1. businesses attempt to maximize profits.
2. government attempts to maximize power.
3. households are inherently altruistic, attempting to maximize the well-being of their fellow citizens..
4. businesses attempt to maximize the well-being of their consumers.
5. government attempts to tax households at the maximum possible level.

    Q1 answer

1. both parties must gain the same amount.
2. one party must gain more than the other party loses.
3. one party must gain more than the other party gains.
4. only 1 party may gain.
5. None of the above answers is correct.

Q2 answer

3. To achieve "mutual gains from voluntary exchange"
 

1. government must ensure that businesses do not discriminate against consumers.
2. households must not be selfish.
3. businesses must care about their consumers' well-being.
4. businesses and households should be concerned about their own "self-interest".

    Q3 answer

4. For the free market to yield optimal results for the production and consumption of good X, Adam Smith assumed all of the following would have to exist, except possibly one. The single exception, if one exists, is
 

1. competition exists in the production of good X.
2. successful government planning is able to inform businesses how much of good X consumers demand.
3. consumer sovereignty exists.
4. None of the above is an exception. Adam Smith assumed all of the above.

    Q4 answer

Questions 5 - 7 refer to the following consumption lines:

5.    Which one of the above lines represents the largest positive slope?
 

1. a
2. b
3. c
4. d

    Q5 answer

6. Which one of the above lines represents the largest negative slope?
 

1. a
2. b
3. c
4. d

 Q6 answer

7.    Which one of the above lines would illustrate the strongest positive response of consumption expenditures (C) to a change in disposable income (DI)?
 

1. a
2. b
3. c
4. d

Q7 answer

8. If, in response to an increase in disposable income (DI), a household keeps its level of consumption expenditures (C) constant, then the household's consumption line would be
 

1. vertical
2. horizontal
3. positively sloped
4. negatively sloped

9. A household consumes $40,000 when its disposable income is $50,000. If the slope of the consumption line were 0.60 and was constant, then at what level of disposable income (DI) would the household consume $52,000?

    Q9 answer

    What is the slope of the consumption line?

Q10 answer

1. There will be a shift down in the entire consumption function.
2. There will be a shift up in the entire consumption function.
3. There will be a movement to the right along a given consumption function.
4. There will be a movement to the left along a given consumption function.

Q11 answer

12. Mrs. Randall's elderly, penniless, mother comes to live with her. As a result, she has to quit her job to care for her mother. What effect will these events have on the Randall family’s consumption function?
 

1. There will only be a shift down in the entire consumption function.
2. There will only be a shift up in the entire consumption function.
3. There will only be a movement to the left along a given consumption function.
4. There will be a shift down in the entire consumption function and a movement to the left along the new consumption   function.
5. There will be a shift up in the entire consumption function and a movement to the left along the new consumption function.

Q12 answer

13.  A family saves 10% of their disposable (after-tax) income of $20,000. If its consumption function were linear with a slope of 0.75, then what percent of their disposable income would this family save if its income were $60,000?

      Q13 answer

14.  Given the following consumption line with a slope of 0.75:

          What level of consumption does point N correspond to?

      Q14 answer

15.  A linear consumption function for household X illustrates that if the family’s income were $10,000 it would consume $9,000, and if the family’s income were $20,000 it would consume $16,000. How much would the family consume if its income were $40,000?

      Q15 answer

16.  A consumer has the following consumption line:

    The slope of her consumption line is

      Q16 answer
 

17.  Mr. Putnam decides to begin working a second job at night. What effect will this have on the Putnam family’s consumption function?
 

1. There will be a shift down in the entire consumption function.
2. There will be a shift up in the entire consumption function.
3. There will be a movement to the right along a given consumption function.
4. There will be a movement to the left along a given consumption function.

Q17 answer

18. Given the following 2 points on a linear consumption function:
 

         What would the level of consumption be if disposable income were $100,000?

      Q18 answer
 
 

For a consumption function, Y = consumption and X = disposable income.

Therefore, slope of a consumption line = (D Consumption/D Disposable Income)  = DC/DDI

(Both consumption and disposable income are expressed in $ per year)

Saving = Disposable Income - Consumption   (Disposable Income refers to after-tax  income)

% of disposable income consumed  = (Consumption/Disposable Income) x 100

% of disposable income saved  = (Saving/Disposable Income) x 100
 
 

1. a  Return to Q1
Solution to Q1

2. e  Return to Q2
Solution to Q2
 

3. d  Return to Q3
Solution to Q3

4. b  Return to Q4
Solution to Q4

5. a  Return to Q5
Solution to Q5

6. d  Return to Q6
Solution to Q6

7. a  Return to Q7
Solution to Q7

8. b  Return to Q8
Solution to Q8

9. $70,000  Return to Q9
Solution to Q9

10. 0.85   Return to Q10
Solution to Q10

11. a Return to Q11
Solution to Q11

12. e Return to Q12
Solution to Q12

13. 20% Return to Q13
Solution to Q13

14. $67,000 Return to Q14
Solution to Q14

15. $30,000 Return to Q15
Solution to Q15

16. 0.65 Return to Q16
Solution to Q16

17. c Return to Q17
Solution to Q17

18. $61,000 Return to Q18
Solution to Q18

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