifference curve since real income is now lower. C. higher indifference curve since real income is now higher. D. higher indifference curve since real income is now lower. Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

129. When the price of one good decreases, the associated substitution effect is represented by a: A. move from one indifference to a higher indifference curve since real income is now higher. B. move from one indifference to a lower indifference curve since real income is now lower. C. move along a given indifference curve holding real income constant. D. move along a given indifference curve since real income increases. Answer: C Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

130. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume goods X and Y are normal goods and the price of good X decreases. Then the substitution effect will lead consumers to consume: A. more of good X and more of good Y. B. less of good X and more of good Y. C. less of good X and less of good Y. D. more of good X and less of good Y. Answer: D Learning Objective: 04-04 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application 4-38 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Difficulty: 02 Medium

131. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good X increases. Then the substitution effect will lead consumers to consume: A. more of good X and more of good Y. B. less of good X and more of good Y. C. less of good X and less of good Y. D. more of good X and less of good Y. Answer: B Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

132. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that both X and Y are inferior goods and the price of good Y increases. Then the substitution effect will lead consumers to consume: A. more of good X and more of good Y. B. less of good X and more of good Y. C. less of good X and less of good Y. D. more of good X and less of good Y. Answer: D Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

133. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that both X and Y are normal goods and that the price of good X increases. Then, which of the following effects is known with certainty? A. The income and substitution effects reinforce one another, leading to an overall increase in the consumption of good X. B. The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X. C. The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good X. D. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y. Answer: B Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze 4-39 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Analytical Thinking Difficulty: 03 Hard

134. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that both X and Y are normal goods and that the price of good Y decreases. Then, which of the following effects is known with certainty? A. The income and substitution effects reinforce one another, leading to an overall increase in the consumption of good X. B. The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X. C. The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good X. D. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y. Answer: D Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

135. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that both X and Y are normal goods and that the price of good Y increases. Then, which of the following effects is known with certainty? A. The income and substitution effects reinforce one another, leading to an overall increase in the consumption of good X. B. The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X. C. There will be an indeterminate effect on the consumption of good X. D. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y. Answer: C Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

136. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good Y increases. Then, which of the following effects is known with certainty?

4-40 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

A. The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X. B. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y. C. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good X. D. The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y. Answer: D Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

137. Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good Y decreases. Then, which of the following effects is known with certainty? A. The income and substitution effects reinforce one another leading to an overall decrease in the consumption of good X. B. The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y. C. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y. D. The income and substitution effects will reinforce one another, leading to an overall decrease in the consumption of good Y. E. The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good X. Answer: B Learning Objective: 04-04 Topic: Comparative Statics Blooms: Analyze AACSB: Analytical Thinking Difficulty: 03 Hard

138. Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 20 − QX; Consumer 2's (inverse) demand is PX = 20 − 2QX; and Consumer 3's (inverse) demand is PX = 20 − 4QX. When PX = $10, the market will demand: A. 17.5 units and the inverse market demand curve is PX = 20 − 0.5714QX. B. −30 units and the inverse market demand curve is PX = 60 − 7QX. C. 17.5 units and the inverse market demand curve is PX = 60 − 7QX. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-05 Topic: The Relationship Between Indifference Curve Analysis and Demand Curves 4-41 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

139. Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied and the initial budget constraint is given by 300 = 2X + 4Y. At the initial budget constraint, this consumer purchases 100 units of good X and 25 units of good Y. Suppose the price of X increases to $4 per unit, resulting in a new consumption bundle consisting of 60 units of X and 15 units of Y. Then, the slope of the inverse demand for good X over this consumption range is: A. 0.05. B. −0.05. C. −0.267. D. −0.444. Answer: B Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

140. Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied and the initial equilibrium consumption bundle consists of 100 units of X and 50 units of Y. If PX decreases such that the new equilibrium consumption bundle is 150 units of X and 75 units of Y, then goods X and Y are: A. complements. B. substitutes. C. inferior goods. D. unrelated. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

141. Suppose a manager views both quantity and profit as "goods." Such a manager will then have an indifference curve that:

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Chapter 04 - The Theory of Individual Behavior

A. is tangent to the profit curve somewhere between quantities of 0 and 2.5. B. is tangent to the profit curve somewhere between quantities of 2.5 and 5. C. intersects the profit curve at a quantity exactly equal to 2.5. D. intersects the profit curve at a quantity exactly equal to 5. Answer: B Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

142. Suppose a manager's preferences depend only on profit. Such a manager will then have an indifference curve that:

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Chapter 04 - The Theory of Individual Behavior

A. is tangent to the profit curve somewhere between quantities of 0 and 2.5. B. is tangent to the profit curve somewhere between quantities of 2.5 and 5. C. is tangent to the profit curve at a quantity exactly equal to 2.5. D. intersects the profit curve at a quantity exactly equal to 5. Answer: C Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

143. Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied and the initial equilibrium consumption bundle consists of 10 units of X and 25 units of Y. If PY increases such that the new equilibrium consumption bundle is 15 units of X and 10 units of Y, then goods X and Y are: A. complements. B. substitutes. C. normal goods. D. unrelated. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

144. Suppose we are given that the value of a particular utility function is a constant. That is, U(X,Y) = c. Then, the total derivative of this relation is: A. (∂U/∂X)dX + (∂U/∂Y)dY = c. B. (∂U/∂X)dX + (∂U/∂Y)dY = 0. C. (∂Y/∂X)dX + (∂X/∂Y)dY = 0. D. (∂Y/∂X)dU + (∂X/∂Y)dU = c. Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

145. Suppose the following Lagrangian is formed to maximize a consumer's utility subject to her budget constraint: ℒ = U(X,Y) + λ(1,000 − 50X − 5Y). The first-order conditions for this problem imply: A. MRS = 10. B. PX / PY = 10. C. (∂U/∂X) / (∂U/∂Y) = 10. D. All of the statements associated with this question are correct. Answer: D Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

146. Suppose a consumer has M = $200 to spend on two goods, X and Y. If the per-unit prices of X and Y are respectively given by PX = $2 and PY = $4, then utility maximization subject to a budget constraint can be found from which of the following Lagrangians? A. ℒ = U(X,Y) + λ(200 − 2X − 4Y) B. ℒ = U(X,Y) + λ(200 − 2PX − 4PY) C. ℒ = (200 − 2X − 4Y) + λU(X,Y) D. ℒ = U(X,Y) + λ(2X − 4Y + 200) Answer: A Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

147. What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 5, and M = 400? A. 80 B. 20 C. 40 D. 30 Answer: D Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

148. What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 0, and M = 400? A. 0 B. 20 C. 40 D. 30 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

149. What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, X = 20, and M = 400? A. 10 B. 20 C. 5 D. 0 Answer: A Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

150. What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, X = 0, and M = 400? A. 10 B. 20 C. 5 D. 0 Answer: B Learning Objective: 04-02 Topic: Constraints Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

151. A price increase causes a consumer's "real" income to: A. increase. B. decrease. C. remain unchanged. D. decrease or increase depending on the size of the price change. Answer: B Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

152. If the price of good X increases, what will happen to the budget line? A. It will have a parallel shift inward. B. It will have a parallel shift outward. C. It will become steeper. D. It will become flatter. Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

153. The income effect isolates the change in the consumption of a good caused by the change in: A. "real" income. B. the relative prices of two goods. C. consumer preferences. D. None of the preceding statements is correct.

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Chapter 04 - The Theory of Individual Behavior Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

154. If the price of a good Y falls, then the marginal rate of substitution between X and Y: A. increases. B. decreases. C. remains the same. D. depends on whether X and Y are normal or inferior goods, and we cannot tell without that information. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

155. Suppose the utility function for a firm manager is U = π + bQ, where Q is output, π is profit, and b is a negative constant. How would the firm's output compare with what it would be if the manager's objective was to maximize profit? A. It would be greater than the profit-maximizing output. B. It would be less than the profit-maximizing output. C. It would be the same as the profit-maximizing output. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

156. If the slope of the budget line is steeper than the slope of the indifference curve, and X is on the horizontal axis: A. the consumer is willing to give up more of good X to get an additional unit of good Y than is necessary under the current market prices. B. MRS > PX /PY. C. MRS = −PX /PY. D. the consumer is willing to give up more of good Y to get an additional unit of good X than is necessary under the current market prices. Answer: A Learning Objective: 04-03 4-48 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

157. If the price of a good falls, then the equilibrium consumption of that good: A. increases if it is an inferior good. B. decreases if it is a normal good. C. remains the same. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

158. Kate's money income is $350, the price of X is $4, and the price of Y is $6. Given these prices and income, Kate buys 50 units of X and 25 units of Y. Call this combination of X and Y bundle J. At bundle J, Kate's MRS is 3. At bundle J, if Kate increases consumption of Y by 1 unit, how many units of X can she give up and still reach the same level of utility? A. 1 B. 1/3 C. 3 D. 2/3 Answer: B Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

159. Ann's money income is $250, the price of X is $3, and the price of Y is $2. Given these prices and income, Ann buys 60 units of X and 35 units of Y. Call this combination of X and Y bundle J. At bundle J Ann's MRS is 2. Given these prices and income, what is Ann's equilibrium consumption of X? A. X < 60 B. X = 60 C. X > 60 D. None of the preceding statements is correct. Answer: C Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand 4-49 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Knowledge Application Difficulty: 03 Hard

160. Kate's money income is $250, the price of X is $3, and the price of Y is $2. Given these prices and income, Kate buys 60 units of X and 35 units of Y. Call this combination of X and Y bundle J. At bundle J, Kate's MRS is 3. At bundle J, if Kate increases consumption of Y by 1 unit, how many units of X must she give up in order to satisfy her budget constraint? A. 3/2 B. 3 C. 2/3 D. 1 Answer: C Learning Objective: 04-02 Topic: Constraints Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

161. If sugar and Nutrasweet are substitutes, then we can be certain that an increase in the price of sugar will lead to an increase in the consumption of: A. Nutrasweet only. B. sugar only. C. sugar and Nutrasweet. D. None of the preceding statements is correct. Answer: A Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

162. If money income triples and the price of all goods doubles, then the: A. budget line remains unchanged. B. consumer is worse off due to inflation. C. consumer will buy more of normal goods. D. budget line will shift in. Answer: C Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

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Chapter 04 - The Theory of Individual Behavior

163. Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 40 − 5QX; Consumer 2's (inverse) demand is PX = 10 − QX; and Consumer 3's (inverse) demand is PX = 30 − 2QX. When PX = $5, the market will demand: A. 15.5 units. B. −12 units. C. 24.5 units. D. None of the preceding statements is correct. Answer: C Learning Objective: 04-05 Topic: The Relationship Between Indifference Curve Analysis and Demand Curves Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

164. Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 40 − QX; Consumer 2's (inverse) demand is PX = 50 − 2QX; and Consumer 3's (inverse) demand is PX = 70 − 4QX. When PX = $20, the market will demand: A. 41 units. B. 47.5 units. C. 19.5 units. D. None of the preceding statements is correct. Answer: B Learning Objective: 04-05 Topic: The Relationship Between Indifference Curve Analysis and Demand Curves Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

Essay Questions 165. Airlines give away millions of tickets each year through their frequent flyer programs, with the typical airline awarding a free ticket for each 25,000 miles flown on the airline. The average airline ticket costs $500 and is for a 2,500-mile round trip. Given this information, evaluate the following statement: Airlines could have the same effect on demand by eliminating their frequent flyer programs and simply lowering the average ticket price by 10 percent. Answer: The statement is false. The frequent flyer programs are, in effect, a "buy 10 tickets, get one free" deal. The price of the first 10 tickets remains unchanged under the deal, while the price of the 11th ticket is zero. Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium 4-51 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

166. Natalie is always willing to give up 10 ounces of licorice for 1 ounce of chocolate. Mitchell, on the other hand, will always give up 10 ounces of chocolate for 1 ounce of licorice. Based on this information, answer the following questions: a. Do Natalie's preferences exhibit a diminishing marginal rate of substitution between chocolate and licorice? Why or why not? b. Assuming that Natalie and Mitchell have the same amount of money to spend on chocolate and licorice, who will purchase the most licorice? Why? Answer: a. No, since she is always willing to give up the same amount of chocolate for an additional ounce of licorice. b. Other things equal, Mitchell will consume more licorice. More precisely, if we graph licorice on the horizontal axis and chocolate on the vertical axis, Mitchell's indifference curves are always steeper than Natalie's. For given prices and income, this means that Mitchell will never consume less licorice than Natalie. Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

167. Suppose an individual's marginal rate of substitution is three slices of pizza for one beer at the present bundle of beer and pizza she is consuming. If the price of beer is $1.00 and the price of a slice of pizza is $1.50, is the consumer maximizing her welfare? If not, how should she change her consumption? Answer: Since the ratio of beer prices to pizza prices is $1/$1.5 = 2/3 < 3 = MRS, the consumer is not maximizing her welfare. She should consume less pizza but more beer to maximize her welfare. Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

168. Clothing stores frequently run "sales" where they discount clothing prices by as much as 25 percent. What impact, if any, would you expect these "sales" to have on a store that specializes in selling shoes produced by Rockport? Answer: Since shoes and clothing are probably complements, "sales" at clothing stores most likely lead to increased shoe purchases at Rockport shoe stores. Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

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Chapter 04 - The Theory of Individual Behavior

169. A stockholder named Sue must cast a vote for chair of the board. Sue prefers Mr. Lee to Ms. Doe, Ms. Doe to Mr. James, and Mr. James to Mr. Lee. a. Are Sue's preferences consistent with our assumptions about consumer behavior? Explain. b. If all stockholders had the same preferences as Sue, who would win the appointment as chair of the board? Explain. Answer: a. No, her preferences are not consistent with our assumptions about consumer behavior. In particular, the property of transitivity is not satisfied. According to this axiom, given that she prefers Mr. Lee to Ms. Doe and Ms. Doe to Mr. James, then she must prefer Mr. Lee to Mr. James but not the reverse. b. If they are voted on in pairs, it would depend on which pair was voted on first. For example, if Lee and Doe were paired first, Lee would win the first vote, and James the second. Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

170. Over the past decade, medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 100, Px = 4, and Py = 5. a. Graph the budget line, and determine the market rate of substitution. b. Illustrate the budget set. c. Show in your graph what happens to the budget constraint if Px increases to $10. d. What is the meaning of the slope of the two budget constraints? Answer: a. See the figure below. b. The budget set is the area above the x-axis, to the left of the y-axis, and below the budget line when M = 100, Px = 4, and Py = 5. c. See the figure below. d. The slopes reflect the market rate of substitutions under two different sets of prices. A steeper slope means you have to give up a larger amount of Y in order to obtain one more unit of X. Learning Objective: 04-02

Y (a) Slope = - 4/5

20

(c) Slope = - 2

0

10

4-5325

X

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Chapter 04 - The Theory of Individual Behavior Topic: Constraints Blooms: Create AACSB: Analytical Thinking Difficulty: 02 Medium

171. At a very basic level, food and shelter constitute the two most important goods needed to sustain human life. Accordingly, assume that a poor person must allocate his income solely between food and shelter. a. Show that if shelter is an inferior good, food must be a normal good. b. If food is a normal good, is shelter necessarily an inferior good? Explain, and show your answer graphically. Answer: a. Let the quantities of food and shelter be denoted by F and S. Then the budget constraint implies PfF + PsS = M. Differentiating this equation, holding Ps and Pf constant, reveals PfdF/dM + PsdS/dM = 1. If shelter is an inferior good, dS/dM < 0, then dF/dM must be positive; food is a normal good if shelter is inferior. b. It need not be the case, as the figure below reveals. The movement from A to B means that demand for both shelter and food increased due to the increase in income.

F ood

B A

0

S h e lte r

Learning Objective: 04-03 Topic: Comparative Statics Blooms: Appky AACSB: Analytical Thinking Difficulty: 03 Hard

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Chapter 04 - The Theory of Individual Behavior

172. Suppose you are the manager of a firm that produces Ultrasweet, a sugar substitute. Show graphically the effect of a reduction in the price of Sweet and Healthy, a competitor's product, on a typical consumer's consumption of Ultrasweet. Answer: A reduction in the price of Sweet and Healthy rotates the budget constraint, and consumer equilibrium will change. Since Sweet and Healthy and Ultrasweet are substitutes, a typical consumer will consume more Sweet and Healthy and less Ultrasweet. Learning Objective: 04-03 Topic: Comparative Statics Blooms: Create AACSB: Analytical Thinking Difficulty: 02 Medium

173. If shoes and socks are complements and both are normal goods, show graphically what would happen to the consumption of shoes and socks if: a. the price of shoes decreased. b. consumer incomes increased. Answer: a. As shown in the accompanying figure, a decrease in the price of shoes rotates the budget constraint from 1 to 2. Since shoes and socks are complements, more of both goods are consumed as equilibrium moves from A to B.

Socks

B A 1

2

0

Shoes

b. Since both goods are normal, an increase in income leads to greater consumption of each good, as illustrated by the movement from C to D in the accompanying figure.

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Chapter 04 - The Theory of Individual Behavior

S o ck s

D C

0

Shoes

Learning Objective: 04-03 Topic: Comparative Statics Blooms: Create AACSB: Analytical Thinking Difficulty: 03 Hard

174. Draw the opportunity set of a consumer with an income of $200 who faces prices of Px = 5 and Py = 10. What is the market rate of substitution between the two goods? Answer: a. See figure below. b. The market rate of substitution is −1/2. 0

Y slope = -1/2

20

0

40

X

Learning Objective: 04-02 Topic: Constraints Blooms: Create 4-56 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior AACSB: Analytical Thinking Difficulty: 02 Medium

175. Explain what would happen to the equilibrium consumption of two goods, X and Y, if (a) income doubled and all prices tripled, (b) all prices doubled and income tripled, and (c) all prices and income doubled. In each case, show the effects when both goods are normal goods and when one good is a normal good and the other an inferior good. Answer: a. When both goods are normal, the consumption of both goods will decline. When one good is inferior, consumption of the inferior good will increase and the consumption of the normal good will decrease. b. When both goods are normal, consumption of both goods will increase. When one of the goods is inferior, consumption of the normal good will increase and consumption of the inferior good will decrease. c. Nothing will happen to the consumption of either good. Learning Objective: 04-03 Topic: Comparative Statics Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

176. Joe consumes 10 units of food and 12 units of clothing. If food is an inferior good, will Joe be indifferent between receiving a $12 gift certificate at a clothing store and receiving $12 in cash? Explain and show graphically. Answer: Yes, Joe would be indifferent between receiving a $12 gift certificate at a clothing store and receiving $12 in cash. As food is inferior, if Joe is awarded $12 in cash, he will definitely spend it entirely on clothing–just as he would if given a $12 gift certificate at a clothing store. Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Create AACSB: Analytical Thinking Difficulty: 02 Medium

177. Suppose a consumer derives satisfaction from consuming two types of hamburgers, X and Y. a. Graph the budget line of the consumer under the assumption that he is offered a "buy two, get one free" deal for burger X (limit one free burger). b. Graph the budget constraint under the assumption that the producer of burger Y also offers a "buy two, get one free" deal (limit one free burger). c. Explain in words why each of the preceding budget constraints looks as it does.

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Chapter 04 - The Theory of Individual Behavior

Answer: a. In Figure 4-6a, ABCD is the budget line under a "buy two, get one free" deal for burger X. b. In Figure 4-6b, ABCD is the budget line under a "buy two, get one free" deal from the producer of burger Y.

Y D C

3

2 B 0

A

X

c. When your consumption of the good under a special deal is less than or equal to two units, the deal has no effect on you. This explains the segment AB of your budget line. As you buy two units of that good, you get the third free. This explains the jump from B to C. After the third one, the deal becomes ineffective for you. Hence, CD has the same slope as AB does. Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Create AACSB: Analytical Thinking Difficulty: 02 Medium

178. A consumer has a choice of spending $13,000 on a Honda or $9,000 on a Saturn. She is observed buying the Saturn. Does this mean the consumer prefers the Saturn? Explain your answer. Answer: No. We conclude that the consumer prefers a Saturn and $4,000 in cash (or other goods) to a Honda. It may be the case that she likes a Honda much more than a Saturn. Learning Objective: 04-03 Topic: Consumer Equilibrium Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

179. Sally Consumer's indifference curve between cigarettes and hamburgers is upward sloping. Based on this information, can we conclude that Sally views cigarettes as "bads" and hamburgers as "goods"? Explain. Answer: No. But we can conclude that either cigarettes or hamburgers are bads, but not both. Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium 4-58 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

180. An economics professor went out to dinner one night and observed one of her students drinking heavily. The next day was a final exam. When the professor's husband found out the student was in her class, he said the student's behavior was irrational. The professor disagreed. Under what condition is behavior irrational according to the properties of consumer behavior discussed in the chapter? What situations could make the student's behavior rational? Answer: It is irrational if (1) drinking will cause the student to earn a lower grade than would be earned by not drinking, and (2) the higher grade is preferred to drinking and receiving the lower grade. The behavior is rational if the student prefers having a good time and receiving a low grade to studying and receiving a higher grade. Learning Objective: 04-01 Topic: Consumer Behavior Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

181. While at a discount shoe store, a customer asked a clerk, "I see that your shoes are ‘buy one, get one free–limit one free pair per customer.' Will you sell me one pair for half price?" The clerk answered, "I can't do that." When the customer started to leave the store, the clerk hastily offered, "However, I am authorized to give you a 40 percent discount on any pair in the store." Assuming the consumer has $200 to spend on shoes (X) or all other goods (Y), and that shoes cost $100 per pair, answer the following questions: a. Illustrate the consumer's opportunity set with the "buy one, get one free" deal and with a 50 percent discount. b. Why was the 40 percent discount offered only after the consumer rejected the "buy one, get one free" deal and started to leave the store? c. Why was the clerk willing to offer a "buy one, get one free" deal, but unwilling to sell a pair of shoes for half price? Answer: a. The straight line connecting points A and J as shown in the accompanying figure represents combinations of shoes and other goods that cost exactly $200. Since the consumer can't buy fractions of pairs of shoes, the consumer must decide between bundle A (no shoes but $200 worth of other goods) and bundle B (one pair of shoes, but only $100 worth of other goods), or bundle J (two pairs of shoes but no other goods). The buy one pair, get one pair free deal leaves the price of the first pair at $100, but makes the price of the second pair zero. Under the buy one, get one free offer, the combinations of shoes and other goods that cost exactly $200 is given by ABDH. Since the consumer can't buy fractional pairs, the consumer must choose between points A, B, D, and H. If pairs of shoes were sold at half price, the straight line connecting points A and K would represent the combinations of shoes and other goods that cost exactly $200. Since the consumer can't purchase fractions of shoes, the choices available to the consumer in this case are points A, F, D, G, and K.

4-59 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Income on other goods (Y)

$200

A F N

$100

I D

B

G

J 1

2

H

M 3

K 4

Pairs of shoes (X)

b. The consumer was originally offered the buy one, get one free deal, but asked the clerk if she would sell them at half price. The clerk initially said "No" to learn more about the consumer's preferences. When the clerk said "No," the consumer started to leave the store. Based on this, the clerk concluded that the indifference curve must look something like the one labeled I in the accompanying figure. How did the clerk know this? By starting to leave the store, the consumer was, in effect, revealing to the clerk that Bundle A was preferred to bundles B, D, and H (which were available with the buy one, get one free offer, but not chosen). Based on this new information, the clerk realized that, if she offered to sell shoes at half price, the consumer would not choose a bundle such as D, G, or K (since indifference curves cannot cross). In fact, the consumer would buy only one pair (bundle F) if charged half price. c. By asking for the half price deal, the consumer revealed to the clerk that Bundle F was preferred to bundle A. Based on this the clerk concluded that the consumer was indifferent between bundle A and bundle N in Figure 47. With the offer of the 40 percent discount on a single pair of shoes, the budget line is AM, and the consumer would just as soon buy a pair of shoes for $60 as leave the store. The purchase yields the store $60 in revenue for the pair of shoes, which is greater than the $50 it would have earned if the clerk had let the consumer buy a pair of shoes at half price. Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Create AACSB: Analytical Thinking Difficulty: 03 Hard

182. Use indifference curve and constraint analysis to analyze the behavior of employees who are paid: a. An hourly wage rate of $4 per hour. b. A fixed hourly wage of $4 per hour, plus an overtime bonus of $4 for every hour worked in excess of eight hours. c. A fixed salary of $40 per day, plus $4 for each hour worked. d. Which of the above schemes would yield the largest number of hours worked? Explain. Answer: 4-60 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior a. This is shown as the opportunity set through 96, A, 24 in the figure below. As we have drawn it, the consumer consumes 16 hours of leisure and earns $32. b. This is shown as the opportunity set 160, A, 24 in the figure below. This consumer chooses 12 hours of leisure and earns $64. c. Shown as the opportunity set through 136, C, 24 in the figure below. This consumer consumes 17 hours of leisure and earns $68. d. Given scheme (a), A is the equilibrium bundle. Consequently, scheme (b) must definitely increase the quantity of labor supplied (the movement from A to B involves less leisure and more work). On the other hand, scheme (c) will definitely decrease the labor supply compared with scheme (a) if both money and leisure are normal goods.

Income $160 $136 $96 D $68 $64 $32

B C A 12 16 17

24 Leisure

Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

183. In order to encourage energy conservation, many public utility companies charge consumers a higher rate on units of electricity consumed in excess of some threshold amount. In contrast, a common marketing ploy by other firms is to offer "quantity discounts" to consumers who purchase large quantities of a good. To illustrate how these pricing schemes alter the typical consumer's opportunity set, suppose income = $100, Px = $2 if the consumer buys less than 40 units of X, Px = $3 if the consumer buys more than 40 units of X, and Py = $5. Draw the budget constraint. How would the budget constraint change if the price decreased to $1 after 40 units of X were consumed? Answer: This figure represents the budget constraint for the first part of this question.

4-61 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Y

20 4 0

40 46.7

X

This figure represents the budget constraint for the second part.

Y

20 4 0

40

60

X

Learning Objective: 04-06 Topic: Applications of Indifference Curve Analysis Blooms: Create AACSB: Analytical Thinking Difficulty: 03 Hard

184. Suppose a worker is paid according to the following pay scheme: For every unit produced, the worker gets $8. Assume a worker can produce three units per hour. a. Express the worker's earnings as a function of hours worked. b. Graph the equation for earnings. c. Graphically depict equilibrium, and show the earnings and hours worked by the employee. d. Do you think that from the firm's point of view, this scheme is better, worse, or the same as paying the worker a wage of $24 per hour? Explain carefully. Answer: a. Earnings are $24 times the hours worked. b. See figure below. c. See figure below. d. Better, because the worker is incentivized to put forth maximal effort.

4-62 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 04 - The Theory of Individual Behavior

Income

$576

$288

0

12

24

Leisure

Learning Objective: 04-07 Topic: Applications of Indifference Curve Analysis Blooms: Create AACSB: Analytical Thinking Difficulty: 02 Medium

4-63 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.