Deck 12: Consumer Choices and Constraints

Question 1

When the price of a normal good decreases, the _______ can be divided between the _______, which keeps the best affordable point on the same indifference curve and the _______, which moves the best affordable point farther away from the origin.

A) price effect; substitution effect; income effect
B) price effect; income effect; substitution effect
C) income effect; substitution effect; price effect
D) substitution effect; price effect; income effect

Answer 1

price effect; substitution effect; income effect

Question 2

Joe has $50 to spend on pizza and movies. If movies are $5 each and a pizza is $10 then, assuming he spends all his money, he can buy which of the following bundle of goods?

A) 6 movies and 4 pizzas
B) 2 movies and 6 pizzas
C) 6 movies and 2 pizzas
D) 8 movies and 4 pizzas

Answer 2

6 movies and 2 pizzas

Question 3

Consider the budget line in the above figure. If the consumer has income of $240, what is the relative price of movies?

A) 0.42 books
B) 2.4 books
C) $24 per movie
D) $10 per movie

Answer 3

0.42 books

Question 4

Jodie has indifference curves for CDs and colas, with CDs on the vertical axis. The flatter her indifference curves are, the

A) smaller her marginal rate of substitution.
B) larger her average rate of substitution.
C) smaller her average rate of substitution.
D) larger her marginal rate of substitution.

Question 5

The income effect for an inferior good

A) is negative.
B) is positive.
C) is zero.
D) could be negative, zero or positive.

Question 6

A curve/line that shows combinations of goods among which a consumer would not desire one combination of goods over another combination of goods on that curve/line is called

A) an indifference curve.
B) a utility possibilities curve.
C) a demand curve.
D) a budget line.

Question 7

In an indifference curve diagram, the quantities of good Y are measured along the vertical axis and the quantities of good X are measured along the horizontal axis. The marginal rate of substitution is defined as

A) how much good Y you must give up to get one more unit of good X.
B) how much good Y you are willing to give up to get one more unit of good X.
C) how much you prefer to substitute good X for good Y.
D) the relative price of good Y in terms of good X.

Question 8

If your marginal rate of substitution between two goods diminishes continuously as you give up one good for the other, that means the

A) two goods are perfect complements.
B) two goods are perfect substitutes.
C) two goods are neither perfect substitutes nor perfect complements.
D) price per unit of one good declines when you buy it in larger and larger quantities.

Question 9

When the price of a normal good decreases, people buy _______ of the good due to _______.

A) more; the substitution effect only
B) less; the substitution effect only
C) more; the substitution and income effects
D) less; the income effect only

Question 10

Budget lines are drawn on a diagram with the

A) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
B) price of the good on the vertical axis and its quantity on the horizontal axis.
C) price of one good on the vertical axis and the price of another good on the horizontal axis.
D) quantity of the good on the vertical axis and its price on the horizontal axis.

Question 11

The rate at which a person is willing to give up a litre of petrol to get one more kilogram of coffee and remain on the same indifference curve is called his or her

A) relative cost of coffee in terms of petrol.
B) marginal rate of substitution.
C) indifference cost of coffee.
D) personal price of coffee.

Question 12

Which of the following statements is FALSE?

A) When the relative price of a good falls, the substitution effect always leads the consumer to substitute more of that good for the other good.
B) For an inferior good, the income effect is positive.
C) For an inferior good, the income effect offsets the substitution effect.
D) For a normal good, the income effect reinforces the substitution effect.

Question 13

All points below a given indifference curve are

A) preferred to any point on the indifference curve.
B) definitely affordable.
C) less preferred to any point on the indifference curve.
D) Both answers A and C are correct.

Question 14

Real income can be measured by

A) an intercept of the budget line.
B) the slope of the budget line.
C) the area under the budget line.
D) the length of the budget line.

Question 15

The price effect refers to how changes in

A) preference affect prices.
B) price affect the quantity of a good consumed.
C) income affect prices.
D) price affect real income.

Question 16

Samara's income is $30 a month and she spends all of it on music downloads and petrol. The price of a music download is $3 and the price of a litre of petrol is $3. At Samara's best affordable point, her marginal rate of substitution is _______ litre(s) of petrol per music download.

A) 0.5
B) 1.5
C) 1
D) More information is needed to determine the marginal rate of substitution.

Question 17

The indifference curves in the above figure could represent your indifference curves between

A) Coke and Pepsi, which you consider perfect substitutes.
B) eyeglass frames and eyeglass lenses, which you think are perfect complements.
C) hot dogs and textbooks, which you think are neither perfect substitutes nor perfect complements.
D) None of the above.

Question 18

Consider the indifference maps shown above. If X and Y are perfect substitutes, your indifference curves between them would look like those in

A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.

Question 19

Except for perfect complements and perfect substitutes, an indifference curve has a _______ slope and becomes _______ moving to the right.

A) negative; steeper
B) positive; flatter
C) positive; steeper
D) negative; flatter

Question 20

The indifference curve in the above figure

A) illustrates two goods that are perfect substitutes.
B) violates assumptions about preferences.
C) illustrates two goods that are perfect complements.
D) None of the above statements is correct.

Question 21

The figure above shows Tanya's consumption possibilities. Tanya spends $100 per month on movies and restaurant meals. The price of a movie ticket is _______ and the price of a restaurant meal is _______.

A) $20; $5
B) $7; $15
C) $5; $20
D) $10; $10

Question 22

The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if the price of a lobster dinner increases?

A) It would rotate inward around the vertical intercept, 10 lobster dinners.
B) It would rotate outward around the horizontal intercept, 20 steak dinners.
C) It would rotate inward around the horizontal intercept, 20 steak dinners.
D) It would rotate outward around the vertical intercept, 10 lobster dinners.

Question 23

In the figure above, a decrease in the price of a bag of potato chips would result in the budget line

A) becoming steeper.
B) becoming flatter.
C) making a parallel shift toward point a.
D) making a parallel shift toward point c.

Question 24

Which of the following will change the slopes of your indifference curves between petrol and movie rentals?

A) Only a change in the price of either of the two goods.
B) A change in your preferences for either of the two goods.
C) Only a change in your income.
D) Both a change in the price of either good and a change in income will change the slopes of your indifference curves.

Question 25

If the combination of goods consumed at point C is preferred to combination D, then

A) point C is on a lower indifference curve.
B) point C is on the same indifference curve but at a point where the vertical axis value is greater than point D's vertical axis value.
C) point C is on the same indifference curve but at a point where the horizontal axis value is greater than point D's horizontal axis value.
D) point C is on a higher indifference curve.

Question 26

Goods that can be bought in any quantity desired are called

A) invisible goods.
B) divisible goods.
C) inferior goods.
D) indivisible goods.

Question 27

If green bikes and brown bikes are perfect substitutes, the corresponding indifference curves

A) are vertical.
B) have constant slope.
C) are horizontal.
D) intersect each other.

Question 28

The above figure shows Jane's budget line and two of her indifference curves. Which of the following happens to Jane's budget line if the price of a lobster dinner falls?

A) It would rotate outward, pivoting around the vertical intercept 10 lobster dinners.
B) It would rotate outward, pivoting around the horizontal intercept 20 steak dinners.
C) It would rotate inward, pivoting around the horizontal intercept 20 steak dinners.
D) It would rotate inward, pivoting around the vertical intercept 10 lobster dinners.

Question 29

In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move from

A) a to c.
B) a to b.
C) T to S.
D) b to c.

Question 30

Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. If Dave buys 15 pizzas each week, what is the maximum number of magazines can he buy?

A) 10
B) 200
C) 40
D) 20

Question 31

The indifference curves in the figure above (I1, I2 and I3) reflect Peter's consumption preferences. Which of the following combinations of goods does Peter prefer the most?

A) 48 slices of pizza and 12 chocolate bars
B) 32 slices of pizza and 8 chocolate bars
C) 24 slices of pizza and 24 chocolate bars
D) 40 slices of pizza and 20 chocolate bars

Question 32

The figure above gives your budget line for magazines and CDs per month. Given that your income equals $60 per month, what is the price of a magazine and the price of a CD?

A) The price of a magazine is $4 per magazine and the price of a CD is $12 per CD.
B) The price of a magazine is $12 per magazine and the price of a CD is $6 per CD.
C) The price of a magazine is $5 per magazine and the price of a CD is $10 per CD.
D) It is impossible to tell from the information given.

Question 33

The concept of diminishing marginal rate of substitution indicates that

A) along an indifference curve, a consumer prefers the consumption combinations moving to the northwest along the curve.
B) individuals are willing to give up an increasing amount of good Y in order to obtain one more unit of good X as the consumption of good X increases.
C) individuals are willing to give up a decreasing amount of good Y in order to obtain one more unit of good X as the consumption of good X increases.
D) None of the above answers is correct.

Question 34

Which of the following is NOT a divisible good?

A) Petrol
B) Movies
C) Electricity
D) Tap water

Question 35

Wendy spends $30 a week on movies and magazines. The price of a movie is $8, the price of a magazine is $2, and Wendy sees 3 movies a week and buys 3 magazines. The price of a magazine now increases to $4 and Wendy's brother gives her $6 a week so that she can still see 3 movies a week and buy 3 magazines. In this situation, Wendy will see _______ movies and buy _______ magazines.

A) less than 3; less than 3
B) less than 3; more than 3
C) more than 3; less than 3
D) 3; 3

Question 36

Bob plans to spend $60 per month on DVD movie rentals and CDs. The price of a movie rental is $3 and the price of a CD is $15. If Bob rents 5 DVDs per month, how many CDs can he buy?

A) 1
B) 2
C) 3
D) 4

Question 37

The price of one good changes and Sue is now at a point on her indifference curve where the marginal rate of substitution exceeds the relative price. Sue will now choose to buy _______ of the good that is measured on the _______.

A) more; x- axis
B) the same quantity; x- axis
C) more; y- axis
D) less; x- axis

Question 38

Consumers' preferences are described by

A) relative prices.
B) household income.
C) indifference curves.
D) budget lines.

Question 39

Shaniq consumes only magazines and CDs. Her income equals $60 per month. CDs are $12 each and magazines are $5 each. What is the equation for her budget line?

A) $60 = $12Qm + $5QCD
B) $60 = 12QCD + 5Qm
C) 12 = - 2Qm + 6
D) $60 = Qm + QCD

Question 40

In an indifference curve/budget line diagram, a consumer will select the combination of goods that is on the budget line and for which the

A) marginal rate of substitution between two goods is greater than the relative price of the two goods.
B) marginal rate of substitution between two goods is equal to the relative price of the two goods.
C) slope of the indifference curve is less than the relative price of the two goods.
D) slope of the indifference curve is greater than the relative price of the two goods.

Question 41

In the above figure, Brendan originally consumes at point A. If his income rises and both compact discs and haircuts are normal goods then he could begin consuming at point

A) C.
B) B.
C) D.
D) B, C or D.

Question 42

In the figure above, suppose the original budget line is BD. A rise in the price of a compact disc will

A) rotate the budget line to CD.
B) result in a parallel leftward shift of the budget line.
C) not move the budget line.
D) rotate the budget line to AD.

Question 43

In the above figure, Brendan originally consumes at point A. If his income falls and compact discs are a normal good but haircuts are an inferior good then he will begin consuming at a point such as

A) E.
B) B.
C) G.
D) F.

Question 44

Left shoes and right shoes are perfect complements. An indifference curve for left and right shoes is a line with

A) constant slope.
B) a 90- degree angle.
C) a 30- degree angle.
D) a 45- degree angle.

Question 45

For a consumer, a budget line shows the boundary between

A) what is desired and what is not desired.
B) what is affordable and what is not affordable.
C) what is needed and what is not needed.
D) what is available and what is not available.

Question 46

Tonya, who is rich, and Jerome, who is poorer, both buy orange juice and croissants for lunch at the student cafeteria. Their budget constraints on a diagram with orange juice on the vertical axis and croissants on the horizontal have the same

A) horizontal intercepts.
B) midpoints.
C) vertical intercepts.
D) slopes.

Question 47

Which of the following statements is true?

A) The price effect is shown by moving up or down a fixed budget line.
B) To determine a consumer's best affordable point, we need only the budget line or the indifference curve.
C) Every point on a budget line lies on an indifference curve.
D) Both A and B are true.

Question 48

Bobby moves along an indifference curve for shirts and pants by increasing consumption of shirts and decreasing consumption of pants. As Bobby has more and more pants, the number of shirts he is willing to trade for yet another pair of pants

A) decreases.
B) does not change.
C) increases.
D) initially decreases and then increases.

Question 49

The above figure gives your budget line between CDs and magazines. Which combination of CDs and magazines is not affordable?

A) Combination a
B) Combination b
C) Combination c
D) Both combinations b and d

Question 50

All points above the budget line are

A) preferred to every point on the budget line.
B) unaffordable.
C) inferior to every point on the budget line.
D) Both answers B and C are correct.

Question 51

In the above figure, the budget line would rotate in the direction indicated as a result of a

A) fall in the price of a book.
B) rise in the price of a book.
C) rise in the price of a movie.
D) decrease in income.

Question 52

The point where the indifference curve is tangent to the budget line

A) is a point on a consumer's demand curve.
B) is the best affordable point.
C) is where the marginal rate of substitution exceeds the relative price by as much as possible.
D) All of the above answers are correct.

Question 53

Samara's income is $30 a month and she spends all of it on music downloads and petrol. The price of a music download is $1.50 and the price of a litre of petrol is $3. At Samara's best affordable point, her marginal rate of substitution is _______ per litre of petrol.

A) 0.5 of a download
B) 1 download
C) 1.5 downloads
D) 2 downloads

Question 54

The figure above illustrates Sally's budget line and her preferences. Point _______ is Sally's best affordable point, and Sally prefers point _______ to point _______.

A) E; C; B
B) B; B; D
C) A; B; A
D) B; A; B

Question 55

The effect of a change in price on the quantity bought, keeping the consumer on the same indifference curve, is called the

A) price effect.
B) substitution effect.
C) income effect.
D) real effect.

Question 56

The above figure gives your budget line between CDs and magazines. The slope of the budget line is _______ CD(s) per magazine.

A) - 2
B) - 1/2
C) - 1
D) 1/2

Question 57

If an indifference curve is a straight line it will not show which of the following?

A) Any marginal rate of substitution
B) Combinations of goods among which a consumer is indifferent
C) The diminishing marginal rate of substitution
D) None of the above answers is correct.

Question 58

When a consumer is consuming at a point where his or her budget line is not as steep as his or her indifference curve, then he or she should

A) consume none of the good that is measured on the horizontal axis.
B) consume less of the good that is measured on the horizontal axis.
C) not change his or her behaviour.
D) consume more of the good that is measured on the horizontal axis.

Question 59

In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is
$2) If the price of a milkshake decreases to $1, the substitution effect is the movement from point _______ to point _______.

A) b; d
B) a; b
C) b; c
D) a; c

Question 60

Mary has $10 to spend each week on coffee, Qc and magazines, Qm. The price of a coffee is $1, and the price of a magazine is $2. Mary's budget equation is _______.

A) Qm = 10 - 2 × Qc
B) Qm + Qc = 20
C) Qm = 10 - Qc
D) $1 × Qc + $2 × Qm = $10

Question 61

If all prices rise by 5 per cent and money income remains constant, the new budget line will have

A) the same slope.
B) a steeper slope.
C) a flatter slope.
D) a positive slope.

Question 62

Indifference curves are drawn on a diagram with the

A) price of one good on the vertical axis and the price of another good on the horizontal axis.
B) price of a good on the vertical axis and its quantity on the horizontal axis.
C) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
D) quantity of a good on the vertical axis and its price on the horizontal axis.

Question 63

If an indifference map for a consumer is made up of straight, negatively- sloped lines, the goods are

A) perfect substitutes.
B) perfect complements.
C) not desirable.
D) unrelated.

Question 64

Along an indifference curve,

A) the consumer prefers some of the consumption points to others.
B) the marginal rate of substitution is equal to 0.
C) the marginal rate of substitution is constant but not equal to zero.
D) the consumer does not prefer one consumption point to another.

Question 65

In the above figure, Brendan originally consumes at point A. If his income rises and compact discs are a normal good but haircuts are an inferior good then he will begin consuming at a point such as

A) E.
B) B.
C) C.
D) D.

Question 66

In the figure above, suppose the original budget line is BD. A fall in the price of a compact disc will

A) result in a parallel leftward shift of the budget line.
B) not move the budget line.
C) rotate the budget line to CD.
D) rotate the budget line to AD.

Question 67

In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is
$2) If the price of a milkshake decreases to $1, the income effect is the movement from point _______
To point _______.

A) b; c
B) b; d
C) a; c
D) a; b

Question 68

Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the income effect can be represented by a movement from

A) point G to point F.
B) point E to point F.
C) point G to point A.
D) point A to point F.

Question 69

When your income increases,

A) your budget line shifts leftward and its slope does not change.
B) the slope of your budget line decreases.
C) your budget line shifts rightward and its slope does not change.
D) the slope of your budget line increases.

Question 70

An indifference curve shows combinations of goods _______.

A) that have the same relative price
B) that are inside or on the budget line
C) that are affordable
D) that the consumer prefers equally

Question 71

In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is
$2) If the price of a milkshake decreases to $1, milkshakes are revealed to be

A) less preferred than soft drinks.
B) an inferior good.
C) a normal good.
D) None of the above answers is correct.

Question 72

_______ on an indifference curve that is/are farther from the origin _______ on an indifference curve that is/are closer to the origin.

A) Most combinations; are preferred to all combinations
B) Combinations; are not as affordable as combinations
C) Any combination; is preferred to any combination
D) Some combinations; are preferred to some combinations

Question 73

Which of the following statements about the above figure is true?

A) Point C is preferred to point A.
B) Point A is equally preferred to point C.
C) Point B is equally preferred to point C.
D) Point A is preferred to point C.

Question 74

If two goods are perfect complements, the shapes of the indifference curves are

A) bowed away from the origin.
B) straight lines.
C) bowed toward the origin.
D) right- angled lines.

Question 75

The magnitude of the slope of an indifference curve

A) increases as income increases.
B) is equal to the marginal rate of substitution.
C) always equals the relative price of the product measured along the horizontal axis.
D) decreases when income increases.

Question 76

The above figure shows Katie's consumption possibilities. The relative price of a movie ticket is

A) 4 restaurant meals.
B) 2 restaurant meals.
C) 1 restaurant meal.
D) 0.25 restaurant meals.

Question 77

The indifference curves in the figure above (I₁, I₂ and I₃) reflect Peter's consumption preferences. If Peter consumes 24 slices of pizza and 24 chocolate bars per month, he is as satisfied as he would be consuming _______ slices of pizza and _______ chocolate bars per month.

A) 32; 8
B) 16; 16
C) 40; 20
D) 48; 12

Question 78

The combinations of petrol and coffee along one of Sam's indifference curves are combinations

A) amongst which he is 'indifferent.'
B) that give him the same marginal rate of substitution.
C) that require the same total expenditure.
D) that he can afford with his $60 income.

Question 79

In order to draw an individual's budget line, we must know

A) prices and income.
B) income and preferences.
C) prices, income and preferences.
D) prices and preferences.

Question 80

Movies are $10 a ticket, and DVD rentals are $5 a DVD. With movies on the vertical axis, the magnitude of the slope of the budget line is

A) 2.
B) 5.
C) 1/2.
D) 10.