Question 1

When a consumer is at his or her best affordable point, the budget line

Accepted Answer

At the consumer's best affordable point, the budget line is tangent to the highest attainable indifference curve. This is the point where the consumer is maximizing utility given their budget constraint.

Question 2

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

Accepted Answer

The answer of Samara's income is $30 a month and...

Question 3

Larry consumes at a point on his budget line where his marginal rate of substitution is less than the magnitude of the slope of his budget line. As Larry moves toward his consumer equilibrium point, he will move to a

Accepted Answer

When Larry moves towards his consumer equilibrium point, he will choose to consume at a point where his marginal rate of substitution equals the magnitude of the slope of the budget line. This point will be on a higher indifference curve than the initial point where he consumed. Therefore, the correct choice is D - he will move to a higher indifference curve.

Question 4

If consumers buy only gasoline and food, at their best affordable choice the marginal rate of substitution between food and gasoline ________ the relative price of food and gasoline.

Accepted Answer

When consumers only buy gasoline and food, their budget constraint can be represented by a straight line in a two-dimensional graph, with food on the horizontal axis and gasoline on the vertical axis. The slope of this line represents the relative price of food and gasoline, which is their opportunity cost of choosing one over the other. The marginal rate of substitution (MRS) between food and gasoline represents the rate at which the consumer is willing to give up one good to get more of the other, which is the slope of the indifference curve at the point where the budget constraint is tangent to it. At the best affordable choice, which is the point where the budget constraint and the highest indifference curve they can reach intersect, the slope of the budget constraint (i.e. the relative price) must be equal to the slope of the indifference curve (i.e. the MRS). Therefore, the answer is C.

Question 5

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

Accepted Answer

The point where the indifference curve is tangent to the budget line is the best affordable point because it represents the combination of goods that maximizes the consumer's utility within their budget constraint.

Question 6

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

Accepted Answer

Samara can spend her entire income either on music downloads or gasoline. The price of both the goods is the same at $3. Therefore, at the best affordable point, the marginal rate of substitution will be 1 gallon of gasoline per music download. This implies that Samara is willing to give up 1 gallon of gasoline to obtain one more music download.

Question 7

In an indifference curve/budget line diagram, at your consumer equilibrium, that is, your best affordable point, which of the following statements is CORRECT?

Accepted Answer

At consumer equilibrium, the best affordable point is where the budget line is tangent to the indifference curve, meaning any movement along the budget line will lead to a less preferred point.

Question 8

If two goods are complements, then their

Accepted Answer

Complementary goods have an L-shaped indifference curve because as the price of one good changes, the quantity demanded for that good changes in the opposite direction, causing a kink at the axis of the complementary good. This means that consumers only want to consume the other good if they can also consume a certain amount of the complimentary good.

Question 9

Which of the following statements is TRUE?

Accepted Answer

The answer of Which of the following statements is TRUE?
...

Question 10

If Rachel is at her best affordable point, then ________.

Accepted Answer

The best affordable point for Rachel is where the budget line is tangent to the highest indifference curve she can reach. This is where the relative price of the goods she buys equals the marginal rate of substitution. Therefore, option C is the correct choice. Option A is incorrect because the marginal rate of substitution can be equal to 1 at multiple points on the budget line. Option B is incorrect because while the marginal rate of substitution is maximized at the best affordable point, this does not necessarily mean she has reached it. Option D is incorrect because if Rachel is at her best affordable point, she cannot be indifferent among other points on her budget line.

Question 11

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 ________.

Accepted Answer

When the marginal rate of substitution (MRS) exceeds the relative price, it means that Sue values the good on the x-axis more than its cost in terms of the other good. Therefore, she will choose to buy more of the good on the x-axis.

Question 12

If the newspaper reported that wearing plaid clothing was a sure way to obtain good grades, students'

Accepted Answer

If students believe that wearing plaid clothing leads to better grades, their preferences may change to favor purchasing more plaid clothing, assuming they value good grades.

Question 13

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

Accepted Answer

When the budget line is not as steep as the indifference curve, the marginal rate of substitution (MRS) is greater than the price ratio, indicating that the consumer values the good on the horizontal axis more than its cost. Therefore, the consumer should consume more of that good to reach a higher level of utility.

Question 14

If the indifference curves between two goods are L-shaped, the goods are

Accepted Answer

Indifference curves that are L-shaped indicate that the two goods are complementary. This means that as the quantity consumed of one good increases, the quantity consumed of the other good also increases, and the consumer is only willing to consume the two goods in specific proportions. For example, if the two goods are coffee and cream, a consumer may be indifferent between consuming 1 cup of coffee with 1 teaspoon of cream and consuming 2 cups of coffee with 2 teaspoons of cream. These goods are complementary because the consumer values the consumption of both goods together more than the consumption of either good alone.

Question 15

In a budget line/indifference curve diagram, at the consumer equilibrium

Accepted Answer

At the consumer equilibrium, the consumer has maximized utility subject to the budget constraint. Any movement upward or downward on the budget line implies a decrease in his purchasing power and therefore will move the consumer to a less preferred point. Any movement to the northeast to higher indifference curves would indicate that the consumer is consuming more goods and hence would be preferable, not less preferred. The slope of the budget line cannot be larger than the marginal rate of substitution as that would imply that the consumer is not optimizing his utility. Therefore, only statement A is correct.

Question 16

The assumption of diminishing marginal rate of substitution means that

Accepted Answer

The assumption of diminishing marginal rate of substitution implies that as a consumer substitutes more and more of one good for another, the marginal utility (or satisfaction) gained from each additional unit of the substituted good decreases. This leads to a concave shape for the indifference curves, which represent all combinations of goods that give the same level of satisfaction to the consumer. Therefore, the correct choice is D, indifference curves will be concave. The other options are not necessarily true or related to the assumption of diminishing marginal rate of substitution.

Question 17

In an indifference curve/budget line diagram, a consumer's equilibrium consumption combination will occur

Accepted Answer

The consumer's equilibrium consumption combination occurs where the budget line and the highest attainable indifference curve intersect. This is because the consumer is maximizing satisfaction while staying within their budget constraint. Therefore, the equilibrium consumption combination must occur on the budget line. Option A is incorrect because a point inside the budget line means the consumer is not spending all their income and could still increase their satisfaction by buying more. Option B is incorrect because a point outside the budget line is not attainable given the consumer's income level. Option D is incorrect because the origin represents consuming nothing, which is not an optimal consumption choice.

Question 18

Tunitra consumes at a point on her budget line where her marginal rate of substitution exceeds the magnitude of the slope of her budget line. As Tunitra moves toward her consumer equilibrium point, she will move to a

Accepted Answer

When Tunitra is consuming at a point on her budget line where her marginal rate of substitution (MRS) exceeds the slope of her budget line, it indicates that she is not maximizing her satisfaction. To maximize her utility, Tunitra needs to move to a point where the MRS equals the slope of her budget line.

Since her MRS is higher than the slope of the budget line at the current consumption point, it means that she would be willing to give up more of one good to get an additional unit of the other good compared to what the budget line is currently allowing her to do.

To achieve a balance between her preferences and budget constraint, Tunitra needs to move to a higher indifference curve where her MRS equals the slope of the budget line, i.e., her highest possible level of satisfaction given her budget, and where she is consuming both goods optimally.

Question 19

When the consumer is at his or her best affordable consumption point, it is the case that the marginal rate of substitution is

Accepted Answer

At the best affordable consumption point, the consumer has optimized the trade-off between the two goods and achieved the highest level of satisfaction given their budget constraint. This occurs when the marginal rate of substitution (MRS) between the two goods equals the price ratio (PR). If MRS > PR, the consumer could increase satisfaction by trading more of one good for the other until MRS = PR. If MRS < PR, the consumer could increase satisfaction by trading less of one good for the other until MRS = PR. Therefore, at the best affordable consumption point, MRS = PR.

Question 20

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

Accepted Answer

The consumer will choose the combination of goods where the marginal rate of substitution (MRS) between the two goods is equal to the relative price of the two goods. This is because the consumer wants to get the most satisfaction possible given their budget constraint, and equalizing the MRS with the price ratio will achieve this. If the MRS is greater than the price ratio (option B), the consumer can increase their satisfaction by consuming more of the good with the higher MRS and less of the other good, and still stay on the budget line. If the slope of the indifference curve is less than the relative price (option C), the consumer can increase their satisfaction by consuming more of one good and less of the other until the slope of the indifference curve matches the price ratio, which is the optimal point. If the slope of the indifference curve is greater than the relative price (option D), the consumer is not optimizing because they can increase their satisfaction by consuming less of the more expensive good and more of the less expensive good, which would move them to a higher indifference curve while staying on the budget line.

Quiz 9: Possibilities, Preferences, and Choices