Question 1

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,
A) the budget line will become steeper.
B) the budget line will become flatter.
C) the slope of the budget line will not change.
D) the slope of the budget line will change, but in an indeterminate way.

Accepted Answer

The slope of the budget line represents the rate at which the market is willing to substitute one good for another (the price ratio of the two goods). If the prices of both goods double, the price ratio between good A and good B remains unchanged, hence the slope of the budget line does not change.

Question 2

If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis), Jill would willingly give up:
A) 2, but no more than 2, units of popcorn for an additional unit of candy.
B) 2, but no more than 2, units of candy for an additional unit of popcorn.
C) 1, but no more than 1, unit of candy for an additional 2 units of popcorn.
D) 2, but no more than 2, units of popcorn for an additional 2 units of candy.

Accepted Answer

MRS is the maximum amount of one good a consumer is willing to give up for an additional unit of another good while remaining equally satisfied. In this case, if Jill's MRS of popcorn for candy is 2, she would be willing to give up 2 units of popcorn for an additional unit of candy. Therefore, the correct answer is B - Jill would be willing to give up 2 units of popcorn for an additional unit of candy, but no more than 2 units of candy for an additional unit of popcorn.

Question 3

Use the following two statements to answer this question:
I. Consumer theory can determine whether giving an individual a more preferred basket of goods doubles her overall level of satisfaction, less than doubles her satisfaction, or more than doubles her satisfaction.
II. There is not much empirical evidence to support the assumption that higher incomes result in higher levels of satisfaction.
A) Both I and II are true.
B) I is true and II is false.
C) I is false and II is true.
D) Both I and II are false.

Accepted Answer

The answer of Use the following two statements to answer...

Question 4

The following combinations of goods X and Y represent various market baskets. Consumption is measured in pounds per month.
Market Basket Units of X Units of Y
A 4 6
B 16 7
C 15 3
D 3 2
Explain which market basket(s) is(are) preferred to other(s), and if there is any uncertainty over which is preferable, point this out as well.

Accepted Answer

The answer of The following combinations of goods X and...

Question 5

Match the following descriptions of preferences to the indifference curve diagrams that follow.
________ Ann does not care whether she has more diet soft drinks or fewer
diet soft drinks.
________ Peter is very picky about his buttered popcorn. He tops every quart
of popped corn with exactly one quarter cup of melted butter.
________ Amy likes M&M's, plain and peanut. For Amy, the marginal rate of
substitution between plain and peanut M&M's does not vary with the
quantities of plain and peanut M&M's she consumes.
________ George dislikes broccoli and would be willing to pay something to not
have to eat it.
________ Natalya likes rap and rock music. Natalya's preferences exhibit a
diminishing marginal rate of substitution between the two types of music.
________ Matthew knows his limit. He likes beer up to a point, but if he drinks
too much he gets sick.

Accepted Answer

The answer of Match the following descriptions of preferences to...

Question 6

In the theory of consumer behavior, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words.

Accepted Answer

The answer of In the theory of consumer behavior, certain...

Question 7

In the field of financial management it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return.
a. Draw a set of indifference curves between risk and return for a person that is risk averse (a person that does not like risk).
b. Draw a set of indifference curves for a person that is risk neutral (a person that does not care about risk one way or the other).
c. Draw a set of indifference curves for a person that likes risk.

Accepted Answer

The answer of In the field of financial management it...

Question 8

Each of the following consumers exhibit behavior that violates one of the basic assumptions of consumer preferences. Identify the assumption that is violated for each individual.
∙ Art says that he can watch 2 movies a week but couldn't be paid to watch another movie after that.
∙ Alex says that he prefers going to a movie over hiking. He also indicates that he prefers hiking to swimming. Alex then states that he would rather go swimming than go to a movie.
∙ Alicia says that she prefers hiking to watching a movie but can't determine her preferences for swimming.

Accepted Answer

The answer of Each of the following consumers exhibit behavior...

Question 9

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?
A) -7/15
B) -7/100
C) -15/7
D) 7/15

Accepted Answer

The answer of A consumer has $100 per day to...

Question 10

The endpoints (horizontal and vertical intercepts) of the budget line:
A) measure its slope.
B) measure the rate at which one good can be substituted for another.
C) measure the rate at which a consumer is willing to trade one good for another.
D) represent the quantity of each good that could be purchased if all of the budget were allocated to that good.
E) indicate the highest level of satisfaction the consumer can achieve.

Accepted Answer

The endpoints of the budget line represent the maximum quantity of each good that could be purchased if all of the budget were allocated to that good. The budget line slope measures the rate at which one good can be substituted for another, and the rate at which a consumer is willing to trade one good for another. The endpoints do not indicate the highest level of satisfaction the consumer can achieve, as this depends on the individual's preferences and utility function.

Question 11

You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point?
A) +1
B) -1
C) Zero
D) Infinity

Accepted Answer

For perfect complements, the MRS is undefined or infinite because you cannot substitute one good for the other; they must be consumed in fixed proportions.

Question 12

Draw a set of indifference curves for the following pairs of goods:
a. Hamburgers and carrots for a vegetarian who neither likes nor dislikes meat. (Vegetarians do not eat meat.)
b. Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or jelly sandwiches, but loves peanut butter and jelly sandwiches made with two parts peanut butter and one part jelly.
c. Tickets for Knott's Berry Farm (KBF) and Universal Studios (US) for a tourist that believes that KBF and US are perfect substitutes.
d. Ice cream and pie if these are goods that you like, but if you consume enough of either, you get sick of them. If you are sick of a good, consuming more of it lowers your utility.

Accepted Answer

The answer of Draw a set of indifference curves for...

Question 13

Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line? 
A) The price of food and the price of clothing increased.
B) The price of food increased, and the price of clothing decreased.
C) The price of food decreased, and the price of clothing increased.
D) The price of food and the price of clothing decreased.
E) none of the above

Accepted Answer

If the price of food decreased, but the price of clothing increased, Theodore can now afford to buy more food and less clothing, which would result in a new budget line that is farther out on the food axis and closer to the origin on the clothing axis.

Question 14

In the theory of consumer behavior, several assumptions are made about the nature of preferences. What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

Accepted Answer

The answer of In the theory of consumer behavior, several...

Question 15

An island economy produces only two goods, coconuts and pineapples. There are five people (A,B, C, D, and
E) living on the island with these preferences:
A has a strong preference for pineapples.
B has a strong preference for coconuts.
C doesn't care for pineapples (assigns no value to them).
D doesn't care for coconuts (assigns no value to them)
E will only consume pineapples and coconuts in the fixed
proportion of one pineapple to one coconut.
For each of these five individuals, construct a representative indifference curve with pineapples on the vertical axis and coconuts on the horizontal axis. Discuss the shape of the indifference curves and relate them to the MRS.

Accepted Answer

The answer of An island economy produces only two goods,...

Question 16

Which of the following statements concerning utility as a measure for well being are false?
A) There is generally a positive relationship between income and utility.
B) It is possible to determine which of two individuals is made happier by consuming a particular market basket.
C) Utility is an abstract representation of an individual's degree of happiness.
D) Cross country studies suggest that citizens in wealthier countries are happier than citizens in poorer countries.

Accepted Answer

It is not possible to determine which of two individuals is made happier by consuming a particular market basket, as utility is a subjective measure and differs from person to person.

Question 17

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is ________. A) -Q_A/Q_B B) -Q_B/Q_A C) -P_A/P_B D) -P_B/P_A E) I/P_A or I/P_B

Accepted Answer

The slope of the consumer's budget constraint is given by the negative ratio of the prices of the two goods, which is -P_A/P_B. This represents the rate at which the consumer can trade off good A for good B while staying within their budget.

Question 18

Consider the indifference map in the figure below:  Which of the four basic assumptions about consumer preferences are violated by this indifference map?
A) More is better than less
B) Transitivity
C) Diminishing MRS
D) A and B are correct.
E) A and C are correct.

Accepted Answer

The answer of Consider the indifference map in the figure...

Question 19

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?
A) 2 units
B) 4 units
C) 6 units
D) 8 units

Accepted Answer

The answer of Suppose your utility function for food (F)...

Question 20

Consider Gary's utility function: U(X,Y) = 5 XY, where X and Y are two goods. If the individual consumed 10 units of X and received 250 units of utility, how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.

Accepted Answer

The answer of Consider Gary's utility function: U(X,Y) = 5...

Quiz 3: Consumer Behavior

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis) , Jill would willingly give up:

In the theory of consumer behavior, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words.

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

The endpoints (horizontal and vertical intercepts) of the budget line:

You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point?

Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

In the theory of consumer behavior, several assumptions are made about the nature of preferences. What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

Which of the following statements concerning utility as a measure for well being are false?

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is ________.

Consider the indifference map in the figure below: Which of the four basic assumptions about consumer preferences are violated by this indifference map?

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

Consider Gary's utility function: U(X,Y) = 5 XY, where X and Y are two goods. If the individual consumed 10 units of X and received 250 units of utility, how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.

Quiz 3: Consumer Behavior

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis) , Jill would willingly give up:

In the theory of consumer behavior, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words.

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

The endpoints (horizontal and vertical intercepts) of the budget line:

You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point?

Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

In the theory of consumer behavior, several assumptions are made about the nature of preferences. What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

Which of the following statements concerning utility as a measure for well being are false?

If the quantity of good A (QA) is plotted along the horizontal axis, the quantity of good B (QB) is plotted along the vertical axis, the price of good A is PA, the price of good B is PB and the consumer's income is I, then the slope of the consumer's budget constraint is ________.

Consider the indifference map in the figure below: Which of the four basic assumptions about consumer preferences are violated by this indifference map?

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

Consider Gary's utility function: U(X,Y) = 5 XY, where X and Y are two goods. If the individual consumed 10 units of X and received 250 units of utility, how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is ________.