Question 1

Suppose a consumer has an income of $$100 and faces prices P_X = 10$ and P_Y = 20$ for goods X and Y, respectively. What is the equation for the consumer's budget constraint?

Accepted Answer

$$10X + 20Y = 100$$

Question 2

If the price of good X decreases while income and the price of good Y remain constant, what happens to the budget constraint?

Accepted Answer

The budget constraint pivots outward along the X-axis.

Question 3

What does the slope of the budget constraint $$\left( -\frac{P_X}{P_Y} \right)$$ represent?

Accepted Answer

The opportunity cost of good X in terms of good Y.

Question 4

A bundle of goods lies on the consumer's budget constraint. What does this imply?

Accepted Answer

The consumer is spending all of their income.

Question 5

Which of the following would cause the budget constraint to shift outward in a parallel fashion?

Accepted Answer

An increase in income.

Question 6

What is the main objective of a consumer in microeconomic theory?

Accepted Answer

To maximize utility subject to their budget constraint.

Question 7

If a consumer chooses a bundle where the marginal utility per dollar spent on good X is greater than that for good Y, what should the consumer do?

Accepted Answer

Buy more of good X and less of good Y.

Question 8

Which formula correctly calculates the price elasticity of demand using the midpoint method?

Accepted Answer

$$\frac{(Q_2$ - Q_1$)}{(Q_2$ + Q_1$)/2} \div \frac{(P_2$ - P_1$)}{(P_2$ + P_1$)/2}$$

Question 9

If the cross-price elasticity of demand between goods A and B is positive, what does this indicate?

Accepted Answer

Goods A and B are substitutes.

Question 10

A good has an income elasticity of demand greater than 1. What type of good is this?

Accepted Answer

A luxury good.

Question 11

If the price elasticity of demand for a product is $$|E_d| = 0.5$$, how is demand classified?

Accepted Answer

Inelastic.

Question 12

What does consumer surplus represent in a market transaction?

Accepted Answer

The difference between what consumers are willing to pay and what they actually pay.

Question 13

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves cannot cross each other.

Question 14

What is the marginal rate of substitution (MRS) at a point on an indifference curve?

Accepted Answer

The rate at which a consumer is willing to trade one good for another while maintaining the same utility.

Question 15

At the consumer's optimal choice, which condition must be satisfied?

Accepted Answer

$$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$$

Question 16

If a consumer's preferences are well-behaved, what does this imply about their indifference curves?

Accepted Answer

They are convex to the origin.

Question 17

Which of the following best describes a perfectly inelastic demand curve?

Accepted Answer

A vertical line.

Question 18

If the price of a good increases and the demand for another good decreases, what is the relationship between the two goods?

Accepted Answer

They are complements.

Question 19

Which of the following is NOT a constraint faced by consumers?

Accepted Answer

The consumer's utility function.

Question 20

A consumer spends all their income on two goods. If the price of both goods doubles and income also doubles, what happens to the budget constraint?

Accepted Answer

It remains unchanged.

Ch. 5 Consumer Behavior: Budget Constraints, Elasticity, Surplus, and Indifference Curves

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