### Microeconomics Practice Test - 5: Advanced Topics in Consumer Demand Theory

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1. Slutsky keeps real income constant when the price of a commodity falls by

1. keeping the consumer on the same indifference curve

2. pushing the consumer to a lower indifference curve

3. allowing the consumer to purchase the same basket of goods as before the price change

4. allowing the consumer to purchase more of both commodities than before the price change

2. Which of the following statements is false with regard to the Slutsky substitution effect?

1. It is larger than the Hicksian substitution effect

2. it leads to a demand curve which is more elastic than the Hicksian demand curve

3. consumption is on a different indifference curve than before the price change

4. it is given by a movement along the same indifference curve

3. Which of the following is not an assumption of the theory of revealed preference?

1. A cardinal measure of utility

2. consistency

3. transitivity

4. a consumer can be induced to purchase any basket of commodities if its price is made sufficiently attractive

4. Which of the following statements is correct with regard to the theory of revealed preference?

1. It infers a consumer’s preferences from that person’s market choices

2. it can be used to derive a consumer’s indifference curve

3. it can be used to derive a consumer’s demand curve

4. all of the above

5. The Laspeyres price index measures the cost of purchasing

1. period 1 quantities at period 1 prices relative to base period prices

2. base period quantities at period 1 prices relative to base period prices

3. base period quantities at base period prices

4. period 1 quantities at period 1 prices

6. Which of the following statements is correct with regard to price indices?

1. L is biased upward

2. P is biased downward

3. L becomes available sooner than P

4. all of the above

7. Traditional economic theory could not explain choices involving risk because it assumed that

1. MU always declines

2. MU first declines and then rises

3. MU first rises and then declines

4. MU always increases

8. If income is either $10 with p = 0.2 or$20, the expected income is

1. $2 2.$16

3. $18 4.$20

9. Which of the following is incorrect with respect to the new approach to consumer theory?

1. The characteristics of a good and not the good itself give rise to utility

2. a consumer’s equilibrium is shown in good or commodity space

3. a good usually possesses more than one characteristic

4. a given characteristic is usually possessed by more than one good

10. Which of the following represent(s) an advance of the new approach to consumer theory over traditional consumer theory?

1. Substitute goods are explained in terms of possessing some common characteristics

2. the introduction of new goods can be considered

3. quality changes can be considered

4. all of the above

11. Empirical demand curves refer to demand curves estimated from

1. utility theory

2. the new approach to consumer theory

3. information provided by individual consumers

4. actual market price-quantities observations

12. Which of the following is false with regard to the derivation of empirical demand curves?

1. Supply shifts must be greater than demand shifts

2. tastes must remain constant over the period of the analysis

3. the price of related commodities must remain constant

4. market and not individual demand curves are derived