Applications of consumer theory

Question 1

What is the idea behind food stamps?

Answer 1

To improve the well being of low income individuals

Question 2

What is better for the individual, food stamps or cash?

Answer 2

Cash

Question 3

Why is cash better for the individual than food stamps?

Answer 3

Cash generates a bigger budget constraint

Question 4

Why does the government give food stamps instead of cash?

Answer 4

The government doesn’t want the individual spending money on illegal products or products that could harm a person’s well being

Question 5

What is the trade off that people face in terms of labour supply?

Answer 5

Between work and leisure

Question 6

Define opportunity cost

Answer 6

Whatever must be given up to obtain some item; the value of benefits sacrificed

Question 7

What opportunity cost needs to be considered by the individual in this trade off?

Answer 7

The individual’s opportunity cost of leisure

Question 8

If your wage is £15 an hour, what is your opportunity cost of leisure?

Answer 8

The opportunity cost of an hour of leisure is £15

Question 9

What happens to the opportunity cost of leisure if the wage goes up?

Answer 9

The opportunity cost of leisure also goes up

Question 10

What does the labour supply curve reflect?

Answer 10

How workers’ decisions about the labour-leisure trade off respond to a change in that opportunity cost

Question 11

What does an upward sloping labour supply curve mean?

Answer 11

An increase in the wage induces the workers to increase the quantity of labour that they supply.

Question 12

Why do more hours of work mean that leisure time is less?

Answer 12

Time is limited

Question 13

How do workers respond to the increase in opportunity cost of leisure?

Answer 13

They take less of it (have less leisure time)

Question 14

What does a downward sloping leisure supply curve suggest about the leisure demand curve?

Answer 14

It is upwards sloping

Question 15

What happens for every hour of leisure given up?

Answer 15

One more hour is worked and the individual gets more money for consumption

Question 16

What happens to the individual’s budget constraint if they spend all of their time on leisure?

Answer 16

They have no consumption

Question 17

What happens to the individual’s budget constraint if they spend all their time working?

Answer 17

They have a large amount of consumption but they have no time for leisure

Question 18

What can be used to represent the individual’s preferences for consumption and leisure?

Answer 18

Indifference curves

Question 19

What is an indifference curve?

Answer 19

A curve that shows consumption bundles that give the consumer the same level of satisfaction

Question 20

What is assumed about leisure and consumption when looking at indifference curves?

Answer 20

The individual always wants more leisure and more consumption

Question 21

What point on the indifference curve is more preferable (high or low) ?

Answer 21

High points on indifference curves are more preferable because the individual gets more of both.

Question 22

What happens to the budget constraint if the wage increases?

Answer 22

It pivots outwards and becomes steeper

Question 23

What happens to consumption when the price of labour goes up?

Answer 23

Consumption goes up also

Question 24

What are the two possible effects of income increase?

Answer 24

1- enjoy less leisure, hours of labour increase and the labour supply curve slopes upwards
2- hours of leisure increase, hours of labour decrease and the labour supply curve slopes backwards

Question 25

What is the reason for a backwards sloping supply curve?

Answer 25

Because of the income and substitution effect

Question 26

Define income effect

Answer 26

The change in consumption when a price change moves the consumer to a higher or lower indifference curve

Question 27

Define substitution effect

Answer 27

The choice to substitute consumption for leisure and work more hours as a result of an increase in salary, moving the individual to a higher indifference curve.

Question 28

What happens if leisure and consumption are normal goods, the wage increases and the substitution effect takes place?

Answer 28

The individual uses this to increase their well being to enjoy both higher consumption and greater leisure

Question 29

What is a result of the income effect?

Answer 29

The individual works fewer hours and is still better off, causing the labour supply curve to slope backwards

Question 30

What happens for the individual if the substitution effect is greater than the income effect?

Answer 30

They work more

Question 31

What happens for the individual if the substitution effect is less than the income effect?

Answer 31

They work less

Question 32

What are the two possible outcomes from lowering taxes?

Answer 32

People work more

People work less and enjoy more leisure

Question 33

What are three things that can cause the labour supply curve to shift?

Answer 33

Changes in norms
Changes in alternative opportunities
Immigration

Question 34

How has a change in norms caused the labour supply curve to shift?

Answer 34

It used to be men that worked, but now women do too which has increased the supply of labour

Question 35

How can changes in alternative opportunities cause the labour supply curve to shift?

Answer 35

The supply of labour in any one labour market depends on the opportunities available in other markets. If the wage earned by workers in one market increases, people may switch to work in that market, decreasing the labour supply in the other market.

Question 36

How can immigration cause the labour supply curve to shift?

Answer 36

Movement of workers from region to region, or country to country, is an obvious and often important source of shifts in labour supply. When immigrants move the labour supply market increases in the place they move and contracts from where they leave.

Question 37

If the labour supply curve is backwards sloping, what type of good is it?

Answer 37

A Giffen good