Question 1

During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. How does the fall in gasoline price affect the relative price of air travel in terms of travel by car?
A) decreases
B) does not change
C) decreases then increases
D) increases

Accepted Answer

The fall in gasoline prices makes car travel cheaper, thus increasing the relative price of air travel compared to car travel.

Question 2

If the price of a good rises and the consumer's budget remains the same, what happens to the consumer's consumption possibilities?

Accepted Answer

The answer of If the price of a good rises...

Question 3

Barth Anderson states that the 2008 "downturn in the economy has really brought a lot of people home. They don't say, 'Well, we're going to order a pizza.' They actually cook." Assuming that restaurant meals and eating at home are substitutes for one another and only consumers' income decreases, what is TRUE?
A) Restaurant meals are an inferior good and eating at home is a normal good.
B) Restaurant meals are a normal good and eating at home is an inferior good.
C) Restaurant meals are an inferior good and eating at home is an inferior good.
D) Restaurant meals are a normal good and eating at home is a normal good.

Accepted Answer

If the 2008 downturn in the economy has brought a lot of people home to cook, it implies that eating at home has become more popular or increased. This means that as income decreases, people are more likely to buy inferior goods (i.e., cheaper alternatives such as cooking at home) and less likely to buy normal goods (e.g., restaurant meals). Therefore, restaurant meals are a normal good and eating at home is an inferior good. Choice B states this relationship correctly.

Question 4

Why is the budget line negatively sloped?

Accepted Answer

The answer of Why is the budget line negatively sloped?...

Question 5

What is a household's real income?

Accepted Answer

The answer of What is a household's real income?...

Question 6

If your income increases, what is the effect on your budget line?

Accepted Answer

The answer of If your income increases, what is the...

Question 7

What information do you need to draw your budget line? What is your budget line? What does it show for any pair of goods?

Accepted Answer

The answer of What information do you need to draw...

Question 8

Organic food might be good for your health but in light of the 2008 downturn in the economy and falling incomes, consumers are buying less organic and more non-organic food. Based on these events, what is TRUE?
A) Organic food is a normal good and non-organic food is an inferior good.
B) Organic food is an inferior good and non-organic food is a normal good.
C) Organic food is a normal good and non-organic food is a normal good.
D) Organic food is an inferior good and non-organic food is an inferior good.

Accepted Answer

When incomes fall, consumers buy less organic food, indicating it is a normal good. Conversely, they buy more non-organic food, indicating it is an inferior good.

Question 9

During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for air travel.
A) If air travel is a normal good, the substitution effect would cause an increase and the income effect would cause a decrease in air travel.
B) If air travel is a normal good, both the substitution and income effects would cause a decrease in air travel.
C) If air travel is a normal good, the substitution effect would cause a decrease and the income effect would cause an increase in air travel.
D) If air travel is a normal good, both the substitution and income effects would be cause an increase in air travel.

Accepted Answer

The answer of During October and November 2008, gasoline prices...

Question 10

Suppose a budget line is drawn between pizza, on the horizontal axis, and tacos, on the vertical axis. How does a change in the price of a pizza affect the budget line?

Accepted Answer

The answer of Suppose a budget line is drawn between...

Question 11

During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for travelling by car.
A) If travelling by car is a normal good, the substitution effect would cause an increase and the income effect would cause a decrease in travelling by car.
B) If travelling by car is a normal good, both the substitution and income effects would be cause an increase in travelling by car.
C) If travelling by car is a normal good, the substitution effect would cause a decrease and the income effect would cause an increase in travelling by car.
D) If travelling by car is a normal good, both the substitution and income effects would cause a decrease in travelling by car.

Accepted Answer

When the price of gasoline falls, making car travel cheaper, the substitution effect leads consumers to substitute car travel for other more expensive forms of travel, like air travel. Additionally, the income effect suggests that with the same income, consumers can afford more travel overall, increasing car travel if it is a normal good.

Question 12

"Consumption possibilities are limited by total utility." True or false? Explain.

Accepted Answer

The answer of "Consumption possibilities are limited by total utility."...

Question 13

Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each) for her iTouch. At current prices, she makes her best affordable choice and purchases 20 songs and 4 applications. Suppose, for a limited time only, applications are buy-one, get-one-free and she purchases 30 songs and 4 applications. Which of the following statements is TRUE?
A) For songs, the substitution effect just equals the income effect.
B) For songs, the income effect is stronger than the income effect for applications.
C) For applications, the substitution effect is stronger than the income effect.
D) For applications, the income effect is stronger the income effect for songs.

Accepted Answer

The answer of Janelle spends all of her income on...

Question 14

During October and November 2008, gasoline prices were falling dramatically, making travel by car less expensive but air travel prices were as high as ever. What is TRUE about consumer preferences, possibilities, or choices?
A) The relative price of air travel in terms of travelling by car decreases.
B) If travelling by car is a normal good, both the substitution and income effects would lead to a decrease in travelling by car.
C) The consumers' budget line would shift outward and its slope would not change.
D) If air travel is a normal good, both the substitution and income effects would lead to an increase in air travel.

Accepted Answer

The answer of During October and November 2008, gasoline prices...

Question 15

On a big weekend of college football in 2010, the Associated Press found fans… who said they are making concessions yet determined to indulge their passion. "We basically let the wife and children not eat for a week so we can do this," joked Neil Plotkin, who was attending his first Penn State game. If Neil views eating and football games as perfect substitutes, how would his indifference curve be shaped?
A) downward sloping line that is bowed out
B) downward sloping line that is bowed in
C) "L" shaped
D) straight line that is downward sloping

Accepted Answer

If Neil views eating and football games as perfect substitutes, his indifference curve would be a straight line that is downward sloping, indicating a constant rate of substitution between the two goods.

Question 16

What does the slope of the budget line equal?

Accepted Answer

The answer of What does the slope of the budget...

Question 17

On a big weekend of college football in 2010, the Associated Press found fans… who said they are making concessions yet determined to indulge their passion. "We basically let the wife and children not eat for a week so we can do this," joked Neil Plotkin, who was attending his first Penn State game. If Neil's marginal rate of substitution between weeks of food and his first Penn State game is 1, what do you predict the marginal rate of substitution between food and subsequent Penn State games is for Neil?
A) less than one
B) greater than one
C) equal to one
D) cannot determine without knowing Neil's income

Accepted Answer

The joke made by Neil implies that he is sacrificing the basic necessities of food for the first Penn State game, indicating a higher value for the game compared to food. Therefore, we can predict that the marginal rate of substitution between food and subsequent Penn State games will be less than one as the value of each additional game will be lower than the value of the first game.

Question 18

"If Bill's income increases from $80,000 per year to $91,000 per year and he consumes pickup trucks and lamb chops with his money, Bill's budget line shifts outward and the increase in income means he can consume more trucks and more lamb." Is this statement true or false? Briefly explain your answer.

Accepted Answer

The answer of "If Bill's income increases from $80,000 per...

Question 19

How is a budget line similar to a production possibilities frontier? How do they differ?

Accepted Answer

The answer of How is a budget line similar to...

Question 20

You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not?

Accepted Answer

The answer of You are studying with a friend and...

Quiz 9: Possibilities, Preferences, and Choices

During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. How does the fall in gasoline price affect the relative price of air travel in terms of travel by car?