Question 1

What is the budget constraint?

Accepted Answer

The budget constraint refers to the different combinations of goods that a consumer can afford given both the consumer's income and the prices of the goods. The slope of the budget constraint is determined by the relative prices of the goods.

Question 2

Which of the following statements is not true with regard to the standard properties of indifference curves?

Accepted Answer

A)  Indifference curves are downward sloping. 
B)  Indifference curves are bowed outward. 
C)  Indifference curves do not cross each other. 
D)  Higher indifference curves are preferred to lower ones. 
A)  Indifference curves are downward sloping. 
B)  Indifference curves are bowed outward. 
C)  Indifference curves do not cross each other. 
D)  Higher indifference curves are preferred to lower ones. B

Question 3

Outline the four key properties of indifference curves.

Accepted Answer

1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for another while holding utility constant. If the quantity of one good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy. 3: Indifference curves do not cross. If indifference curves did cross, the same point could be on two different curves, thus contradicting the assumption that consumers prefer more of both goods to less. 4: Indifference curves are bowed inward. This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have less.

Question 4

If a consumer spent their entire income on crisps and cola, what would happen if the consumer's income were to double and the prices of crisps and cola were also to double?

Accepted Answer

A)  The consumer's budget line would remain unchanged. 
B)  The consumer's budget line would shift outward but remain parallel to the original budget line. 
C)  The consumer's budget line would shift inward but remain parallel to the original budget line. 
D)  The consumer's budget line would shift in an unpredictable way. 
A)  The consumer's budget line would remain unchanged. 
B)  The consumer's budget line would shift outward but remain parallel to the original budget line. 
C)  The consumer's budget line would shift inward but remain parallel to the original budget line. 
D)  The consumer's budget line would shift in an unpredictable way.

Question 5

Suppose that Annette gets an increase in her wage and she decides to work fewer hours. For her, the substitution effect of the wage change is

Accepted Answer

A)  greater than the income effect. 
B)  less than the income effect. 
C)  exactly offset by the income effect. 
D)  zero. 
A)  greater than the income effect. 
B)  less than the income effect. 
C)  exactly offset by the income effect. 
D)  zero.

Question 6

Budget constraints exist for consumers because

Accepted Answer

A)  their utility from consuming goods eventually reaches a maximum level. 
B)  even with unlimited incomes they have to pay for each good they consume. 
C)  they have to pay for goods and they have limited incomes. 
D)  prices and incomes are inversely related. 
A)  their utility from consuming goods eventually reaches a maximum level. 
B)  even with unlimited incomes they have to pay for each good they consume. 
C)  they have to pay for goods and they have limited incomes. 
D)  prices and incomes are inversely related.

Question 7

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

Accepted Answer

A) True 
 B)False

Question 8

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

Accepted Answer

Because the budget constraint is tangent

Question 9

The slope at any point on an indifference curve is known as the

Accepted Answer

A)  marginal rate of indifference. 
B)  marginal rate of trade-off. 
C)  trade-off rate. 
D)  marginal rate of substitution. 
A)  marginal rate of indifference. 
B)  marginal rate of trade-off. 
C)  trade-off rate. 
D)  marginal rate of substitution.

Question 10

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

Accepted Answer

A)  right shoes and left shoes 
B)  petrol from BP and petrol from Shell 
C)  Kit-Kat chocolate snacks and Twix chocolate snacks 
D)  Coke and Pepsi 
A)  right shoes and left shoes 
B)  petrol from BP and petrol from Shell 
C)  Kit-Kat chocolate snacks and Twix chocolate snacks 
D)  Coke and Pepsi

Question 11

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

Accepted Answer

A)  income effect. 
B)  normal effect. 
C)  inferior effect. 
D)  substitution effect. 
A)  income effect. 
B)  normal effect. 
C)  inferior effect. 
D)  substitution effect.

Question 12

For dessert, Ingrid has the choice between cheesecake and apple pie. Ingrid would gain marginal utility of 50 from a piece of cheesecake, while the price of cheesecake is €5 per slice., Ingrid would gain marginal utility of 30 from a piece of apple pie, and the price of apple pie is €3 per slice. Given this information, Ingrid should buy

Accepted Answer

A)  the cheesecake. 
B)  the apple pie. 
C)  two servings of the apple pie and no cheesecake. 
D)  either the apple pie or the cheesecake; it makes no difference to Ingrid at this point. 
A)  the cheesecake. 
B)  the apple pie. 
C)  two servings of the apple pie and no cheesecake. 
D)  either the apple pie or the cheesecake; it makes no difference to Ingrid at this point.

Question 13

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. If the price of a belt is €10 and the price of a pair of socks is €5, the consumer will choose to buy the commodity bundle represented by point? ​   ​

Accepted Answer

A)  Z 
B)  X 
C)  Y 
D)  the optimal point cannot be determined from this graph. 
A)  Z 
B)  X 
C)  Y 
D)  the optimal point cannot be determined from this graph.

Question 14

A family on a trip budgets €800 for restaurant meals and fast food. If the price of a fast food meal for the family is €20, how many such meals can the family buy if they do not eat at restaurants?

Accepted Answer

A)  8 
B)  15 
C)  20 
D)  40 
A)  8 
B)  15 
C)  20 
D)  40

Question 15

All of the following are characteristics of an indifference map except

Accepted Answer

A)  moving northeast to a new, higher indifference curve will increase utility. 
B)  points on the same indifference curve yield equal utility. 
C)  the axes represent levels of utility for each of the goods. 
D)  indifference curves cannot cross. 
A)  moving northeast to a new, higher indifference curve will increase utility. 
B)  points on the same indifference curve yield equal utility. 
C)  the axes represent levels of utility for each of the goods. 
D)  indifference curves cannot cross.

Question 16

The limit on the consumption bundles that a consumer can afford is known as

Accepted Answer

A)  an indifference curve. 
B)  the budget constraint. 
C)  the marginal rate of substitution. 
D)  the consumption limit. 
A)  an indifference curve. 
B)  the budget constraint. 
C)  the marginal rate of substitution. 
D)  the consumption limit.

Question 17

The marginal rate of substitution between two goods equals the

Accepted Answer

A)  marginal utility of one divided by the marginal utility of the other. 
B)  marginal utility of one times the marginal utility of the other. 
C)  marginal cost of one times the marginal cost of the other. 
D)  price of one good divided by the price of the other. 
A)  marginal utility of one divided by the marginal utility of the other. 
B)  marginal utility of one times the marginal utility of the other. 
C)  marginal cost of one times the marginal cost of the other. 
D)  price of one good divided by the price of the other.

Question 18

The more difficult it is to substitute one good for another, the more bowed inward indifference curves become.

Accepted Answer

A) True 
 B)False

Question 19

The consumer's optimal purchase of any two goods is the point where the

Accepted Answer

A)  budget constraint crosses the indifference curve. 
B)  two highest indifference curves cross. 
C)  consumer reaches the highest indifference curve subject to remaining on the budget constraint. 
D)  consumer has reached the highest indifference curve. 
A)  budget constraint crosses the indifference curve. 
B)  two highest indifference curves cross. 
C)  consumer reaches the highest indifference curve subject to remaining on the budget constraint. 
D)  consumer has reached the highest indifference curve.

Question 20

Using the graph shown, construct a demand curve for M&M's given an income of €10.

Accepted Answer

The answer of Using the graph shown, construct a demand...

Exam 5: Background to Demand: Consumer Choices

What is the budget constraint?

Which of the following statements is not true with regard to the standard properties of indifference curves?

Outline the four key properties of indifference curves.

If a consumer spent their entire income on crisps and cola, what would happen if the consumer's income were to double and the prices of crisps and cola were also to double?

Suppose that Annette gets an increase in her wage and she decides to work fewer hours. For her, the substitution effect of the wage change is

Budget constraints exist for consumers because

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

The slope at any point on an indifference curve is known as the

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. If the price of a belt is €10 and the price of a pair of socks is €5, the consumer will choose to buy the commodity bundle represented by point? ​ ​

A family on a trip budgets €800 for restaurant meals and fast food. If the price of a fast food meal for the family is €20, how many such meals can the family buy if they do not eat at restaurants?

All of the following are characteristics of an indifference map except

The limit on the consumption bundles that a consumer can afford is known as

The marginal rate of substitution between two goods equals the

The more difficult it is to substitute one good for another, the more bowed inward indifference curves become.

The consumer's optimal purchase of any two goods is the point where the

Using the graph shown, construct a demand curve for M&M's given an income of €10.

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

Filters

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. If the price of a belt is €10 and the price of a pair of socks is €5, the consumer will choose to buy the commodity bundle represented by point?