MULTIPLE CHOICE.

Choose the one alternative that best completes the statement or answers
the question.
1)
Economists assume that the goal of consumers is to

1)

_______
A)
do as little work as possible to survive.
B)
consume as much as possible.
C)
expend all their income.
D)
make themselves as well off as possible.
Answer
D

2)
Utility is

2)

_______
A)
the consumption of a quasi-public product like electricity or natural gas.
B)
easily measured in units called utils.
C)
the production of a quasi-public product like electricity or natural gas.
D)
subjective and cannot be measured.
Answer
D

3)
Marginal utility is the

3)

_______
A)
satisfaction achieved when a consumer has had enough of a product.
B)
total satisfaction received from consuming a given number of units of a product.
C)
extra satisfaction received from consuming one more unit of a product.
D)
average satisfaction received from consuming a product.
Answer
C

4)
As a consumer consumes more and more of a product in a particular time period, eventually marginal
utility

4)

_______
 A)
rises.

B)

declines.

C)

fluctuates.

D)

is constant.
Answer
B

5)
If a consumer receives 22 units of marginal utility for consuming the first can of soda, 20 units from
consuming the second, and 15 from the third, the total utility of consuming the three units is

5)

_______
A)
35 utility units.
B)
15 utility units.
C)
57 utility units.
D)
unknown as more information is needed to determine the answer.
Answer
C

6)
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from
consuming three candy bars, the marginal utility of the third candy bar is

6)

_______
A)
25 utility units.
B)
5 utility units.
C)
20 utility units.
D)
unknown as more information is needed to determine the answer.
Answer
B

7)
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from
consuming three candy bars, the marginal utility of the second candy bar is

7)

_______
A)
unknown as more information is needed to determine the answer.
B)
5 utility units.
C)
25 utility units.
D)
20 utility units.
Answer
A

8)
Total utility

8)

_______
A)
has a constant rate of increase as a person consumes more and more of a product.
B)
is equal to the sum of the marginal utilities of all units consumed.
C)
cannot decrease as a person consumes more and more of a product.
D)
is negative when marginal utility is declining.
Answer
B

9)
If, as a person consumes more and more of a product, each additional unit adds less satisfaction than the
previous unit consumed, we are seeing the workings of

9)

_______
A)
the law of supply.
B)
the law of demand.
C)
the law of diminishing marginal utility.
D)
the law of increasing marginal opportunity cost.
Answer
C

10)
The law of diminishing marginal utility states that

10)

______
A)
eventually total utility falls as more of a product is consumed, with all else constant.
B)
the extra satisfaction from consuming a product decreases as more of a product is consumed, with all
else constant.
C)
the extra satisfaction from consuming a product increases slowly as more of a product is consumed, with
all else constant.
D)
when the extra satisfaction from consuming a product becomes negative, total utility starts falling, with
all else constant.
Answer
B

11)
Marginal utility can be

11)

______
A)
positive, negative or zero.

B)

zero.
C)
negative.

D)

positive.
Answer
A

12)
Which of the following is likely to occur as the result of the law of diminishing marginal utility?

12)

______
A)
Tamer enjoyed his second bottle of iced tea less than his first bottle, with all else constant.
B)
Sabine's utility from her first granola bar is greater than Shereen's utility from her second granola bar.
C)
Walaa's utility from her second apple was less than her satisfaction from her first orange.
D)
Yousef enjoyed his second slice of pizza more than his first.
Answer
A

13)
If, when you consume another unit of a product, your marginal utility is zero, then

13)

______
A)
you should consume less of this product.
B)
you have maximized your total utility from consuming the product.
C)
you want more of the product.
D)
you have not yet reached the point of diminishing marginal utility.
Answer
B

14)
Consumers have to make trade-offs in deciding what to consume because

14)

______
A)
the prices of goods vary.
B)
they are limited by a budget constraint.
C)
not all goods give them the same amount of satisfaction.
D)
there is a limit to the amount of goods produced.
Answer
B

15)
If your total satisfaction increases when you consume another unit, your marginal utility must be

15)

______
A)
negative.

B)

increasing.

C)

decreasing.

D)

positive.
Answer
D

16)
If total utility increases at a decreasing rate as a consumer consumes more of a product, then marginal
utility must

16)

______
A)
increase also.

B)

remain constant.
C)
be negative.

D)

decrease.
Answer
D
 17)
An item has utility for a consumer if it

17)

______
A)
generates enjoyment or satisfaction.

B)

is something everyone else wants.

C)
is scarce.

D)

has a high price.

Answer
A

18)
Suppose your marginal utility from consuming the third slice of cake is zero, then your total utility from
consuming cake is

18)

______
A)
decreasing.

B)

maximized.

C)

increasing.

D)

negative.
Answer
B

19)
Consumers maximize total utility within their budget constraint by

19)

______
A)
buying the cheapest goods they can find.
B)
spending the same amount for each product.
C)
buying whatever they like the best.
D)
buying the goods with the largest marginal utility per dollar spent.
Answer
D
 20)
If a consumer always buys goods rationally, then

20)

______
A)
the marginal utility per dollar spent on all goods will be equal.
B)
the total utilities of the different goods consumed will be equal.
C)
the marginal utility of the different goods consumed will be equal.
D)
the average utilities of the different goods consumed will be equal.
Answer
A

Table 6-1

Quantity of Quantity of
Pita Wraps Total utility Bubble Tea Total utility
1 60 1 40
2 102 2 70
3 132 3 91
4 144 4 106
5 144 5 112
6 138 6 115
7 128 7 115

Kamal has US$30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is US$6 and the price
of a glass of Bubble Tea is US$3. Table 6-1 shows his total utility from different quantities of the two
items.

21)
Refer to Table 6-1. What is Kamal's optimal consumption bundle?

21)

______
A)
5 Pita Wraps and 0 Bubble Teas

B)

4 Pita Wraps and 2 Bubble Teas

C)
3 Pita Wraps and 3 Bubble Teas

D)

3 Pita Wraps and 4 Bubble Teas

Answer
D

22)
Refer to Table 6-1. If Kamal can drink all the Bubble Tea he wants for free, how many glasses will he
consume?
22)

______
A)
6 glasses

B)

7 glasses

C)

5 glasses

D)

4 glasses
Answer
B

23)
Shadia spends her income on popular magazines and music CDs. If the price of a CD is four times the
price of a magazine, then if Shadia is maximizing her utility, she buys

23)

______
A)
both goods until the marginal utility of the last CD purchased is four times the marginal utility of the last
magazine purchased.
B)
four times as many CDs as magazines.
C)
four times as many magazines as CDs.
D)
both goods until the marginal utility of the last magazine purchased is four times the marginal utility of
the last CD purchased.
Answer
A

24)
Suppose Nabil is maximizing total utility within his budget constraint. If the price of the last pair of jeans
purchased is US$25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased
is US$20, then, using the rule of equal marginal utility per dollar spent, the extra satisfaction received
from the last shirt must be

24)

______
A)
80 units of utility.

B)

100 units of utility.

C)
500 units of utility.

D)

2000 units of utility.

 Answer
A

25)
Amir is maximizing total utility by buying sports magazines and protein supplements. What situation
would make him buy more sports magazines?

25)

______
A)
The price of sports magazines would have to rise.
B)
The price of protein supplements would have to fall.
C)
The price of sports magazines would have to fall.
D)
Since Amir is maximizing his utility, nothing can change his consumption of sports magazines.
Answer
C

26)
Most people would prefer to drive a luxury car, but more people buy less expensive cars even though they
could afford the luxury car because

26)

______
A)
the total utility of less expensive cars is greater than that of luxury cars.
B)
the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars.
C)
car buyers are irrational.
D)
luxury cars cost a lot more than non-luxury cars.
Answer
B

27)
If Farida purchases ankle socks at US$5 and gets 25 units of marginal utility from the last unit, and
bandanas at US$3 and gets 12 units of marginal utility from the last bandana purchased, she

27)

______
A)
is maximizing total utility and would not want to change her consumption of ankle socks or bandanas.
B)
should consume more bandanas and fewer ankle socks.
C)
should consume more ankle socks and fewer bandanas.
D)
should consume fewer ankle socks and fewer bandanas.
Answer
C

28)
If Malak obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on
oranges, then Malak
28)

______
A)
should buy fewer oranges and fewer apples.
B)
should buy more oranges and fewer apples.
C)
should buy more apples and fewer oranges.
D)
is maximizing total utility.
Answer
C

29)
If Amr is consuming his utility maximizing bundle and the price of one product rises, what happens to the
marginal utility per dollar spent on this product (MU/P), and what should Amr do?

29)

______
A)
MU/P has increased and Amr should buy less of this product.
B)
MU/P has decreased and Amr should buy less of this product.
C)
MU/P has increased and Amr should buy more of this product.
D)
MU/P has decreased and Amr should buy more of this product.
Answer
B

30)
If Emad is consuming his utility maximizing bundle and the price of one product falls, what happens to
the marginal utility per dollar spent on this good (MU/P), and what should Emad do?

30)

______
A)
MU/P has increased and Emad should buy more of this product.
B)
MU/P has increased and Emad should buy less of this product.
C)
MU/P has decreased and Emad should buy more of this product.
D)
MU/P has decreased and Emad should buy less of this product.
Answer
A

31)
When the price of audio books, a normal product, falls causing consumers' purchasing power to rise, they
buy more of it due to

31)

______
A)
the deadweight loss effect.

B)
the elasticity effect.
C)
the income effect.

D)

the substitution effect.

Answer
C

32)
When the price of summer tank tops falls and consumers buy more because they are relatively less
expensive, this is called

32)

______
A)
the income effect.

B)

the deadweight loss effect.

C)
the elasticity effect.

D)

the substitution effect.

Answer
D

33)
The substitution effect of an increase in the price of Raisin Bran refers to

33)

______
A)
the decrease in the demand for Raisin Bran when its price rises.
B)
the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers
to buy less Raisin Bran.
C)
the result that consumers will now switch to a substitute product such as Cheerios, and the demand
curve for Raisin Bran shifts to the left.
D)
the fact that the higher price of Raisin Bran lowers consumers' purchasing power, holding money income
constant.
Answer
B

34)
The income effect of an increase in the price of salmon

34)

______
A)
is the change in the demand for other types of fish, for example trout, that result from a decrease in
purchasing power.
B)
is the change in the demand for salmon when income increases.
C)
refers to relative price effect — salmon is more expensive compared to other types of fish — which causes
the consumer to buy less salmon.
D)
refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon,
holding all other factors constant.
Answer
D

35)
If the price of lattes, a normal product you enjoy falls,

35)

______
A)
the income and substitution effects offset each other but the price effect leads you to buy more lattes.
B)
the substitution effect which causes you to increase your latte consumption outweighs the income effect
which causes you to reduce your latte consumption, resulting in more latte purchased.
C)
both the income and substitution effects lead you to buy more lattes.
D)
the income effect which causes you to increase your latte consumption outweighs the substitution effect
which causes you to reduce your latte consumption, resulting in more latte purchased.
Answer
C

36)
If the price of muffins, a normal product you enjoy, rises,

36)

______
A)
the income and substitution effects offset each other but the price effect leads you to buy fewer muffins.
B)
both the income and substitution effects lead you to buy fewer muffins.
C)
the substitution effect which causes you to decrease your muffin consumption outweighs the income
effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased.
D)
the income effect which causes you to decrease your muffin consumption outweighs the substitution
effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased.
Answer
B

37)
The demand curve for corn is downward sloping. If the price of corn, an inferior food item, falls,

37)

______
A)
the income and substitution effects offset each other but the price effect of an inferior food item leads you
to buy less corn.
B)
the income effect which causes you to increase your corn purchases is larger than the substitution effect
which causes you to reduce your corn purchases, resulting in a net increase in quantity demanded.
C)
the income effect which causes you to reduce your corn purchases is smaller than the substitution effect
which causes you to increase your corn purchases, resulting in a net increase in quantity demanded.
D)
both the income and substitution effects reinforce each other to increase the quantity demanded.
Answer
C

38)
The demand curve for canned peas is downward sloping. If the price of canned peas, an inferior food
item, rises,

38)

______
A)
the income and substitution effects offset each other but the price effect of an inferior food item leads you
to buy more canned peas.
B)
both the income and substitution effects reinforce each other to decrease the quantity demanded.
C)
the income effect which causes you to increase your canned peas purchases is smaller than the
substitution effect which causes you to reduce your purchases, resulting in a net increase in quantity
demanded.
D)
the income effect which causes you to reduce your canned peas purchases is smaller than the
substitution effect which causes you to increase your purchases, resulting in a net increase in quantity
demanded.
Answer
C

39)
Consider a downward-sloping demand curve. When the price of an inferior product increases, the income
and substitution effects

39)

______
A)
work in the same direction to decrease quantity demanded.
B)
work in opposite directions and quantity demanded decreases.
C)
work in opposite directions and quantity demanded increases.
D)
work in the same direction to increase quantity demanded.
Answer
B

40)
Consider a downward-sloping demand curve. When the price of an inferior product decreases, the income
and substitution effects

40)

______
A)
work in the same direction to increase quantity demanded.
B)
work in opposite directions and quantity demanded increases.
C)
work in opposite directions and quantity demanded decreases.
D)
work in the same direction to decrease quantity demanded.
Answer
B

41)
Consider a downward-sloping demand curve. When the price of a normal product increases, the income
and substitution effects

41)

______
A)
work in the same direction to decrease quantity demanded.
B)
work in opposite directions and quantity demanded increases.
C)
work in opposite directions and quantity demanded decreases.
D)
work in the same direction to increase quantity demanded.
Answer
A

42)
Consider a downward-sloping demand curve. When the price of a normal product decreases, the income
and substitution effects

42)

______
A)
work in the same direction to increase quantity demanded.
B)
work in opposite directions and quantity demanded increases.
C)
work in opposite directions and quantity demanded decreases.
D)
work in the same direction to decrease quantity demanded.
Answer
A

Table 6-2

Quantity of Quantity of
Total utility Total utility
soup (cups) sandwiches
1 40 1 45
2 60 2 75
3 72 3 102
4 82 4 120
5 88 5 135
6 90 6 145

Table 6-2 above shows Safaa's utility from soup and sandwiches. The price of soup is US$2 per cup and
the price of a sandwich is US$3. Safaa has US$18 to spend on these two products.

43)
Refer to Table 6-2. What is Safaa's marginal utility per dollar spent on the third cup of soup?

43)

______
A)
36 units of utility

B)

6 units of utility
C)
72 units of utility

D)

12 units of utility
Answer
B

44)
Refer to Table 6-2. If Safaa maximizes her utility, how many units of each product should she buy?

44)

______
A)
1 cup of soup and 5 sandwiches

B)

3 cups of soup and 4 sandwiches

C)
4 cups of soup and 3.5 sandwiches

D)

6 cups of soup and 2 sandwiches

Answer
B

45)
Refer to Table 6-2. Suppose Safaa's income increases from US$18 to US$23 but prices have not
changed. What is her utility maximizing bundle now?

45)

______
A)
5 cups of soup and 4 sandwiches

B)

6 cups of soup and 5 sandwiches

C)
4 cups of soup and 5 sandwiches

D)

5 cups of soup and 5 sandwiches

Answer
C

46)
Refer to Table 6-2. Holding prices constant, when Safaa's income changed from US$18 to US$23, her
utility maximizing bundle changed. Based on your answers to her optimal choices at the two income
levels, what type of goods are soup and sandwiches?

46)

______
A)
Soup is a normal food item and sandwiches are an inferior food item.
B)
Both soup and sandwiches are inferior goods.
C)
Soup is an inferior food item and sandwiches are a normal food item.
D)
Both soup and sandwiches are normal goods.
Answer
D

47)
Refer to Table 6-2. Holding prices constant, when Safaa's income changed from US$18 to US$23, what
happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich
purchased?

47)

______
A)
Her total utility decreases but the marginal utilities of the last cup of soup and the last sandwich
consumed increase.
B)
Her total utility, the marginal utility of the last cup of soup consumed and the marginal utility of the last
sandwich consumed, all increase.
C)
Her total utility and the marginal utility of the last cup of soup consumed increase but marginal utility of
the last sandwich consumed decreases.
D)
Her total utility increases but the marginal utilities of the last cup of soup and the last sandwich
consumed decrease.
Answer
D

48)
Wafaa buys three bars of chocolates and four bags of almonds. The marginal utility of the third chocolate
bar is 18 of marginal utility and the marginal utility from the fourth bag of almonds is also 18. Is Wafaa
maximizing her utility?

48)

______
A)
No, she must cut back to three bags of almonds to equate her quantities of the two goods.
B)
Yes, the marginal utility from the last unit of each food item is equal.
C)
No, she must buy one more chocolate bar to equate her quantities of the two goods.
D)
Without information on her income and the prices of the two goods, we cannot answer the question.
Answer
D

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
49)
If you received negative marginal utility from consuming the fourth slice of pizza, then your total utility
from four slices of pizza must be less than your total utility from three slices of pizza.

49)

______
Answer

True

False

50)
When diminishing marginal utility sets in, total utility must be negative.

50)

______
Answer
True

False

51)
A consumer maximizes her total utility from a bundle of goods when her marginal utility from each
product is equal.

51)

______
Answer
True

False

52)
The economic model of consumer behavior explains how consumers' tastes and preferences are formed.

52)

______
Answer
True

False

53)
The demand curve for an inferior product can never be downward-sloping.

53)
______
Answer
True

False

54)
The income effect of a price increase causes a decrease in the quantity demanded of a normal product.

54)

______
Answer

True

False

55)
The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior
product.

55)

______
Answer

True

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
Figure 6-1

56)
Refer to Figure 6-1. Which of the following statements is true?

56)

______
A)
Points a and b are derived independently of the utility-maximizing model.
B)
Point a could be a utility-maximizing choice if the price is US$3 but point b may not be because we have
no information on the marginal utility per dollar when price changes.
C)
Points a and b may not necessarily be the utility-maximizing quantities of ice cream cones at two different
prices because we have no information on the consumer's budget or the price of other goods.
D)
Points a and b are the utility-maximizing quantities of ice cream cones at two different prices of ice
cream.
Answer
D

57)
In order to derive an individual's demand curve for a product, we would observe what happens to the
utility-maximizing bundle when we change

57)

______
A)
income and hold everything else constant.
B)
the price of the product and hold everything else constant.
C)
the price of a close substitute and hold everything else constant.
D)
tastes and preferences and hold everything else constant.
Answer
B

58)
Along a downward-sloping linear demand curve,

58)

______
A)
the marginal utility from the consumption of each unit of the product rises and the total utility from
consuming larger quantities remain constant.
B)
the marginal utility from the consumption of each unit of the product and the total utility from consuming
larger quantities increase.
C)
the marginal utility from the consumption of each unit of the product and the total utility from consuming
larger quantities remain constant.
D)
the marginal utility from the consumption of each unit of the product falls and the total utility from
consuming larger quantities increases.
Answer
D

Figure 6-2
 59)
Refer to Figure 6-2. When the price of pizza increased from US$5.00 to US$5.75, quantity demanded
decreased from Q1 to Q0. This change in quantity demanded is due to

59)

______
A)
the income and substitution effects.
B)
the fact that marginal willingness to pay falls.
C)
the price and output effects.
D)
the law of diminishing marginal utility.
Answer
A

60)
A Giffen good is

60)

______
A)
an inferior product with an income effect that is smaller than the opposing substitution effect.
B)
an inferior product with an income effect and a substitution effect working in the same direction.
C)
a normal product.
D)
an inferior product with an income effect that is larger than the opposing substitution effect.
Answer
D

61)
The demand curve for a Giffen good is

61)

______
 A)
non-existent.

B)

upward-sloping.
C)
vertical.

D)

non-linear but downward-sloping.

Answer
B

62)
For a demand curve to be upward sloping, the product would have to be

62)

______
A)
a luxury product for which the income effect of a price change is larger than the substitution effect.
B)
an inferior product for which the income effect of a price change is larger than the substitution effect.
C)
an inferior product for which the substitution effect of a price change is larger than the income effect.
D)
a luxury product for which the substitution effect of a price change is larger than the income effect.
Answer
B

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
63)
Each price quantity combination on a consumer's demand curve shows the utility-maximizing quantity at
the given price.

63)

______
Answer

True

False

64)
A Giffen good could be either a normal good or an inferior good.

64)

______
Answer
True

False

65)
The income effect of a price increase for a Giffen good outweighs the substitution effect.

65)

______
Answer

True

False

66)
The demand curve for a luxury good is upward-sloping.

66)

______
Answer
True

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
67)
Consider the following factors
a. culture
b. religion
c. customs
d. prices
e. income
Which of the factors above are likely to influence the choices consumers make?

67)

______
A)
all the factors except b
B)
d and e only
C)
a, d, and e only
D)
all the factors except c
E)
all the factors listed
Answer
E

68)
What is the common feature displayed by the following items?
a. eating in a newly opened "fusion" cuisine restaurant
b. attending a football match
c. wearing designer jeans

68)

______
 A)
They tend to be consumed by better educated people.
B)
The consumption of these goods takes place publicly.
C)
They are all highly inelastic goods.
D)
The consumption of these goods takes place privately.
Answer
B

69)
Which of the following does not explain why consumers buy products that many other consumers are
already buying?

69)

______
A)
the satisfaction people derive by being viewed as "fashionable"
B)
differences in tastes and preferences
C)
technology
D)
cost-effective way to gather information about a product
Answer
B

70)
Firms pay famous individuals to endorse their products because

70)

______
A)
apparently demand is affected not just by the number of people who use a product but also by the type of
person that uses the product.
B)
famous people only consume high quality products.
C)
the firms are irrational and are wasting advertising expenditures.
D)
famous people obviously know what are the best goods and services.
Answer
A

71)
Over the years, Pepsi has used celebrities to advertise its products. In 2005, it hired superstar
Amr Diab to appear in television commercials as part of an innovative marketing campaign for Pepsi-
Cola. What is the rationale for using "expensive" celebrities?

71)

______
A)
By using celebrities, Pepsi conveys crucial information about the product's quality.
B)
People learn more about their own preferences by watching celebrities.
C)
Celebrities provide useful information about the product.
 D)
By linking the product to a famous person, Pepsi hopes to create a positive image of the product in the
consumer's mind.
Answer
D

72)
A network externality occurs when

72)

______
A)
there are production cost savings from being networked with buyers.
B)
the usefulness of a product is affected by celebrities who use it.
C)
the usefulness of a product is affected by how many people use it.
D)
there are production cost savings from being networked with suppliers.
Answer
C

73)
A significant down side to network externalities is that

73)

______
A)
firms may network with unethical suppliers or distributors.
B)
there may be large switching costs to consumers of changing products so that consumers end up using
products with inferior technologies.
C)
there may be large switching costs to firms changing technologies.
D)
the costs of hiring celebrity endorsements may be very high.
Answer
B

74)
All of the following products are most likely to have significant network externalities except

74)

______
A)
cell phones.

B)

popular board games.

C)
fax machines.

D)

cat food.
Answer
D
 75)
A product is path dependent, when

75)

______
A)
the first technology that was adopted has an advantage over a better technology that came later.
B)
it can only be used in one way.
C)
people who move location follow the path of people who moved before them.
D)
consumers get utility from consuming products that others are consuming such as eating in restaurants.
Answer
A

76)
Why does Al-Baik restaurant charge less per meal than its competitors (which creates long queues)?

76)

______
A)
Because of the low quality of Al-Baik meals.
B)
Because there is a price ceiling on Al-Baik meals.
C)
Because if Al-Baik decided to increase its prices to eliminate the long queues, it might also eliminate its
popularity as well.
D)
Al-Baik meaks are subsidized by the Saudi government.
Answer
C

77)
Which of the following statements is correct?

77)

______
A)
Short-run profits may be given up to increase long-run profits.
B)
Firms will always take advantage of opportunities to raise prices to increase profit.
C)
Firms raise prices whenever demand increases.
D)
Potential buyers who see long queues at a theater will likely go somewhere else.
Answer
A

78)
For which of the following products is social influence likely to have the greatest impact?

78)

______
A)
toothpaste
 B)

school text book

C)
high blood pressure medication

D)

a meal in a restaurant
Answer
D

79)
Jamal, Laila and Salwa have been standing in a queue for almost an hour waiting to be served at Hamada,
a new Japanese restaurant. It is possible that some of the people in the queue won't be served at all
before the restaurant closes. Which of the following could explain why the restaurant does not simply
increase prices high enough to eliminate the queues?
a. In situations where consumption takes place publicly, demand for the product is also influenced by how
many other people are buying the product. Consequently, a popular restaurant that increases its prices
enough to eliminate queues might find that it has also eliminated its popularity.
b. Firms may sometimes not raise their prices for fear that it violates people's sense of fairness and might
alienate customers.
c. The demand for restaurant meals is relatively elastic and if the firm increases prices it will lower its
profits.

79)

______
A)
a, b, and c

B)

a and b only
C)
a and c only

D)

a only
Answer
B

80)
Which of the following is an experiment which tests whether fairness is important in consumer decision
making?

80)

______
A)
the preferential treatment game

B)

the ultimatum game

C)
the behavioral experiment

D)
the fair trade principle
Answer
B

81)
In the ultimatum game, allocators usually offer recipients at least a 40 percent share of the money, and
recipients almost always reject offers of less than a 10 percent share. Which of the following does not
explain why allocators offer recipients a relatively generous share and why recipients reject meager
offers?

81)

______
A)
Some people are careful not to engage in economic behavior that might offend and alienate others.
B)
Fear of arousing outrage and abhorrence could influence economic decisions.
C)
People can and often do reject offers that offend their sense of fairness even if doing so means taking a
monetary loss.
D)
Allocators can count on recipients to ignore all considerations except financial benefit.
Answer
D

82)
What is behavioral economics?

82)

______
A)
the study of how people make wealth-maximizing decisions
B)
the study of situations in which people act in ways that are not economically rational
C)
the study of how people behave in the face of scarcity
D)
the study of how people make decisions at the margin
Answer
B

83)
The observation that people tend to value something more highly when they own it than when they don't
is called the

83)

______
A)
endowment effect.

B)

path dependent effect.

C)
endorsement effect.

D)
wealth effect.
Answer
A

84)
What is the endowment effect?

84)

______
A)
The tendency for economic agents with abundant resources to consume a proportionately greater
quantity of goods and services.
B)
The tendency of people to be unwilling to sell something they already own, even if they are offered a
price that is greater than the price they would be willing to pay for the product if they didn't already own
it.
C)
The phenomenon that economic agents are endowed with different qualities and abilities so that trade
among individuals increase efficiency.
D)
The tendency of firms to use celebrities endowed with good looks to promote their products.
Answer
B

85)
The endowment effect suggests that people

85)

______
A)
act in ways to distort market prices.
B)
have a strong sense of fairness.
C)
have a strong attachment to their entitlement, regardless of whether they paid to acquire it.
D)
are concerned about the welfare of others.
Answer
C

86)
If you exhibit the endowment effect as a decision maker, then you are

86)

______
A)
ignoring non-monetary opportunity costs.
B)
buying something you can't really afford because you expect to save in the future.
C)
deciding on the basis of sunk costs.
D)
consuming based on celebrity endorsements.
Answer
A

87)
Which of the following demonstrates the endowment effect?
87)

______
A)
Isabella was not willing to part with her "Youssra" DVD although she was offered US$100 for it, a sum
greater than the cost of another such DVD.
B)
Walid inherits a house in Doha city from his grandfather and is unwilling to sell it for sentimental
reasons.
C)
If you received a product as a gift, you are less likely to attach a monetary value to it.
D)
Youssra commands a premium in the movie industry because he is endowed with dashing looks.
Answer
A

88)
The average price of gasoline in your neighborhood is US$3.53 per gallon. Your neighbor, Diana, tells you
that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price
of gasoline is US$3.46 per gallon However, she cautions you that there are usually long queues at that
station. Is her suggestion beneficial to you?

88)

______
A)
Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial.
B)
No, Diana is misled; clearly, the lower priced gasoline must be of inferior quality and could damage
vehicles.
C)
Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to
consume more of other goods.
D)
No, if I factor in the non-monetary opportunity costs (driving time and waiting in line), it could prove
more costly to go to the lower-priced gasoline station.
Answer
D

89)
According to an article in the San Francisco Chronicle, some gas stations in San Francisco encourage
customers to pay in cash rather than credit card by posting a lower "cash price" and a higher "credit
price". They justify this dual pricing on the grounds that credit card companies levy transaction fees on
gas stations for customers who pay using credit cards. Credit card companies, on the other hand, oppose
the use of the terms "cash price" and "credit price". They want the price paid with credit cards to be a
station's "base price", and for the cash price to represent a discount from that rate. In other words, they
prefer the use of "base price" and "discounts for cash". In reality, in terms of opportunity cost, there is no
difference between having to pay a higher "credit price" and not receiving a discount for using a credit
card, so why are credit card companies pushing for a change in the usage of terms?
Source David Lazarus, "Gas prices spark a war of words," San Francisco Chronicle, May 9, 2007.

89)

______
A)
Credit card companies recognize that consumers are more sensitive to monetary opportunity costs than
to non-monetary opportunity costs. The term "credit price" suggests that consumers pay a surcharge for
using their credit card and will see this as an increase in the monetary opportunity cost, but not receiving
a discount when using credit cards is a non-monetary opportunity cost and is therefore likely to be
ignored by consumers.
 B)
Credit card companies want people to have a clear idea of the payment options if using cash the price is
lower but the opportunity cost is higher and if they use credit cards, the price is higher but the
opportunity cost is lower because of the convenience of credit cards.
C)
Credit card companies recognize that consumers are sensitive to hidden costs. The opportunity cost of
using cash is generally higher than using credit cards because credit cards allow people to consume
goods and services that they cannot pay for at present. By posting a lower cash price, gas stations are not
revealing the true opportunity cost of the item.
D)
The credit card companies' argument is sound; California law prohibits surcharges from being tacked
onto retail prices for use of plastic and therefore, the dual pricing system is price discrimination and is
illegal.
Answer
A

90)
Consider the following hypothetical scenarios
Scenario A You are about to purchase a pair of 7 For All Mankind jeans for US$175 and a T-shirt for
US$45. The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for
US$160 at another store, located about a 20-minute drive away.
Scenario B You are about to purchase a pair of 7 For All Mankind jeans for US$175 and a T-shirt for
US$45. The sales attendant at the store tells you that the T-shirt you wish to buy is on sale for US$30 at
another store, located about a 20-minute drive away.
Based on standard economic theory, under which scenario would you make the 20-minute trip to the
other store?

90)

______
A)
Scenario A because the pair of jeans is a very expensive item and US$15 saving is quite substantial.
B)
Scenario B because a US$15 saving amounts to a substantial discount (about 33 percent).
C)
I think a US$15 saving is worth the 20-minute trip in both scenarios.
D)
I think the US$15 saving is not worth the 20-minute trip in either scenario.
E)
C and D are both correct.
Answer
E

91)
Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a
sample of people the following questions
Scenario A "Imagine that you have decided to see a play and paid the admission price of US$10 per
ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and
the ticket cannot be recovered. Would you pay US$10 for another ticket?"
Scenario B "Imagine that you have decided to see a play where admission is US$10 per ticket. As you
enter the theater you discover that you have lost a US$10 bill. Would you still pay US$10 for a ticket for
the play?"
As long as additional tickets are available, there is no meaningful difference between losing US$10 in
cash before buying a ticket, and losing the US$10 ticket after buying it. In both cases, you are US$10
worse off. Yet, far more subjects (88 percent) in Scenario B say they would pay US$10 for another ticket
and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend
another US$10 to see the play.
Which of the following is the best explanation for the results of the experiment?

91)
______
A)
The endowment effect applies in Scenario A since people already own the ticket and therefore it is more
valuable but this is not so in Scenario B.
B)
The net benefit derived from watching the play is lower in Scenario A where the effective cost is US$20
compared to the net benefit in Scenario B.
C)
In Scenario B, people had not anticipated spending an additional US$10 so in effect the price of the ticket
is US$20 and not US$10 whereas in Scenario A, the price of the ticket is still US$10.
D)
In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer
by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not
make the connection between the lost US$10 bill and the play.
Answer
D

92)
Sunk costs

92)

______
A)
are costs that firms sink into marketing.
B)
are costs that have already been paid and cannot be recovered in any significant way.
C)
are important for optimal decision making.
D)
are costs associated with repairing something you already own.
Answer
B

93)
Samia finally bought a pair of blue shoes that she had been wanting for a long time. In less than a week
she discovered that the shoes were uncomfortable. She went back to wearing her old pair and stashed
away the new pair. When asked by her boss, Mervat, why she doesn't simply give away the new pair, she
said "But I paid so much for them." Samia's behavior

93)

______
A)
is rational she should not discard a valuable item.
B)
is rational because the more you pay for an item the more valuable it is.
C)
supports the endowment effect which states that ownership of an item makes it more valuable.
D)
ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should
give them away or not.
Answer
D

94)
Standard economic theory asserts that sunk costs are irrelevant in making economic decisions yet studies
conducted by behavioral economists reveal that sunk costs often affect economic decisions. Which of the
following could explain this observation?

94)
______
A)
People measure the value of a product in terms of its purchase price.
B)
Even though sunk costs cannot be recovered, the cost has been incurred and therefore should be treated
as part of the product's value.
C)
Sunk costs have a higher opportunity cost than costs that can be recovered.
D)
If consumers maximize their utility, it makes sense to consider the full purchase price of a product in
their consumption decisions.
Answer
A

95)
In "An Inside Look Was Nokia Right to Choose Mohamed Hamaki to Endorse its New Music Service?”,
Nokia hired Hamaki because of his popularity among young adults. When is this endorsement likely to
increase Nokia's profit?

95)

______
A)
When young Arab adults do not like to imitate celebrities.
B)
If there are rumors about Hamaki participating in unacceptable behavior.
C)
When Nokia's revenue from selling mobile phones increases by the same amount paid to Hamaki.
D)
When the increase in demand on Nokia phones generates revenue that is more than the cost of hiring
Hamaki.
Answer
D

96)
An article in The Boston Globe notes that many products come with a deceptive price structure.
Examples include printers that come with a hefty add-on fee in the form of ink cartridges and razors that
must be used with specific high-priced blades.
Source Christopher Shea, "The Hidden Economy", The Boston Globe , June 25, 2006.
All of the following statements could explain why it is rational for firms to use such a pricing scheme
except

96)

______
A)
Using sneaky pricing schemes makes it more difficult for consumers to compare pricing.
B)
It reduces the need to resort to price competition in the marketplace since customers cannot easily
discern the true price of the product.
C)
Firms recognize that there are more myopic customers than sophisticated customers and this pricing
strategy tends to draw the myopic (short-sighted) customers.
D)
Firms recognize that it's best not to overwhelm customers with too much pricing information.
Answer
D

97)
Consider the following scenario There are two types of customers the myopes (short sighted) and the
sophisticates. Now, imagine two hotel chains. The first, Hidden Price Inn, has a very low room rate of
US$80 a night, but makes liberal use of high "shrouded" fees US$3 for a minibar Coca-Cola, US$25 for
parking, US$2 for local calls. The second chain, Straightforward Suites, charges much more reasonably
for the extra costs (US$1 for a minibar Coca-Cola, , US$10 for parking, and no charge for local calls ), but
because it makes less on the extras, it has to charge slightly more for the room — US$95, instead of
US$80.
The myopes are lured by Hidden Price Inn's low room rate but end up spending far more because of the
fees on the extras. The sophisticates, on the other hand, know all about hidden fees. They seek out low
advertised rates and whenever possible avoid or find substitutes for the hidden fees such as using cell
phones at hotels and avoiding the minibar.
Drawn from Christopher Shea, "The Hidden Economy", The Boston Globe, June 25, 2006.
In a competitive market, it would appear that Straightforward Suites has a strong incentive to launch an
advertising campaign to expose Hidden Price Inn's liberal use of hidden fees. But, economists Xavier
Gabaix and David Laibson argue to the contrary. Which of the following supports their argument?

97)

______
A)
Since it is difficult to distinguish between the myopes and the sophisticates, it is unclear whether the
advertising campaign would affect the intended consumers.
B)
Hidden Price Inn is likely to retaliate with an advertising campaign of its own pointing out the saving in
the room rate more than offsets the higher price of the extras, thereby sparking an advertising war.
C)
At best, the campaign would convert some myopes into sophisticates and these newly wised-up
customers will spend less on any hotel they frequent, thus hurting the hotel industry in general.
D)
It is too complex to explain the deceptive pricing structure, and too costly to launch such an advertising
campaign.
Answer
C

98)
Research conducted by Professors Cass Sunstein and Richard Thaler show that employees are much
more likely to enroll in a savings plan under automatic enrollment than under a default term of non-
enrollment because it turns out that very few employees drop out if automatically enrolled.
Source Sunstein, Cass R. and Richard H. Thaler. 2003. "Libertarian Paternalism Is Not an Oxymoron,"
University of Chicago Law Review, 701159-1202.
What does this suggest about getting people to save for their retirement?

98)

______
A)
Many people need to be "tricked" into saving because they are unrealistic about their future behavior.
They spend money today that they should be saving for retirement, partly because they overestimate
their ability to save in the future.
B)
Planning for one's retirement is complex and emotional and most people deliberately avoid confronting
these financial decisions.
C)
One way to get people to save more is to make mandatory contributions to a saving plan part and parcel
of employment, and to make opting-out legally impossible.
D)
People are overly pessimistic about their future financial prospects; many fear that the social security
scheme may be non-existent by the time they retire.
Answer
A
 99)
A fair number of people buy expensive gym memberships to commit themselves to exercising. Yet, data
from health clubs show that many do not follow through with their intentions and end up losing money on
their membership contracts. Which of the following could explain this behavior?

99)

______
A)
People realize after the fact that they have made a mistake but unfortunately memberships are often not
transferable and not refundable.
B)
People fail to ignore the sunk cost of a gym membership when making the purchase.
C)
People have a tendency to pursue immediate gratification in a way that their 'long-run selves' do not
appreciate (quoted from Ted O'Donoghue and Matthew Rabin, "Choice and Procrastination," Quarterly
Journal of Economics, February 2001, pp. 125-26.).
D)
People tend to be overly optimistic about their future behavior, so much so that after making an
expensive investment in the membership, they overrate the dividends they expect to reap.
Answer
D

100)
What is an indifference curve?

100)

_____
A)
It is a curve that shows the total utility and the marginal utility derived from consuming a bundle of
goods.
B)
It is a curve that shows the combinations of consumption bundles that gives the consumer the same
utility.
C)
It is a curve that shows the trade-off a consumer faces among different combinations of consumption
bundles.
D)
It is a curve that ranks a consumer's preference for various consumption bundles.
Answer
B

Figure 6-3
 101)
Refer to Figure 6-3. The Bobsey twins, Laurel and Hardy, both enjoy watching romantic comedies and
science fiction movies. Based on the diagrams above what can you conclude about their movie
preferences?

101)

_____
A)
Laurel enjoys science fiction movies more than Hardy.
B)
They have identical movie preferences.
C)
Laurel enjoys romantic comedies more than Hardy.
D)
The diagrams do not provide any information about relative preferences.
Answer
C

102)
Which of the following is held constant along an indifference curve?

102)

_____
A)
the marginal rate of substitution between the two goods in question
B)
the total utility derived from consuming any bundle of goods on the indifference curve
C)
the prices of the goods in question
D)
the marginal utility derived from consuming any bundle of goods on the indifference curve
Answer
B

103)
In the utility maximizing model, consumer preferences are assumed to be transitive. What does this
mean?

103)
_____
A)
Consumers prefer more of a product than less of it.
B)
Consumers go through cycles in their consumption behavior.
C)
Consumers have the freedom to change their preferences from time to time.
D)
Consumers have preferences that are relatively consistent in the time period under consideration.
Answer
D

104)
If Aliah prefers pizza to hamburgers and hamburgers to hot dogs, then if preferences are transitive,

104)

_____
A)
she must prefer pizza to hot dogs.
B)
at times she could be indifferent to all three items.
C)
she could prefer hamburgers to pizza on some occasions but not hot dogs to pizza.
D)
she could prefer hot dogs to pizza on some occasions but not hamburgers to hot dogs.
Answer
A

105)
If preferences are transitive, indifference curves

105)

_____
A)
intersect at the optimum consumption bundle.
B)
intersect where the marginal rate of substitution for each indifference curve is equal.
C)
intersect at the equilibrium consumption bundle.
D)
do not intersect.
Answer
D

106)
The slope of an indifference curve

106)

_____
A)
measures the marginal rate of substitution between the two products in question.
B)
is calculated by dividing the price of the product on the vertical axis by the price of the product on the
horizontal axis.
C)
is calculated by dividing the quantity of the product on the vertical axis by the quantity of the product on
the horizontal axis.
 D)
measures total utility.
Answer
A

107)
Convex indifference curves have a negative slope

107)

_____
A)
because, to keep utility constant, a consumer must obtain more of one product if she is to give up some of
another product.
B)
because consumers face a budget constraint.
C)
because scarcity implies that it is not possible to consume more of one product without giving up some of
another product.
D)
because consumers take market prices as given.
Answer
A

108)
What is the marginal rate of substitution?

108)

_____
A)
the rate at which the consumer is willing to trade one product for another so that she increases her utility
B)
the rate at which the consumer must give up one product to purchase an additional unit of the other
products in the market
C)
the price ratio
D)
the rate at which the consumer is willing to trade one product for another without any loss in utility
Answer
D

Figure 6-4
 109)
Refer to Figure 6-4. What is the marginal rate of substitution between g and h?

109)

_____
A)
Three cookies

B)

One third of a cookie

C)
Two cookies

D)

Half a cookie
Answer
D

110)
What happens to the absolute value of marginal rate of substitution as you move down a convex (bowed
toward the origin) indifference curve?

110)

_____
A)
it could increase or decrease

B)

it decreases
C)
it increases

D)

it remains constant
Answer
B

111)
A consumer's budget constraint is

111)

_____
A)
the rate at which the consumer must give up one product to purchase an additional unit of the other
goods in the market.
B)
the extent to which one's preferences are limited by one's income.
C)
the price ratio a consumer faces in the marketplace.
D)
the limited income that a consumer has to spend on goods and services.
Answer
D

112)
The absolute value of the slope of the budget constraint is equal to

112)

_____
A)
the marginal rate of substitution between the two goods in question.
B)
the price of the product on the horizontal axis divided by the price of the product on the vertical axis.
C)
the quantity of the product on the vertical axis divided by the quantity of the product on the horizontal
axis.
D)
the price of the product on the vertical axis divided by the price of the product on the horizontal axis.
Answer
B

113)
A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the
point on

113)

_____
A)
the indifference curve that intersects the vertical axis.
B)
the budget constraint where it intersects one of the axes.
C)
the indifference curve that intersects the horizontal axis.
D)
an indifference curve that is tangent to the budget constraint.
Answer
D

Figure 6-5
 114)
Refer to Figure 6-5. The consumer can afford consumption bundles

114)

_____
A)
r, s, v and u.

B)

s, v and u only.
C)
s, v, t and u.

D)

r, s, t and u.
Answer
C

115)
Refer to Figure 6-5. Which of the following statements is true?

115)

_____
A)
Bundles r, s, t and u all cost the same.
B)
Bundles r and w are not affordable.
C)
The consumer gets more utility from bundle r than from bundle v.
D)
The consumer gets less utility from bundle w than from bundle v.
Answer
B

116)
Refer to Figure 6-5. Suppose the price of pizza increases while the price of hamburger remains
constant. Then, the consumer's
116)

_____
A)
budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept
remains the same.
B)
indifference curve becomes more concave away from the origin.
C)
budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept
remains the same.
D)
indifference curve becomes straighter.
Answer
C

117)
Aisha and Asmaa both purchase milk and bread at the same Quik Mart. They have different preferences
for milk and eggs and different incomes. They both buy some milk and some bread, but they buy
considerably different quantities of the two goods. Which of the following statements is true, given that
Aisha and Asmaa are utility-maximizers?

117)

_____
A)
In equilibrium, the marginal rate of substitution between milk and bread is greater for the person who
prefers milk more than bread.
B)
No statement can be made about their respective marginal rate of substitution without their budget
constraint/indifference curves diagrams.
C)
In equilibrium, their marginal rate of substitution between milk and bread is higher for the person with
the higher income.
D)
In equilibrium, their marginal rate of substitution between milk and bread is the same.
Answer
D

Figure 6-6

118)
Refer to Figure 6-6. A change in income is shown in
118)

_____
A)
Panel A.

B)

Panel B.
C)
Panel C.

D)

none of the above.

Answer
B

119)
Refer to Figure 6-6. A change in the price of candy only is shown in

119)

_____
A)
Panel A.

B)

Panel B.
C)
Panel C.

D)

none of the above.

Answer
C

120)
Refer to Figure 6-6. A change in the price of popcorn only is shown in

120)

_____
A)
Panel A.

B)

Panel B.
C)
Panel C.

D)

none of the above.

Answer
A
 121)
Refer to Figure 6-6. Which diagram demonstrates an increase in total utility following a decrease in the
price of popcorn?

121)

_____
A)
the movement from d to e in Panel A

B)

the movement from f to g in Panel B

C)
the movement from h to k in Panel C

D)

None of the above.

Answer
A

122)
Refer to Figure 6-6. Which diagram demonstrates a decrease in total utility following an increase in the
price of candy?

122)

_____
A)
the movement from e to d in Panel A

B)

the movement from g to f in Panel B

C)
the movement from k to h in Panel C

D)

None of the above.

Answer
C

123)
Suppose the consumer's income increases while the prices of the goods remain constant. Then the

123)

_____
A)
indifference curves shift outward away from the origin.
B)
budget constraint shifts outward parallel to the original budget constraint.
C)
indifference curves become flatter.
D)
budget constraint shifts inward parallel to the original budget constraint.
Answer
B
 Figure 6-7

124)
Refer to Figure 6-7. The change in the budget constraint from BC0 to BC1 implies

124)

_____
A)
income and the prices of DVDs and CDs have increased.
B)
the prices of DVDs and CDs have increased.
C)
the price of DVDs has decreased and the price of CDs has increased.
D)
the price of DVDs has increased and the price of CDs has decreased.
Answer
D

125)
Refer to Figure 6-7. Consider the budget constraint BC0. If the price of DVDs is US$20 and the price of
CDs is US$10, what is the consumer's income?

125)

_____
A)
US$480

B)

US$360

C)

US$240

D)

US$120
Answer
C

126)
Refer to Figure 6-7. If the consumer has US$240 to spend on DVDs and CDs, what is the price of a DVD
if the budget constraint is BC0?

126)

_____
A)
US$20

B)

US$40

C)

US$10

D)

US$24
Answer
A

127)
Refer to Figure 6-7. If the consumer has US$240 to spend on DVDs and CDs, what is the price of a CD
if the budget constraint is BC1?

127)

_____
A)
US$40

B)

US$8

C)

US$20

D)

US$10
Answer
B

Figure 6-8
Monir has US$300 to spend on an aerobics class and a yoga class. The price of a group aerobics class is
US$20 and the price of a group yoga class is US$10. Monir's optimal bundle is given by "A" in Figure 6-8.

128)
Refer to Figure 6-8. Suppose the price of aerobics sessions rises to US$30 while income and the price
of yoga sessions remains unchanged. What is Monir's new optimal bundle?

128)

_____
A)
bundle B

B)

bundle C
C)
still remains at bundle A

D)

bundle D
Answer
B

129)
Refer to Figure 6-8. Suppose the price of aerobics sessions rises to US$30 while income and the price
of yoga sessions remains unchanged. The substitution effect of this price change is represented by the
movement from

129)

_____
A)
D to B.

B)
A to B.

C)

A to C.

D)

A to CD.
Answer
D

130)
Refer to Figure 6-8. Suppose the price of aerobics sessions rises to US$30 while income and the price
of yoga sessions remains unchanged. The income effect of this price change is represented by the
movement from

130)

_____
A)
D to B.

B)

A to B.

C)

B to C.

D)

D to C.
Answer
D

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
131)

Gina has US$6 per day to purchase lunch. She spends all of her lunch money on pizza and iced tea. The
price of pizza is US$2 per slice and iced tea costs US$1 per bottle.
a. Draw Gina's budget constraint. Put Pizza on the horizontal axis and Iced tea on the vertical axis. Be
sure to identify the intercept values.
b. If the price of iced tea rises to US$1.20 per bottle, show what will happen to her budget constraint in
your diagram. Be sure to indicate any new intercept values.
Answer

a.
b. BC1 in the figure above represents the effect of an increase in the price of iced tea.

132)

Farah has US$100 to spend each month on bread and chicken. Suppose the price of bread is US$4 a loaf
and the price of chicken is US$5 per kilo.
a. Draw her budget constraint and label it BC0. Put Loaves of bread on the horizontal axis and Chicken
(kilos) on the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 kilos of chicken. On
the same graph you drew in part (a), draw an indifference curve to identify her optimal bundle. Label this
bundle "E".
c. Is her budget exhausted? Explain your answer.
d. Suppose Farah's income falls so that she can now spend US$80 each month on the two goods. Prices
however remain unchanged. In the same diagram, graph her new budget contraint and label it . Be sure
to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your answer.
f. What must happen to her total utility following the decrease in her income?
Answer

a. Please see the figure below.

b. Please see the figure below.
c. Yes, her budget is exhausted. She spends (US$4 × 10) + (US$5 × 12) = US$100.
d. Please see the figure below.
e. No, the bundle "E" is no longer affordable. It lies outside her budget line.
f. Her total utility falls.
 133)

George has US$200 to spend each month on restaurant meals and jazz performances at his neighborhood
jazz club. The price of a typical restaurant meal is US$20 and the price of a jazz performance ticket is
US$10. George is maximizing his utility by consuming six restaurant meals and attending eight jazz
performances. Suppose George still has US$200 to spend, but the price of a restaurant meal rises to
US$25, while the price of a jazz performance ticket drops to US$8. Is George better or worse off than he
was before the price change? Use a budget constraint/indifference curve graph to illustrate your answer.
Answer

Initially, when the price of a typical restaurant meal is US$20 and the price of a jazz performance ticket is
US$10, George consumes the bundle "A" on BC0. Following the price changes, George's new budget line
is BC1. He is no longer able to afford this same bundle "A" as shown in the figure below. Therefore, he is
worse off.

1)

D
2)
D
 3)
C
4)
B
5)
C
6)
B
7)
A
8)
B
9)
C
10)
B
11)
A
12)
A
13)
B
14)
B
15)
D
16)
D
17)
A
18)
B
19)
D
20)
A
21)
D
22)
B
23)
A
24)
A
25)
C
26)
B
27)
C
28)
C
29)
B
30)
A
31)
C
32)
D
33)
B
34)
D
35)
C
36)
B
37)
C
38)
C
39)
B
40)
B
41)
A
42)
A
43)
B
44)
B
45)
C
46)
D
47)
D
48)
D
49)
TRUE
50)
FALSE
51)
FALSE
52)
FALSE
53)
FALSE
54)
TRUE
55)
TRUE
56)
D
57)
B
58)
D
59)
A
60)
D
61)
B
62)
B
63)
TRUE
 64)
FALSE
65)
TRUE
66)
FALSE
67)
E
68)
B
69)
B
70)
A
71)
D
72)
C
73)
B
74)
D
75)
A
76)
C
77)
A
78)
D
79)
B
80)
B
81)
D
82)
B
83)
A
84)
B
85)
C
86)
A
87)
A
88)
D
89)
A
90)
E
91)
D
92)
B
93)
D
94)
A
95)
D
96)
D
97)
C
98)
A
99)
D
100)

B
101)

C
102)

B
103)

D
104)

A
105)

D
106)

A
107)

A
108)

D
109)

D
110)

B
111)

D
112)

B
113)

D
114)

C
115)

B
116)
C
117)

D
118)

B
119)

C
120)

A
121)

A
122)

C
123)

B
124)

D
125)

C
126)

A
127)

B
128)

B
129)

D
130)

D
131)

a.
b. BC1 in the figure above represents the effect of an increase in the price of iced tea.
132)

a. Please see the figure below.

b. Please see the figure below.
c. Yes, her budget is exhausted. She spends (US$4 × 10) + (US$5 × 12) = US$100.
d. Please see the figure below.
e. No, the bundle "E" is no longer affordable. It lies outside her budget line.
f. Her total utility falls.

133)

Initially, when the price of a typical restaurant meal is US$20 and the price of a jazz performance ticket is
US$10, George consumes the bundle "A" on BC0. Following the price changes, George's new budget line
is BC1. He is no longer able to afford this same bundle "A" as shown in the figure below. Therefore, he is
worse off.