Question 1

Suppose Lisa has $$40 to spend, the price of a movie is 8$$, and the price of cola is $4 per case. What is the equation for Lisa's budget line?

Accepted Answer

$$4Q_C + 8Q_M = 40$$

Question 2

If Lisa's income increases from $$40 to 60$$, with prices unchanged, what happens to her budget line?

Accepted Answer

It shifts outward in a parallel fashion; the slope remains the same.

Question 3

What does the magnitude of the slope of the budget line represent?

Accepted Answer

The relative price of one good in terms of the other.

Question 4

If the price of movies rises while Lisa's income and the price of cola remain unchanged, what happens to her budget line?

Accepted Answer

It rotates inward, becoming steeper.

Question 5

Which of the following best describes an indifference curve?

Accepted Answer

A line showing all combinations of goods among which a consumer is indifferent.

Question 6

What does a diminishing marginal rate of substitution (MRS) imply about a consumer's preferences?

Accepted Answer

The consumer is willing to give up less of good y for each additional unit of good x as x increases.

Question 7

At the consumer's best affordable choice, which of the following must be true?

Accepted Answer

The marginal rate of substitution equals the relative price.

Question 8

Suppose Lisa's MRS of movies for cola is 2 at point C, and the relative price of a movie in terms of cola is 1. What should Lisa do to maximize her utility?

Accepted Answer

Consume more cola and fewer movies.

Question 9

If the price of a movie falls from $$8 to 4 $$and Lisa's income remains at $40, what happens to her budget line?

Accepted Answer

It rotates outward, allowing her to buy more movies.

Question 10

Which of the following statements about the substitution effect is correct?

Accepted Answer

It is the effect of a price change on quantity demanded, holding utility constant.

Question 11

For a normal good, what is the direction of the income effect when the price of the good falls?

Accepted Answer

Positive; the consumer buys more of the good.

Question 12

If a good is inferior and the negative income effect is stronger than the substitution effect, what happens to the demand curve for that good?

Accepted Answer

It slopes upward.

Question 13

Which formula gives Lisa's real income in terms of cola?

Accepted Answer

$$Y / P_C$$

Question 14

If Lisa's budget equation is $$P_C Q_C + P_M Q_M = Y$$, what does $$P_M / P_C$$ represent?

Accepted Answer

The relative price of a movie in terms of cola.

Question 15

Which of the following best describes the effect of a decrease in Lisa's income, with prices held constant?

Accepted Answer

The budget line shifts inward in a parallel fashion.

Question 16

If Lisa is indifferent between points C and G on her indifference map, what does this imply?

Accepted Answer

She values both combinations equally.

Question 17

Which of the following is NOT a property of indifference curves for ordinary goods?

Accepted Answer

They are upward sloping.

Question 18

Suppose Lisa's MRS is less than the relative price at her current consumption bundle. What should she do to maximize her utility?

Accepted Answer

Consume more of good y and less of good x.

Question 19

Which of the following best explains why the demand curve for a normal good slopes downward?

Accepted Answer

Because both the substitution effect and the income effect increase quantity demanded when price falls.

Possibilities, Preferences, and Choices: Consumer Theory in Microeconomics

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