Question 1

Suppose Lisa has an income of $$40, the price of a movie is 8$$, and the price of a case of cola is $4. Which of the following equations correctly represents her budget constraint?

Accepted Answer

$$4Q_C + 8Q_M = 40$$

Question 2

If Lisa's income increases from $$40 to 60$$, 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 choice theory?

Accepted Answer

The relative price of one good in terms of the other.

Question 4

Given the budget equation $$P_CQ_C + P_MQ_M = Y$$, what does $$Y/P_C$$ represent?

Accepted Answer

Lisa's real income in terms of cola.

Question 5

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

Accepted Answer

It rotates inward, becoming steeper.

Question 6

Which of the following statements about indifference curves is correct?

Accepted Answer

All points on an indifference curve are equally preferred by the consumer.

Question 7

The marginal rate of substitution (MRS) is best described as:

Accepted Answer

The rate at which a consumer is willing to give up good y for good x while remaining on the same indifference curve.

Question 8

If Lisa's indifference curve between movies and cola is relatively steep, what does this imply about her preferences?

Accepted Answer

She is willing to give up a large quantity of cola to get a bit more movies.

Question 9

Which of the following is a key assumption of consumer theory regarding the marginal rate of substitution?

Accepted Answer

The marginal rate of substitution diminishes as more of good x is consumed.

Question 10

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 of the two goods.

Question 11

Suppose the price of movies falls from $$8 to 4$$, with Lisa's income and the price of cola unchanged. What is the effect on her consumption possibilities?

Accepted Answer

Her budget line rotates outward, allowing her to afford more movies.

Question 12

Which of the following best describes the substitution effect?

Accepted Answer

The effect of a change in price on the quantity bought when the consumer remains on the same indifference curve.

Question 13

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

Accepted Answer

Positive; the consumer buys more of the good.

Question 14

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

Accepted Answer

It slopes upward.

Question 15

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

Accepted Answer

They are always straight lines for ordinary goods.

Question 16

Lisa's budget equation is $$P_CQ_C + P_MQ_M = Y. If$$ $$P_C = 4$$, $$P_M = 8$$, and $$Y = 40$$, what is the maximum number of movies Lisa can afford if she buys no cola?

Accepted Answer

10

Question 17

If Lisa is currently at a point where her MRS is greater than the relative price, what should she do to maximize her utility?

Accepted Answer

Consume more of good x and less of good y.

Question 18

Which of the following best explains why the demand curve for a normal good slopes downward?

Accepted Answer

Because the substitution effect and income effect both increase quantity demanded when price falls.

Question 19

Suppose Lisa's preferences for movies and cola are such that her indifference curves are straight lines. What does this imply about the relationship between movies and cola?

Accepted Answer

They are perfect substitutes.

Question 20

If Lisa's income falls, but prices remain unchanged, what happens to her demand curve for movies?

Accepted Answer

It shifts to the left.

chapter 9

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