Deck 18: Consumer Theory With Indifference Curves

Question 1

Exhibit 5A-1
Refer to Exhibit 5A-1. Which of the following statements is false?

A) At point C, MU_X/MU_Y > P_X/P_Y.
B) Curve I₂ represents a greater level of utility than I₁.
C) If the individual started at point A and moved to point B, the most likely cause was a decrease in the price of X.
D) In moving from point A to point B, the individual is moving down along his or her demand curve for good Y.
E) At point B, MU_X/P_X = MU_Y/P_Y.

Answer 1

In moving from point A to point B, the individual is moving down along his or her demand curve for good Y.

Question 2

Exhibit 5A-2
Refer to Exhibit 5A-2. If the individual starts at point A and moves to point B as a result of an increase in the price of Y, then the income effect

A) decreases the consumption of both X and Y.
B) has no effect on the consumption of either X or Y.
C) increases the consumption of both X and Y.
D) decreases the consumption of X but increases the consumption of Y.
E) increases the consumption of X but decreases the consumption of Y.

Answer 2

increases the consumption of X but decreases the consumption of Y.

Question 3

When income decreases, all else held constant, which of the following occurs?

A) Demand for an inferior good decreases.
B) The slope of the highest attainable indifference curve changes.
C) The budget line shifts out from the origin.
D) Total utility decreases.
E) Total utility increases.

Answer 3

Total utility decreases.

Question 4

An indifference curve shows

A) various combinations of two goods that give the consumer the same amount of utility.
B) the quantities of a good that give the consumer maximum utility when compared directly to price.
C) the relationship between the price and quantity of a good that a consumer is able to purchase.
D) the relationship between the quantity of a good and maximum utility.
E) the relationship between total and marginal utility.

Question 5

As an individual consumer's income increases, that consumer's

A) budget line shifts to the left.
B) indifference curve shifts to the right.
C) budget line shifts to the right.
D) indifference curve shifts to the left.
E) budget line remains unchanged.

Question 6

Exhibit 5A-2
Refer to Exhibit 5A-2. If the individual starts at point A and moves to point B as a result of an increase in the price of Y, then the amount of reduction in the consumption of Y is

A) 45 due to the substitution effect and 25 due to the income effect.
B) 25 due to the substitution effect and 20 due to the income effect.
C) 25 due to both the substitution effect and income effect.
D) 20 due to the substitution effect and 25 due to the income effect.
E) 25 due to the substitution effect and 45 due to the income effect.

Question 7

As you move down an indifference curve, your

A) budget must decrease.
B) budget must increase.
C) total utility increases.
D) total utility remains the same.
E) total utility decreases.

Question 8

Indifference curves

A) are straight lines.
B) show the different combinations of goods and services that consumers prefer.
C) must intersect.
D) bow outward with respect to the origin.
E) do not intersect.

Question 9

The slope of an indifference curve is equal to the

A) degree of responsiveness of demand to a change in price.
B) price elasticity of demand for a good.
C) rate of substitution between two goods.
D) marginal utility of a good measured on the horizontal axis.
E) marginal utility of a good measured on the vertical axis.

Question 10

A budget line identifies combinations of two goods that a consumer

A) will purchase if the prices are low enough.
B) will purchase, given his or her preferences.
C) wants to purchase.
D) is able to purchase, given his or her income and prices.
E) has purchased, given his or her income and prices.

Question 11

Exhibit 5A-1
Refer to Exhibit 5A-1. If income for this individual is $120 and the individual is consuming at point B, the price of X is ____ and the price of Y is ____.

A) $2.40; $1.20
B) $1.20; $2.00
C) $2.40; $2.00
D) $2.00; $2.40
E) $1.20; $2.40

Question 12

Which of the following will most likely happen when a person's income increases, other things being equal?

A) The budget line will shift outward.
B) The indifference curves will shift downward.
C) The indifference curves will shift outward.
D) The budget line will become steeper.
E) The budget line will become flatter.

Question 13

At any point on an indifference curve for an individual consuming two goods, A and B, with A on the vertical axis and B on the horizontal axis, the slope is equal to

A) MU_A/MU_B.
B) MU_B/MU_A.
C) -MU_A/MU_B.
D) -MU_B/MU_A.
E) -P_B/P_A.

Question 14

The point on the budget line that reaches the greatest level of utility is that point where

A) the difference between the slope of the budget line and the slope of an indifference curve is greatest.
B) the budget line touches the horizontal axis.
C) the slope of the budget line equals the slope of an indifference curve.
D) the budget line touches the vertical axis.
E) an indifference curve is beyond the budget line.

Question 15

For a given budget, a consumer is assumed to

A) maximize marginal utility.
B) minimize marginal utility.
C) maximize total utility.
D) minimize total utility.
E) do nothing about utility.

Question 16

When the price of a good increases, all else held equal, which of the following does not occur?

A) The slope of the budget line changes.
B) The consumer's indifference curves shift.
C) Utility decreases.
D) Quantity demanded decreases.
E) The budget line shifts inward along that good's axis.

Question 17

Suppose that a consumer has a choice between hotdogs and video games. All of the following can lead to a rotation of the consumer's budget line except a(n)

A) increase in the price of hotdogs.
B) decrease in the price of hotdogs.
C) increase in the price of video games.
D) decrease in the price of video games.
E) increase in the consumer's income.

Question 18

The slope of a budget line for two goods, A and B, with A on the vertical axis and B on the horizontal axis, is equal to

A) -P_A/P_B.
B) P_B/P_A.
C) -P_B/P_A.
D) -MU_A/P_B.
E) P_A/P_B.

Question 19

A typical budget line is

A) a positively sloped straight line that intersects the origin.
B) bowed inward toward the origin.
C) a positively sloped straight line.
D) bowed outward away from the origin.
E) a negatively sloped straight line.

Question 20

A curve showing different combinations of two products that give a consumer the same satisfaction is

A) a paradox of value.
B) an indifference curve.
C) total utility.
D) an indifference map.
E) a utility curve.

Question 21

If the price of video games falls, then the substitution effect will cause a consumer to reduce her consumption of video games.

Question 22

Along a given indifference curve, marginal utility is constant.

Question 23

Derive a continuous individual demand curve using an indifference curve diagram and budget lines. Be careful to label your graphs completely.

Question 24

Indifference curves never intersect.

Question 25

As a consumer's income rises, her indifference curves shift outward.

Question 26

A decrease in income shifts the budget line outward from the origin.

Question 27

Exhibit 5A-3
Refer to Exhibit 5A-3. Calculate the maximum quantity of good Y and the maximum quantity of good X that the consumer can purchase if the price of good Y is $3 and the price of good X is $5.

Question 28

Suppose Jane has $100 to spend on either compact disks, which cost $10 each, or hamburgers, which cost $2 each.

Question 29

The budget line rotates when a consumer's budget increases.

Question 30

For every point along a demand curve, utility is being maximized.

Question 31

A budget line indicates different combinations of two products that can be purchased by a consumer with a given budget.

Question 32

Suppose you are having a dinner party and you have 15 cans of cola in your refrigerator. Five are diet colas and the others are regular colas. A neighbor comes to you and ask you to trade some diet colas for regular colas. You agree to trade two diet colas for three regular colas. An hour later, the neighbor comes back and asks for two more diet colas. This time you agree to trade two diet colas for four regular colas. What property of indifference curves is illustrated by this example?

Question 33

Along an indifference curve, different combinations of a good represent the same cost to a consumer.

Question 34

Suppose a consumer allocates a budget to apples and oranges. Now, the prices of apples and oranges are increased by the same percentage. What change will happen to the budget line? What change will happen to the consumer's indifference curves? What will happen to the consumption of the two goods?

Question 35

Other things being equal, if there is a price increase of a good measured on the vertical axis, the budget constraint shifts outward.

Question 36

As you move down your indifference curve, total utility decreases.

Question 37

Exhibit 5A-3

-Refer to Exhibit 5A-3. Calculate the income of the consumer with this budget line if the price of good Y is $3 and the price of good X is $5.

Question 38

The slope of the budget line is always positive.

Question 39

In terms of indifference curve analysis, equilibrium occurs at the point of tangency of the indifference curve and the demand curve.