Question 1

Gertrude has a $15 budget to spend on soda and crackers.Soda costs $1 per bottle and crackers cost 50¢ each.If the price of soda increases to $2 per bottle,the ________ rotates inward and there is a movement along the ________.
A) budget line; demand curve for crackers
B) demand curve; indifference curve for crackers
C) budget line; demand curve for soda
D) demand curve; indifference curve for soda
E) indifference curves; demand curve for soda

Accepted Answer

When the price of soda increases, the budget line rotates inward because Gertrude can no longer afford as many bottles of soda as before. However, there is a movement along the demand curve for soda because the price has changed, causing her to adjust the quantity of soda she is willing to buy. The demand curve for crackers is not affected by the change in price of soda, so options A and B are incorrect. Option D is also incorrect because there is no movement along an indifference curve - those represent the same level of satisfaction regardless of price or budget. Option E does not make sense as indifference curves are not related to prices or budget constraints.

Question 2

In the indifference curve/budget line diagram,consumers reach higher indifference curves when
A) their budget decreases.
B) the price of only the good measured along the y-axis increases.
C) the price of only the good measured along the x-axis increases.
D) the price of either good falls.
E) the price of either good rises.

Accepted Answer

Consumers reach higher indifference curves, which represent higher levels of utility or satisfaction, when their purchasing power increases. This can happen if the price of either good falls, allowing them to buy more of one or both goods within their budget.

Question 3

A consumer's demand for tuna can be found from an indifference curve diagram by doing which of the following?
A) observing what happens to the consumption of tuna for different income levels
B) finding where the budget line is tangent to an indifference curve for one price of tuna
C) allowing the price of tuna to change and observing the different best, affordable levels of tuna
D) changing the indifference curves and seeing the changes in the quantity of tuna the consumer demands
E) It is impossible to derive a demand curve from an indifference curve graph.

Accepted Answer

The demand curve can be derived by changing the price of tuna and observing the different quantities of tuna that are affordable and preferred, which is shown by the tangency points of the budget line and indifference curves.

Question 4

At her best affordable point,Kris
i.is on her budget line.
ii.is on the highest attainable indifference curve.
iii.has a marginal rate of substitution equal to the relative price of the goods.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii

Accepted Answer

At her best affordable point, Kris is on her budget line, indicating she is utilizing her entire budget (i). She is also on the highest attainable indifference curve, which means she cannot reach a higher level of satisfaction given her budget constraints (ii). Additionally, at this point, her marginal rate of substitution (MRS) is equal to the relative price of the goods, ensuring that she is maximizing her utility given the prices of the goods and her budget (iii).

Question 5

The point where an indifference curve just touches the budget line at one point
A) is the best affordable point.
B) is where the marginal rate of substitution exceeds the relative price by as much as possible.
C) is a point on the consumer's supply of spending curve.
D) cannot be possible because indifference curves always cross the budget line at two points.
E) None of the above answers is correct.

Accepted Answer

The point where the indifference curve just touches the budget line at one point is the highest attainable level of utility. It is the best affordable point because it maximizes the utility that the consumer can achieve with their limited income.

Question 6

In the indifference curve/budget line framework,at the consumer equilibrium,the consumer
A) is on the budget line.
B) is on the highest attainable indifference curve.
C) has a marginal rate of substitution equal to the relative price of the goods.
D) Only answers A and B are correct.
E) Answers A, B, and C are correct.

Accepted Answer

At the consumer equilibrium, the consumer is on the highest attainable indifference curve (B) and on the budget line (A). The marginal rate of substitution (MRS) between the two goods is equal to the relative price of the goods (C), which means that the consumer is allocating their budget efficiently between the two goods. Therefore, all three answers (A, B, and C) are correct.

Question 7

If a person consumes only two goods,which of the following is NOT necessary for a consumer to be at his or her best affordable point of consumption?
A) The consumer chooses a bundle of goods that lies on his or her budget line.
B) The consumer is on his or her highest attainable indifference curve.
C) The consumer chooses equal amounts of both goods.
D) The marginal rate of substitution between the two goods is equal to the relative price of those two goods.
E) The indifference curve is tangent to the budget line.

Accepted Answer

The consumer does not necessarily need to choose equal amounts of both goods to be at their best affordable point. The best affordable point occurs where the indifference curve is tangent to the budget line, and the marginal rate of substitution between the two goods is equal to the relative price of those two goods. Therefore, options A, B, D, and E are all necessary for the consumer to be at their best affordable point of consumption.

Question 8

Luke enjoys eating tuna sashimi and drinking Pepsi.His consumer equilibrium occurs where his budget line
A) just touches the lowest indifference curve at one point.
B) just touches the highest indifference curve at one point.
C) touches every indifference curve.
D) is below every indifference curve.
E) More information about Luke's budget is needed to determine his consumer equilibrium.

Accepted Answer

Luke's consumer equilibrium occurs where his marginal utility per dollar spent is equal for both goods. This happens where the budget line just touches the highest indifference curve at one point, as this is where he is maximizing his total utility given his budget constraint.

Question 9

Using Gabriel's budget line and his indifference curves between horseback riding lessons and baseball lessons,and then changing the prices of each activity holding his income constant,which of the following can be derived?
A) Gabriel's demand curve for each activity
B) Gabriel's supply curve for each activity
C) Gabriel's marginal benefit for each activity
D) Gabriel's net gain for each activity
E) Both answers A and B are correct.

Accepted Answer

Changing the prices while holding income constant will allow us to trace out the different points on Gabriel's demand curve for each activity, showing the quantity of each activity he is willing to purchase at different price levels. Supply curves deal with the behavior of producers, not consumers, so option B is incorrect. Marginal benefit is a concept that deals with the additional satisfaction a consumer gains from consuming one more unit of a good or service, but this concept cannot be derived solely from Gabriel's budget line and indifference curves, so option C is incorrect. Net gain is also not something that can be derived solely from Gabriel's budget line and indifference curves, so option D is incorrect. Option E is incorrect because only answer A is correct.

Question 10

A consumer is in equilibrium when the
A) consumer is buying any combination of goods and services on his or her budget line.
B) consumer is buying the combination of goods and services on the budget line and on the highest attainable indifference curve.
C) marginal rate of substitution is as small as possible.
D) marginal rate of substitution is as large as possible.
E) marginal rate of substitution exceeds the relative price of the two goods by as much as possible.

Accepted Answer

In order to be in equilibrium, the consumer must be buying a combination of goods and services on the budget line, meaning they are spending all of their budget, and on the highest attainable indifference curve, meaning they are maximizing their utility. This is represented by the point where the budget line intersects the highest indifference curve.

Question 11

If a consumer's marginal rate of substitution is greater than the relative price of the goods,the consumer is
A) at his or her best affordable point.
B) perhaps at his or her best affordable point.
C) not at his or her best affordable point and should move along his or her indifference curve to a higher budget line.
D) not at his or her best affordable point and should move along his or her budget line to a higher indifference curve.
E) More information is needed to determine if the consumer is or is not at his or her best affordable point.

Accepted Answer

When a consumer's marginal rate of substitution (MRS) is greater than the relative price of the goods, it means the consumer values the goods being substituted more than the market does. Therefore, the consumer can increase utility by moving along the budget line to a point where the MRS equals the relative price, which corresponds to a higher indifference curve.

Question 12

A point where the budget line is just touching an indifference curve at one point is
A) the least affordable point.
B) the best affordable point.
C) on the lowest attainable indifference curve.
D) Both answers B and C are correct.
E) Both answers A and C are correct.

Accepted Answer

When the budget line is just touching an indifference curve at one point, it means that the consumer is spending all of their available income on purchasing a combination of goods that gives them the highest level of satisfaction (i.e. on the highest indifference curve they can afford). Therefore, answer B is correct as it identifies this point as the best affordable point. Answer C is also correct, but it does not provide information regarding affordability. Answer A is incorrect as this point is not necessarily the least affordable, but rather the point where the budget constraint and preferences just meet.

Question 13

In an indifference curve/budget line diagram,at the consumer equilibrium the slope of the budget line
A) equals the slope of the indifference curve.
B) is greater than the slope of the indifference curve.
C) is less than the slope of the indifference curve.
D) may be greater than, equal to, or less than the slope of the indifference curve.
E) has nothing to do with the equilibrium.

Accepted Answer

At the consumer equilibrium point, the consumer is deriving the highest possible satisfaction from the given budget constraint. Therefore, the slope of the budget line (which represents the rate at which the consumer can trade one good for another) must be equal to the slope of the indifference curve (which represents the rate at which the consumer is willing to trade one good for another in order to maintain the same level of satisfaction). This is because if the slopes were not equal, the consumer could reallocate their consumption towards a bundle that would give them higher satisfaction. Thus, the consumer equilibrium occurs where the budget line is tangent to the indifference curve.

Question 14

At the best affordable point,
A) the marginal rate of substitution reaches its minimum value.
B) relative prices reach their minimum value.
C) the marginal rate of substitution equals the relative price.
D) the marginal rate of substitution equals real income.
E) the marginal rate of substitution reaches its maximum value.

Accepted Answer

At the best affordable point, the consumer is maximizing utility subject to the budget constraint. This means that the marginal rate of substitution (MRS) must equal the relative price (the ratio of the prices of the two goods being consumed). If the MRS were higher than the relative price, the consumer would be willing to substitute more of the cheaper good for the more expensive one, thus reducing costs and increasing utility. If the MRS were lower than the relative price, the consumer would be better off substituting less of the cheaper good for the more expensive one, thus increasing utility. Therefore, at the best affordable point, the MRS must equal the relative price.

Question 15

Gertrude has a $15 budget to spend on soda and crackers.Soda costs $1 per bottle and crackers cost 50¢ each.The quantity of soda is measured on the vertical axis.If the price of soda increases to $2 per bottle and the price of crackers increase to $1 each,the
A) indifference curves shift inward.
B) indifference curves shift outward.
C) budget line shifts inward.
D) budget line shifts outward.
E) demand curve for soda shifts leftward.

Accepted Answer

The budget line and not the indifference curves shift as a result of an increase in prices. The price increase implies that Gertrude can afford fewer items than before with her $15 budget. Therefore, her budget line shifts inward, reducing her purchasing power.

Question 16

In a budget line/indifference curve diagram,at the consumer's equilibrium at the best affordable point,
A) any movement upward or downward on the budget line will move the consumer to a less preferred point.
B) any movement to the northeast to higher indifference curves moves the consumer to a less preferred point.
C) the slope of the budget line exceeds the marginal rate of substitution by as much as possible.
D) the budget line has a positive slope and the indifference curve has a negative slope.
E) the budget line has a negative slope and the indifference curve has a positive slope.

Accepted Answer

At the consumer's equilibrium at the best affordable point, the consumer is already at the highest possible indifference curve that they can afford. Any movement upward or downward on the budget line will mean that the consumer can either afford more or less of at least one good, which will result in a less preferred point. Therefore, option A is the correct answer. Option B is incorrect because moving to higher indifference curves would mean consuming more of both goods and would be a preferred outcome. Option C is incorrect because the marginal rate of substitution is equal to the slope of the indifference curve, not the budget line. Likewise, option D is incorrect because both the budget line and the indifference curve typically have a negative slope. Option E is also incorrect because the budget line has a positive slope and the indifference curve has a negative slope.

Question 17

When Bo is at his best affordable consumption point,his marginal rate of substitution is
A) greater than the relative price.
B) equal to the relative price.
C) less than the relative price.
D) equal to one.
E) maximized.

Accepted Answer

At Bo's best affordable consumption point, he has allocated his budget in such a way that the marginal utility per dollar spent on each good is equal. This is because any deviation from this allocation would result in a lower overall utility. This implies that the marginal rate of substitution (MRS) between the goods is equal to their relative price. Therefore, option B) is the correct answer.

Question 18

At the point where the budget line is just touching an indifference curve at one point,
A) the slope of the budget line is equal to the slope of the indifference curve.
B) the marginal rate of substitution equals the relative price.
C) the consumer can change his or her consumption and can move to a higher indifference curve.
D) Both answers A and B are correct.
E) Both answers B and C are correct.

Accepted Answer

When the budget line is just touching an indifference curve at one point, it means that the consumer is allocating their income in the most efficient way possible. This implies that the slope of the budget line (which represents the relative price of the two goods) is equal to the slope of the indifference curve (which represents the consumer's marginal rate of substitution). At this point, the consumer is also in equilibrium, meaning that they are maximizing their utility given their budget constraint. However, this does not mean that the consumer cannot change their consumption and move to a higher indifference curve if their income or the prices of the goods change.

Question 19

In an indifference curve/budget line diagram,generally when the price of a good increases,the consumer purchases
A) less of the good and moves to a lower indifference curve.
B) less of the good and moves to a higher indifference curve.
C) more of the good and moves to a higher indifference curve.
D) more of the good and moves to a lower indifference curve.
E) the same amount of the good and moves to a higher indifference curve.

Accepted Answer

If the price of a good increases, the budget line pivots inwards from the y-intercept, making the consumer's budget constraint tighter. As a result, the consumer can afford to buy less of the good without increasing expenditure beyond their budget. This leads to a movement down along the original indifference curve to a point where the new budget line is tangent to the indifference curve. Hence, the consumer purchases less of the good and moves to a lower indifference curve.

Question 20

The indifference curve/budget line diagram concludes that Jim is definitely in equilibrium when he is
A) spending all his budget.
B) saving some of his budget.
C) consuming the combination of goods and services that is affordable and on the highest attainable indifference curve.
D) consuming a combination of goods and services that is on an indifference curve.
E) None of the above answers is correct.

Accepted Answer

According to the indifference curve/budget line diagram, Jim is in equilibrium when he is consuming a combination of goods and services that is both affordable (falls within the budget line) and on the highest attainable indifference curve (maximizes his satisfaction/welfare). This point of equilibrium is the optimal level of consumption for Jim given his budget and preferences. Therefore, options A, B, D, and E are not correct.

Quiz 13: Consumer Choice and Demand

Gertrude has a $15 budget to spend on soda and crackers.Soda costs $1 per bottle and crackers cost 50¢ each.If the price of soda increases to $2 per bottle,the rotates inward and there is a movement along the .

In the indifference curve/budget line diagram,consumers reach higher indifference curves when

A consumer's demand for tuna can be found from an indifference curve diagram by doing which of the following?

At her best affordable point,Kris i.is on her budget line. ii.is on the highest attainable indifference curve. iii.has a marginal rate of substitution equal to the relative price of the goods.

The point where an indifference curve just touches the budget line at one point

In the indifference curve/budget line framework,at the consumer equilibrium,the consumer

If a person consumes only two goods,which of the following is NOT necessary for a consumer to be at his or her best affordable point of consumption?

Luke enjoys eating tuna sashimi and drinking Pepsi.His consumer equilibrium occurs where his budget line

Using Gabriel's budget line and his indifference curves between horseback riding lessons and baseball lessons,and then changing the prices of each activity holding his income constant,which of the following can be derived?

A consumer is in equilibrium when the

If a consumer's marginal rate of substitution is greater than the relative price of the goods,the consumer is

A point where the budget line is just touching an indifference curve at one point is

In an indifference curve/budget line diagram,at the consumer equilibrium the slope of the budget line

At the best affordable point,

Gertrude has a $15 budget to spend on soda and crackers.Soda costs $1 per bottle and crackers cost 50¢ each.The quantity of soda is measured on the vertical axis.If the price of soda increases to $2 per bottle and the price of crackers increase to $1 each,the

In a budget line/indifference curve diagram,at the consumer's equilibrium at the best affordable point,

When Bo is at his best affordable consumption point,his marginal rate of substitution is

At the point where the budget line is just touching an indifference curve at one point,

In an indifference curve/budget line diagram,generally when the price of a good increases,the consumer purchases

The indifference curve/budget line diagram concludes that Jim is definitely in equilibrium when he is