Question 1

The price of one good divided by the price of another good is a

Accepted Answer

The relative price of a good refers to how much it costs in terms of another good, essentially comparing the price of one good to another. This concept is crucial in economics for understanding consumer choice and the allocation of resources.

Question 2

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

Accepted Answer

A rise in the price of a movie would cause the budget line to rotate inward from the movie axis, as it would decrease the quantity of movies that can be purchased for a given amount of money, assuming income and the price of books remain constant.

Question 3

-In the above figure, point B

Accepted Answer

Point B is inferior to point A because it is located below point A in the figure, indicating a lower value or position.

Question 4

If the relative price of pizza in terms of movies is 3, this means that

Accepted Answer

All of the above answers are correct.

Question 5

In an indifference curve/budget line diagram, generally when the price of a good increases, the consumer purchases _______ of the good and moves to a _______ indifference curve.

Accepted Answer

When the price of a good increases, the consumer generally purchases less of that good due to the substitution and income effects, and moves to a lower indifference curve because they can no longer afford the combinations of goods that provided the same level of utility as before the price increase.

Question 6

In order to determine a household's budget line, you must know the

Accepted Answer

A household's budget line is determined by both the prices of the goods bought and the household's income. This line represents all the combinations of goods and services that the household can afford given its income and the prices of goods. Preferences do not determine the budget line, but rather where on the line the household chooses to consume.

Question 7

All points above a given indifference curve are

Accepted Answer

Points above an indifference curve represent higher levels of utility or satisfaction, hence are preferred to any point on the indifference curve.

Question 8

The assumption that the magnitude of the slope of an indifference curve decreases moving to the right along the indifference curve is known as the assumption of

Accepted Answer

The assumption of a diminishing marginal rate of substitution reflects the idea that as a consumer substitutes one good for another, the amount of the good being given up becomes less valuable to them, hence the slope of the indifference curve (representing the rate at which they are willing to substitute one good for another) decreases as we move to the right along the curve. This captures the principle that consumers are willing to give up smaller and smaller amounts of one good to obtain additional units of another, reflecting diminishing additional satisfaction.

Question 9

Larry spends all his $800 monthly income on pizza and milk. The price of pizza is $4 a slice, and the price of milk is $2 per litre. The relative price of milk is

Accepted Answer

The relative price of milk in terms of pizza is the price of milk divided by the price of pizza, which is $2/$4 = 0.5 slices of pizza per litre.

Question 10

A constant marginal rate of substitution between two goods implies that they are

Accepted Answer

A constant marginal rate of substitution implies that the consumer is willing to substitute one good for another at a constant rate, indicating that the two goods are perfect substitutes for each other.

Question 11

-The indifference curve in the above figure

Accepted Answer

Indifference curves for perfect substitutes are straight lines because the consumer is willing to substitute one good for another at a constant rate.

Question 12

Sam buys petrol and coffee each week. In order to draw his budget line between petrol and coffee, Sam would have to know

Accepted Answer

To draw a budget line, one needs to know both the prices of the goods in question (in this case, petrol and coffee) and the total income available to spend on these goods. This allows for the calculation of the maximum quantities of each good that can be purchased with the given income, at their respective prices.

Question 13

The marginal rate of substitution is equal to the _______.

Accepted Answer

The marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of utility, and it is represented by the magnitude of the slope of the indifference curve.

Question 14

Ernie has an income of $40 which he plans to spend on cookies and milk. The price of milk is $1 per litre, and the price of cookies is $2 per dozen. If Ernie buys 12 litres of milk, how many dozens of cookies will he buy if he spends all of his income?

Accepted Answer

Ernie spends $12 on milk (12 litres at $1 each), leaving him with $28 ($40 - $12). At $2 per dozen cookies, he can buy 14 dozens ($28 / $2).

Question 15

If Sue is consuming two normal goods and her income decreases, then her best affordable bundle of goods will contain _______ goods with _______ marginal rate of substitution as her bundle prior to her income change.

Accepted Answer

When income decreases, Sue will consume less of the normal goods, but the marginal rate of substitution remains the same because it depends on her preferences, not her income.

Question 16

Inga's graph of her budget line has apples per week on the vertical axis and loaves of bread per week on the horizontal. A fall in the price of an apple shifts the

Accepted Answer

When the price of apples falls, Inga can afford to buy more apples for the same amount of money, which increases the maximum quantity of apples she can purchase if she spends all her money on apples. This is represented by the vertical intercept moving upward on a budget line graph.

Question 17

-Consider the budget line in the above figure. If the consumer's income is $120, then the price of a book is

Accepted Answer

The budget line is a straight line that shows all the possible combinations of two goods that a consumer can buy with a given income. The slope of the budget line is equal to the negative of the ratio of the prices of the two goods. In this case, the slope of the budget line is -2, which means that the price of a book is twice the price of a movie. Since the consumer's income is $120, the y-intercept of the budget line is 120. This means that the consumer can buy 120 movies or 60 books with their income. Therefore, the price of a book is $12 per book.

Question 18

-In the above figure, if income is $8, the initial price of a soft drink is $1, and the initial price of a milkshake is $2, a decrease in the price of a milkshake to $1 will move the consumer from point _______ to point _______.

Accepted Answer

The decrease in the price of a milkshake makes it relatively cheaper than a soft drink, so the consumer will substitute milkshakes for soft drinks. This will move the consumer from point a (where they were consuming 4 soft drinks and 2 milkshakes) to point c (where they are consuming 2 soft drinks and 4 milkshakes).

Question 19

The effect of a change in price on the quantity bought when the consumer remains indifferent between the original and the new situation is called the

Accepted Answer

The substitution effect occurs when a change in the price of a good causes a consumer to substitute one good for another while maintaining the same level of utility or satisfaction.

Question 20

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

Accepted Answer

The answer of 
-The indifference curves in the above figure...

Quiz 12: Consumer Choices and Constraints