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Microeconomics, 7e (Pindyck/Rubinfeld) Chapter 4 Individual and Market Demand 1) As we move downward along a demand curve for apples, A) consumer well-being decreases. B) the marginal utility of apples decreases. C) the marginal utility of apples increases. D) Both A and B are true. E) Both A and C are true. Answer: B Diff: 1 Section: 4.1 2) The change in the price of one good has no effect on the quantity demanded of another good. These goods are: A) complements. B) substitutes. C) both inferior. D) both Giffen goods. E) none of the above Answer: E Diff: 1 Section: 4.1 3) The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that: A) good A is a normal good. B) good B is an inferior good. C) goods A and B are substitutes. D) goods A and B are complements. E) none of the above Answer: D Diff: 1 Section: 4.1 4) An individual demand curve can be derived from the A) price-consumption B) price-income C) income-substitution D) income-consumption E) Engel Answer: A Diff: 1 Section: 4.1

__________ curve.

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5) Which of the following claims is true at each point along a price-consumption curve? A) Utility is maximized but income is not all spent. B) All income is spent, but utility is not maximized. C) Utility is maximized, and all income is spent. D) The level of utility is constant. Answer: C Diff: 1 Section: 4.1 6) Which of the following is true regarding income along a price-consumption curve? A) Income is increasing. B) Income is decreasing. C) Income is constant. D) The level of income depends on the level of utility. Answer: C Diff: 2 Section: 4.1 7) Which of the following is true regarding utility along a price-consumption curve? A) It is constant. B) It changes from point to point. C) It changes only if income changes. D) It changes only for normal goods. Answer: B Diff: 2 Section: 4.1 8) The income-consumption curve A) illustrates the combinations of incomes needed with various levels of consumption of a good. B) is another name for income-demand curve. C) illustrates the utility-maximizing combinations of goods associated with every income level. D) shows the utility-maximizing quantity of some good (on the horizontal axis) as a function of income (on the vertical axis). Answer: C Diff: 1 Section: 4.1 9) Which of the following pairs of goods are NOT complements? A) Hockey sticks and hockey pucks B) Computer CPUs and computer monitors C) On-campus student housing and off-campus rental apartments D) all of the above E) none of the above Answer: C Diff: 1 Section: 4.1

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10) Which of the following goods has a low, but positive, income elasticity of demand? A) furniture. B) new cars. C) health insurance. D) all of the above E) none of the above Answer: C Diff: 1 Section: 4.1 11) The curve in the diagram below is called

A) the price-consumption curve. B) the demand curve. C) the income-consumption curve. D) the Engel curve. E) none of the above Answer: A Diff: 1 Section: 4.1

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12) The curve in the diagram below is called:

A) the price-consumption curve. B) the demand curve. C) the income-consumption curve. D) the Engel curve. E) none of the above Answer: D Diff: 1 Section: 4.1 13) If an Engel curve has a positive slope A) both goods are normal. B) the good on the horizontal axis is normal C) as the price of the good on the horizontal axis increases, more of both goods in consumed. D) as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed. Answer: B Diff: 1 Section: 4.1 14) Which of the following pairs of goods are substitutes? A) Baseball bats and baseballs B) Hot dogs and mustard C) Computer hardware and software D) Gasoline and motor oil E) Owner-occupied housing and rental housing Answer: E Diff: 1 Section: 4.1

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15) When the income-consumption curve has a positive slope throughout its entire length, we can conclude that A) both goods are inferior. B) both goods are normal. C) the good on the vertical (y) axis is inferior. D) the good on the horizontal (x) axis is inferior. Answer: B Diff: 2 Section: 4.1 16) Use the following statements to answer this question: I. A price-consumption curve is derived by varying the price of asparagus. If the priceconsumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping. II. Fred consumes only food and clothing. Fred's Engel curve traces out the utility maximizing combinations of food and clothing associated with each and every income level. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Answer: B Diff: 2 Section: 4.1 17) Consider two goods X and Y available for consumption. Assume that the price of X changes while the price of Y remains fixed. For these two goods, the price-consumption curve illustrates the A) relationship between the price of X and consumption of Y. B) utility-maximizing combinations of X and Y for each price of X. C) relationship between the price of Y and the consumption of X. D) utility-maximizing combinations of X and Y for each quantity of X. Answer: B Diff: 2 Section: 4.1 18) Consider a graph on which one good Y is on the vertical axis and the only other good X is on the horizontal axis. On this graph the income-consumption curve has a positive slope for low incomes, then it takes a zero slope for a higher income, and then it takes a negative slope for even higher incomes (the curve looks like an arc, first rising and then falling as income increases). This curve illustrates that, for all income levels, A) both X and Y are normal. B) only Y is normal. C) both X and Y are inferior. D) only X is normal. Answer: D Diff: 2 Section: 4.1

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19) According to a survey by the U.S. Bureau of Labor Statistics, which of the following statements about annual U.S. household consumer expenditures is false? A) The income elasticity of demand for entertainment is positive. B) The income elasticity of demand for owner-occupied housing is positive. C) The income elasticity of demand for rental housing is positive. D) The income elasticity of demand for health care is positive. E) Average family expenditures increase with income. Answer: C Diff: 2 Section: 4.1 20) The income-consumption curve for Dana between Qa and Qb is given as: Qa = Qb. His budget constraint is given as: 120 = Qa + 4Qb How much Qa will Dana consume to maximize utility? A) 0 B) 24 C) 30 D) 60 E) More information is needed to answer this question. Answer: B Diff: 3 Section: 4.1 21) Jon's income-consumption curve is a straight line from the origin with a positive slope. Now suppose that Jon's preferences change such that his income-consumption curve remains a straight line but rotates 15 degrees clockwise. Jon's demand curve for the good on the horizontal axis A) will shift left. B) will shift right. C) will not change. D) might do any of the above. Answer: B Diff: 3 Section: 4.1 22) Suppose that a consumer regards two types of soap as perfect substitutes for one another. The price consumption path generated by changing the price of one type of soap A) is always upward sloping. B) is always horizontal. C) is always vertical. D) corresponds with the axis for the cheaper soap. E) corresponds with the axis for the more expensive soap. Answer: D Diff: 3 Section: 4.1

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23) Your income response for bicycle riding changes with the amount of income you earn. At low levels of income, you view bicycle riding as an inferior good and substitute other types of transportation (e.g., auto travel) as your income rises. However, you view bicycle riding as a normal good after your income rises above a particular level. What shape does your Engel curve for bicycle riding have? A) Vertical line B) Horizontal line C) C-shaped D) Upward sloping E) none of the above Answer: A Diff: 1 Section: 4.1 24) Use the following statements to answer this question: I. The income-consumption curve for perfect complements is a straight line. II. The price-consumption curve for perfect complements is a straight line. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false. Answer: A Diff: 2 Section: 4.1

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25) Based on the diagram below it can be inferred that:

A) hot dogs are a normal good for all levels of income. B) hot dogs are an inferior good, but not a Giffen good, for all levels of income. C) hot dogs are a Giffen good for all levels of income. D) hot dogs are an inferior good for low levels of income, but at higher levels of income become a normal good. E) none of the above Answer: E Diff: 2 Section: 4.2 26) Good A is a normal good. The demand curve for good A: A) slopes downward. B) usually slopes downward, but could slope upward. C) slopes upward. D) usually slopes upward, but could slope downward. Answer: A Diff: 1 Section: 4.2 27) Use the following two statements in answering this question: I. All Giffen goods are inferior goods. II. All inferior goods are Giffen goods. A) I and II are true. B) I is true, and II is false. C) I is false, and II true. D) I and II are false. Answer: B Diff: 1 Section: 4.2

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28) The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the __________ effect. A) Giffen B) real price C) income D) substitution Answer: D Diff: 1 Section: 4.2 29) For an inferior good, the income and substitution effects A) work together. B) work against each other. C) can work together or in opposition to each other depending upon their relative magnitudes. D) always exactly cancel each other. Answer: B Diff: 1 Section: 4.2 30) The substitution effect of a price change for product X is the change in consumption of X associated with a change in A) the price of X, with the level of utility held constant. B) the price of X, with the level of real income not considered. C) the price of X, with the prices of other goods changing by the same percentage as that for product X. D) income, with prices of other goods held constant. Answer: A Diff: 1 Section: 4.2 31) A Giffen good A) is always the same as an inferior good. B) is the special subset of inferior goods in which the substitution effect dominates the income effect. C) is the special subset of inferior goods in which the income effect dominates the substitution effect. D) must have a downward sloping demand curve. Answer: C Diff: 1 Section: 4.2

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32) Which of the following is true concerning the substitution effect of a decrease in price? A) It will lead to an increase in consumption only for a normal good. B) It always will lead to an increase in consumption. C) It will lead to an increase in consumption only for an inferior good. D) It will lead to an increase in consumption only for a Giffen good. Answer: B Diff: 1 Section: 4.2 33) Which of the following is true concerning the income effect of a decrease in price? A) It will lead to an increase in consumption only for a normal good. B) It always will lead to an increase in consumption. C) It will lead to an increase in consumption only for an inferior good. D) It will lead to an increase in consumption only for a Giffen good. Answer: A Diff: 1 Section: 4.2 34) Which of the following describes the Giffen good case? When the price of the good A) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls. B) falls, the income effect is in the same direction as the substitution effect, and consumption rises. C) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls. D) falls, the income effect is in opposite direction to the substitution effect and consumption rises. E) Both A and D are correct. Answer: C Diff: 3 Section: 4.2 35) Use the following two statements in answering this question: I. For all Giffen goods the substitution effect is larger than the income effect. II. For all inferior goods the substitution effect is larger than the income effect. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Answer: D Diff: 2 Section: 4.2

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36) Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying __________ of the good and the income effect results in the person buying __________ of the good. A) more, more B) more, less C) less, more D) less, less Answer: D Diff: 2 Section: 4.2 37) Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying __________ of the good and the income effect results in the person buying __________ of the good. A) more, more B) more, less C) less, more D) less, less Answer: B Diff: 2 Section: 4.2 38) Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by A) more than double. B) exactly double. C) less than double. D) Any of the above are possible. E) none of the above Answer: E Diff: 2 Section: 4.2 39) Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by A) more than double. B) exactly double. C) less than double. D) Any of the above are possible. E) none of the above Answer: D Diff: 2 Section: 4.2

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Figure 4.1 A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B. 40) Refer to Figure 4.1. The substitution effect of the price change in food on the quantity of food purchased is: A) the change from F3 to F1. B) the change from F3 to F2. C) the change from F2 to F1. D) the change from F1 to F2. E) none of the above Answer: B Diff: 2 Section: 4.2 41) Refer to Figure 4.1. The income effect of the price change in food on the quantity of food purchased is: A) the change from F3 to F1. B) the change from F3 to F2. C) the change from F2 to F1. D) the change from F1 to F2. E) none of the above Answer: C Diff: 2 Section: 4.2

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42) Based on Figure 4.1, food is: A) a normal good. B) an inferior good, but not a Giffen good. C) a Giffen good. D) none of the above Answer: A Diff: 2 Section: 4.2

Figure 4.2 A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B. 43) Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is: A) the change from C3 to C1. B) the change from C3 to C2. C) the change from C2 to C1. D) the change from C1 to C2. E) none of the above Answer: D Diff: 2 Section: 4.2 44) Refer to Figure 4.2. The income effect on the quantity of clothing purchased is: A) the change from C1 to C3. B) the change from C1 to C2. C) the change from C2 to C3. D) the change from C3 to C2. E) none of the above Answer: C Diff: 2 Section: 4.2 Page 13 Copyright © 2009 Pearson Education, Inc.

45) Based Figure 4.2, clothing is: A) a normal good. B) an inferior good, but not a Giffen good. C) a Giffen good. D) none of the above Answer: A Diff: 2 Section: 4.2 Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. 46) See Scenario 4.1. What is Daniel's budget constraint? A) 240 = 3Pc + 3Pd B) 240 = 3Qc + 3Qd C) 240 = (Pc)(Qc) D) 240 = (Qc)(Qd) E) none of the above Answer: B Diff: 2 Section: 4.2 47) See Scenario 4.1. What is Daniel's income-consumption curve? A) Pc = Pd B) Pc = Qc C) Qd = I - 3Qc D) Qc = Qd E) all of the above Answer: D Diff: 3 Section: 4.2 48) See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above? A) 0 B) 24 C) 40 D) 60 E) none of the above Answer: C Diff: 3 Section: 4.2 49) See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake? A) Qc = 240 - Pc Page 14 Copyright © 2009 Pearson Education, Inc.

B) Qc = 240/Pc C) Qc = 120/Pc D) Qc = 240/(3 + Pc) E) none of the above Answer: D Diff: 3 Section: 4.2 50) You have just won a cash award of $500 for academic excellence. A) The substitution effect of this award will be larger than its income effect. B) The income effect of this award will be larger than its substitution effect. C) The substitution and income effects will be of identical size. D) It is impossible to know whether the substitution effect is larger than the income effect or vice versa. Answer: B Diff: 3 Section: 4.2 51) The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s)? A) Vodka is an inferior good. B) Vodka is a normal good. C) Vodka is an inferior good and the taxes collected from this tax are rebated to consumers. D) Vodka is a normal good and the taxes collected from this tax are rebated to consumers. E) both B and C Answer: E Diff: 3 Section: 4.2 52) Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a __________ change in rice consumption, and the income effect leads to a __________ change in rice consumption. A) positive, positive B) positive, negative C) negative, positive D) negative, negative Answer: C Diff: 1 Section: 4.2

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53) You consume good X (horizontal axis) and good Y (vertical axis), and your indifference curves are vertical lines because you do not gain any satisfaction from consumption of Y. As the price of X declines, the change in consumption of X is entirely composed of the: A) income effect. B) substitution effect. C) Giffen effect. D) independent good effect. Answer: A Diff: 2 Section: 4.2 54) A consumer spends his income on food and rent. The government places a $1 tax on food. To restore the pre-tax consumption level of food the rebate paid to consumers will be smallest when A) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 5. B) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 5. C) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 10. D) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 10. Answer: C Diff: 3 Section: 4.3 55) Price elasticity of demand measures the A) slope of the demand curve. B) sensitivity of quantity demanded to changes in the price of substitute goods. C) sensitivity of price to changes in the quantity demanded of substitute goods. D) sensitivity of quantity demanded to changes in price. Answer: D Diff: 1 Section: 4.3 56) When a good is price inelastic, consumer expenditures on the good A) increase when price increases. B) decrease when price increases. C) do not change when price increases. D) are not related to price elasticity of demand. Answer: A Diff: 1 Section: 4.3

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57) When a good has a unitary price elasticity, consumer expenditures for the good A) change in the same direction as a price change. B) change in the opposite di...