Question 1

-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

Accepted Answer

The income effect is the change in consumption of a good due to a change in real income. In this case, the price of the book has decreased, which means that the consumer can now afford to buy more books with the same amount of money. This is represented by a movement from point E to point F, where the consumer is consuming more books and less of the other good.

Question 2

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15. The indifference curves in the figure above (I₁, I₂, and I₃) reflect Kristen's preferences. If the price of a DVD is $22.50, then Kristen buys ________ DVDs; if the price of a DVD is $18.00, then Kristen buys ________ DVDs.

Accepted Answer

Kristen's budget constraint is $450. When DVDs cost $22.50, she can buy 20 CDs (450/15) or 20 DVDs (450/22.5). When DVDs cost $18, she can buy 25 DVDs (450/18). The optimal choice is where the budget line is tangent to the highest indifference curve. Given the options, 10 DVDs at $22.50 and 15 DVDs at $18 are feasible and likely optimal choices.

Question 3

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.

Accepted Answer

Before the price increase, Wendy spent a total of $30 a week, which can be broken down as follows:

- Movies: $8 x 3 = $24
- Magazines: $2 x 3 = $6

Now, with the price of magazines increasing to $4 and an additional $6 a week from her brother, Wendy has a total of $36 to spend each week.

To determine how many movies and magazines she can buy, we can set up the following equations:

- $8x + $4y = $36 (total amount spent on movies and magazines)
- x + y = 6 (total number of movies (x) and magazines (y) purchased)

Simplifying these equations, we get:

- 8x + 4y = 36
- x + y = 6

Using substitution, we can solve for one variable in terms of the other. For example, we could solve for y in the second equation:

y = 6 - x

Substituting this expression for y into the first equation, we get:

8x + 4(6-x) = 36

Simplifying and solving for x, we get:

4x = 12

x = 3

So, Wendy can still see 3 movies a week.

Substituting this value for x into the second equation, we can solve for y:

3 + y = 6

y = 3

So, Wendy will buy 3 magazines a week after the price increase.

Therefore, Wendy will see 3 movies and buy 3 magazines in this situation, which corresponds to choice C.

Question 4

Which of the following statements is FALSE?

Accepted Answer

For an inferior good, when the price falls, the substitution effect leads the consumer to buy more of that good while the income effect leads the consumer to buy less of that good. Therefore, the income effect is negative for an inferior good, not positive as stated in choice D.

Question 5

-Consider the budget line labeled RT in the above figure. What would shift the budget line to RS?

Accepted Answer

A fall in the price of good X would allow the consumer to purchase more of good X for the same amount of money, shifting the budget line outward from RT to RS.

Question 6

-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 substitution effect can be represented by a movement from

Accepted Answer

The substitution effect is the change in consumption of a good due to a change in its relative price. In this case, the price of the book has decreased, so the substitution effect will lead to an increase in the consumption of books. This is represented by a movement from point A to point E, where the consumer is consuming more books and less of the other good.

Question 7

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15 and the initial price of a DVD is $22.50. The indifference curves in the figure above (I₁, I₂, and I₃) reflect Kristen's preferences. If the price of a DVD falls to $18, the income effect on Kristen's consumption of DVDs ________ the substitution effect, so a DVD is ________ good.

Accepted Answer

When the price of a DVD falls, the substitution effect will lead Kristen to buy more DVDs because they are relatively cheaper. If the income effect also leads her to buy more DVDs, it reinforces the substitution effect, indicating that DVDs are a normal good.

Question 8

Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is ________ and the income effect of this price decrease is ________.

Accepted Answer

The substitution effect is reflected by the change in the slope of the budget line, indicating that food has become relatively cheaper compared to clothing. The income effect is that Bart has greater purchasing power, allowing him to buy more of both goods since they are normal goods.

Question 9

The income effect for an inferior good

Accepted Answer

An inferior good is a type of good whose demand decreases when income increases. Therefore, the income effect for an inferior good is negative, as an increase in income leads to a decrease in demand for the inferior good.

Question 10

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

Accepted Answer

The substitution effect is the change in the consumption of one good as a result of a change in the relative price of that good. In this case, the relative price of good X has increased, so consumers will substitute away from good X and towards good Y. This is illustrated by the move from point a to point b.

Question 11

-The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from

Accepted Answer

The substitution effect is the change in consumption resulting from a change in the relative price of goods, holding utility constant. This is represented by the movement from point A to point B.

Question 12

Sue consumes only sandwiches and soda and is at her best affordable point. The price of a sandwich falls. The substitution effect is that Sue substitutes ________ for ________. The income effect is that Sue ________.

Accepted Answer

The substitution effect occurs when a price change makes a good relatively cheaper, leading Sue to substitute sandwiches for soda. The income effect, due to the lower price, increases her real income, allowing her to buy more of both goods if they are normal goods.

Question 13

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

Accepted Answer

When the price of a normal good decreases, people buy more of the good due to both the substitution and income effects. The substitution effect occurs because the lower price of the good makes it relatively cheaper compared to other goods in the market. The income effect occurs because the lower price of the good increases the purchasing power of consumers, allowing them to buy more of the good or other goods.

Question 14

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I₁, I₂, and I₃) reflect Kristen's preferences. What is Kristen's best affordable combination of DVDs and CDs?

Accepted Answer

Kristen's best affordable combination of DVDs and CDs is 10 DVDs and 15 CDs per year. This combination is on the highest indifference curve (I3) that she can afford with her income of $450.

Question 15

Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being an inferior good, the

Accepted Answer

When a good is considered inferior, the income effect is negative, meaning that as income increases, the quantity demanded of the inferior good decreases. Therefore, as the price of macaroni and cheese falls, the income effect leads to a decrease in the quantity demanded, which is larger than the substitution effect. This is why the answer is D.

Question 16

-Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the price of a steak dinner?

Accepted Answer

The answer of 
-Jane spends her monthly dining-out budget of...

Question 17

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

Accepted Answer

The answer of 
-In the above figure, if the budget...

Question 18

The concept of inferior goods can be used to show that

Accepted Answer

The concept of inferior goods suggests that when an individual's income rises, they may consume less of these goods despite being able to afford more. This contradicts the idea that consumers will always buy more of all products if their incomes increase, which is stated in option D. Option A suggests a negative correlation between price and quality, which is not necessarily true for all goods. Option B references the possibility of positively sloped indifference curves, which is not related to the concept of inferior goods.

Question 19

Suppose the price of a good rises. The income effect

Accepted Answer

The income effect is shown by adjusting income at the new relative price to reflect the change in purchasing power, moving from the old to the new indifference curve.

Question 20

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. Initially the price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I₁, I₂, and I₃) reflect Kristen's preferences. If the price of a DVD falls to $18, Kristen will buy

Accepted Answer

With the price of DVDs falling to $18, Kristen can afford more DVDs within her budget. The combination of 15 DVDs and 12 CDs fits within her budget constraint and aligns with her preferences as shown by the indifference curves.

Quiz 9: Possibilities, Preferences, and Choices

-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

Which of the following statements is FALSE?

-Consider the budget line labeled RT in the above figure. What would shift the budget line to RS?

-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 substitution effect can be represented by a movement from

Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is and the income effect of this price decrease is .

The income effect for an inferior good

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

-The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from

Sue consumes only sandwiches and soda and is at her best affordable point. The price of a sandwich falls. The substitution effect is that Sue substitutes for . The income effect is that Sue .

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

Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being an inferior good, the

-Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the price of a steak dinner?

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

The concept of inferior goods can be used to show that

Suppose the price of a good rises. The income effect

Quiz 9: Possibilities, Preferences, and Choices

-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

Which of the following statements is FALSE?

-Consider the budget line labeled RT in the above figure. What would shift the budget line to RS?

-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 substitution effect can be represented by a movement from

Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is ________ and the income effect of this price decrease is ________.

The income effect for an inferior good

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

-The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from

Sue consumes only sandwiches and soda and is at her best affordable point. The price of a sandwich falls. The substitution effect is that Sue substitutes ________ for ________. The income effect is that Sue ________.

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

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. The price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. What is Kristen's best affordable combination of DVDs and CDs?

Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being an inferior good, the

-Jane spends her monthly dining-out budget of $300.00 on either steak or lobster dinners. Using the above figure, what is the price of a steak dinner?

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

The concept of inferior goods can be used to show that

Suppose the price of a good rises. The income effect

-Kristen has an income of $450 per year to spend on music CDs and movies on DVDs. Initially the price of a CD is $15 and the price of a DVD is $22.50. The indifference curves in the figure above (I1, I2, and I3) reflect Kristen's preferences. If the price of a DVD falls to $18, Kristen will buy

Bart consumes food and clothing, which are both normal goods. Suppose that the price of food falls. The substitution effect of this price decrease is and the income effect of this price decrease is .

Sue consumes only sandwiches and soda and is at her best affordable point. The price of a sandwich falls. The substitution effect is that Sue substitutes for . The income effect is that Sue .

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