W hen you walk into a store, you are confronted with thousands of goods that
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| 458 PART VII
tOpICS FOr FUrther StUDY 1. Emilio buys pizza for $10 and soda for $2. He has income of $100. His budget constraint will experience a parallel outward shift if which of the following events occur? a. The price of pizza falls to $5, the price of soda falls to $1, and his income falls to $50. b. The price of pizza rises to $20, the price of soda rises to $4, and his income remains the same. c. The price of pizza falls to $8, the price of soda falls to $1, and his income rises to $120. d. The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400. 2. At any point on an indifference curve, the slope of the curve measures the consumer’s a. income. b. willingness to trade one good for the other. c. perception of the two goods as substitutes or complements. d. elasticity of demand. 3. Matthew and Susan are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer that Matthew’s marginal rate of substitution is _____ hats per shirt, while Susan’s is _____. a. 2, 1 b. 2, 2 c. 4, 1 d. 4, 2 4. Charlie buys only milk and cereal. Milk is a normal good, while cereal is an inferior good. When the price of milk rises, Charlie buys a. less of both goods. b. more milk and less cereal. c. less milk and more cereal. d. less milk, but the impact on cereal is ambiguous. 5. If the price of pasta increases and a consumer buys more pasta, we can infer that a. pasta is a normal good, and the income effect is greater than the substitution effect. b. pasta is a normal good, and the substitution effect is greater than the income effect. c. pasta is an inferior good, and the income effect is greater than the substitution effect. d. pasta is an inferior good, and the substitution effect is greater than the income effect. 6. The labor-supply curve slopes upward if a. leisure is a normal good. b. consumption is a normal good. c. the income effect on leisure is greater than the substitution effect. d. the substitution effect on leisure is greater than the income effect. Quick Check Multiple Choice 3. Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution. What does the marginal rate of substitution tell us? 4. Show a consumer’s budget constraint and indiffer- ence curves for wine and cheese. Show the optimal consumption choice. If the price of wine is $3 per glass and the price of cheese is $6 per pound, what is the marginal rate of substitution at this optimum? 5. A person who consumes wine and cheese gets a raise, so her income increases from $3,000 to $4,000. Show what happens if both wine and cheese are normal goods. Now show what happens if cheese is an inferior good. 6. The price of cheese rises from $6 to $10 per pound, while the price of wine remains $3 per glass. For a consumer with a constant income of $3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effects. 7. Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain. 1. Jennifer divides her income between coffee and crois- sants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States. a. Show the effect of the frost on Jennifer’s budget constraint. b. Show the effect of the frost on Jennifer’s optimal consumption bundle assuming that the substitution effect outweighs the income effect for croissants. c. Show the effect of the frost on Jennifer’s optimal consumption bundle assuming that the income effect outweighs the substitution effect for croissants. Problems and Applications 65875_ch21_ptg01_433-460.indd 458 15/10/13 11:53 AM Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. |