Question 1

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

Accepted Answer

$$P_M Q_M + P_C Q_C = Y$$

Question 2

If Lisa spends all her income on cola, how many cases can she buy? (Income = $$40, Price of cola = 4)$$

Accepted Answer

$$40 \div 4 = 10$$ cases

Question 3

What does the slope of the budget line represent in terms of movies and cola?

Accepted Answer

The relative price of movies in terms of cola, $$\frac{P_M}{P_C}$$

Question 4

If Lisa's income increases but prices remain the same, what happens to her budget line?

Accepted Answer

It shifts outward in a parallel fashion

Question 5

Which of the following best describes an indifference curve?

Accepted Answer

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

Question 6

What does the principle of diminishing marginal rate of substitution (MRS) state?

Accepted Answer

As a person consumes more of good x, they are willing to give up less of good y to get one more unit of x

Question 7

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

Accepted Answer

The marginal rate of substitution equals the relative price, $$MRS = \frac{P_M}{P_C}$$

Question 8

If the price of movies falls from $$8 to 4$$, what happens to Lisa's budget line?

Accepted Answer

It rotates outward, allowing her to buy more movies for the same income

Question 9

What is the substitution effect when the price of a good falls?

Accepted Answer

The consumer substitutes more of the cheaper good for other goods

Question 10

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

Accepted Answer

The quantity consumed increases

Question 11

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

Accepted Answer

It slopes upward

Question 12

Lisa is currently at point C on her indifference curve, willing to give up 2 cases of cola for 1 more movie. What is her marginal rate of substitution (MRS) at point C?

Accepted Answer

$$MRS = 2$$

Question 13

Which of the following is true about perfect substitutes in indifference curves?

Accepted Answer

The indifference curves are straight lines

Question 14

If Lisa's best affordable point is on the budget line and on the highest attainable indifference curve, what does this imply?

Accepted Answer

She is maximizing her utility given her budget constraint

Question 15

Suppose Lisa's income is $$40, the price of a movie is 8$$, and the price of cola is $4. If she buys 3 movies, how many cases of cola can she afford?

Accepted Answer

$$Q_C = \frac{Y - P_M Q_M}{P_C} = \frac{40 - 8 	imes 3}{4} = \frac{40 - 24}{4} = 4$$

Question 16

Which of the following statements about inferior goods is correct?

Accepted Answer

When income increases, the quantity bought decreases

Question 17

If the price of cola increases, what happens to the slope of the budget line (with movies on the x-axis and cola on the y-axis)?

Accepted Answer

The slope increases (becomes steeper)

Question 18

What is the effect called when a change in the price of a good changes the quantity consumed of that good?

Accepted Answer

The price effect

Question 19

If Lisa is indifferent between points F, I, and H, but prefers C to I, what does this indicate about her preferences?

Accepted Answer

Point C is on a higher indifference curve than points F, I, and H

Question 20

Which of the following is NOT a property of indifference curves?

Accepted Answer

They intersect each other

Microeconomics: Possibilities, Preferences, and Choices (Chapter 9 Study Notes)

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