Question 1

The budget line on a graph represents choices which exhaust all resources.

Accepted Answer

The budget line on a graph represents all possible combinations of two goods that can be purchased, given the consumer's income and the prices of the goods. Therefore, it represents the choices that maximize utility but may not necessarily exhaust all resources.

Question 2

If all consumers are price-takers facing the same prices, then all choice sets are the same.

Accepted Answer

While all consumers may face the same prices, their choice sets can differ due to variations in income, preferences, and other constraints, leading to different sets of affordable and preferred options.

Question 3

For choice sets emerging from "exogenous" income, the budget line will shift parallel whenever both prices change by the same percentage.

Accepted Answer

When both prices change by the same percentage, the slope of the budget line remains constant because the slope is determined by the ratio of the prices of the two goods. However, if income is exogenous and remains constant, the budget line does not shift; it rotates around the intercept with the axis of the good whose price has changed relatively less. A parallel shift of the budget line would imply a change in income, not a proportional change in both prices.

Question 4

Derive the budget line equation for the case where good 2 is a composite good.What is the vertical intercept and what is the slope?

Accepted Answer

The answer of Derive the budget line equation for the...

Question 5

When the good on the vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.

Accepted Answer

This is true because when the good on the vertical axis is a composite good, its price is not specified and is dependent on the prices of the goods required to produce it. Therefore, the vertical intercept of the budget line cannot be determined but the slope can still be calculated by dividing the price of the good on the horizontal axis by the price of the composite good. This gives us the rate at which the consumer can trade one good for the other along the budget line. Since the slope of the budget line is negative, the coefficient of the horizontal good would be negative in order for the ratio to be positive. Hence, the slope is equal to minus the price of the good on the horizontal axis.

Question 6

If a consumer's fixed income increases, his opportunity cost also increases.

Accepted Answer

Opportunity cost is the choice of giving up the next best alternative when a decision is made. If a consumer's fixed income increases, he has more resources to allocate towards different choices. This means the opportunity cost of choosing one option over another may decrease as there are more resources available to make multiple choices. Therefore, if a consumer's fixed income increases, his opportunity cost may decrease, not increase.

Question 7

In a graph of choice sets, a price change affects the ratio but does not affect the budget line.

Accepted Answer

A price change affects the slope of the budget line in a graph of choice sets, as the budget line represents the combination of goods that can be purchased with a given budget at specific prices.

Question 8

Suppose you are given a coupon for pizza.This coupon lowers the price for each additional pizza you buy by 5% for each addition pizza you buy.What happens to your budget constraint, with pizza on the horizontal axis and a composite good on the vertical?

Accepted Answer

The vertical intercept remains the same because the total amount of money (or income) you have to spend on pizza and the composite good hasn't changed. However, because each additional pizza becomes cheaper due to the coupon, you can afford to buy more pizza for the same amount of money, which means the slope of the budget constraint becomes shallower. This reflects the increased purchasing power specifically for pizzas.

Question 9

Suppose that the price of a TV is $200 and he price of an MP3 player is $50.What is the opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3 player (in terms of TVs)?

Accepted Answer

The answer of Suppose that the price of a TV...

Question 10

While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.

Accepted Answer

The answer of While the endowment bundle must lie on...

Question 11

Suppose inflation comes in the form of an across-the board increase in all prices by some percentage k.For a consumer with exogenous income operating in a 2-good world, this will cause the budget constraint to

Accepted Answer

The answer of Suppose inflation comes in the form of...

Question 12

Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of her available income.

Accepted Answer

This statement assumes that consumers always fully allocate their budget across available goods, which is not necessarily true. Consumers may choose to save some of their income instead of spending it all, depending on their preferences and the utility they derive from saving versus consuming.

Question 13

If all consumers are price-takers facing the same prices, then their budget lines will all have the same slope.

Accepted Answer

If all consumers are facing the same prices, then their relative prices for goods will be the same. Therefore, their budget lines will all have the same slope, which represents the ratio of prices of the goods they can buy with their budget.

Question 14

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.Demonstrate, using the budget line equation, how this could have happened if the price of the good on the horizontal axis did not change?

Accepted Answer

The answer of Consider a consumer with a choice set...

Question 15

In a graph of choice sets, a price change causes the slope of budget lines to change.

Accepted Answer

A price change will shift the budget line outwards or inwards, causing its slope to change as the quantity of one good that can be purchased with a given amount of income changes.

Question 16

The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)

Accepted Answer

A k percent decrease in the price of good 2 combined with a k percent decrease in income will result in a steeper budget line with the vertical intercept unchanged. This is because the decrease in the price of good 2 will increase the quantity of good 2 that can be purchased for any given income, while the decrease in income will decrease the total amount of money available to spend on both goods. As a result, the budget line will become steeper, but the vertical intercept will remain the same.

Question 17

When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.

Accepted Answer

The slope of the budget constraint is minus the price of the good on the vertical axis divided by the price of the good on the horizontal axis, not just the price of the good on the vertical axis alone.

Question 18

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.How could this have happened if the price of the good on the horizontal axis did not change?

Accepted Answer

The answer of Consider a consumer with a choice set...

Question 19

For choice sets generated from endowment bundles, the budget line will shift parallel if both prices change by the same proportion.

Accepted Answer

The answer of For choice sets generated from endowment bundles,...

Question 20

Suppose the government wants to discourage excessive consumption of alcohol.It therefore imposes a per-unit tax on alcohol that increases as more alcohol is bought by a consumer at a store.What happens to a consumer's budget at a liquor store (with liters of alcohol on the horizontal axis and a composite good on the vertical) --- assuming the consumer takes only one trip to the store.

Accepted Answer

The answer of Suppose the government wants to discourage excessive...

Quiz 2: A Consumers Economic Circumstances

The budget line on a graph represents choices which exhaust all resources.

If all consumers are price-takers facing the same prices, then all choice sets are the same.

For choice sets emerging from "exogenous" income, the budget line will shift parallel whenever both prices change by the same percentage.

Derive the budget line equation for the case where good 2 is a composite good.What is the vertical intercept and what is the slope?

When the good on the vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.

If a consumer's fixed income increases, his opportunity cost also increases.

In a graph of choice sets, a price change affects the ratio but does not affect the budget line.

Suppose you are given a coupon for pizza.This coupon lowers the price for each additional pizza you buy by 5% for each addition pizza you buy.What happens to your budget constraint, with pizza on the horizontal axis and a composite good on the vertical?

Suppose that the price of a TV is $200 and he price of an MP3 player is $50.What is the opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3 player (in terms of TVs)?

While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.

Suppose inflation comes in the form of an across-the board increase in all prices by some percentage k.For a consumer with exogenous income operating in a 2-good world, this will cause the budget constraint to

Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of her available income.

If all consumers are price-takers facing the same prices, then their budget lines will all have the same slope.

In a graph of choice sets, a price change causes the slope of budget lines to change.

The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)

When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.

For choice sets generated from endowment bundles, the budget line will shift parallel if both prices change by the same proportion.