Question 1

Which of the following best describes a household's budget line?

Accepted Answer

It describes the limits to the household's consumption choices based on income and prices.

Question 2

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?

Accepted Answer

$$8Q_M + 4Q_C = 40$$

Question 3

If Lisa spends all her money on cola, how many cases can she buy?

Accepted Answer

10

Question 4

What happens to the budget line if Lisa’s income increases, holding prices constant?

Accepted Answer

The budget line shifts outward in a parallel fashion.

Question 5

What is the relative price of a movie in terms of cola if $$P_M = 8$$ and $$P_C = 4$$?

Accepted Answer

$$P_M / P_C = 2$$

Question 6

Which of the following statements about indifference curves is correct?

Accepted Answer

All points on an indifference curve are just as good as each other to 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 one good to get more of another while remaining indifferent.

Question 8

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

Accepted Answer

The consumer is willing to give up a large quantity of y to get a bit more x.

Question 9

What is the principle of diminishing marginal rate of substitution?

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 10

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

Accepted Answer

The marginal rate of substitution equals the relative price.

Question 11

If the price of a movie 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 12

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

Accepted Answer

Price effect

Question 13

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

Accepted Answer

Quantity demanded increases.

Question 14

For an inferior good, what happens when income increases?

Accepted Answer

Quantity demanded decreases.

Question 15

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

Accepted Answer

It slopes upward.

Question 16

Suppose Lisa’s budget equation is $$P_C Q_C + P_M Q_M = Y. If$$ $$P_C = 4$$, $$P_M = 8$$, and $$Y = 40$$, how many movies can Lisa see if she spends all her money on movies?

Accepted Answer

5

Question 17

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

Accepted Answer

They are always straight lines.

Question 18

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

Question 19

What is the substitution effect?

Accepted Answer

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

Question 20

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

Accepted Answer

Both the substitution effect and the income effect are positive.

Possibilities, Preferences, and Choices: Microeconomic Consumer Theory

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