Chapter 4

Front 1

Which of the following does NOT describe a compensating variation?

Back 1

The amount of money that produces an equivalent effect on a consumer's well-being

Front 2

The amount of compensation associated with the income effect of a price change is called:

Back 2

a compensation variation.

Front 3

Consumer surplus is:

Back 3

the net benefit a consumer receives from participating in the market for some good.

Front 4

Suppose the price of pizza is $8.50. Then the consumer will purchase _____ pizzas and the net benefit is ______.

Back 4

4; $8.00

Front 5

Suppose the price of pizza is $9.75. Then consumer surplus is:

Back 5

$3.75.

Front 6

If the price of computers is $1,000, then consumer surplus is given by the area represented by:

Back 6

a + b + e.

Front 7

If the price of computers is $1,000, then expenditures on computers is represented by the area:

Back 7

c + d

Front 8

If the price of computers is $1,500, then consumer surplus is equal to:

Back 8

$175,000.

Front 9

What area represents the decrease in consumer surplus when the price of computers increases from $1,000 to $1,500?

Back 9

b + e

Front 10

Suppose Eddie's demand curve for text messages is T = 150 - 500Pt, where T stands for the number of text messages and Pt represents the price of text messages. What is Eddie's consumer surplus if Pt = $0.10 per message?

Back 10

$10

Front 11

Suppose Eddie's demand curve for text messages is T = 150 - 500Pt, where T stands for the number of text messages and Pt represents the price of text messages. What is Eddie's consumer surplus if Pt = $0.20 per message?

Back 11

$2.50

Front 12

Suppose Eddie's demand curve for text messages is T = 150 - 500Pt, where T stands for the number of text messages and Pt represents the price of text messages. What is Eddie's consumer surplus if Pt = $0.05 per message?

Back 12

$15.63

Front 13

When the price of a good decreases:

Back 13

the good becomes less expensive relative to other goods and the consumer's purchasing power increases.

Front 14

Which of the following does NOT occur when the price of a good increases?

Back 14

The consumer's purchasing power increases.

Front 15

Assume that L1 represents the budget line before a price change. Point B represents the:

Back 15

uncompensated effect of an increase in the price of soup.

Front 16

Assume that L1 represents the budget line before a price change. Point C represents the:

Back 16

compensated effect on an increase in the price of soup.

Front 17

According to Figure 6.1:

Back 17

soup is a normal good.

Front 18

Assume that L1 represents the budget line before a price change. Which change in budget lines represents compensation?

Back 18

L2 to L3

Front 19

Assume that L1 represents the budget line before a price change. The substitution effect is shown by the movement:

Back 19

from bundle A to bundle C.

Front 20

Assume that L1 represents the budget line before a price change. The income effect is shown by the movement:

Back 20

from bundle C to bundle B.

Front 21

A change in price that is accompanied by a change in income sufficient to leave a consumer's well-being unchanged is called:

Back 21

a compensated price change.

Front 22

What effect does a compensated price change have on a consumer's well-being?

Back 22

The consumer's well-being is unaffected.

Front 23

Which of the following is correct?

Back 23

The effect of a compensated price change equals the effect of an uncompensated price change plus the effect of providing compensation.

Front 24

The effect of a compensated price change is known as:

Back 24

the substitution effect of a price change.

Front 25

Which of the following statements about the income effect of a price change is NOT true?

Back 25

It isolates the influence of a change in relative prices.

Front 26

Which of the following statements is true?

Back 26

The effect of an uncompensated price change = the substitution effect of the price change + the income effect of the price change.

Front 27

A compensated increase in the price of a good:

Back 27

always causes the consumer to buy less of that good.

Front 28

If a good is _______, the income effect is negative for a price increase and positive for a price decrease.

Back 28

normal

Front 29

For what type of good do the substitution and income effects work in opposite directions?

Back 29

Inferior goods

Front 30

If a good is normal, then the income effect is _____ for a price increase and _____ for a price decrease.

Back 30

negative; positive

Front 31

What must occur for a good to violate the Law of Demand?

Back 31

The good must be inferior and the income effect must be larger than the substitution effect.

Inferior; Income > Substitution

Front 32

illustrates a change in the price of soup. From the graph, we can conclude that:

Back 32

the price of soup has fallen and soup is a Giffen good.

Front 33

The demand curve for a normal good will:

Back 33

slope downward.

Front 34

The substitution effect of a price change ________ consistent with the Law of Demand.

Back 34

is always

Front 35

The income effect of a price change is:

Back 35

consistent with the Law of Demand only for normal goods.

Front 36

If leisure is drawn on the horizontal axis and labor is drawn on the vertical axis, then a person who attaches more importance to leisure than to labor will have indifference curves that:

Back 36

tend to be flatter.

Front 37

The demand curve for leisure will slope upward if leisure is a ______ good and the income effect of a wage change is relatively _______.

Back 37

normal; large

Front 38

Because individuals initially own more time than they consume and sell the difference to their employers:

Back 38

the direction of the income effect is the opposite than it is for other goods.

Front 39

For low wages, the leisure demand curve slopes ______; for higher wages it slopes ______.

Back 39

downward; upward

Front 40

For low wages, the labor supply curve slopes ______; for higher wages it slopes ______.

Back 40

upward; downward

Front 41

Which of the following statements is true, assuming leisure is a normal good?

If the income effect is sufficiently ____; the labor supply curve will _____ _______

Back 41

If the income effect is sufficiently large, the labor supply curve will bend backwards.

Front 42

Suppose that an individual has chosen not to work. Then a change in the wage rate:

Back 42

creates a substitution effect, but no income effect.

Front 43

Refer to Figure 6.5. The substitution effect is shown by the movement:

Back 43

from point A to point B.

Front 44

Refer to Figure 6.5. By how many hours does leisure change as a result of the income effect of the wage change?

Back 44

5

Front 45

Which of the following best describes labor force participation rates for men and women over the period 1960 to 2000?

Back 45

Labor force participation rates for men declined while labor force participation rates for women increased.

Front 46

A demand curve that shows the relationship between the price of a good and the amount of the good consumed holding the consumer's income fixed and allowing their well-being to vary is called:

Back 46

an uncompensated demand curve.

Front 47

A demand curve that shows the relationship between the price of a good and the amount of the good consumed holding the consumer's well-being fixed and allowing their to income vary is called:

Back 47

a compensated demand curve.

Front 48

A consumer's ______ determines the location of their uncompensated demand curve, while the level of their ______ determines the location of their compensated demand curve.

Back 48

income; well-being

Front 49

For a normal good, the income and substitution effects work in the ______ direction. Therefore, a change in price produces a ______ change in uncompensated demand than in compensated demand.

Back 49

same; larger

Front 50

A Hicksian, or compensated, demand curve reflects:

Back 50

only the substitution effect of a price change.

Front 51

A Marshallian, or uncompensated, demand curve reflects:

Back 51

both the income and substitution effects of a price change.

Front 52

If a good is inferior, then whenever the compensated demand curve intersects the uncompensated demand curve:

Back 52

the uncompensated demand curve is steeper than the compensated demand curve.

Front 53

What is the difference between approximate and exact consumer surplus?

Back 53

Approximate consumer surplus is calculated using an uncompensated demand curve, while exact consumer surplus is calculated using a compensated demand curve.

Front 54

When income effects are small:

Back 54

the uncompensated demand curve lies close to the compensated demand curve.

Front 55

What area represents the compensation for reduced consumption that results from an increase in the price of gasoline from $1.75 to $3.00 per gallon?

Back 55

d + e

Front 56

What area represents the compensation for an increase in the price of gasoline from $1.75 to $3.00 per gallon?

Back 56

a + b + c

Front 57

The relative cost of achieving a fixed standard of living in different situations is called:

Back 57

a cost of living index.

Front 58

The amount of money received in a particular period adjusted for changes in purchasing power is called:

Back 58

real income.

Front 59

The amount of money actually received in a particular period is called:

Back 59

nominal income.

Front 60

Suppose a consumer's nominal income is $50,000 and the cost-of-living index is 1.3. The consumer's real income is:

Back 60

$38,462

Front 61

Constructing an accurate cost-of-living index is difficult because:

Back 61

prices of different goods change by different proportions.

Front 62

______ measures the percent change in the cost of a fixed consumption bundle.

Back 62

A fixed-weight price index

Front 63

______ is a fixed-weight index that is based on a consumption bundle actually purchased in the base year.

Back 63

A Laspeyres price index

Front 64

Suppose the base year for a Laspeyres index is 2001. The value of the index is 1.3 in 2004 and 1.6 in 2006. By how much did the cost of the bundle increase between 2004 and 2006?

Back 64

23%

Front 65

When prices are rising:

Back 65

the Laspeyres index tends to overstate the increase in the cost of living because of the substitution bias.

Front 66

The substitution bias refers to:

Back 66

the failure of the Laspeyres index to capture a consumer's tendency to substitute away from goods that have become more expensive.

Front 67

The change in the cost of living over time is referred to as:

Back 67

inflation.