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 money on cola, how many cases can she buy? (Her income is $$40, price of cola is 4 $$per case.)

Accepted Answer

$$10$$

Question 3

What happens to Lisa's budget line if her income increases but prices remain unchanged?

Accepted Answer

The budget line shifts outward in a parallel fashion.

Question 4

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

Accepted Answer

The slope increases (the line becomes steeper).

Question 5

What does the relative price of movies in terms of cola represent?

Accepted Answer

The magnitude of the slope of the budget line.

Question 6

Which of the following best describes an indifference curve?

Accepted Answer

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

Question 7

If Lisa is willing to give up 2 cases of cola to see one more movie at point C, what is her marginal rate of substitution (MRS) at that point?

Accepted Answer

$$2$$

Question 8

What does the principle of diminishing marginal rate of substitution 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 9

Which condition must be met for a consumer's best affordable choice?

Accepted Answer

The marginal rate of substitution equals the relative price.

Question 10

If the price of a movie falls from $$8 to 4$$, what is the immediate effect on Lisa's budget line?

Accepted Answer

The budget line rotates outward, allowing Lisa to afford more movies.

Question 11

What is the substitution effect of a price decrease for a normal good?

Accepted Answer

The consumer substitutes more of the cheaper good for other goods.

Question 12

For an inferior good, what happens when income increases?

Accepted Answer

The quantity bought decreases.

Question 13

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

Accepted Answer

The demand curve slopes upward.

Question 14

Which formula represents Lisa's real income in terms of cola?

Accepted Answer

$$\frac{Y}{P_C}$$

Question 15

If Lisa's MRS at point F is greater than the relative price, what should she do to reach her best affordable choice?

Accepted Answer

Consume more movies and less cola.

Question 16

What is the effect called when a change in income alters the quantity of a good consumed?

Accepted Answer

Income effect

Question 17

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

Accepted Answer

$$5$$

Question 18

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

Accepted Answer

The indifference curves are straight lines.

Question 19

What is the first reason why the demand curve slopes downward?

Accepted Answer

The substitution effect

Question 20

If Lisa's income decreases and the price of movies and cola remain unchanged, what happens to her demand for movies?

Accepted Answer

Her demand for movies decreases.

Possibilities, Preferences, and Choices: Consumer Theory in Microeconomics

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