Question 1

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.If the indifference curves are horizontal,then we can conclude that
A) X does not affect the individual's utility.
B) Y does not affect the individual's utility.
C) both X and Y affect the individual's utility.
D) neither good affects the individual's utility.

Accepted Answer

If the indifference curves are horizontal, it means that the individual's utility is not affected by changes in the quantity of one of the goods, in this case, good X. The level of satisfaction remains the same regardless of the quantity of X consumed.

Question 2

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.Which of the following can cause a parallel,outward shift in the budget line?
A) A rise in the consumer's income.
B) A rise in the marginal value of X in terms of Y.
C) A fall in the price of good X.
D) A fall in the price of good Y.

Accepted Answer

A rise in the consumer's income would cause an outward shift in the budget line, as the consumer can afford to purchase more of both Goods X and Y at all price levels. Choices B, C, and D would cause a rotation in the budget line, not a parallel shift.

Question 3

Suppose a price index is formed to measure changes in the price level between 1999 to 2005.A price index based on changes in the cost of the basket of goods purchased by the typical consumer in 2005 is called a
A) relative price index.
B) consumer price index.
C) Laspeyres price index.
D) Paasche price index.

Accepted Answer

The answer of Suppose a price index is formed to...

Question 4

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.If the indifference curves are downward sloping straight lines (rather than convex curves),then we can conclude that
A) X does not affect the individual's utility.
B) Y does not affect the individual's utility.
C) both X and Y affect the individual's utility.
D) neither good affects the individual's utility.

Accepted Answer

If the indifference curves are downward sloping straight lines, it means that the individual's marginal rate of substitution between X and Y is constant, which implies that both goods affect the individual's utility.

Question 5

If Odetta's marginal value of freedom fries is $8 per pound,then
A) Odetta will be indifferent if she trades 1 pound of freedom fries for $8 worth of all other goods.
B) Odetta thinks 1 pound of freedom fries is worth $8,2 pounds of freedom fries are worth $16,and so forth.
C) Odetta will not purchase any freedom fries if the price is more than $8 per pound.
D) Odetta must sacrifice $8 in currency for every pound of freedom fries she chooses to purchase.

Accepted Answer

C  Odetta's marginal value of freedom fries is $8 per pound, meaning she values each additional pound at $8. She will be indifferent to trading 1 pound for $8 worth of other goods (A), and she will not buy if the price exceeds $8 per pound (C).

Question 6

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.Suppose the consumer is spending all of his income buying some of both goods.If the marginal value of X is greater than the relative price of X,how can the consumer improve his level of satisfaction?
A) By purchasing more of both goods.
B) By purchasing more of good X and less of good Y.
C) By purchasing more of good Y and less of good X.
D) The consumer cannot improve his level of satisfaction because he is at the optimum.

Accepted Answer

If the marginal value of X is greater than the relative price of X, it implies that the consumer is willing to pay more for additional units of X than what it costs. This means that the consumer is not maximizing their satisfaction as they could increase their overall satisfaction by purchasing more of X and less of Y. By doing so, they would be able to satisfy their higher marginal utility for X while decreasing the consumption of Y, which has a lower marginal value. Therefore, the best choice would be to purchase more of good X and less of good Y.

Question 7

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.Suppose the consumer is at an optimum,spending all his income on good X.How are the marginal value of X and the relative price of X related at this corner solution?
A) The marginal value of X and the relative price of X must be equal.
B) The marginal value of X must be less than or equal to the relative price of X.
C) The marginal value of X must be greater than or equal to the relative price of X.
D) There is no definite relationship between the marginal value and the relative price of X.

Accepted Answer

In a corner solution where the consumer spends all their income on good X, the marginal value of X must be greater than or equal to the relative price of X. This is because the consumer sees enough value in good X to spend all their income on it, even at its current price, indicating that the marginal value (the additional satisfaction from consuming one more unit of X) is at least as high as the cost of acquiring it.

Question 8

If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows,then
A) the consumer is at the optimum.
B) the consumer's level of satisfaction would increase if he buys more marshmallows and less of other goods.
C) a surplus of marshmallows exists in the market.
D) the optimum contains fewer marshmallows than the consumer is currently buying.

Accepted Answer

If the price of marshmallows exceeds the marginal value that the consumer places on them, it means that the consumer is paying more for marshmallows than they are worth to them. Therefore, the consumer is buying too many marshmallows and should reduce their consumption to reach their optimum level of consumption. This means that the optimum contains fewer marshmallows than the consumer is currently buying.

Question 9

Suppose the consumer's indifference curves are concave (i.e.,bowed away from the origin)instead of convex.In this situation, A) along an indifference curve,the marginal value of X is falling as more X and less Y is consumed. B) all baskets on the budget line give the consumer the same level of satisfaction. C) the marginal value of X must equal P_X/P_Y at the consumer's optimum. D) the consumer's optimum is always a corner solution.

Accepted Answer

In the context of consumer theory, indifference curves are typically convex to the origin, reflecting diminishing marginal rates of substitution between goods. If the indifference curves are concave (bowed away from the origin), it suggests that the consumer experiences increasing marginal rates of substitution. This unusual situation implies that as the consumer substitutes one good for another, they are willing to give up increasingly larger amounts of the second good to obtain additional units of the first good. This scenario often leads to a corner solution at the consumer's optimum, where the consumer chooses to consume only one of the two goods because the marginal value of one good becomes significantly higher than the other as consumption increases.

Question 10

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.

-Refer to Budget Lines.Which of the following changes is consistent with the situation shown in the diagram?
A) The consumer's income fell.
B) The relative price of good X in terms of good Y fell.
C) The absolute price of good X rose,and the absolute price of good Y fell.
D) The absolute price of both goods rose,with the price of good X rising by the higher percentage.

Accepted Answer

The answer of Budget Lines

The following questions refer to the...

Question 11

In using the composite-good convention in an indifference curve diagram,economists
A) compare the prices of market baskets at different points in time.
B) divide the world's production into two classes,goods and services.
C) divide the world's goods into two classes,high quality goods and low quality goods.
D) lump together all goods but one into a single good measured in a single unit,like dollars.

Accepted Answer

The composite-good convention in an indifference curve diagram involves lumping together all goods but one into a single good measured in a single unit, like dollars. This allows economists to simplify the diagram and make it easier to analyze. By doing so, they can focus on the relationship between two goods instead of the complex interaction between all goods in the market.

Question 12

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.

-Refer to Budget Lines.If the consumer purchased basket D last year and basket A this year,
A) They are definitely better off this year than last year.
B) They were definitely better off last year than this year.
C) They could be equally well off in the two years.
D) It is impossible to tell wether they are better or worse off,even if we knew the person's preferences.

Accepted Answer

Since we do not know the person's preferences, we cannot definitively say whether they are better off or worse off. However, it is possible for them to be equally well off in the two years since they are both on the same budget line.

Question 13

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.

-Refer to Budget Lines.If the consumer purchased basket B last year and purchases basket C this year,we can conclude that
A) the consumer is not behaving optimally.
B) the consumer's tastes changed between this year and last year.
C) the consumer's indifference curves cannot be convex.
D) the law of demand does not hold for this consumer.

Accepted Answer

If the consumer has changed their consumption basket from B to C, it indicates that their preferences have changed between the two periods. This change in preferences could be due to various factors, such as a change in income, a change in the prices of goods, or simply a change in taste. However, if the consumer was behaving rationally, they would have chosen the consumption bundle that maximizes their utility given their budget constraint, so we cannot conclude that the consumer is not behaving optimally. The convexity of indifference curves and the law of demand are not directly related to this scenario.

Question 14

The price of wine has risen from $7 to $9 per bottle and the price of cheese has fallen from $6 to $5 per pound,while Anne's income has stayed fixed at $46 per week.Since the price changes,Anne has been buying 4 bottles of wine and 2 pounds of cheese per week.We can conclude that
A) Anne is indifferent about the price changes.
B) Anne is worse off after the price changes.
C) Anne is better off after the price changes.
D) Anne may be worse off,better off,or indifferent after the price changes.

Accepted Answer

Anne is worse off because she is spending more on wine and less on cheese, but her total expenditure remains the same, indicating she cannot afford the same combination of goods as before.

Question 15

Suppose a price index is formed to measure changes in the price level between 1989 to 1995.If the price index focuses on the year-to-year costs of the typical market basket purchased in 1989,then the reported price changes
A) seem worse for consumers than they really are.
B) seem better for consumers than they really are.
C) accurately reflect changes in people's levels of satisfaction.
D) may overestimate or underestimate the effects of price changes,depending on whether consumers' indifference curves are relatively flat or steep.

Accepted Answer

This price index, by focusing on the costs of a 1989 market basket over time, may not account for changes in consumer behavior, such as substituting cheaper goods for more expensive ones. This can make the situation seem worse for consumers than it actually is, as it doesn't reflect their ability to adapt to price changes by altering their consumption patterns.

Question 16

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.How would a budget line be affected if income and both prices all simultaneously doubled?
A) It would shift out so that all quantities are doubled.
B) It would shift in so that all quantities are halved.
C) It would not be affected.
D) The slope would be doubled.

Accepted Answer

The budget line would not be affected because the relative prices of goods X and Y remain the same, and the consumer's ability to purchase a combination of these goods remains unchanged when income and both prices double simultaneously.

Question 17

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.

-Refer to Budget Lines.The only situation where we can conclude that this consumer's tastes must have changed is when we observe him
A) buying B last year and buying A this year.
B) buying D last year and buying A this year.
C) buying B last year and buying C this year.
D) buying D last year and buying C this year.

Accepted Answer

A change from buying B last year to buying C this year suggests a change in preferences, as both choices lie on different budget lines, indicating a shift in the consumer's tastes.

Question 18

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.When the price of good X rises,what happens to the budget line?
A) The budget line shifts in,with no change in the slope.
B) The budget line becomes flatter,and the horizontal intercept moves to the right.
C) The budget line becomes steeper,with no change in the vertical intercept.
D) The budget line pivots about the horizontal intercept,with the vertical intercept moving up.

Accepted Answer

When the price of good X rises, the budget line becomes steeper. This is because the amount of good Y that can be purchased with the given budget decreases relative to the increase in the price of good X. The vertical intercept remains the same because it represents the maximum amount of good Y that can be purchased at the initial price of good X.

Question 19

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.

-Refer to Goods X and Y.Which of the following would cause the vertical intercept to move upwards?
A) A decrease in the price of good Y.
B) An increase in the price of good X.
C) An increase in the price of good Y
D)   A  decrease in the price of good Y.

Accepted Answer

The answer of Goods X and Y

For the following questions,...

Question 20

Suppose a price index is formed to measure changes in the price level between 2005 to 2010.To form a Laspeyres price index,one would
A) compare the cost of the typical basket of goods purchased in 2005 with the cost of the typical basket of goods purchased in 2010.
B) calculate the increase in the cost of the typical market basket purchased in 2005.
C) calculate the increase in the cost of the typical market basket purchased in 2010.
D) take the typical basket of goods purchased in 2007,and compare the costs of that basket in 2005 and 2010.

Accepted Answer

A Laspeyres price index uses the quantities of goods from the base year (2005) and compares the cost of this fixed basket in the base year to its cost in the comparison year (2010).

Quiz 3: The Behavior of Consumers

Suppose a price index is formed to measure changes in the price level between 1999 to 2005.A price index based on changes in the cost of the basket of goods purchased by the typical consumer in 2005 is called a

If Odetta's marginal value of freedom fries is $8 per pound,then

If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows,then

Suppose the consumer's indifference curves are concave (i.e.,bowed away from the origin) instead of convex.In this situation,

Budget Lines The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year. -Refer to Budget Lines.Which of the following changes is consistent with the situation shown in the diagram?

In using the composite-good convention in an indifference curve diagram,economists

Budget Lines The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year. -Refer to Budget Lines.If the consumer purchased basket D last year and basket A this year,

Budget Lines The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year. -Refer to Budget Lines.If the consumer purchased basket B last year and purchases basket C this year,we can conclude that

The price of wine has risen from $7 to $9 per bottle and the price of cheese has fallen from $6 to $5 per pound,while Anne's income has stayed fixed at $46 per week.Since the price changes,Anne has been buying 4 bottles of wine and 2 pounds of cheese per week.We can conclude that

Suppose a price index is formed to measure changes in the price level between 1989 to 1995.If the price index focuses on the year-to-year costs of the typical market basket purchased in 1989,then the reported price changes

Budget Lines The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year. -Refer to Budget Lines.The only situation where we can conclude that this consumer's tastes must have changed is when we observe him

Suppose a price index is formed to measure changes in the price level between 2005 to 2010.To form a Laspeyres price index,one would