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 if Q_m is the number of movies and Q_c is the number of cola cases?

Accepted Answer

$$8Q_m + 4Q_c = 40$$

Question 2

If Lisa's income increases from $$40 to 80$$, with prices unchanged, what happens to her budget line?

Accepted Answer

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

Question 3

What does the slope of the budget line represent in consumer theory?

Accepted Answer

The relative price of the good on the x-axis in terms of the good on the y-axis.

Question 4

Lisa's utility function is $$U(M, C)$$, where $$M is $$movies and $$C is $$cola. What does the indifference curve $$U = U(M, C)$$ represent?

Accepted Answer

All combinations of movies and cola that give Lisa the same level of utility.

Question 5

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

Accepted Answer

It rotates inward, making the budget line steeper.

Question 6

Which of the following best describes the principle of diminishing marginal rate of substitution?

Accepted Answer

As a consumer acquires more of good x, they are willing to give up less of good y to get additional units of x.

Question 7

Given the utility function $$U = \sqrt{ZB}$$, which of the following bundles is on the indifference curve $$U = 16$$?

Accepted Answer

$$(Z, B) = (16, 1)$$

Question 8

What is the formula for the marginal utility of good Z?

Accepted Answer

$$MU_z = \frac{\Delta U}{\Delta Z}$$

Question 9

If Lisa is at a point on her budget line where her marginal rate of substitution (MRS) is greater than the relative price, what should she do to maximize her utility?

Accepted Answer

Consume more of the good on the x-axis and less of the good on the y-axis.

Question 10

Which of the following is true about perfect substitutes?

Accepted Answer

Their indifference curves are straight, parallel lines.

Question 11

If Maureen only enjoys pie and ice cream in fixed proportions, what type of indifference curve does she have?

Accepted Answer

L-shaped indifference curves, representing perfect complements.

Question 12

What is the mathematical expression for the marginal rate of substitution (MRS) between two goods Z and B?

Accepted Answer

$$MRS = \frac{\Delta B}{\Delta Z}$$

Question 13

If the indifference curve is relatively flat, what does this imply about the marginal rate of substitution (MRS)?

Accepted Answer

The MRS is low; the consumer is willing to give up only a small quantity of y to get more x.

Question 14

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

Accepted Answer

The marginal rate of substitution equals the relative price.

Question 15

If the price of a normal good falls, what is the combined effect on quantity consumed?

Accepted Answer

Both the substitution effect and the income effect increase the quantity consumed.

Question 16

For an inferior good, what happens if the negative income effect is stronger than the substitution effect when the price falls?

Accepted Answer

The quantity demanded decreases and the demand curve slopes upward.

Question 17

If Lisa's marginal utility per dollar spent on movies is greater than that for cola, what should she do to maximize her utility?

Accepted Answer

Buy more movies and less cola until the marginal utility per dollar is equalized.

Question 18

Suppose Lisa's budget equation is $$P_c Q_c + P_m Q_m = Y. If$$ $$P_c = 4$$, $$P_m = 8$$, and $$Y = 40$$, what is the maximum number of movies Lisa can buy if she spends all her income on movies?

Accepted Answer

5

Question 19

Which of the following statements about real income is correct?

Accepted Answer

Real income is the income expressed as a quantity of goods the household can afford to buy.

Possibilities, Preferences, and Choices: Microeconomic Consumer Theory

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