Chapter 21
The Theory of Consumer Choice
TRUE/FALSE
1. The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of
Economics.
ANS: T DIF: 1 REF: 21-0 NAT: Analytic
LOC: Utility and consumer choice TOP: Consumer choice
MSC: Definitional
2. A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes good X
relative to good Y.
ANS: F DIF: 2 REF: 21-1 NAT: Analytic
LOC: Utility and consumer choice TOP: Budget constraint
MSC: Definitional
3. The slope of the budget constraint reveals the relative price of good X compared to good Y.
ANS: T DIF: 2 REF: 21-1 NAT: Analytic
LOC: Utility and consumer choice TOP: Budget constraint
MSC: Applicative
4. A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates
bundles that are equally affordable to a consumer.
ANS: F DIF: 2 REF: 21-1 | 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Budget constraint
MSC: Applicative
5. For a typical consumer, most indifference curves are bowed inward.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Indifference curves
MSC: Interpretive
6. For a typical consumer, most indifference curves are downward sloping.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Indifference curves
MSC: Interpretive
7. For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.
ANS: F DIF: 2 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Indifference curves
MSC: Interpretive
8. When two goods are perfect complements, the indifference curves are right angles.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Perfect complements
MSC: Interpretive
9. The indifference curves for left shoes and right shoes are right angles.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Perfect complements
MSC: Applicative
10. The indifference curves for perfect substitutes are straight lines.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Perfect substitutes
MSC: Applicative
126
Chapter 21/The Theory of Consumer Choice 127
11. The indifference curves for nickels and dimes are straight lines.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Perfect substitutes
MSC: Applicative
12. When two goods are perfect substitutes, the indifference curves are right angles.
ANS: F DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Perfect complements | Perfect substitutes
MSC: Interpretive
13. If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is
constant.
ANS: T DIF: 2 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Marginal rate of substitution | Perfect substitutes
MSC: Interpretive
14. The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to
substitute one good for the other.
ANS: F DIF: 2 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Marginal rate of substitution
MSC: Interpretive
15. The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.
ANS: F DIF: 2 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Marginal rate of substitution
MSC: Definitional
16. The marginal rate of substitution is the slope of the budget constraint.
ANS: F DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Marginal rate of substitution
MSC: Definitional
17. The marginal rate of substitution is the slope of the indifference curve.
ANS: T DIF: 1 REF: 21-2 NAT: Analytic
LOC: Utility and consumer choice TOP: Marginal rate of substitution
MSC: Definitional
18. At a consumer’s optimal choice, the consumer chooses the combination of goods that equates the marginal
rate of substitution and the price ratio.
ANS: T DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Optimization
MSC: Interpretive
19. At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio of the
marginal utilities equals the ratio of the prices.
ANS: T DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Optimization
MSC: Interpretive
20. If consumers purchase more of a good when their income rises, the good is a normal good.
ANS: T DIF: 1 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Normal goods | Inferior goods
MSC: Definitional
21. If a consumer purchases more of good B when his income rises, good B is an inferior good.
ANS: F DIF: 1 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Normal goods | Inferior goods
MSC: Definitional
Chapter 21/The Theory of Consumer Choice 128
22. If a consumer purchases more of good A when her income falls, good A is an inferior good.
ANS: T DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Inferior goods
MSC: Definitional
23. The income effect of a price change is unaffected by whether the good is a normal or inferior good.
ANS: F DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Income effect
MSC: Interpretive
24. The income effect of a price change is the change in consumption that results from the movement to a new
indifference curve.
ANS: T DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Income effect
MSC: Interpretive
25. The direction of the substitution effect is not influenced by whether the good is normal or inferior.
ANS: T DIF: 3 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice KEY: Substitution effect
MSC: Analytical
26. The substitution effect of a price change is the change in consumption that results from the movement to a new
indifference curve.
ANS: F DIF: 2 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Substitution effect
MSC: Interpretive
27. All points on a demand curve are optimal consumption points.
ANS: T DIF: 3 REF: 21-3 NAT: Analytic
LOC: Utility and consumer choice TOP: Demand MSC: Analytical
28. Economists use the term Giffen good to describe a good that violates the law of demand.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Giffen good MSC: Interpretive
29. Giffen goods are inferior goods for which the income effect dominates the substitution effect.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Giffen good MSC: Definitional
30. Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese
province of Hunan.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Giffen good MSC: Applicative
31. Katie wins $1 million in her state’s lottery. If Katie drastically reduces the number of hours she works after
she wins the money, we can infer that the income effect is larger than the substitution effect for her.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Labor supply
MSC: Interpretive
32. Susie wins $1 million in her state’s lottery. If Susie keeps working after she wins the money, we can infer that
the income effect is larger than the substitution effect for her.
ANS: F DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Labor supply
MSC: Interpretive
Chapter 21/The Theory of Consumer Choice 129
33. A rational person can have a negatively-sloped labor supply curve.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Labor supply
MSC: Applicative
34. The substitution effect in the work-leisure model induces a person to work less in response to higher wages,
which tends to make the labor-supply curve slope upward.
ANS: F DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Labor supply
MSC: Interpretive
35. The income effect in the work-leisure model induces a person to work less in response to higher wages, which
tends to make the labor-supply curve slope backward.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Labor supply
MSC: Interpretive
36. Some economists have advocated reducing the taxation of interest and other capital income, arguing that such
a policy change would raise the after-tax interest rate that savers can earn and would thereby encourage people
to save more.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Consumption-saving decision
MSC: Interpretive
37. A rise in the interest rate will generally result in people consuming more when they are old if the substitution
effect outweighs the income effect.
ANS: T DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Consumption-saving decision
MSC: Interpretive
38. A rise in the interest rate will generally result in people consuming less when they are old if the substitution
effect outweighs the income effect.
ANS: F DIF: 2 REF: 21-4 NAT: Analytic
LOC: Utility and consumer choice TOP: Consumption-saving decision
MSC: Interpretive
Chapter 21/The Theory of Consumer Choice 130
SHORT ANSWER
1. Answer the following questions based on the table. A consumer is able to consume the following bundles of
rice and beans when the price of rice is $2 and the price of beans is $3.
RICE BEANS
12 0
6 4
0 8
a. How much is this consumer's income?
b. Draw a budget constraint given this information. Label it B.
c. Construct a new budget constraint showing the change if the price of rice falls $1. Label this C.
d. Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this
consumer's income increased to $48. Label this D.
ANS:
a. $24
b.
c.
d.
DIF: 2 REF: 21-1 NAT: Analytic LOC: Utility and consumer choice
TOP: Budget constraint MSC: Applicative