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Module M16 Quiz: Applications of Consumer Theory

25 questions ยท Intermediate ยท Multiple choice, calculation, and short answer

How to use

Attempt each question before clicking Show Answer.

Question 1

Lesson L01 ยท Applications

The intertemporal budget constraint is:

Type: Multiple Choice

  • A) c1 + c2 = m1 + m2
  • B) c1 + c2/(1+r) = m1 + m2/(1+r)
  • C) c1/(1+r) + c2 = m1/(1+r) + m2
  • D) c1 + c2 = (m1 + m2)/(1+r)
Show Answer

Answer: B) c1 + c2/(1+r) = m1 + m2/(1+r)

Future consumption is discounted by (1+r)

Question 2

Lesson L01 ยท C1_Max = M1 + M2/(1+R) = 50 + 55/1.05 โ‰ˆ 102.38

Calculate maximum c1 if m1=50, m2=55, r=5%

Type: Calculation

Show Answer

Answer:

102.38

Question 3

Lesson L01 ยท Because The Cost Of Current Consumption Rises, Potentially Reducing Disposable Income Available For Saving

Why might higher interest rates reduce saving for borrowers?

Type: Short Answer

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Answer:

Question 4

Lesson L01 ยท Applications

What does the slope of the intertemporal budget constraint represent?

Type: Multiple Choice

  • A) Marginal utility
  • B) Interest rate
  • C) Price ratio (1+r)
  • D) Time preference rate
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Answer: C) Price ratio (1+r)

Slope = -(1+r), the relative price of current vs future consumption

Question 5

Lesson L01 ยท Applications

For a borrower, a rise in interest rates:

Type: Multiple Choice

  • A) Shifts budget line outward
  • B) Shifts budget line inward
  • C) Rotates budget line steeper
  • D) Rotates budget line flatter
Show Answer

Answer: B) Shifts budget line inward

Higher rates reduce the present value of future income for borrowers

Question 6

Lesson L02 ยท Applications

In labor-leisure choice, the wage rate is:

Type: Multiple Choice

  • A) The price of consumption
  • B) The price of leisure
  • C) The price of labor
  • D) Independent of the budget constraint
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Answer: B) The price of leisure

Opportunity cost of leisure is the wage rate

Question 7

Lesson L02 ยท Set Mrs=W: (0.4C)/(0.6R)=20 โ†’ C=30R. Budget: C=20L+200. T=R+L=80 โ†’ L=48

Find optimal labor supply if U=R^0.4C^0.6, w=20, V=200, T=80

Type: Calculation

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Answer:

48

Question 8

Lesson L02 ยท When The Income Effect (Desire For More Leisure) Dominates The Substitution Effect (Higher Wage)

What causes a backward-bending labor supply curve?

Type: Short Answer

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Answer:

Question 9

Lesson L02 ยท Applications

A lump-sum tax affects labor supply by:

Type: Multiple Choice

  • A) Rotating the budget line
  • B) Shifting the budget line parallel inward
  • C) Changing the wage rate
  • D) Eliminating non-labor income
Show Answer

Answer: B) Shifting the budget line parallel inward

Lump-sum tax reduces V without changing slope

Question 10

Lesson L02 ยท Applications

For U=C+lnR, optimal labor supply is:

Type: Multiple Choice

  • A) L=0
  • B) L=T
  • C) L=T-1/w
  • D) L=wT+V
Show Answer

Answer: C) L=T-1/w

From FOC: 1/R=w โ†’ R=1/w โ†’ L=T-1/w

Question 11

Lesson L03 ยท Applications

Which tax creates no deadweight loss?

Type: Multiple Choice

  • A) Quantity tax
  • B) Income tax
  • C) Lump-sum tax
  • D) Sales tax
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Answer: C) Lump-sum tax

Lump-sum taxes don't distort relative prices

Question 12

Lesson L03 ยท Dwl โ‰ˆ 0.5 ร— Tax ร— ฮ”q = 0.5 ร— 2 ร— 50 = 50 (With Elasticity= 1, ฮ”q/Q=10% โ†’ ฮ”q=10)

Calculate DWL of a $2 quantity tax when initial p=10, Q=100, elasticity=-1

Type: Calculation

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Answer:

50

Question 13

Lesson L03 ยท Because They'Re Regressive And Politically Unpopular Despite Being Efficient

Why are lump-sum taxes rarely used?

Type: Short Answer

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Answer:

Question 14

Lesson L03 ยท Applications

Which Australian tax is an example of a quantity tax?

Type: Multiple Choice

  • A) Income tax
  • B) GST
  • C) Medicare levy
  • D) Council rates
Show Answer

Answer: B) GST

GST is a 10% quantity tax on most goods/services

Question 15

Lesson L03 ยท Applications

A price subsidy creates:

Type: Multiple Choice

  • A) Consumer surplus gain only
  • B) Producer surplus gain only
  • C) Deadweight loss
  • D) No welfare effects
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Answer: C) Deadweight loss

Subsidies typically create DWL by distorting prices

Question 16

Lesson L04 ยท Applications

Expected utility is:

Type: Multiple Choice

  • A) The utility of expected consumption
  • B) Probability-weighted average utility
  • C) Always linear in probabilities
  • D) Independent of risk preferences
Show Answer

Answer: B) Probability-weighted average utility

EU = ฮฃ ฯ€_i U(c_i)

Question 17

Lesson L04 ยท Eu=0.5โˆš100 + 0.5โˆš400 = 5 + 10 = 15

Calculate EU for U=โˆšc with 50% chance of $100 or $400

Type: Calculation

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Answer:

15

Question 18

Lesson L04 ยท Risk Aversion (Consumer Prefers Certain Outcomes Over Gambles With Same Ev)

What does concave utility imply about risk preferences?

Type: Short Answer

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Answer:

Question 19

Lesson L04 ยท Applications

Which utility function represents risk neutrality?

Type: Multiple Choice

  • A) U=lnc
  • B) U=c^2
  • C) U=c
  • D) U=โˆšc
Show Answer

Answer: C) U=c

Linear utility implies risk neutrality

Question 20

Lesson L04 ยท Applications

The certainty equivalent is:

Type: Multiple Choice

  • A) The expected value of a gamble
  • B) The sure amount giving same utility as a gamble
  • C) The risk premium
  • D) The probability-weighted outcome
Show Answer

Answer: B) The sure amount giving same utility as a gamble

CE solves U(CE)=EU

Question 21

Lesson L05 ยท Applications

Absolute risk aversion is measured by:

Type: Multiple Choice

  • A) -U''(c)/U'(c)
  • B) U'(c)/U''(c)
  • C) U''(c)U'(c)
  • D) -U'(c)/U''(c)
Show Answer

Answer: A) -U''(c)/U'(c)

ARA = -U''/U'

Question 22

Lesson L05 ยท 662

Find risk premium for U=lnc, 10% chance of \(1m loss, initial c=\)5m

Type: Calculation

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Answer:

52

Question 23

Lesson L05 ยท Because They'Re Willing To Pay More Than The Expected Loss To Avoid Uncertainty

Why do risk-averse individuals buy insurance?

Type: Short Answer

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Answer:

Question 24

Lesson L05 ยท Applications

Actuarially fair insurance means:

Type: Multiple Choice

  • A) Premium = expected payout
  • B) Premium > expected payout
  • C) Premium < expected payout
  • D) No loading factors
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Answer: A) Premium = expected payout

Fair insurance sets premium = probability ร— loss

Question 25

Lesson L05 ยท Applications

Which describes Australian private health insurance?

Type: Multiple Choice

  • A) Community rating
  • B) Risk-adjusted premiums
  • C) No pre-existing conditions
  • D) Mandatory for all
Show Answer

Answer: A) Community rating

Australia uses community rating with lifetime loading