Question 1

Suppose Arun consumes only 2 goods - books and CDs - and has a set of downward sloping indifference curves.As Arun moves from one point to another on a particular indifference curve,

Accepted Answer

Indifference curves represent combinations of goods that provide the same level of utility to the consumer. As Arun moves along a particular indifference curve, the mix of books and CDs changes, but his overall level of satisfaction (utility) remains constant. Choices B, C, D, and E suggest changes in preferences, income, or utility levels, which are not characteristics of movement along an indifference curve.

Question 2

If money income is reduced by half,and the prices of all goods consumed by the household are reduced by half,the householdʹs budget line will

Accepted Answer

A reduction in money income and a corresponding reduction in prices of all goods by the same percentage will result in no change to the budget line. The slope of the budget line remains the same as the relative prices of the goods have not changed.

Question 3

Assume the quantity of good X is measured on the horizontal axis and the quantity of good Y on the vertical axis.Initial prices are PX = $5 and PY = $10.The consumerʹs income is $100.If PY increases to $20,then

Accepted Answer

The budget line will rotate toward the origin because the price of good Y increases, making it more expensive relative to good X. This changes the slope of the budget line, reflecting the new price ratio between good X and good Y. Initially, the slope was -PX/PY = -5/10 = -1/2, and after the price increase, it becomes -PX/PY = -5/20 = -1/4.

Question 4

The marginal rate of substitution

Accepted Answer

The marginal rate of substitution (MRS) is the amount of one good a consumer is willing to give up in exchange for another while keeping total utility or satisfaction unchanged. It represents the compromise between the two goods that a consumer is willing to make. On an indifference curve, the MRS is not constant but diminishes as we move down the curve because as the consumer gets more of one good, they are willing to give up less of it for the other good. The MRS is not equal to the price ratio on the budget line, as this represents the rate at which the consumer can exchange one good for another in the market, not necessarily the amount they are willing to give up. The MRS is always positive, as no consumer would be willing to give up a good unless they receive something they value more in return.

Question 5

The diagram below shows a set of budget lines facing a household.
  FIGURE 6-8
-Refer to Figure 6-8.The movement of the budget line from ab to ef could be caused by

Accepted Answer

The movement of the budget line from ab to ef represents an increase in money income, allowing the household to afford more of both food and housing.

Question 6

The diagram below shows a set of budget lines facing a household.
  FIGURE 6-8
-Refer to Figure 6-8.The movement of the budget line from ab to ac could be caused by

Accepted Answer

The answer of The diagram below shows a set of...

Question 7

The diagram below shows a set of budget lines facing a household.
  FIGURE 6-8
-Refer to Figure 6-8.The movement of the budget line from ab to db could be caused by

Accepted Answer

The answer of The diagram below shows a set of...

Question 8

The marginal rate of substitution measures the tradeoff between the

Accepted Answer

The definition of marginal rate of substitution is that it measures the amount of one good that a consumer is willing to give up in order to obtain an additional unit of another good and still remain indifferent, or at the same level of satisfaction. Therefore, option C is the correct answer. Option A refers to the slope of the budget line, option B refers to personal preferences, option D refers to the shape of indifference curves, and option E refers to price and quantity demanded, not tradeoffs.

Question 9

Indifference theory is based on the assumption that

Accepted Answer

Indifference theory assumes that consumers can rank consumption bundles in order of preference, but it does not require them to quantify the difference in utility between those bundles. This means they can say which bundle they prefer without specifying by how much.

Question 10

A parallel shift in the consumerʹs budget line must indicate a change in

Accepted Answer

The answer of A parallel shift in the consumerʹs budget...

Question 11

In indifference curve analysis,a point to the left of the consumerʹs budget line

Accepted Answer

A point to the left of the budget line indicates that the household is not spending all of its income on the goods in question. This could be due to the household choosing to save some of their income or spending it on different goods.

Question 12

Given a particular consumerʹs indifference map,the further the indifference curve is from the origin

Accepted Answer

The further the indifference curve is from the origin, the higher the level of satisfaction. This is because the consumer is able to consume more of both goods and thus has a higher level of utility or satisfaction.

Question 13

The paradox in ʺthe paradox of valueʺ refers to the

Accepted Answer

The paradox of value refers to the situation where a good with a low total value can command a high price, while a good with a high total value can command a low price. This is paradoxical because one would expect goods with higher total values to command higher prices. For example, a diamond has a low total value (it is not necessary for survival), but commands a high price due to its rarity and desirability. On the other hand, water has a high total value (it is necessary for survival), but commands a low price due to its abundance.

Question 14

An equal proportional increase in money income and all money prices will

Accepted Answer

An equal proportional increase in money income and all money prices will leave the position of the budget line unchanged because the purchasing power of the additional income will remain the same. This means that the amount of goods and services that can be purchased will not change despite the increase in both income and prices.

Question 15

As a consumer moves along an indifference curve

Accepted Answer

An indifference curve represents the combinations of goods that give the consumer the same level of utility or satisfaction. Moving along an indifference curve means the consumer is changing the combination of goods they are consuming while still receiving the same level of satisfaction. Therefore, the level of utility remains constant as the consumer moves along an indifference curve.

Question 16

For your typical consumption levels of water and diamonds, the good with the higher marginal utility is________; the good with the higher total utility is ________; and the good with the greatest consumer surplus is________.

Accepted Answer

The answer of For your typical consumption levels of water...

Question 17

An indifference curve plotted for two different goods on the axes

Accepted Answer

Indifference curves show all possible combinations of two goods that give the same level of utility or satisfaction to the consumer. They do not shift when real income changes (choice A), change their slope as relative prices change (choice C), or show combinations that just use up a consumer's income (choice D). However, they do show the different combinations of two goods that the same income can purchase (choice E) but this is not the best choice as it is not specific to the purpose of an indifference curve.

Question 18

The total value that Doug places on his consumption of computer games equals

Accepted Answer

The total value that Doug places on his consumption of computer games is equal to his total expenditure on computer games plus his consumer surplus. This is because consumer surplus measures the difference between the total value placed on a good by a consumer and the total amount actually paid. Therefore, answer choice E is the best option.

Question 19

Suppose a consumer can purchase only two goods,pasta and cheese.Let the quantity of pasta be measured on the vertical axis and the quantity of cheese be measured on the horizontal axis.If the price of pasta falls,with no change in the price of cheese or in the consumerʹs money income,then the budget line for the consumer will rotate

Accepted Answer

The answer of Suppose a consumer can purchase only two...

Question 20