Deck 2: A Consumers Economic Circumstances

Question 1

The budget line on a graph represents choices which exhaust all resources.

Answer 1

True

Question 2

If all consumers are price-takers facing the same prices, then all choice sets are the same.

Answer 2

False

Question 3

For choice sets emerging from "exogenous" income, the budget line will shift parallel whenever both prices change by the same percentage.

Answer 3

False

Question 4

Derive the budget line equation for the case where good 2 is a composite good.What is the vertical intercept and what is the slope?

Question 5

When the good on the vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.

Question 6

If a consumer's fixed income increases, his opportunity cost also increases.

Question 7

In a graph of choice sets, a price change affects the ratio but does not affect the budget line.

Question 8

Suppose you are given a coupon for pizza.This coupon lowers the price for each additional pizza you buy by 5% for each addition pizza you buy.What happens to your budget constraint, with pizza on the horizontal axis and a composite good on the vertical?

A)The vertical intercept remains the same but the slope becomes steeper as more pizzas are bought.
B)The vertical intercept increases and the slope becomes steeper as more pizzas are bought.
C)The vertical intercept remains the same but the slope becomes shallower as more pizzas are bought.
D)The vertical intercept increases but the slope becomes shallower as more pizzas are bought.
E)None of the above.

Question 9

Suppose that the price of a TV is $200 and he price of an MP3 player is $50.What is the opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3 player (in terms of TVs)?

Question 10

While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.

Question 11

Suppose inflation comes in the form of an across-the board increase in all prices by some percentage k.For a consumer with exogenous income operating in a 2-good world, this will cause the budget constraint to

A)rotate inward
B)rotate outward
C)shift out in a parallel way
D)shift inward in a parallel way
E)none of the above

Question 12

Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of her available income.

Question 13

If all consumers are price-takers facing the same prices, then their budget lines will all have the same slope.

Question 14

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.Demonstrate, using the budget line equation, how this could have happened if the price of the good on the horizontal axis did not change?

Question 15

In a graph of choice sets, a price change causes the slope of budget lines to change.

Question 16

The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)

A)A k percent decrease in the price of good 2 combined with a k percent decrease in income
B)A k percent increase in the price of good 2 combined with a k percent decrease in income
C)A k percent decrease in the price of good 2 combined with a k percent increase in income
D)A k percent increase in the price of good 2 combined with a k percent increase in income.
E)None of the above

Question 17

When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.

Question 18

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.How could this have happened if the price of the good on the horizontal axis did not change?

Question 19

For choice sets generated from endowment bundles, the budget line will shift parallel if both prices change by the same proportion.

Question 20

Suppose the government wants to discourage excessive consumption of alcohol.It therefore imposes a per-unit tax on alcohol that increases as more alcohol is bought by a consumer at a store.What happens to a consumer's budget at a liquor store (with liters of alcohol on the horizontal axis and a composite good on the vertical) --- assuming the consumer takes only one trip to the store.

A)The vertical intercept decreases and the slope becomes shallower as more alcohol is bought.
B)The vertical intercept remains constant but the slope becomes shallower as more alcohol is bought.
C)The vertical intercept decreases and the slope becomes steeper as more alcohol is bought.
D)The vertical intercept remains constant but the slope becomes steeper as more alcohol is bought.
E)None of the above.

Question 21

A consumer has $1,000 a week to spend on renting square feet of housing x₁ (at a price of $5 per square foot) and eating out meals x₂ (at a price of $20 per meal).Derive the budget line equation and find the opportunity cost of housing in terms of meals in your equation.

Question 22

A consumer has $1,000 a week to spend on renting square feet of housing (at a price of $5 per square foot) and eating out (at a price of $20 per meal).With square feet of housing on the horizontal and meals on the vertical axis, what is the vertical intercept and what is the slope of this consumer's budget constraint?

Question 23

Derive the budget line equation for the case where good 1 is a composite good.What is the vertical intercept and what is the slope?

Question 24

Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by $100.Model TVs as x₁ and all other goods as a composite good x₂.
a.For a consumer with income I, write down an equation for the before-tax budget line.
b.Write down the after-tax budget line equation.
c.Suppose you know the bundle on the after-tax budget that is chosen by the consumer contains 3 TVs.How much in tax revenue is the government raising from this consumer?
d.If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but raises the same amount of revenue from the consumer, how would this change the consumer's budget line equation?

Question 25

Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by $10.
a.On a graph with TVs on the horizontal axis and "$'s of other consumption" on the vertical, illustrate how the budget constraint for a consumer with exogenous income changes as a result of the tax.
b.Suppose you know the bundle on the after-tax budget that is chosen by the consumer.Illustrate on your graph how much in tax revenue the government is raising from this consumer.
c.If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but raises the same amount of revenue from the consumer, how would this consumer's budget constraint change?

Question 26

Suppose a business offers a 10% discount on the good x₁ that it sells.
a.Illustrate a consumer's before and after-discount budget constraint by modeling x₂ as a composite good.
b.Suppose you observe only the after-discount consumption decision of the consumer.Can you tell from this information how much revenue the firm is giving up (from this consumer) by offering the discount? If so, illustrate this in your graph.
c.Suppose that, instead of the firm offering the 10% discount, the government subsidized consumption of x₁ sufficiently to reduce p₁ by 10%.Suppose again that you only observe the after-subsidy decision of the consumer.Can you tell how much of a subsidy payment is made to this consumer by the government? If so, illustrate it in your graph.
d.Why are your answers to (b) and (c) different?