Question 1

Suppose a consumer has an income of $$I = 100$$, the price of good 1 is $$p_1 = 10$, and the price of good 2 is p_2$ = 5. $$What is the equation for the consumer's budget constraint?

Accepted Answer

$$100 = 10x_1 + 5x_2$$

Question 2

If a consumer's utility function is $$U(x_1$, x_2$) = x_1$ x_2$, and prices and income are p_1$ = 2$$, $$p_2 = 4$, I = 40$, what is the optimal bundle $$($$x_1$$^*, $$x_2$$^*)$$ the consumer will choose?

Accepted Answer

$$(10, 5)$$

Question 3

What does the slope of the budget constraint $$x_2$$ = \frac{I}{$$p_2$$} - \frac{$$p_1$$}{$$p_2$$}$$x_1$$ represent?

Accepted Answer

The opportunity cost of good 1 in terms of good 2

Question 4

If the price of good 1 decreases while income and the price of good 2 remain constant, what happens to the budget constraint?

Accepted Answer

It pivots outward along the $$x_1$$ axis, increasing the $$x_1-$$intercept

Question 5

Which of the following statements about indifference curves is TRUE?

Accepted Answer

Indifference curves never cross each other

Question 6

At the optimal consumption bundle, which of the following conditions must be satisfied?

Accepted Answer

$$\frac{MB_1$}{p_1$} = \frac{MB_2$}{p_2$}$$ and the budget is exhausted

Question 7

A consumer is willing to pay $$\75$ for a pair of shoes, but the market price is $$\$$50. $$What is the consumer surplus for this purchase?

Accepted Answer

$$\25$

Question 8

Suppose the price of a good falls from $$P_0 = 60$ to P_1$ = 40$$, and the quantity demanded increases from $$Q_0 = 30$ to Q_1$ = 50. $$What is the arc price elasticity of demand?

Accepted Answer

$$-1.5$$

Question 9

If the cross-price elasticity of demand between two goods is positive, what does this imply about the relationship between the goods?

Accepted Answer

They are substitutes

Question 10

Which of the following is an example of a perfectly inelastic demand curve?

Accepted Answer

A vertical demand curve, such as for a life-saving medication

Question 11

If a 10% increase in income leads to a 20% increase in the quantity demanded of a good, what is the income elasticity of demand, and how is the good classified?

Accepted Answer

2; luxury good

Question 12

Which of the following factors will make the demand for a good more elastic?

Accepted Answer

The good has many close substitutes

Question 13

Suppose a consumer's budget set expands outward in a parallel fashion. What is the most likely cause?

Accepted Answer

An increase in income

Question 14

If the price elasticity of demand for a product is $$|\varepsilon| \u003e 1$$, what will happen to total revenue if the price increases?

Accepted Answer

Total revenue will decrease

Question 15

A consumer faces the following marginal benefit per dollar for two goods: $$\frac{MB_1$}{p_1$} = 4$$ and $$\frac{MB_2$}{p_2$} = 2. $$What should the consumer do to maximize utility?

Accepted Answer

Buy more of good 1 and less of good 2

Question 16

If a consumer's indifference curve is tangent to the budget constraint at a bundle $$(x_1$^*, x_2$^*)$$, what does this point represent?

Accepted Answer

The optimal consumption bundle

Question 17

Suppose the price of sandwiches increases, and you substitute pizza for sandwiches to maintain the same level of utility. This is an example of:

Accepted Answer

The substitution effect

Question 18

Which of the following best describes a normal good?

Accepted Answer

A good for which demand increases as income increases

Question 19

If the arc cross-price elasticity of demand between two goods is $$-0.8$$, what does this indicate?

Accepted Answer

The goods are complements

Question 20

A consumer's willingness to pay for the 40th banana is $$\60$, but the market price is $$\$$50. $$What is the consumer surplus for the 40th banana?

Accepted Answer

$$\10$

Consumers and Incentives: Microeconomic Theory of Consumer Choice

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