Question 1

Which of the following best describes an indifference curve?

Accepted Answer

A curve showing all combinations of two goods that provide the consumer with the same level of satisfaction.

Question 2

Suppose a consumer’s budget line is given by $$P_X x + P_Y y = I. If$$ $$P_X = 4$$, $$P_Y = 2$$, and $$I = 40$$, how many units of good X can the consumer buy if they spend all their income on X?

Accepted Answer

$$10$$

Question 3

Which property is NOT true of indifference curves for a single consumer?

Accepted Answer

They can cross another consumer’s indifference curves.

Question 4

If the marginal value of good X is equal to the absolute value of the slope of the indifference curve at a given basket, what does a steeper indifference curve imply?

Accepted Answer

A higher marginal value of X.

Question 5

A consumer’s optimum occurs where:

Accepted Answer

The budget line is tangent to the highest attainable indifference curve.

Question 6

If a consumer’s indifference curves are nonconvex, what type of solution is most likely?

Accepted Answer

A corner solution, where the consumer spends all income on one good.

Question 7

Given the budget line $$P_X x + P_Y y = I$$, if the price of X increases, what happens to the budget line?

Accepted Answer

It pivots inward around the Y-intercept.

Question 8

Which of the following statements about the Laspeyres and Paasche price indices is correct?

Accepted Answer

The Laspeyres index uses the basket from the earlier period, while the Paasche index uses the basket from the later period.

Question 9

If a consumer is willing to trade 3 root beers for 1 egg, what is the marginal value of an egg in terms of root beer?

Accepted Answer

$$3$$

Question 10

Suppose Albert’s budget line for tomatoes ($$T) $$and potatoes ($$P) is$$ $$4T + 3P = 60. If he $$buys 12 tomatoes, how many potatoes can he afford?

Accepted Answer

$$4$$

Question 11

Why can’t two indifference curves for the same consumer cross?

Accepted Answer

Because it would imply that the consumer is indifferent between two baskets, each of which is preferred to the other.

Question 12

If a consumer’s indifference curves are convex to the origin, what does this imply about their preferences?

Accepted Answer

The consumer prefers balanced baskets to extreme ones.

Question 13

A consumer faces prices $$P_X = 2$$, $$P_Y = 4$$, and income $$I = 24. $$What is the equation of the budget line?

Accepted Answer

$$2x + 4y = 24$$

Question 14

If the slope of the indifference curve at a basket is $$-2$$, what is the marginal rate of substitution (MRS) of X for Y at that point?

Accepted Answer

$$2$$

Question 15

Which of the following is an example of a corner solution?

Accepted Answer

A consumer spends all income on good X and none on good Y.

Question 16

If a head tax and a wage tax collect the same amount of revenue, which is generally preferable according to the study materials?

Accepted Answer

A head tax, because it causes less distortion in consumer choices.

Question 17

If a consumer’s optimum occurs at a point where the budget line is not tangent to any indifference curve, what type of solution is this?

Accepted Answer

A corner solution.

Question 18

If the price of good Y decreases while the price of good X and income remain constant, what happens to the consumer’s budget line?

Accepted Answer

It pivots outward around the X-intercept.

The Behavior of Consumers: Indifference Curves, Budget Lines, and Consumer Choice

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