Test Bank For Microeconomics 13th Edition Michael Parkin Full Download

Test Bank for Microeconomics 13th Edition Michael Parkin
Test Bank for Microeconomics 13th Edition Michael

Parkin
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Microeconomics, 13e (Parkin)
Chapter 9 Possibilities, Preferences, and Choices
1 Consumption Possibilities
1) Goods that can be bought in any quantity desired are called

A) divisible goods.
B) indivisible goods.
C) invisible goods.
D) inferior goods.
Answer: A
Topic: Consumption Possibilities
Skill: Definition
Status: Old
A-level heading: Consumption Possibilities
AACSB: Analytical thinking
2) Which of the following is NOT a divisible good?

A) gasoline
B) tap water
C) electricity
D) movies
Answer: D
Skill: Definition
Status: Old
3) Budget lines are drawn on a diagram with the

A) price of the good on the vertical axis and its quantity on the horizontal axis.
B) price of one good on the vertical axis and the price of another good on the horizontal axis.
C) quantity of the good on the vertical axis and its price on the horizontal axis.
D) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
Answer: D
Topic: Consumption Possibilities, Budget Line
Skill: Definition
Status: Old
1
Copyright © 2019 Pearson Education, Inc.
4) The variables that determine a household's budget line are
A) its preferences and income.
B) its preferences and prices.
C) prices and income.
D) None of the above are correct.
Answer: C
Skill: Definition
Status: Old
5) A budget line shows the

A) consumption possibilities of a consumer at a given level of income and prices.
B) complete set of preferences for a household at various incomes.
C) consumption possibilities for several sets of relative prices at a level of income.
D) rate at which consumers wish to substitute one good for another.
Answer: A
Skill: Definition
Status: Old
6) The budget line

A) shows the limits to a household's consumption choices.
B) illustrates a household's preferences.
C) defines a household's consumption when prices change.
D) shows the income a household needs to be able to buy goods and services.
Answer: A
Skill: Definition
Status: Old
7) For a consumer, a budget line shows the boundary between

A) what is desired and what is not desired.
B) what is needed and what is not needed.
C) what is affordable and what is not affordable.
D) what is available and what is not available.
Answer: C
Skill: Definition
Status: Old
2
8) A household's consumption choices cannot exceed limits created by
A) only the household's income.
B) only the prices of the goods and services that it buys.
C) both the household's income and the prices of the goods and services that it buys.
D) neither the household's income nor the prices of the goods and services that it buys.
Answer: C
Skill: Conceptual
Status: Old
9) In order to determine a household's budget line, you must know the

A) prices of the goods bought and the household's income.
B) prices of the goods bought, but not the household's income.
C) household's income, but not the prices of goods bought.
D) household's income, prices of the goods bought, and the household's preferences.
Answer: A
Skill: Definition
Status: Old
10) Sam buys gasoline and coffee each week. In order to draw his budget line between gasoline and
coffee, Sam would have to know
A) only how much income he has available to spend on gasoline and coffee.
B) only the prices of one gallon of gasoline and one pound of coffee.
C) only how much gasoline he wants to buy and how much coffee he wants to drink.
D) both how much income he has to spend and the prices of one gallon of gasoline and one pound of
coffee.
Answer: D
Skill: Definition
Status: Old
11) In order to draw an individual's budget line, we must know

A) prices and preferences.
B) prices and income.
C) income and preferences.
D) prices, income, and preferences.
Answer: B
Skill: Definition
Status: Old
3
12) Lily is a college student who likes to buy only two goods: Cheetos and Pepsi. To determine Lily's
budget line, you need to know
I. Lily's preferences for Cheetos and Pepsi.
II. The prices of Cheetos and Pepsi.
III. Lily's income.
A) II only
B) I and II
C) II and III
D) I, II and III
Answer: C
Skill: Definition
Status: Old
13) All points below the budget line are

A) inferior to every point on the budget line.
B) preferred to every point on the budget line.
C) affordable.
D) Answers A and C are correct.
Answer: C
Skill: Definition
Status: Old
14) All points above the budget line are

A) inferior to every point on the budget line.
B) preferred to every point on the budget line.
C) unaffordable.
D) Both answers B and C are correct.
Answer: C
Skill: Definition
Status: Old
4
15) Moving along a given budget line
A) prices and real income both decrease.
B) prices fall and real income is constant.
C) real income decreases and prices are constant.
D) prices and real income are constant.
Answer: D
Skill: Definition
Status: Old
16) Tonya, who is rich, and Jerome, who is poorer, both buy orange juice and croissants for lunch at the
student cafeteria. Their budget constraints on a diagram with orange juice on the vertical axis and
croissants on the horizontal have the same
A) horizontal intercepts.
B) vertical intercepts.
C) slopes.
D) midpoints.
Answer: C
Skill: Analytical
Status: Old
17) Ernie has an income of $40 which he plans to spend on cookies and milk. The price of milk is $1 per
gallon, and the price of cookies is $2 per dozen. If Ernie buys 12 gallons of milk, how many dozens of
cookies will he buy if he spends all of his income?
A) 28
B) 20
C) 14
D) 12
Answer: C
Skill: Analytical
Status: Old
5
18) Jake plans to spend $100 on fried chicken and Pepsi. The price of a fried chicken is $5 and Pepsi is $2
per bottle. If Jake buys 10 fried chickens how many bottles of Pepsi can he buy?
A) 50
B) 10
C) 25
D) 75
Answer: C
Skill: Analytical
Status: Old
19) Bob plans to spend $60 per month on DVD movie rentals and CDs. The price of a movie rental is $3
and the price of a CD is $15. If Bob rents 5 DVDs per month, how many CDs can he buy?
A) 1
B) 2
C) 3
D) 4
Answer: C
Skill: Analytical
Status: Old
20) Larry spends all his $800 monthly income on pizza and gasoline. The price of pizza is $4 a slice, and
the price of gasoline is $2 per gallon. If Larry buys 150 slices of pizza per month, his budget constraint
will allow him to buy ________ gallons of gas per month.
A) 100
B) 80
C) 120
D) 200
Answer: A
Skill: Analytical
Status: Old
6
21) Joe has $50 to spend on pizza and movies. If movies are $5 each and a pizza is $10 then, assuming he
spends all his money, he can buy which of the following bundle of goods?
A) 6 movies and 2 pizzas
B) 8 movies and 4 pizzas
C) 2 movies and 6 pizzas
D) 6 movies and 4 pizzas
Answer: A
Skill: Analytical
Status: Old
22) Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a
pizza is $10 and the price of a magazine is $5. What is the maximum amount of pizza Dave can buy each
week?
A) 40
B) 20
C) 200
D) 60
Answer: B
Skill: Analytical
Status: Old
pizza is $10 and the price of a magazine is $5. If Dave buys 15 pizza each week, what is the maximum
number of magazines can he buy?
A) 40
B) 20
C) 10
D) 200
Answer: C
Skill: Analytical
Status: Old
7
pizza is $10 and the price of a magazine is $5. If Dave buys 20 magazines per week, which of the
following amount of pizza is not affordable to him?
A) 10
B) 20
C) 9
D) All of the above answers are correct because none of the listed amounts of pizza are affordable.
Answer: B
Skill: Analytical
Status: Old
25) Junkfood Jill spends all of her income on jellybeans and Jolt cola. Suppose that Jill's income is $30, the
price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. Which of the following
combinations of jellybeans and Jolt cola lies inside of Jill's budget line?
A) 5 bags of jellybeans and 0 bottles of Jolt
B) 4 bags of jellybeans and 4 bottles of Jolt
C) 3 bags of jellybeans and 6 bottles of Jolt
D) 2 bags of jellybeans and 8 bottles of Jolt
Answer: D
Skill: Analytical
Status: Old
8
26) Consider the budget line in the above figure. If the consumer's income is $120, then the price of a book
is
A) $10 per book.
B) $12 per book.
C) $6 per book.
D) More information is needed to determine the price of a book.
Answer: B
Skill: Graphing
Status: Old
27) Consider the budget line in the above figure. If the consumer's income is $120, then the price of a
movie is
A) $24 per movie.
B) $12 per movie.
C) $5 per movie.
D) More information is needed to determine the price of a movie.
Answer: C
Skill: Graphing
Status: Old
9
28) Consider the budget line in the above figure. If the consumer's income is $240, then the price of a book
is
A) $20 per book.
B) $24 per book.
C) $12 per book.
D) More information is needed to determine the price of a book.
Answer: B
Skill: Graphing
Status: Old
29) Consider the budget line in the above figure. If the consumer's income is $240, then the price of a
movie is
A) $24 per movie.
B) $12 per movie.
C) $10 per movie.
D) More information is needed to determine the price of a movie.
Answer: C
Skill: Graphing
Status: Old
10
30) Consider the budget line in the above figure. If the consumer has income of $240, what is the relative
price of movies?
A) .42 books
B) 2.4 books
C) $10 per movie
D) $24 per movie
Answer: A
Skill: Graphing
Status: Old
pizza is $10 and the price of a magazine is $5. What is Dave's real income in terms of magazines?
A) 20
B) 40
C) 200
D) 10
Answer: B
Topic: Consumption Possibilities, Real Income
Skill: Analytical
Status: Old
11
32) Given the budget line in the above figure, if income is $60, then the price of a pizza is ________ and
the price of a CD is ________.
A) $5; $20
B) $6; $4
C) $15; 15
D) $10; $15
Answer: D
Skill: Graphing
Status: Old
33) According to the budget line in the above figure, which of the following combinations is
unaffordable?
A) 1 pizza and 3 CDs
B) 3 pizzas and 2 CDs
C) 2 pizzas and 4 CDs
D) All of the above are affordable.
Answer: C
Skill: Graphing
Status: Old
12
34) The figure above shows Tanya's consumption possibilities. Tanya spends $100 per month on movies
and restaurant meals. The price of a movie ticket is ________ and the price of a restaurant meal is
________.
A) $7; $15
B) $10; $10
C) $20; $5
D) $5; $20
Answer: D
Skill: Graphing
Status: Old
35) The figure above shows Tanya's consumption possibilities. Which of the following combinations of
goods is NOT affordable?
A) 8 movie tickets and 3 restaurant meals.
B) 12 movie tickets and 2 restaurant meals.
C) 10 movie tickets and 3 restaurant meals.
D) 6 movie tickets and 3 restaurant meals.
Answer: C
Skill: Graphing
Status: Old
13
36) The figure above shows Tanya's consumption possibilities when the price of a restaurant meal is $20.
If the price of a restaurant meal falls to $10 and Tanya buys 12 movie tickets, how many restaurant meals
can she buy?
A) 2
B) 3
C) 4
D) 5
Answer: C
Skill: Graphing
Status: Old
37) Based on the above figure showing a budget line, which of the following combinations of soda and
bottled water are NOT affordable?
A) 3 bottles of water and 4 cans of soda
B) 4 bottles of water and 2 cans of soda
C) 2 bottles of water and 6 cans of soda
D) None of the above, that is, all the combinations listed are affordable.
Answer: C
Skill: Graphing
Status: Old
14
38) The above figure gives your budget line between CDs and magazines. Which combination of CDs and
magazines is NOT affordable?
A) combination a
B) combination b
C) combination c
D) both combinations b and d
Answer: A
Skill: Graphing
Status: Old
39) The figure above gives your budget line for magazine and CDs per month. Given that your income
equals $60 per month, what is the price of a magazine and the price of a CD?
A) The price of a magazine is $12 per magazine and the price of a CD is $6 per CD.
B) The price of a magazine is $5 per magazine and the price of a CD is $10 per CD.
C) The price of a magazine is $4 per magazine and the price of a CD is $12 per CD.
D) It is impossible to tell from the information given.
Answer: B
Skill: Graphing
Status: Old
15
equals $60 per month, what is your real income in terms of CDs?
A) 3 CDs
B) 5 CDs
C) 6 CDs
D) $60/month
Answer: C
Skill: Graphing
Status: Old
equals $60 per month, what is your real income in terms of magazines?
A) 12 magazines
B) 6 magazines
C) 2 magazines
D) $60/month
Answer: A
Skill: Graphing
Status: Old
42) The above figure gives your budget line between CDs and magazines. What would allow you to buy
more CDs?
A) a decrease in the relative price of CDs
B) an increase in income
C) a decrease in the price of magazines with no change in the price of CDs
D) All of the above changes would allow you to buy more CDs.
Answer: D
Skill: Graphing
Status: Old
16
43) The above figure gives your budget line between CDs and magazines. If the price of a magazine falls,
then the budget line
A) shifts outward and the slope does not change.
B) rotates inward with no change in the horizontal intercept.
C) rotates inward with no change in the vertical intercept.
D) rotates outward with no change in the vertical axis.
Answer: D
Topic: Consumption Possibilities, Change in Price
Skill: Graphing
Status: Old
44) The above figure gives your budget line between CDs and magazines. The slope of the budget line is
________ CD per magazine.
A) 1/2
B) -1/2
C) -1
D) -2
Answer: B
Topic: The Budget Equation
Skill: Graphing
Status: Old
45) Which of the following factors is NOT part of the budget equation?
A) relative prices
B) real income
C) quantities of goods
D) preferences
Answer: D
Skill: Analytical
Status: Old
17
46) Shaniq consumes only magazine and CDs. Her income equals $60 per month. CDs are $12 each and
magazines are $5 each. What is the equation for her budget line?
A) $60 = Qm + QCD
B) $60 = $12Qm + $5QCD
C) 12 = -2Qm + 6
D) $60 = 12QCD + 5Qm
Answer: D
Skill: Definition
Status: Old
47) If units of pizza are plotted on the horizontal axis, and units of hot dogs plotted on the vertical axis,
and the price of a hot dog increases the
A) x-intercept and the slope of the budget line will increase.
B) y-intercept and the slope of the budget line will increase.
C) x-intercept and the slope of the budget line will decrease.
D) y-intercept and the slope of the budget line will decrease.
Answer: D
Skill: Conceptual
Status: Old
48) If Sam has $60.00 each week to spend on gasoline and coffee, and their respective prices are $1.50 per
gallon and $3.00 per pound, which of the following equations represents his budget line?
A) $60.00 = $1.50/Qg + $3.00/Qc
B) $60.00 = Qg /$1.50 + Qc /$3.00
C) $60.00 = $1.50(Qg) + $3.00(Qc)
D) $60.00 = $1.50(Qg) - $3.00(Qc)
Answer: C
Skill: Definition
Status: Old
18
49) If Sam has $80.00 each week to spend on tacos and magazines, and their respective prices are $.50 per
taco and $4.00 per magazine, which of the following equations represents his budget line?
A) $80.00 = $.50/Qt + $4.00/Qm
B) $80.00 = Qt/Qm + $.50 /$4.00
C) $80.00 = $.50(Qm) + $4.00(Qt)
D) $80.00 = $.50(Qt) + $4.00(Qm)
Answer: D
Skill: Definition
Status: Old
50) Suppose the price of coffee is $3, the price of a bagel is $2 and a person's budget is $40. The budget
line's equation is
A) $2/Qbagel + $3/Qcoffee = $40.
B) $2(Qbagel) + $3(Qcoffee) = $40.
C) Qbagel /$2 + Qcoffee /$3 = $40.
D) Qbagel + Qcoffee = $40/($3 + $2).
Answer: B
Skill: Definition
Status: Old
51) Mary has $10 to spend each week on coffee, Qc and magazines, Qm. The price of a coffee is $1, and
the price of a magazine is $2. Mary's budget equation is
A) Qm = 10 - Qc.
B) Qm + Qc = 20.
C) $1 × Qc + $2 × Qm = $10.
D) Qm = 10 - 2 × Qc.
Answer: C
Skill: Definition
Status: Old
19
52) Hilda buys only cauliflower, Qc, and geraniums, Qg. The equation for Hilda's initial budget line is $40
= $2 × Qc + $4 × Qg. If Hilda's income increases by $20, the price of cauliflower decreases by $1, and the
price of geraniums increases by $1, the equation of her new budget line is
A) $60 = $1 × Qc + $5 × Qg.
B) $60 + $1 × Qc = $5 × Qg.
C) $0 = $60 + $1 × Qc + $5 × Qg.
D) $60 = $5 × Qc - $1 × Qg.
Answer: A
Skill: Definition
Status: Old
53) Given the budget line in the above figure, which of the following combinations of pizza and milk are
affordable?
A) 0 pizzas, 12 gallons of milk
B) 2 pizzas, 2 gallons of milk
C) 4 pizzas, 4 gallons of milk
D) All of the above combinations are affordable.
Answer: B
Skill: Graphing
Status: Old
20
54) Given the budget line in the above figure, what is the household's real income in terms of pizzas per
month?
A) 5 pizzas per month
B) 4 pizzas per month
C) 3 pizzas per month
D) All of above represent the household's real income.
Answer: A
Skill: Graphing
Status: Old
55) Given the budget line in the above figure, what is the relative price of pizza?
A) 10 gallons of milk per pizza
B) 6 gallons of milk per pizza
C) 4 gallons of milk per pizza
D) 2 gallons of milk per pizza
Answer: D
Topic: Consumption Possibilities, Relative Price
Skill: Graphing
Status: Old
56) Larry spends all his $800 monthly income on pizza and milk. The price of pizza is $4 a slice, and the
price of milk is $2 per quart. Larry's real monthly income in terms of pizza is
A) 400 slices.
B) $800.
C) 200 slices.
D) $400.
Answer: C
Skill: Analytical
Status: Old
57) Real income can be measured by

A) the slope of the budget line.
B) the area under the budget line.
C) the length of the budget line.
D) an intercept of the budget line.
Answer: D
Skill: Definition
Status: Old
21
58) Real income measures the
A) slope of the budget line.
B) purchasing power of a given income.
C) slope of the preference map.
D) area under the indifference curve.
Answer: B
Skill: Definition
Status: Old
59) Real income is

A) equal to money income minus taxes.
B) equal to the income earned legally.
C) equal to money income plus benefits minus taxes.
D) the maximum amount of goods and services that a household can afford.
Answer: D
Skill: Definition
Status: Old
60) Real income equals a household's income

A) in terms of the quantity of goods the household can buy.
B) multiplied by the prices of the goods it buys.
C) divided by the prices of the goods it buys.
D) multiplied by the relative prices of the goods it buys.
Answer: A
Skill: Conceptual
Status: Old
61) Suppose you are graphing the quantity of bagels on the vertical axis and the quantity of coffee on the
horizontal axis. A household's real income in terms of bagels is the
A) relative price of coffee.
B) relative price of bagels.
C) point at which the budget line intersects the x-axis.
D) point at which the budget line intersects the y-axis.
Answer: D
Skill: Conceptual
Status: Old
22
pizza is $10 and the price of a magazine is $5. What is Dave's real income in terms of magazines?
A) 20
B) 40
C) 200
D) 10
Answer: B
Skill: Conceptual
Status: Old
63) John has $40 to spend on pizza and tacos. Pizza costs $10 each and tacos are $1 per taco. John's real
income
A) is $40.
B) is 4 pizzas or 40 tacos.
C) is 4 pizzas plus 40 tacos.
D) depends only on his money wage.
Answer: B
Skill: Conceptual
Status: Old
64) Suppose the price of coffee is $3 each, the price of bagels is $2 each and a person's budget is $40. The
person's real income is
A) $40.
B) $13.33 in terms of bagels.
C) $13.33 in terms of coffee.
D) $8.
Answer: C
Skill: Conceptual
Status: Old
23
65) The ________ is the price of one good ________ the price of another good.
A) relative price; times
B) relative price; divided by
C) budget; times
D) budget; divided by
Answer: B
Skill: Definition
Status: Old
In 2012, the Associated Press examined the effect higher gas prices on consumption of other goods. It said
that the increase in the price of gasoline has decreased the quantity of other goods, such as food, that
people consume. (Source: Associated Press, September 28, 2012)
66) If consumers spend their income either on gasoline or food, then an increase in the price of gasoline
rotates the budget line
A) inward along the "food" axis.
B) outward along the "food" axis.
C) inward along the "gasoline" axis.
D) outward along the "gasoline" axis.
Answer: A
Skill: Analytical
Status: Old
67) If the price of gasoline increases and the price of food remains the same, then real income measured in
terms of
A) gasoline increases.
B) gasoline decreases.
C) food increases.
D) food decreases.
Answer: A
Skill: Analytical
Status: Old
24
68) The price of one good divided by the price of another good is a
A) money price.
B) relative price.
C) budget constraint.
D) divisible good.
Answer: B
Skill: Definition
Status: Old
69) A relative price is the

A) price of one good divided by the price of another good.
B) same as opportunity cost.
C) price of a given good divided by income.
D) Both answers A and B are correct.
Answer: D
Skill: Definition
Status: Old
70) If the relative price of pizza in terms of movies is 3, this means that
A) the opportunity cost of a pizza is 3 movies.
B) 3 pizzas can be traded for 9 movies.
C) in terms of the dollars that must be spent to buy the product, pizza is more expensive than movies.
D) All of the above answers are correct.
Answer: D
Skill: Analytical
Status: Old
71) Suppose the price of coffee is $3 each, the price of bagels is $2 each and a person's budget is $40. The
relative price of coffee is
A) 1.5 bagels.
B) 2/3 of a bagel.
C) 13.33 bagels.
D) 20 bagels.
Answer: A
Skill: Analytical
Status: Old
25
72) Suppose the price of chocolate chip cookies is $4.00 per pound and the price of a slice of cake is $2.00
per slice. The relative price of cookies in terms of cake is
A) $2.00 per cookie.
B) $4.00 per cookie.
C) 1/2 slice of cake per cookie.
D) 2 slices of cake per cookie.
Answer: D
Skill: Analytical
Status: Old
73) Suppose the price of chocolate chip cookies is $4.00 per pound and the price of a slice of cake is $2.00
per slice. The relative price of cake in terms of cookies is
A) 1/2 pound of cookies per cake.
B) 2 pounds of cookies per cake.
C) 1/2 slice of cake per cookie.
D) 2 slices of cake per cookie.
Answer: A
Skill: Analytical
Status: Old
74) Larry spends all his $800 monthly income on pizza and milk. The price of pizza is $4 a slice, and the
price of milk is $2 per quart. The relative price of milk is
A) 2 slices of pizza per quart.
B) 0.5 slices of pizza per quart.
C) $2 per quart.
D) 0.5 quarts per slice of pizza.
Answer: B
Skill: Analytical
Status: Old
26
75) Suppose that the price of a bag of jellybeans is $6, and the price of a bottle of cola is $2. The relative
price of cola is
A) 3 bags of jellybeans per bottle of cola.
B) 2 bags of jellybeans per bottle of cola.
C) 1/3 bag of jellybeans per bottle of cola.
D) $2.
Answer: C
Skill: Analytical
Status: Old
76) When the price of only one good rises, the relative price of that good
A) falls.
B) rises.
C) does not change.
D) rises if it is a normal good and falls if it is an inferior good.
Answer: B
Skill: Analytical
Status: Old
77) Suppose that initially the price of a bag of jellybeans is $6, and the price of a bottle of cola is $2. If the
price of a bottle of cola increases, then the relative price of jellybeans
A) increases.
B) decreases.
C) stays the same, but the relative price of cola increases.
D) stays the same, but the relative price of cola decreases.
Answer: B
Skill: Analytical
Status: Old
27
78) If the price of peanuts increases by 10 percent and the price of potato chips does NOT change, then
the relative price of peanuts with respect to potato chips will ________ and the relative price of potato
chips with respect to peanuts will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Skill: Analytical
Status: Old
79) Real income is equal to ________ and a relative price is given by ________.
A) the dollar amount of income divided by the dollar price of a good; the dollar price of one good divided
by the dollar price of the good whose relative price is being calculated
B) the dollar price of one good divided by the dollar price of the good whose relative price is being
calculated; the dollar amount of income divided by the dollar price of a good
C) The dollar price of one good divided by the dollar price of another good; the dollar price of one good
divided by the dollar price of the good whose relative price is being calculated
D) the dollar amount of income; real income divided by the dollar amount of income
Answer: A
Skill: Definition
Status: Old
80) The magnitude of the slope of the budget line is determined by

A) the marginal rate of substitution.
B) the level of income.
C) the consumer's preferences for the goods.
D) relative prices.
Answer: D
Skill: Definition
Status: Old
28
81) The magnitude of the slope of the budget line is the ratio of
A) a price to its quantity.
B) a quantity to its price.
C) two prices.
D) two marginal rates of substitution.
Answer: C
Skill: Definition
Status: Old
82) The magnitude of the slope of the budget line measures the
A) opportunity cost of the good on the horizontal axis in terms of the good on the vertical axis.
B) opportunity cost of the good on the vertical axis in terms of the good on the horizontal axis.
C) price elasticity of demand.
D) price elasticity of supply.
Answer: A
Skill: Definition
Status: Old
83) The magnitude of the slope of the budget line is equal to the ________ or ________ of the good plotted
on the ________ in terms of the other good.
A) relative price; marginal cost; y-axis
B) relative price; total cost; y-axis
C) relative price; opportunity cost; x-axis
D) price; opportunity cost; x-axis
Answer: C
Skill: Definition
Status: Old
84) Nick consumes two goods, chips and lemonade. Located on the x-axis is the quantity of chips and on
the y-axis is the quantity of lemonade. The magnitude of the slope of the budget line equals the
A) price of lemonade.
B) price of chips.
C) price of chips/price of lemonade.
D) price of lemonade/price of chips.
Answer: C
Skill: Definition
Status: Old
29
85) Movies are $10 a ticket, and DVD rentals are $5 a DVD. With movies on the vertical axis, the
magnitude of the slope of the budget line is
A) 1/2.
B) 2.
C) 5.
D) 10.
Answer: A
Skill: Conceptual
Status: Old
86) If all prices rise by 5 percent and money income remains constant, the new budget line will have
A) a steeper slope.
B) a flatter slope.
C) a positive slope.
D) the same slope.
Answer: D
Skill: Conceptual
Status: Old
87) If all prices fall by 5 percent and money income remains constant, the new budget line will have
A) a positive slope.
B) the same slope.
C) a steeper slope.
D) a flatter slope.
Answer: B
Skill: Conceptual
Status: Old
30
88) Jake spends $200 on fried chickens and Pepsi. The price of a fried chicken is $5 and Pepsi is $2.50 per
bottle. With the quantity of Pepsi being measured along the vertical axis, the slope of Jake's budget line is
________ per fried chicken.
A) 0.5 of a Pepsi
B) -0.5 of a Pepsi
C) 2 Pepsis
D) -2 Pepsis
Answer: D
Skill: Analytical
Status: Old
89) Ron spends $150 on movie tickets and pizza. The price of a pizza is $10 and a movie ticket is $7.50.
With the quantity of movies measured along the vertical axis, the slope of Ron's budget line (with movies
on the vertical axis) is ________ per pizza
A) 1.33 movies
B) -1.33 movies
C) 0.75 of a movie
D) -0.75 of a movie
Answer: B
Skill: Analytical
Status: Old
90) If the price of the good measured on the horizontal axis falls, a consumer's budget line
A) becomes flatter.
B) becomes steeper.
C) shifts rightward and its slope does not change.
D) shifts leftward and its slope does not change.
Answer: A
Skill: Analytical
Status: Old
31
91) Junkfood Jill spends all of her income on jellybeans and cola. Suppose that Jill's income is $30, the
price of a bag of jellybeans is $6, and the price of a bottle of cola is $2. If bags of jellybeans are graphed
along the vertical axis and bottles of cola are graphed along the horizontal axis, what is the slope of the
budget line?
A) 3
B) -3
C) 1/3
D) -1/3
Answer: D
Skill: Analytical
Status: Old
Price of a
Money income Price of a pizza
Case hamburger
(dollars) (dollars)
(dollars)
A 100 20 2
B 50 10 5
C 25 5 4
92) In the table above, in terms of units of pizza, real income is

A) lower in case A than in cases B and C.
B) lower in case B than in cases A and C.
C) lower in case C than in cases A and B.
D) equal in all three cases.
Answer: D
Skill: Analytical
Status: Old
93) In the table above, in terms of units of hamburgers, real income is

A) lower in case A than in cases B and C.
B) lower in case B than in cases A and C.
C) lower in case C than in cases A and B.
D) equal in all three cases.
Answer: C
Skill: Analytical
Status: Old
32
94) In the table above, which case has the lowest relative price for a hamburger?
A) case A
B) case B
C) case C
D) All three cases have an equal relative price for a hamburger.
Answer: A
Skill: Analytical
Status: Old
95) The above figure gives your budget line between CDs and magazines. Which combination of CDs and
magazines are affordable?
A) combination a
B) combinations a, b, c, and d
C) combination c only
D) combinations b, c, and d
Answer: D
Skill: Graphing
Status: Old
33
96) The above figure gives your budget line between CDs and magazines. Which of the following changes
would NOT allow you to buy more CDs?
A) a decrease in the relative price of CDs
B) an increase in income
C) a decrease in the price of magazines with no change in the price of CDs
D) None of the above answers is correct because all of the above changes allow you to buy more CDs.
Answer: D
Skill: Graphing
Status: Old
97) The above figure gives your budget line between CDs and magazines. If the price of a magazine
increased, then the budget line
A) shifts outward and the slope does not change.
B) rotates inward with no change in the horizontal intercept.
C) rotates inward with no change in the vertical intercept.
D) rotates outward with no change in the vertical axis.
Answer: C
Skill: Graphing
Status: Old
34
98) Given the budget line in the above figure, which of the following combinations of pizza and milk are
affordable?
A) 0 pizzas, 10 gallons of milk
B) 2 pizzas, 6 gallons of milk
C) 4 pizzas, 1 gallon of milk
D) All of the above combinations are affordable.
Answer: D
Skill: Graphing
Status: Old
99) Given the budget line in the above figure, what is the household's real income in terms of pizzas per
month?
A) 5 pizzas per month
B) 4 pizzas per month
C) 3 pizzas per month
D) All of above represent the household's real income.
Answer: A
Skill: Graphing
Status: Old
35
100) Given the budget line in the above figure, what is the relative price of pizza?
A) 10 gallons of milk per pizza
B) 6 gallons of milk per pizza
C) 4 gallons of milk per pizza
D) 2 gallons of milk per pizza
Answer: D
Skill: Graphing
Status: Old
101) The above figure shows Katie's consumption possibilities. The relative price of a movie ticket is
A) 1 restaurant meal.
B) 0.25 restaurant meals.
C) 4 restaurant meals.
D) 2 restaurant meals.
Answer: B
Skill: Graphing
Status: Old
36
102) The above figure shows Katie's consumption possibilities. The relative price of a restaurant meal is
A) 1 movie ticket.
B) 0.25 movie tickets.
C) 4 movie tickets.
D) 2 movie tickets.
Answer: C
Skill: Graphing
Status: Old
103) The figure above shows Ronald's budget line. He has a weekly income of $20 and he spends it on hot
dogs and hamburgers. The relative price of a hamburger is
A) 1/2 hot dog.
B) 5 hot dogs.
C) $20.
D) 2 hot dogs.
Answer: A
Skill: Graphing
Status: Old
37
104) The figure above shows Ronald's budget line. He has a weekly income of $20, which he spends on
hotdogs and hamburgers. Ronald's real income in terms of hamburgers
A) depends on the quantity of hamburgers consumed.
B) depends on the quantity of hotdogs consumed.
C) is $20.
D) is 10 hamburgers.
Answer: D
Skill: Graphing
Status: Old
105) The figure above shows Ronald's budget line. He has a weekly income of $20, which he spends on
hotdogs and hamburgers. Now Ronald's income decreases to $10 per week and the price of a hotdog
doubles. Ronald's budget line becomes ________ and ________.
A) flatter; shifts rightward
B) flatter; does not shift
C) steeper; shifts rightward
D) steeper; shifts leftward
Answer: D
Topic: Budget Line
Skill: Graphing
Status: Old
106) Suppose Sam plans to buy only popcorn and soda. He has $40 to spend per week. A change in which
of the following variables will change Sam's consumption possibilities?
I. price of popcorn
II. income
III. preferences
IV. utility
A) II only
B) I and II
C) I, II and III
D) III and IV
Answer: B
Skill: Conceptual
Status: Old
38
107) Joe has $50, which he spends on movies and pizza. If the price of a pizza falls, Joe can
A) consume more of both goods.
B) consume more pizza only if he gives up some movies.
C) consume more movies only if he gives up some pizza.
D) consume more pizza only.
Answer: A
Skill: Conceptual
Status: Old
108) Given the budget line in the figure above, the combination of chips that is NOT affordable is
A) a.
B) b.
C) c.
D) d.
Answer: C
Skill: Graphing
Status: Old
39
109) In the figure above, real income in terms of bags of corn chips is shown by point
A) a.
B) b.
C) c.
D) d.
Answer: D
Skill: Graphing
Status: Old
110) In the figure above, a decrease in the price of a bag of potato chips would result in the budget line
A) making a parallel shift toward point a.
B) making a parallel shift toward point c.
C) becoming flatter.
D) becoming steeper.
Answer: C
Skill: Graphing
Status: Old
111) In the figure above, an increase in the price of a bag of potato chips would result in the budget line
Answer: D
Skill: Graphing
Status: Old
112) In the figure above, an increase in income would result in the budget line
Answer: B
Topic: Consumption Possibilities, Change in Income
Skill: Graphing
Status: Old
40
113) Sharmila has a budget line for DVDs and books. DVDs are on the vertical axis and books on the
horizontal. Her budget line becomes steeper as
A) the price of a DVD falls.
B) the price of a DVD rises.
C) her income decreases.
D) her income increases.
Answer: A
Skill: Analytical
Status: Old
114) Inga's graph of her budget line has apples per week on the vertical axis and loaves of bread per week
on the horizontal. A fall in the price of an apple shifts the
A) horizontal intercept leftward.
B) horizontal intercept rightward.
C) vertical intercept downward.
D) vertical intercept upward.
Answer: D
Skill: Analytical
Status: Old
115) A budget line is drawn with automobiles on the vertical axis and boats on the horizontal. Imposing a
tax on boats that boosts the price of a boat makes the
A) indifference curves flatter.
B) indifference curves steeper.
C) budget line flatter.
D) budget line steeper.
Answer: D
Skill: Analytical
Status: Old
41
116) In the above figure, the budget line would rotate in the direction indicated as a result of a
A) rise in the price of a book.
B) fall in the price of a book.
C) rise in the price of a movie.
D) decrease in income.
Answer: B
Skill: Graphing
Status: Old
117) When your income increases

A) your budget line shifts rightward and its slope does not change.
B) your budget line shifts leftward and its slope does not change.
C) the slope of your budget line increases.
D) the slope of your budget line decreases.
Answer: A
Skill: Analytical
Status: Old
42
118) An increase in a consumer's income creates a
A) rightward parallel shift of the budget line.
B) leftward parallel shift of the budget line.
C) rightward rotation of the budget line, so that the budget line becomes steeper.
D) leftward rotation of the budget line, so that the budget line becomes steeper.
Answer: A
Skill: Analytical
Status: Old
119) If an individual's income increases

A) the person's indifference curves shift outward in a parallel manner.
B) the person's budget line shifts outward in a parallel manner.
C) there will be no impact on the individual's budget line or indifference curves.
D) None of the above answers is correct.
Answer: B
Skill: Analytical
Status: Old
43
120) In the above figure, a shift in the budget line in the direction indicated would occur as a result of
A) a decrease in money income.
B) an increase in money income.
C) a fall in the price of a movie.
D) a rise in the price of movie.
Answer: B
Skill: Graphing
Status: Old
44
121) In the above figure, if the price of milk rises, the budget line
A) rotates outward and the slope becomes steeper.
B) shifts inward and its slope does not change.
C) rotates inward and the slope becomes steeper.
D) rotates inward and the slope becomes more shallow.
Answer: C
Skill: Graphing
Status: Old
122) In the above figure, if the price of pizza falls, the budget line
A) rotates outward and becomes steeper.
B) shifts leftward and its slope does not change.
D) rotates inward and becomes flatter.
Answer: A
Skill: Graphing
Status: Old
45
123) In the above figure if money income increases, the budget line
A) shifts outward and its slope does not change.
B) shifts inward and its slope does not change.
C) rotates outward and becomes steeper.
D) rotates outward and becomes more shallow.
Answer: A
Skill: Graphing
Status: Old
124) In the above figure, the budget line would rotate in the direction indicated as a result of a
A) rise in the price of a book.
B) decrease in income.
C) rise in the price of a movie.
D) fall in the price of a movie.
Answer: C
Skill: Graphing
Status: Old
46
125) If money income increases, a consumer's budget line
A) becomes flatter.
B) becomes steeper.
D) shifts leftward and its slope does not change.
Answer: C
Skill: Analytical
Status: Old
126) In the figure above, which budget line results in the most real income in terms of compact discs?
A) AD
B) BD
C) CD
D) Real income is equal for all three budget lines.
Answer: C
Skill: Graphing
Status: Old
47
127) In the figure above, which budget line results in the most real income in terms of carrots?
A) AD
B) BD
C) CD
D) Real income is equal for all three budget lines.
Answer: D
Skill: Graphing
Status: Old
128) In the figure above, which budget line has the lowest relative price of compact discs?
A) AD
B) BD
C) CD
D) The relative price is equal for all three budget lines.
Answer: C
Skill: Graphing
Status: Old
129) In the figure above, which budget line has the lowest relative price of carrots?
A) AD
B) BD
C) CD
D) The relative price is equal for all three budget lines.
Answer: A
Skill: Graphing
Status: Old
130) In the figure above, suppose the original budget line is BD. A rise in the price of a compact disc will
A) rotate the budget line to AD.
B) rotate the budget line to CD.
C) not move the budget line.
D) result in a parallel leftward shift of the budget line.
Answer: A
Skill: Graphing
Status: Old
48
131) In the figure above, suppose the original budget line is BD. A fall in the price of a compact disc will
A) rotate the budget line to AD.
B) rotate the budget line to CD.
C) not move the budget line.
D) result in a parallel leftward shift of the budget line.
Answer: B
Skill: Graphing
Status: Old
132) The figure above shows Ilene's budget line. The price of a can of cat food is $2. Ilene's income per
week is
A) $10.
B) $40.
C) $56.
D) $160.
Answer: B
Skill: Graphing
Status: Old
49
133) The figure above shows Ilene's budget line. The price of a can of cat food is $2. The price of a can of
dog food
A) is $1.60.
B) is $4.00.
C) is $5.00.
D) cannot be determined without more information.
Answer: C
Skill: Graphing
Status: Old
134) The figure above shows Ilene's budget line. If her dog, Muffin, runs away and she adopts another
cat, named Sphynx, the budget line shown in the figure will
A) become flatter.
B) become steeper.
C) shift outward (because cats eat less).
D) not move.
Answer: D
Skill: Graphing
Status: Old
135) The figure above shows Ilene's budget line. The price of a can of cat food is $2. If the price of a can of
cat food rises, her budget line will
A) rotate inward toward the origin.
B) rotate outward away from the origin.
C) shift leftward in a parallel manner.
D) shift rightward in a parallel manner.
Answer: A
Skill: Graphing
Status: Old
50
136) The figure above shows Ilene's budget line. If the price of a can of cat food rises, her budget line
rotates so that the vertical intercept is
A) unchanged, but the horizontal intercept is closer to the origin.
B) unchanged, but the horizontal intercept is farther away from the origin.
C) farther away from the origin, but the horizontal intercept is closer to the origin.
D) closer to the origin, but the horizontal intercept is farther away from the origin.
Answer: A
Skill: Graphing
Status: Old
137) The figure above shows Ilene's budget line. If Ilene's income rises, her budget line will
A) rotate and become flatter.
B) rotate and become steeper.
C) shift rightward and its slope will not change.
D) shift leftward and its slope will not change.
Answer: C
Skill: Graphing
Status: Old
51
138) In the above figure, Sheryl's monthly budget line for movies and plays shifted, as shown. The shift in
the budget line is parallel, so the shift might be because
A) the price of a movie fell and nothing else changed.
B) the price of a play fell and nothing else changed.
C) Sheryl's income decreased and nothing else changed.
D) Sheryl's income increased and nothing else changed.
Answer: D
Skill: Graphing
Status: Old
139) As Judy moves down along her budget line

A) the opportunity cost of the good measured along the x-axis increases.
B) the opportunity cost of the good measured along the y-axis increases.
C) her income decreases.
D) her income does not change and neither does the relative price of the goods.
Answer: D
Skill: Conceptual
Status: Old
52
140) Waldo buys only two items, pretzels and ham sandwiches. Waldo has $24 in income, pretzels cost
$0.60 per bag and ham sandwiches cost $2.40 each. Which of the following statements is TRUE for the
information given above?
A) Waldo's real income expressed in terms of pretzels is 40 bags of pretzels.
B) Waldo's real income expressed in terms of ham sandwiches is 10 ham sandwiches.
C) The relative price of a ham sandwich in terms of pretzels is 4 bags of pretzels per ham sandwich.
Answer: D
Topic: Consumption Possibilities, Budget Equation
Skill: Analytical
Status: Old
141) Waldo buys only two items, pretzels and ham sandwiches. Waldo has $24 in income, pretzels cost
$0.60 per bag and ham sandwiches cost $2.40 each. If Waldo's budget line is constructed with ham
sandwiches along the horizontal axis and bags of pretzels along the vertical axis, then
A) the horizontal intercept of the budget line will be 40 ham sandwiches.
B) the vertical intercept of the budget line will be 10 bags of pretzels.
C) the slope of the budget line will be -4 bags of pretzels per ham sandwich.
Answer: C
Skill: Analytical
Status: Old
142) Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a
tennis lesson is $20, and the price of a concert ticket is $40. If the quantity of tennis lessons is QT, and the
quantity of concert tickets is QC, Melissa's budget line equation is
A) QC = 6 - 0.5QT.
B) QC = 12 - 2QT.
C) QC = 240 - 40QT.
D) QC = 20 + 40QT.
Answer: A
Skill: Definition
Status: Old
53
tennis lesson is $20, and the price of a concert ticket is $40. The slope of Melissa's budget line, with tennis
lessons on the horizontal axis, is
A) -2.
B) -0.5.
C) -6.
D) -12.
Answer: B
Skill: Definition
Status: Old
tennis lesson is $20, and the price of a concert ticket is $40. Melissa's real monthly income in terms of
concerts is
A) 40.
B) 20.
C) 6.
D) 12.
Answer: C
Skill: Analytical
Status: Old
tennis lesson is $20, and the price of a concert ticket is $40. If the price of a tennis lesson rises to $30,
Melissa's budget line, with tennis lessons on the horizontal axis
A) shifts rightward with no change in its slope.
B) shifts leftward with no change in its slope.
C) becomes flatter.
D) becomes steeper.
Answer: D
Skill: Analytical
Status: Old
54
146) The figure above shows Sam's budget line. Which of the following combinations of gasoline and
coffee are NOT available to Sam?
A) 40 gallons of gasoline and 0 pounds of coffee
B) 32 gallons of gasoline and 4 pounds of coffee
C) 8 gallons of gasoline and 8 pounds of coffee
D) 16 gallons of gasoline and 16 pounds of coffee
Answer: D
Skill: Graphing
Status: Old
147) The figure above shows Sam's budget line. Which of the following combinations of gasoline and
coffee are available to Sam?
A) 40 gallons of gasoline and 1 pound of coffee
B) 1 gallon of gasoline and 20 pounds of coffee
C) 16 gallons of gasoline and 12 pounds of coffee
D) 12 gallons of gasoline and 16 pounds of coffee
Answer: C
Skill: Graphing
Status: Old
55
148) The figure above shows Sam's budget line. Sam's budget line shows
A) which combinations of gasoline and coffee Sam can afford.
B) which combinations of gasoline and coffee Sam is planning to purchase.
C) whether or not Sam thinks gasoline and coffee are worth their prices.
D) whether or not Sam currently has enough gasoline and enough coffee.
Answer: A
Skill: Graphing
Status: Old
149) The figure above shows Sam's budget line. Why will Sam not purchase 36 gallons of gasoline and 4
pounds of coffee?
A) because he does not like this combination
B) because this combination does not contain enough coffee to satisfy him
C) because this combination contains more gasoline than his gasoline tank will hold
D) because he cannot afford this combination
Answer: D
Skill: Graphing
Status: Old
150) The figure above shows Sam's budget line. Which of the following formulas represents Sam's budget
equation?
A) $60.00 = $1.50/Qg + $3.00/Qc
B) $60.00 = Qg /$1.50 + Qc /$3.00
C) $60.00 = $1.50(Qg) + $3.00(Qc)
D) $60.00 = $1.50(Qg) - $3.00(Qc)
Answer: C
Skill: Graphing
Status: Old
56
151) The figure above shows Sam's budget line. Which of the following equals the vertical intercept of
Sam's budget line?
A) Y/Pc
B) Y/Pg
C) -(Pc/Pg)
D) -(Pg/Pc)
Answer: B
Skill: Graphing
Status: Old
152) The figure above shows Sam's budget line. The vertical intercept of Sam's budget line is equal to
A) the quantity of coffee purchased if zero gasoline is purchased.
B) Pc/Y.
C) the quantity of gasoline purchased if zero coffee is purchased.
D) Pg/Y.
Answer: C
Skill: Graphing
Status: Old
153) The figure above shows Sam's budget line. Which of the following equals the slope of Sam's budget
line?
A) Y/Pc
B) Y/Pg
C) (Pc/Pg)
D) (Pg/Pc)
Answer: C
Skill: Graphing
Status: Old
57
154) The figure above shows Sam's budget line. The magnitude of the slope of Sam's budget line is equal
to the
A) quantity of coffee purchased divided by the quantity of gasoline purchased.
B) price of coffee divided by the price of gasoline.
C) quantity of gasoline purchased divided by the quantity of coffee purchased.
D) price of gasoline divided by the price of coffee.
Answer: B
Skill: Graphing
Status: Old
155) The figure above shows Sam's budget line. Which of the following would result in Sam's budget line
rotating inward and not changing its vertical intercept?
A) a decline in his preference for coffee
B) a fall in the price of a gallon of gasoline
C) a decrease in Sam's income
D) an increase in the price of a pound of coffee
Answer: D
Skill: Graphing
Status: Old
rotating outward and not changing its horizontal intercept?
A) a fall in the price of a pound of coffee
B) a rise in the price of a pound of coffee
C) a fall in the price of a gallon of gasoline
D) a rise in the price of a gallon of gasoline
Answer: C
Skill: Graphing
Status: Old
58
shifting leftward and not changing its slope?
A) a decline in his preferences for both gasoline and coffee
B) an equal percentage reduction in the prices of both a gallon of gasoline and a pound of coffee
C) a decrease in Sam's income
D) a fall in the ratio of the price of a gallon of gasoline to the price of a pound of coffee
Answer: C
Skill: Graphing
Status: Old
158) Lizzie's budget line is shown in the figure above. If Lizzie's income is $20, which of the following
formulas represents her budget equation?
A) QC = 20 + QM
B) QC = 20 - QM
C) QC = -20 + 2 QM
D) QC = 20 - 2QM
Answer: D
Skill: Graphing
Status: Old
59
159) Lizzie's budget line is shown in the figure above. If Lizzie's income is $20, which of the following
formulas represents her budget equation?
A) QM = 20 - 2QC
B) 20 = QC + QM
C) 20 = QC + 2QM
D) QM = 20 + QC
Answer: C
Skill: Graphing
Status: Old
160) Lizzie's budget line is shown in the figure above. The slope of the budget line is ________ cookies per
magazine.
A) 2
B) -2
C) 0.5
D) -0.5
Answer: B
Skill: Graphing
Status: Old
161) Lizzie's budget line is shown in the figure above. The relative price of a magazine is ________ per
magazine.
A) 2 cookies
B) 0.5 of a cookie
C) $1
D) $2
Answer: A
Skill: Graphing
Status: Old
60
162) Lizzie's budget line is shown in the figure above. The relative price of a cookie is ________ per
cookie.
A) 2 magazines
B) 0.5 of a magazine
C) $1
D) $2
Answer: B
Skill: Graphing
Status: Old
163) Lizzie's budget line is shown in the figure above. Lizzie's real income in terms of magazines is
________ magazines.
A) 5
B) 10
C) 15
D) 20
Answer: B
Skill: Graphing
Status: Old
164) Lizzie's budget line is shown in the figure above. Lizzie's real income in terms of cookies is ________
cookies.
A) 5
B) 10
C) 15
D) 20
Answer: D
Skill: Graphing
Status: Old
61
165) Lizzie's budget line is shown in the figure above. If the price of a cookie rises, Lizzie's real income in
terms of cookies ________ and her real income in terms of magazines ________.
A) decreases; increases
B) increases; decreases
C) decreases; does not change
D) increases; does not change
Answer: C
Skill: Graphing
Status: Old
166) Lizzie's budget line is shown in the figure above. If the price of a magazine rises, Lizzie's real income
in terms of magazines books ________ and her real income in terms of cookies ________.
A) increases; does not change
B) decreases; does not change
C) decreases; increases
D) increases; decreases
Answer: B
Skill: Graphing
Status: Old
167) Lizzie's budget line is shown in the figure above. If the price of a magazine falls, the budget line
A) shifts rightward and its slope does not change.
C) becomes flatter.
D) becomes steeper.
Answer: C
Skill: Graphing
Status: Old
168) Lizzie's budget line is shown in the figure above. If the price of a cookie falls, the budget line
C) becomes flatter.
D) becomes steeper.
Answer: D
Skill: Graphing
Status: Old
62
169) Lizzie's budget line is shown in the figure above. If Lizzie's income increases, her budget line
C) becomes flatter.
D) becomes steeper.
Answer: A
Skill: Graphing
Status: Old
170) Which of the following statements best describes a consumer's budget line?
A) It shows all combinations of goods among which the consumer is indifferent.
B) It shows the limits to a consumer's set of affordable consumption choices.
C) It shows the desired level of consumption for the consumer.
D) It shows the consumption choices made by a consumer.
Answer: B
Topic: Study Guide Question, Consumption Possibilities, Budget Line
Skill: Conceptual
Status: Old
171) The magnitude of the slope of the budget line

A) is defined as marginal rate of substitution.
B) equals the relative price of the good measured along the horizontal axis.
C) increases when income increases.
D) decreases when income increases.
Answer: B
Skill: Conceptual
Status: Old
172) The budget line can shift or rotate

A) only when income changes.
B) only when prices change.
C) when either income or prices change.
D) None of the above, because changes in income and prices do not shift or rotate the budget line.
Answer: C
Skill: Conceptual
Status: Old
63
173) Sue consumes apples and bananas. Suppose Sue's income doubles and the prices of apples and
bananas do not change. Sue's budget line will
A) shift leftward and its slope will not change.
B) remain unchanged.
C) shift rightward and its slope will not change.
D) shift rightward and become steeper.
Answer: C
Skill: Conceptual
Status: Old
2 Preferences and Indifference Curves
1) Preferences depend on
A) income but not relative prices.
B) relative prices but not income.
C) neither relative prices nor income.
D) both relative prices and income.
Answer: C
Topic: Preferences and Indifference Curves
Skill: Conceptual
Status: Old
A-level heading: Preferences and Indifference Curves
2) Preferences can be described as

A) what a person likes and dislikes.
B) the income opportunities of several activities.
C) feasible consumption combinations.
D) the relative prices of goods and services.
Answer: A
Skill: Conceptual
Status: Old
64
3) Consumers' preferences are represented by
A) budget lines.
B) indifference curves.
C) relative prices.
D) household income.
Answer: B
Skill: Conceptual
Status: Old
4) Which of the following statements is FALSE?

A) A consumer has only one indifference curve.
B) A consumer possesses a preference map.
C) An indifference curve is a curve that shows the combination of goods among which a consumer is
indifferent.
D) The marginal rate of substitution is the rate at which a consumer will give up good y to get more of
good x and remain on the same indifference curve.
Answer: A
Skill: Conceptual
Status: Old
5) Which of the following results in a "parallel" shift outward of your indifference curves between
gasoline and movie rentals?
A) any decrease in the prices of gasoline and movie rentals
B) an equal percentage decrease in the prices of gasoline and movie rentals
C) an increase in your income
D) none of the above
Answer: D
Skill: Conceptual
Status: Old
65
6) Which of the following will change the slopes of your indifference curves between gasoline and movie
rentals?
A) a change in your preferences for either of the two goods
B) only a change in the price of either of the two goods
C) only a change in your income
D) Both a change in the price of either good and a change in income will change the slopes of your
indifference curves.
Answer: A
Skill: Conceptual
Status: Old
7) An indifference curve shows combinations of goods

A) which the consumer prefers equally.
B) that are affordable.
C) that are inside or on the budget line.
D) that have the same relative price.
Answer: A
Topic: Indifference Curves
Skill: Definition
Status: Old
8) An indifference curve shows

A) the relationship between prices and a household's budget.
B) all possible prices and preferences for a good.
C) combinations of goods among which a household is indifferent.
D) budget lines among which a consumer is indifferent.
Answer: C
Skill: Definition
Status: Old
9) The combinations of gasoline and coffee along one of Sam's indifference curves are combinations
A) which require the same total expenditure.
B) that he can afford with his $60.00 income.
C) among which he is "indifferent."
D) that give him the same marginal rate of substitution.
Answer: C
Skill: Definition
Status: Old
66
10) An indifference curve shows
A) different combinations of two goods among which the consumer is indifferent.
B) consumption possibilities that a consumer faces at different prices and income.
C) affordable combinations of goods.
D) the opportunity cost of one good relative to another.
Answer: A
Skill: Definition
Status: Old
11) Indifference curves are drawn on a diagram with the

A) price of a good on the vertical axis and its quantity on the horizontal axis.
B) price of one good on the vertical axis and the price of another good on the horizontal axis.
C) quantity of a good on the vertical axis and its price on the horizontal axis.
D) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
Answer: D
Skill: Definition
Status: Old
12) An indifference curve is a line that shows combinations of goods among which a consumer
A) needs equally.
B) does not care which combination he or she receives.
C) can afford.
D) has readily available.
Answer: B
Skill: Definition
Status: Old
13) A curve/line that shows combinations of goods among which a consumer would not desire one
combination of goods to another combination of goods on that curve/line is called
A) a budget line.
B) an indifference curve.
C) a utility possibilities curve.
D) a demand curve.
Answer: B
Skill: Definition
Status: Old
67
14) The curve in the above figure shows alternative combinations of gasoline and coffee that Sam likes
equally well. This curve is called
A) a budget line.
B) a demand curve.
C) a consumption curve.
D) an indifference curve.
Answer: D
Skill: Graphing
Status: Old
15) The above figure shows one of Sam's indifference curves between gasoline and coffee. Which of the
following about a movement along Sam's indifference curve is CORRECT?
A) As he moves leftward along the curve, he likes the combinations of gasoline and coffee better and
better.
B) As he moves rightward along the curve, he likes the combinations of gasoline and coffee better and
better.
C) He likes all combinations of gasoline and coffee along the curve equally well.
D) None of the above is true.
Answer: C
Skill: Graphing
Status: Old
68
16) ________ on an indifference curve that is farther from the origin ________ on an indifference curve
that is closer to the origin.
A) Some combinations; are preferred to some combinations
B) Any combination; is preferred to any combination
C) Most combinations; are preferred to all combinations
D) Combinations; are not as affordable as combinations
Answer: B
Skill: Definition
Status: Old
17) If two consumption points are NOT on the same indifference curve, then one point is
A) a substitute for the other point.
B) unaffordable and the other is affordable.
C) preferred to the other.
D) more expensive than the other.
Answer: C
Skill: Definition
Status: Old
18) If the combination of goods consumed at point C is preferred to combination D then

A) point C is on a higher indifference curve.
B) point C is on the same indifference cure but at a point where the vertical axis value is greater than
point D's vertical axis value.
C) point C is on a lower indifference curve.
D) point C is on the same indifference curve but at a point where the horizontal axis value is greater than
point D's horizontal axis value.
Answer: A
Skill: Conceptual
Status: Old
69
19) Along an indifference curve
A) the marginal rate of substitution is constant but not equal to zero.
B) the consumer does not prefer one consumption point to another.
C) the marginal rate of substitution is equal to 0.
D) the consumer prefers some of the consumption points to others.
Answer: B
Skill: Conceptual
Status: Old
20) Except for perfect complements and perfect substitutes, an indifference curve has a ________ slope
and becomes ________ moving to the right.
A) negative; flatter
B) negative; steeper
C) positive; flatter
D) positive; steeper
Answer: A
Skill: Analytical
Status: Revised
21) Except for perfect substitutes or perfect complements, indifference curves

A) are straight lines with a positive slope.
B) slope upward to the right.
C) are bowed in toward the origin.
D) are bowed out away from the origin.
Answer: C
Skill: Conceptual
Status: Old
22) All points above a given indifference curve are

A) inferior to any point on the indifference curve.
B) preferred to any point on the indifference curve.
C) definitely not affordable.
D) Both answers Band C are correct.
Answer: B
Skill: Conceptual
Status: Old
70
23) All points below a given indifference curve are
A) less preferred to any point on the indifference curve.
B) preferred to any point on the indifference curve.
C) definitely affordable.
D) Both answers A and C are correct.
Answer: A
Skill: Conceptual
Status: Old
24) Given the indifference curve in the above figure, which point is preferred to point a?
A) point b
B) point c
C) point d
D) point e
Answer: B
Skill: Graphing
Status: Old
71
25) The figure above shows a consumer is indifferent between points
A) d and c.
B) a, b, c, d, and e.
C) e and d.
D) b and a.
Answer: D
Skill: Graphing
Status: Old
26) Which of the following statements about the above figure is TRUE?
A) Point A is equally preferred to point C.
B) Point B is equally preferred to point C.
C) Point C is preferred to point A.
D) Point A is preferred to point C.
Answer: C
Skill: Graphing
Status: Old
72
27) Lizzie's preferences are shown in the figure above. Lizzie is just as happy to have ________ as she is to
have ________.
A) 2 comic books and 12 cookies; 4 comic books and 8 cookies
B) 2 comic books and 12 cookies; 8 comic books and 8 cookies
C) 4 comic books and 8 cookies; 6 comic books and 12 cookies
D) 6 comic books and 6 cookies; 5 comic books and 13 cookies
Answer: A
Skill: Graphing
Status: Old
28) Lizzie's preferences are shown in the figure above. Lizzie is just as happy to have ________ as she is to
have ________.
Answer: D
Skill: Graphing
Status: Old
73
29) Lizzie's preferences are shown in the figure above. Lizzie definitely prefers consuming ________ to
consuming ________.
A) 1 comic book and 12 cookies; 4 comic books and 4 cookies
Answer: C
Skill: Graphing
Status: Old
30) Lizzie's preferences are shown in the figure above. Lizzie definitely prefers consuming ________ to
consuming ________.
Answer: B
Skill: Graphing
Status: Old
31) Lizzie's preferences are shown in the figure above. Which of the following combinations of goods
does Lizzie prefer the most?
A) 6 comic books and 20 cookies
B) 8 comic books and 8 cookies
C) 12 comic books and 10 cookies
D) 4 comic books and 12 cookies
Answer: A
Skill: Graphing
Status: Old
74
32) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences. If
Peter consumes 24 slices of pizza and 24 chocolate bars per month, he as satisfied as he would be
consuming ________ slices of pizza and ________ chocolate bars per month.
A) 48; 12
B) 40; 20
C) 32; 8
D) 16; 16
Answer: A
Skill: Graphing
Status: Old
33) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences.
Peter prefers consuming ________ to consuming ________.
A) 48 slices of pizza and 12 chocolate bars; 24 slices of pizza and 24 chocolate bars
B) 40 slices of pizza and 20 chocolate bars; 48 slices of pizza and 12 chocolate bars
C) 24 slices of pizza and 24 chocolate bars; 40 slices of pizza and 20 chocolate bars
D) 32 slices of pizza and 8 chocolate bars; 16 slices of pizza and 16 chocolate bars
Answer: B
Skill: Graphing
Status: Old
75
34) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's consumption preferences.
Which of the following combinations of goods does Peter prefer the most?
A) 48 slices of pizza and 12 chocolate bars
B) 24 slices of pizza and 24 chocolate bars
C) 40 slices of pizza and 20 chocolate bars
D) 32 slices of pizza and 8 chocolate bars
Answer: C
Skill: Graphing
Status: Old
35) The rate at which Sam is willing to give up a gallon of gasoline to get one more pound of coffee, and
remain on the same indifference curve is called his
A) opportunity cost of coffee.
B) opportunity cost of gasoline.
C) personal price of coffee.
D) marginal rate of substitution.
Answer: D
Topic: Marginal Rate of Substitution
Skill: Analytical
Status: Old
36) The marginal rate of substitution is

A) the rate at which the consumer will give up one good to get an additional unit of another good while
remaining on the same indifference curve.
B) the rate at which utility increases as the consumer increases purchases of a good, holding purchases of
the other good constant.
C) the rate at which a consumer will exchange a good for income holding prices constant.
Answer: A
Skill: Definition
Status: Old
76
37) The rate at which a person is willing to give up a gallon of gasoline to get one more pound of coffee
and remain on the same indifference curve is called his or her
A) relative cost of coffee in terms of gasoline.
B) indifference cost of coffee.
C) personal price of coffee.
D) marginal rate of substitution.
Answer: D
Skill: Definition
Status: Old
38) The marginal rate of substitution is equal to the

A) marginal cost of each good.
B) magnitude of the slope of the indifference curve.
C) inverse of the slope of the budget line.
D) relative price of the two goods.
Answer: B
Skill: Definition
Status: Old
39) The magnitude of the slope of an indifference curve

A) is equal to the marginal rate of substitution.
B) always equals the relative price of the product measured along the horizontal axis.
C) increases as income increases.
D) decreases when income increases.
Answer: A
Skill: Definition
Status: Old
40) The magnitude of the slope of an indifference curve is the marginal

A) rate of substitution.
B) rate of relative prices.
C) utility of substitution.
D) rate of utility of income.
Answer: A
Skill: Definition
Status: Old
77
41) The marginal rate of substitution is equal to the
A) slope of the demand curve.
B) marginal cost of each good.
C) magnitude of the slope of the indifference curve.
D) relative prices of the two goods.
Answer: C
Skill: Definition
Status: Old
42) In an indifference curve diagram, the quantities of good Y are measured along the vertical axis and
the quantities of good X are measured along the horizontal axis. The marginal rate of substitution is
defined as
A) how much good Y you must give up to get one more unit of good X.
B) how much good Y you are willing to give up to get one more unit of good X.
C) the relative price of good Y in terms of good X.
D) how much you prefer to substitute good X for good Y.
Answer: B
Skill: Conceptual
Status: Old
43) An indifference diagram has movies on the vertical axis and sodas on the horizontal axis. As the
consumption of sodas increases, the marginal rate of substitution ________ and the indifference curve
becomes ________.
A) falls; flatter
B) falls; steeper
C) rises; flatter
D) rises; steeper
Answer: A
Skill: Conceptual
Status: Old
78
44) Jodie has indifference curves for CDs and colas, with CDs on the vertical axis. The flatter her
indifference curves are, the
A) smaller her average rate of substitution.
B) larger her average rate of substitution.
C) smaller her marginal rate of substitution.
D) larger her marginal rate of substitution.
Answer: C
Skill: Conceptual
Status: Old
45) Bobby moves along an indifference curve for shirts and pants by increasing consumption of shirts and
decreasing consumption of pants. As Bobby has more and more pants, the number of shirts he is willing
to trade for yet another pair of pants
A) decreases.
B) increases.
C) does not change.
D) initially decreases and then increases.
Answer: A
Skill: Conceptual
Status: Old
46) As Sam moves rightward along his indifference curve, his marginal rate of substitution
A) is diminishing.
B) is increasing.
C) remains constant.
D) shows the change in his income.
Answer: A
Skill: Conceptual
Status: Old
79
47) Which of the following statements about the marginal rate of substitution is NOT correct?
A) It measures the number of units of the good on the horizontal axis that a consumer must be
compensated with to give up a unit of the good on the vertical axis, while remaining on the same
indifference curve.
B) It is measured by the slope of the indifference curve.
C) It decreases in value when moving downward along a typical-shaped indifference curve.
D) It is constant for goods that are perfect substitutes.
Answer: A
Skill: Conceptual
Status: Old
48) The marginal rate of substitution is ________, the ________ is the ________.
A) greater; flatter; indifference curve
B) greater; steeper; budget line
C) smaller; steeper; indifference curve
D) smaller; flatter; indifference curve
Answer: D
Skill: Conceptual
Status: Old
49) As a consumer moves along an indifference curve and decreases consumption of the good on the x-
axis, the consumer needs ________ of the good on the y-axis to give up an additional unit of the good on
the x-axis.
A) less and less
B) more and more
C) none
D) a constant amount
Answer: B
Skill: Conceptual
Status: Old
80
50) The assumption that the magnitude of the slope of an indifference curve decreases moving to the
right along the indifference curve is known as the assumption of
A) the price effect.
B) a diminishing marginal rate of substitution.
C) an increasing marginal rate of substitution.
D) an indifference curve effect.
Answer: B
Skill: Conceptual
Status: Old
51) An indifference curve diagram has movies on the vertical axis and sodas on the horizontal. As the
consumption of sodas increases and movies decreases (moving southeast along an indifference curve) the
marginal rate of substitution of sodas for movies
A) rises.
B) falls.
C) does not change.
D) probably changes, but more information is needed to determine if it rises or falls.
Answer: B
Skill: Conceptual
Status: Old
52) The concept of diminishing marginal rate of substitution indicates that

A) as the consumption of good X increases, individuals are willing to give up an increasing amount of
good Y in order to obtain one more unit of good X.
B) as the consumption of good X increases, individuals are willing to give up a decreasing amount of
good Y in order to obtain one more unit of good X.
C) along an indifference curve, a consumer prefers the consumption combinations moving to the
northwest along the curve.
Answer: B
Skill: Conceptual
Status: Old
AACSB: Reflective thinking
81
53) Indifference curves are
A) bowed in toward the origin if there is diminishing marginal rate of substitution.
B) straight lines if the goods are perfect complements.
C) right angles if the goods are perfect substitutes.
D) always bowed out and away from the origin.
Answer: A
Skill: Conceptual
Status: Old
54) If an indifference curve is a straight line it will NOT show which of the following?
A) any marginal rate of substitution
B) diminishing marginal rate of substitution
C) combinations of goods among which a consumer is indifferent
Answer: B
Skill: Conceptual
Status: Old
55) If your marginal rate of substitution between two goods diminishes continuously as you give up one
good for the other, that means the
A) price per unit of one good declines when you buy it in larger and larger quantities.
B) two goods are perfect substitutes.
C) two goods are perfect complements.
D) two goods are neither perfect substitutes nor perfect complements.
Answer: D
Skill: Conceptual
Status: Old
82
56) In the figure above, the MRS at point A is ________ the MRS at point B.
A) equal to
B) less than
C) greater than
D) not able to be compared to
Answer: C
Skill: Graphing
Status: Old
83
57) The figure illustrates Sally's budget line and her preferences. At point(s) ________, the marginal rate
of substitution is equal to the relative price.
A) B
B) B, C, and E
C) D
D) E and C
Answer: A
Skill: Graphing
Status: Old
84
58) In the above figure, what is the magnitude of the marginal rate of substitution (MRS) at point a?
A) 1/2
B) the rate at which the consumer will give up magazines to purchase more CDs while preferring the new
combination to the old
C) 2
D) The question cannot be answered without more information.
Answer: A
Skill: Graphing
Status: Old
85
59) The figure above shows Sally's budget line and one of her indifference curves. At point a, Sally's
marginal rate of substitution is
A) 1/4.
B) 4.
C) 10.
D) 40.
Answer: A
Skill: Graphing
Status: Old
60) If an indifference map for a consumer is made up of straight, negatively sloped lines, the marginal
rate of substitution ________ as more of the good on the horizontal axis is consumed.
A) does not diminish
B) diminishes
C) increases
D) More information is needed to answer the question.
Answer: A
Topic: Degree of Substitutability
Skill: Analytical
Status: Old
86
61) The more closely substitutable are two goods, the
A) more normal looking is the indifference curve for the two items.
B) more closely the indifference curve for these two items approximates a straight line.
C) more tightly curved is the indifference curve for these items.
Answer: B
Skill: Conceptual
Status: Old
62) If green bikes and brown bikes are perfect substitutes, the corresponding indifference curves
A) are horizontal.
B) intersect each other.
C) are vertical.
D) have constant slope.
Answer: D
Skill: Conceptual
Status: Old
63) For goods and services that are perfect substitutes, the consumer's indifference curves are ________
lines.
A) straight, negatively sloped
B) L-shaped
C) negatively sloped, bowed-outward
D) negatively sloped, bowed-inward
Answer: A
Skill: Conceptual
Status: Old
87
64) An indifference curve will become ________ the origin the more that the consumer considers the two
goods as substitutes.
A) less bowed-in towards
B) more bowed-in towards
C) less bowed-out from
D) more bowed-out from
Answer: A
Skill: Conceptual
Status: Old
65) An indifference curve will become ________ the origin the more that the consumer considers the two
goods as complements.
A) more bowed-in towards
B) less bowed-in towards
C) less bowed-out from
D) more bowed-out from
Answer: A
Skill: Conceptual
Status: Old
66) A constant marginal rate of substitution between two goods implies that they are
A) perfect complements.
B) perfect substitutes.
C) independent goods.
D) unattainable.
Answer: B
Skill: Conceptual
Status: Old
67) If two goods are perfect complements, the shapes of the indifference curves are
A) bowed toward the origin.
B) bowed away from the origin.
C) straight lines.
D) right-angled lines.
Answer: D
Skill: Conceptual
Status: Old
88
68) If an indifference map for a consumer is made up of straight, negatively sloped lines, the goods are
B) unrelated.
C) perfect substitutes.
D) not desirable.
Answer: C
Skill: Conceptual
Status: Old
69) If Bill thinks tacos and turkey sandwiches are perfect substitutes, then his indifference curves for these
two goods
A) are L-shaped.
B) are negatively sloped and linear.
C) are positively sloped and linear.
D) have slopes equal to 1.
Answer: B
Skill: Conceptual
Status: Old
70) Which two goods will most likely have indifference curves that are straight lines?
A) blue and red balloons
B) left and right shoes
C) pizza and hair spray
D) beef and chicken
Answer: A
Skill: Conceptual
Status: Old
89
71) Left shoes and right shoes are perfect complements. An indifference curve for left and right shoes is a
line with
A) constant slope.
B) a 30-degree angle.
C) a 45-degree angle.
D) a 90-degree angle.
Answer: D
Skill: Conceptual
Status: Old
72) A recent article suggests that the introduction of the new iPhone 6 increased the demand for iPhone
protective cases. The article suggests that these two goods are
A) substitutes and their indifference curves are close to being straight lines.
B) complements and their indifference curves are close to being straight lines.
C) substitutes and their indifference curves are close to being L shaped.
D) complements and their indifference curves are close to being L shaped.
Answer: D
Skill: Conceptual
Status: Old
90
73) The indifference curve in the above figure
A) illustrates two goods that are perfect substitutes.
B) illustrates two goods that are perfect complements.
C) violates assumptions about preferences.
D) None of the above statements is correct.
Answer: B
Skill: Graphing
Status: Old

A) could illustrate a person's preferences for identical computer disks made by two different companies.
B) could illustrate a person's preferences for right-handed and left-handed gloves.
C) has a constant marginal rate of substitution.
Answer: B
Skill: Graphing
Status: Old
91
75) Consider the indifference maps shown above. If X and Y are perfect substitutes, your indifference
curves between them would look like those in
A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
Answer: A
Skill: Graphing
Status: Old
76) Consider the indifference maps shown above. If eyeglass frames and eyeglass lenses were perfect
complements, your indifference curves between them would look like those in
A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
Answer: C
Skill: Graphing
Status: Old
92
77) In the above figure, which curve is an indifference curve for someone who views frozen pizzas and
milk as perfect complements?
A) indifference curve F
B) indifference curve G
C) indifference curve H
D) indifference curve I
Answer: D
Skill: Graphing
Status: Old
93
78) The indifference curves in the above figure could represent your indifference curves between
A) Coke and Pepsi, which you consider perfect substitutes.
B) eyeglass frames and eyeglass lenses, which you think are perfect complements.
C) hot dogs and textbooks, which you think are neither perfect substitutes nor perfect complements.
D) none of the above.
Answer: B
Skill: Graphing
Status: Old
94
Answer: A
Skill: Graphing
Status: Old
95
Answer: C
Skill: Graphing
Status: Old
96
A) illustrates two goods that are perfect substitutes.
B) illustrates two goods that are perfect complements.
C) violates assumptions about preferences.
Answer: A
Skill: Graphing
Status: Old

A) could illustrate a person's preferences for identical computer disks made by two different companies.
B) could illustrate a person's preferences for right-handed and left-handed gloves.
C) has a marginal rate of substitution that at first decreases and then increases.
Answer: A
Skill: Graphing
Status: Old
97
83) In the figure above, as more six-packs of soda are consumed, moving along any of the illustrated
indifference curves, the MRS between twelve-packs of soda and six-packs of soda
A) increases.
B) decreases.
C) stays constant.
D) first increases, then decreases.
Answer: C
Skill: Graphing
Status: Old
84) The MRS of the indifference curves in the above figure

A) equals 1/2.
B) equals 2.
C) changes when moving along any one of the curves.
D) is constant along a particular indifference curve, but changes from one indifference curve to the next.
Answer: A
Skill: Graphing
Status: Old
98
85) In the above figure, the indifference curves indicate that the two goods are
B) perfect substitutes.
C) ordinary goods.
D) normal goods.
Answer: B
Skill: Graphing
Status: Old
86) As a consumer moves rightward along an indifference curve, the

A) consumer remains indifferent among the different combinations of goods.
B) consumer generally prefers the combinations of goods farther rightward along the indifference curve.
C) income required to buy the combinations of the goods always increases.
D) relative price of both goods falls.
Answer: A
Topic: Study Guide Question, Indifference Curves
Skill: Conceptual
Status: Old
87) Indifference curves shift or rotate

A) only when income changes.
B) only when prices change.
C) when either income or prices change.
D) with none of the above because changes in income and prices do not shift indifference curves.
Answer: D
Skill: Conceptual
Status: Old
88) If the newspaper reported that wearing plaid clothing was a sure way to obtain good grades,
students'
A) budget lines would shift rightward to compensate for the higher price of plaid clothing.
B) budget lines would rotate so that more plaid clothing would be purchased.
C) preferences would change in favor of more plaid clothing.
Answer: C
Skill: Conceptual
Status: Old
99
89) The assumption of diminishing marginal rate of substitution means that
A) the budget line has a negative slope.
B) the budget line does not shift when people's preferences change.
C) indifference curves might have a positive slope.
D) indifference curves will be concave.
Answer: D
Topic: Study Guide Question, Marginal Rate of Substitution
Skill: Analytical
Status: Old
90) If two goods are complements, then their

A) indifference curves are positively sloped straight lines.
B) indifference curves are negatively sloped straight lines.
C) indifference curves are L-shaped.
D) marginal rate of substitution is infinity.
Answer: C
Topic: Study Guide Question, Degree of Substitutability
Skill: Analytical
Status: Old
91) If the indifference curves between two goods are L-shaped, the goods are
A) complementary goods.
B) substitute goods.
C) normal goods.
D) inferior goods.
Answer: A
Topic: Study Guide Question, Degree of Substitutability
Skill: Conceptual
Status: Old
100
3 Predicting Consumer Choices
1) In an indifference curve/budget line diagram, a consumer's equilibrium consumption combination will

occur
A) inside the budget line.
B) outside the budget line.
C) on the budget line.
D) at the origin.
Answer: C
Topic: Predicting Consumer Behavior, Best Affordable Point
Skill: Conceptual
Status: Old
A-level heading: Predicting Consumer Choices
2) Which of the following statements is TRUE?

A) Every point on a budget line lies on an indifference curve.
B) To determine a consumer's best affordable point, we need only the budget line or the indifference
curve.
C) The price effect is shown by moving up or down a fixed budget line.
D) Both A and B are true.
Answer: A
Skill: Conceptual
Status: Old
3) The point where the indifference curve is tangent to the budget line
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 consumer's demand curve.
Answer: A
Skill: Conceptual
Status: Old
101
4) 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
A) marginal rate of substitution between two goods is equal to the relative price of the two goods.
B) marginal rate of substitution between two goods is greater than the relative price of the two goods.
C) slope of the indifference curve is less than the relative price of the two goods.
D) slope of the indifference curve is greater than the relative price of the two goods.
Answer: A
Skill: Conceptual
Status: Old
5) When the consumer is at his or her best affordable consumption point, it is the case that the marginal
rate of substitution is
A) greater than the price ratio.
B) equal to the price ratio.
C) less than the price ratio.
D) maximized.
Answer: B
Skill: Conceptual
Status: Old
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 $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 music download.
A) 0.5 of a download
B) 1 download
C) 1.5 downloads
D) 2 downloads
Answer: A
Skill: Analytical
Status: Revised
102
7) 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.
A) 0.5
B) 1
C) 1.5
D) More information is needed to determine the marginal rate of substitution.
Answer: B
Skill: Analytical
Status: Old
8) When a consumer is at his or her best affordable point, the budget line
A) is flatter than the highest attainable indifference curve.
B) is tangent to the highest attainable indifference curve.
C) is steeper than the highest attainable indifference curve.
D) does not touch the highest attainable indifference curve.
Answer: B
Skill: Conceptual
Status: Old
9) In a budget line/indifference curve diagram, at the consumer equilibrium

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 is as much larger as possible than the marginal rate of substitution.
D) All of the above statements are correct.
Answer: A
Skill: Conceptual
Status: Old
103
10) If Rachel is at her best affordable point, then
A) her marginal rate of substitution equals 1.
B) her marginal rate of substitution is maximized.
C) the relative price of the goods she buys equals the marginal rate of substitution.
D) she is indifferent among other points on her budget line.
Answer: C
Skill: Analytical
Status: Old
11) 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.
A) must exceed
B) must be less than the
C) must equal
D) might exceed or be less than but not equal to
Answer: C
Skill: Conceptual
Status: Old
12) In an indifference curve/budget line diagram, at your consumer equilibrium, that is, your best
affordable point, which of the following statements is CORRECT?
A) Any movement upward or downward on your budget line will move you to a less preferred point.
B) Any movement upward or downward on your indifference curve will move you to a less preferred
point.
C) Your marginal rate of substitution is greater than the magnitude of the budget line by as much as
possible.
D) All of the above are correct.
Answer: A
Skill: Analytical
Status: Old
104
13) 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
A) lower budget line.
B) higher budget line.
C) lower indifference curve.
D) higher indifference curve.
Answer: D
Skill: Analytical
Status: Old
14) 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
A) lower budget line.
B) higher budget line.
C) lower indifference curve.
D) higher indifference curve.
Answer: D
Skill: Analytical
Status: Old
15) 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 ________.
A) more; x-axis
B) more; y-axis
C) the same quantity; x-axis
D) less; x-axis
Answer: A
Skill: Analytical
Status: Old
105
16) 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
A) consume more of the good that is measured on the horizontal axis.
B) consume less of the good that is measured on the horizontal axis.
C) not change his or her behavior.
D) consume none of the good that is measured on the horizontal axis.
Answer: A
Skill: Analytical
Status: Old
17) At the best affordable point, consumers equate their marginal rates of substitution to
A) their money income.
B) their real income.
C) relative prices.
D) relative quantities.
Answer: C
Skill: Conceptual
Status: Old
106
18) The above figure shows Sam's budget line and one of his indifference curves. What combination of
coffee and gasoline will Sam select?
A) combination a because that contains all the gasoline he needs and still has some coffee
B) combination c because that contains all the coffee he needs and some gasoline
C) combination b because it is on his budget line and on the highest attainable indifference curve
Answer: C
Skill: Graphing
Status: Old
107
19) The figure illustrates Sally's budget line and her preferences. Point ________ is Sally's best affordable
point, and Sally prefers point ________ to point ________.
A) A; B; A
B) E; C; B
C) B; A; B
D) B; B; D
Answer: C
Skill: Graphing
Status: Old
108
20) Your weekly budget for gasoline and movie rentals is $45.00. Referring to the figure above, what is
the price per gallon of gasoline?
A) $1.00
B) $1.25
C) $1.50
D) $1.75
Answer: C
Skill: Graphing
Status: Old
21) Your weekly budget for gasoline and movie rentals is $45.00. Referring to the figure above, what is
the price per movie rental?
A) $2.00
B) $2.25
C) $2.50
D) $3.00
Answer: D
Skill: Graphing
Status: Old
109
22) The above figure shows your budget line and indifference curves. What quantities of gasoline and
movie rentals would you choose?
A) 25 gallons of gasoline and 15 movie rentals
B) 10 gasoline and 10 movie rentals
C) 20 gallons of gasoline and 5 movie rentals
D) 15 gallons of gasoline and 8 movie rentals
Answer: C
Skill: Graphing
Status: Old
23) Consider the budget line in the above figure. If the price of a magazine is $4, then the price of a
hamburger is
A) $1.75.
B) $3.00.
C) $4.00.
D) $5.33.
Answer: B
Skill: Graphing
Status: Old
110
24) The relative price of a magazine in the above figure is
A) 0.5 of a hamburger per magazine.
B) 1 hamburger per magazine.
C) 1.33 hamburgers per magazine.
D) 8 hamburgers per magazine.
Answer: C
Skill: Graphing
Status: Old
25) In the above figure, point B

A) is superior to point A.
B) is inferior to point A.
C) is as good as point A.
D) could be superior to, inferior to, or as good as point A but there is no way of telling which.
Answer: B
Skill: Graphing
Status: Old
26) In the above figure, which of the following statements is TRUE?

I. The consumer maximizes utility by consuming at point A.
II. The marginal rate of substitution at point B and point A are equal because they are on the same
budget line.
A) only I
B) only II
C) both I and II
D) neither I nor II
Answer: A
Skill: Graphing
Status: Old
111
27) In the above figure, at the best affordable point, the marginal rate of substitution is
A) 0.5 of a hamburger per magazine.
B) 1 hamburger per magazine.
C) 1.33 hamburgers per magazine.
D) 8 hamburgers per magazine.
Answer: C
Skill: Graphing
Status: Old
28) In the above figure, the best affordable point is

A) 8 hamburgers and 0 magazines.
B) 0 hamburgers and 6 magazines.
C) 4 hamburgers and 3 magazines.
D) some combination that is not given above.
Answer: C
Skill: Graphing
Status: Old
29) Julie's demand curve for video downloads is downward sloping because as the price of a download
decreases, ________ and she watches ________ videos.
A) the slope of her budget line changes; fewer
B) her budget line shifts inward; fewer
C) the slope of her budget line changes; more
D) her budget line shifts outward; more
Answer: C
Skill: Conceptual
Status: Old
30) In an indifference curve/budget line diagram, generally when the price of a good increases, the
consumer purchases ________ of the good and moves to a ________ indifference curve.
A) less; lower
B) less; higher
C) more; lower
D) more; higher
Answer: A
Topic: Predicting Consumer Behavior, Change in Price
Skill: Conceptual
Status: Old
112
31) In the above figure, Mark's monthly budget line for movies and plays changed, as shown by the
arrow. The change was caused by
A) a decrease in Mark's income.
B) an increase in Mark's income.
C) a fall in the price of a play.
D) a rise in the price of a play.
Answer: C
Skill: Graphing
Status: Old
32) In the above figure, Mark's monthly budget line for movies and plays changed, as shown by the
arrow. Responding to this change, Mark probably will see
A) fewer movies and fewer plays.
B) fewer movies and more plays.
C) more movies and fewer plays.
D) more movies and more plays.
Answer: B
Skill: Graphing
Status: Old
113
33) Suppose the quantity of sodas and the quantity of popcorn are on an indifference curve/budget line
diagram. An increase in income shifts the budget line ________ and, if popcorn is a normal good, shifts
the demand curve for popcorn ________.
A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward
Answer: A
Topic: Predicting Consumer Behavior, Demand Curve
Skill: Analytical
Status: Old
34) In the above figure, Reggie's budget line rotates outward from BL1 to BL2. He initially consumes at
point A. If his new consumption bundle is at point C, this implies that his demand curve for kiwi fruit
A) has shifted.
B) is a vertical line.
C) slopes downward.
D) is a horizontal line.
Answer: C
Skill: Graphing
Status: Old
114
35) In the above figure, Reggie's budget line rotates outward from BL1 to BL2. He initially consumes at
point A. If his new consumption bundle is at point B, this implies that kiwi fruit and mangoes are
A) both lower in price.
B) both inferior goods.
C) neither substitutes nor complements.
Answer: D
Skill: Graphing
Status: Old
36) In the above figure, Brendan originally consumes at point A. If his income rises and both compact
discs and haircuts are normal goods then he will begin consuming at a point such as
A) F.
B) B.
C) C.
D) D.
Answer: C
Skill: Graphing
Status: Old
115
37) In the above figure, Brendan originally consumes at point A. If his income rises and compact discs are
a normal good but haircuts are an inferior good then he will begin consuming at a point such as
A) E.
B) B.
C) C.
D) D.
Answer: B
Skill: Graphing
Status: Old
38) In the above figure, Brendan originally consumes at point A. If his income falls and compact discs are
a normal good but haircuts are an inferior good then he will begin consuming at a point such as
A) B.
B) E.
C) F.
D) G.
Answer: D
Skill: Graphing
Status: Old
39) In the above figure, Brendan originally consumes at point A. If his income rises and both compact
discs and haircuts are normal goods then he could begin consuming at point
A) B, C, or D.
B) B.
C) C.
D) D.
Answer: C
Skill: Graphing
Status: Old
116
40) In the above figure, as Brendan's income rises his consumption bundle moves from point A to point B.
This implies that for Brendan, compact discs are ________ good and haircuts are ________ good.
A) a normal; an inferior
B) a normal; a normal
C) an inferior; an inferior
D) an inferior; a normal
Answer: A
Skill: Graphing
Status: Old
41) In the above figure, as Brendan's income rises his consumption bundle moves from point A to point C.
Answer: B
Skill: Graphing
Status: Old
42) In the above figure, as Brendan's income falls his consumption bundle moves from point A to point E.
Answer: D
Skill: Graphing
Status: Old
117
43) The price effect refers to how changes in
A) price affect real income.
B) price affect the quantity of a good consumed.
C) income affect prices.
D) preference affect prices.
Answer: B
Topic: Predicting Consumer Behavior, Price Effect
Skill: Definition
Status: Old
44) The price effect is the effect of a ________ on the quantity of the good ________.
A) decrease in the price; demanded
B) change in the price; supplied
C) change in price and income; consumed
D) change in the price; consumed
Answer: D
Skill: Definition
Status: Old
45) The ________ effect can be divided into the ________ effect and the ________ effect.
A) marginal; substitution; price
B) income; substitution; price
C) substitution; price; income
D) price; substitution; income
Answer: D
Skill: Conceptual
Status: Old
46) The price effect is equal to the

A) substitution effect.
B) substitution effect plus the income effect.
C) marginal rate of substitution minus relative prices.
D) substitution effect minus the income effect.
Answer: B
Skill: Analytical
Status: Old
118
47) Gasoline is a normal good. If the price of gasoline falls, a consumer buys more gasoline because of
A) only an income effect.
B) only a substitution effect.
C) an increase in the marginal rate of substitution.
D) both an income effect and a substitution effect.
Answer: D
Skill: Analytical
Status: Old
48) When the price of a normal good decreases, the ________ can be divided between the ________, which
keeps the best affordable point on the same indifference curve and the ________, which moves the best
affordable point farther away from the origin.
A) substitution effect; price effect; income effect
B) price effect; income effect; substitution effect
C) income effect; substitution effect; price effect
D) price effect; substitution effect; income effect
Answer: D
Skill: Conceptual
Status: Old
49) The effect of a change in price on the quantity bought while keeping the consumer on the same
indifference curve, is called the
A) price effect.
B) income effect.
C) substitution effect.
D) real effect.
Answer: C
Topic: Predicting Consumer Behavior, Substitution Effect
Skill: Definition
Status: Old
119
50) The substitution effect reflects a movement along a given
A) horizontal line.
B) vertical line.
C) indifference curve.
D) budget line.
Answer: C
Skill: Conceptual
Status: Old
51) The change in consumption that results from a change in the relative price of goods while staying on
the same indifference curve is the
A) income effect.
B) substitution effect.
C) indifference effect.
D) price effect.
Answer: B
Skill: Definition
Status: Old
52) The effect of a change in price on the quantity bought when the consumer remains indifferent
between the original and the new situation is called the
A) income effect.
B) indifference effect.
C) substitution effect.
D) demand effect.
Answer: C
Skill: Definition
Status: Old
120
53) According to the substitution effect along an indifference curve, when the relative price of a good
falls, the consumer ________ substitutes ________ of that good for the other good.
A) always; more
B) always; less
C) sometimes; more
D) sometimes; less
Answer: A
Skill: Definition
Status: Old
54) The substitution effect

A) is always larger than the price effect.
B) always decreases purchases of a good as the price of a good rises.
C) increases purchases of the good as the price rises if the good is a normal good.
D) is always smaller than the income effect.
Answer: B
Skill: Definition
Status: Old
55) The substitution effect from a rise in the price of pizza

A) leads to a movement along the fixed budget line, due to a change in relative prices.
B) increases the quantity demanded of pizza.
C) decreases the quantity demanded of pizza.
Answer: C
Skill: Conceptual
Status: Old
56) If consumers spend their money only on beef and vegetables, then the substitution effect of an
increase in the price of beef would result in consuming ________ beef and ________ vegetables.
A) more; more
B) less; fewer
C) more; fewer
D) less; more
Answer: B
Skill: Conceptual
Status: Old
121
57) When the price of a normal good decreases, people buy ________ of the good due to ________.
A) more; the substitution effect only
B) more; the substitution and income effects
C) less; the substitution effect only
D) less; the income effect only
Answer: B
Topic: Predicting Consumer Behavior, Income & Substitution Effects
Skill: Conceptual
Status: Old
58) 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
________.
A) that Bart buys more clothing and less food; that Bart buys more of both food and clothing
B) reflected by a change in the relative prices of food and clothing; is represented by a movement along
the original indifference curve
C) reflected by a parallel shift outward of the budget line; that Bart earns more money each month
D) reflected by the change in the slope of the budget line; that Bart has greater purchasing power
Answer: D
Skill: Conceptual
Status: Old
59) 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.
A) 3; 3
B) less than 3; less than 3
C) more than 3; fewer than 3
D) less than 3; more than 3
Answer: C
Skill: Analytical
Status: Old
122
60) 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
________.
A) sandwiches; soda; buys less of both goods
B) soda; sandwiches; buys more soda and fewer sandwiches
C) sandwiches; soda; buys more of both goods
D) soda; sandwiches; buys less soda and more sandwiches
Answer: C
Skill: Analytical
Status: Old
61) Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being
an inferior good, the
A) substitution effect must be larger in magnitude than the income effect so that less is purchased as the
price falls.
B) substitution effect must be smaller in magnitude than the income effect so that less is purchased as the
price falls.
C) income effect is positive, so that more is purchased as income increases.
D) income effect is negative, so that less is purchased as income increases.
Answer: D
Skill: Conceptual
Status: Old
62) Suppose the price of a good rises. The income effect

A) shows the change in consumption that results from the change in relative price while staying on the
same indifference curve.
B) shows the change in consumption that results from the change in relative price while keeping income
constant.
C) is shown by decreasing income at the new relative price in order to move from the old indifference
curve to the new indifference curve after the price change.
D) is shown by increasing income at the new relative price in order to move from the old indifference
curve to the new indifference curve after the price change.
Answer: C
Topic: Predicting Consumer Behavior, Income Effect
Skill: Conceptual
Status: Old
123
63) The income effect for an inferior good
A) is negative.
B) is zero.
C) is positive.
D) could be negative, zero, or positive.
Answer: A
Skill: Definition
Status: Old
64) Which of the following statements is FALSE?

A) When the relative price of a good falls, the substitution effect always leads the consumer to substitute
more of that good for the other good.
B) For a normal good, the income effect reinforces the substitution effect.
C) For an inferior good, the income effect offsets the substitution effect.
D) For an inferior good, the income effect is positive.
Answer: D
Skill: Conceptual
Status: Old
65) The concept of inferior goods can be used to show that

A) lower prices signal poorer quality.
B) indifference curves can have positive slopes.
C) being able to consume more of all goods does not mean that a person will consume more of every
good.
D) consumers will always buy more of all products if their incomes increase.
Answer: C
Skill: Conceptual
Status: Old
124
66) 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
A) point A to point E.
B) point A to point G.
C) point F to point G.
D) point A to point F.
Answer: A
Skill: Graphing
Status: Old
67) 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
A) point E to point F.
B) point G to point A.
C) point G to point F.
D) point A to point F.
Answer: A
Skill: Graphing
Status: Old
125
68) Consider the budget line labeled RT in the above figure. What would shift the budget line to RS?
A) a rise in the price of good X
B) a fall in the price of good X
C) a rise in the price of good Y
D) a fall in the price of good Y
Answer: B
Skill: Graphing
Status: Old
69) In the above figure, if the budget line shifts from RT to RS, the substitution effect is illustrated by the
move from
A) a to b.
B) a to c.
C) b to c.
D) T to S.
Answer: A
Skill: Graphing
Status: Old
126
70) In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move
from
A) a to b.
B) a to c.
C) b to c.
D) T to S.
Answer: C
Skill: Graphing
Status: Old
71) 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?
A) 10 DVDs and 15 CDs per year
B) 15 DVDs and 12 CDs per year
C) 12.5 DVDs and 12 CDs per year
D) 5 DVDs and 18 CDs per year
Answer: A
Skill: Graphing
Status: Old
127
72) 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
A) 10 DVDs and 15 CDs per year.
B) 15 DVDs and 12 CDs per year.
C) 12.5 DVDs and 11 CDs per year.
D) 13 DVDs and 15 CDs per year.
Answer: B
Skill: Graphing
Status: Old
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.
A) 12; 14
B) 5; 10
C) 10; 15
D) 7.5; 12.5
Answer: C
Skill: Graphing
Status: Old
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.
A) partly offsets; an inferior
B) partly offsets; a normal
C) reinforces; an inferior
D) reinforces; a normal
Answer: D
Skill: Graphing
Status: Old
128
75) The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by
the movement from
A) point A to point C.
B) point A to point B.
C) point B to point C.
D) point A to point B and then to point C.
Answer: B
Skill: Graphing
Status: Old
129
76) 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?
A) $10.00
B) $15.00
C) $20.00
D) $30.00
Answer: B
Skill: Graphing
Status: Old
above figure, what is the price of a lobster dinner?
A) $10.00
B) $15.00
C) $20.00
D) $30.00
Answer: D
Skill: Graphing
Status: Old
130
above figure, what is the opportunity cost of a lobster dinner in terms of steak dinners?
A) 0.5 steak dinners per lobster dinner
B) 2.0 steak dinners per lobster dinner
C) 5.0 steak dinners per lobster dinner
D) 10.0 steak dinners per lobster dinner
Answer: B
Skill: Graphing
Status: Old
79) The above figure shows Jane's budget line and two of her indifference curves. Which of the following
happens to Jane's budget line if the price of a lobster dinner fell?
A) It would rotate inward around the vertical intercept, 10 lobster dinners.
B) It would rotate outward around the vertical intercept, 10 lobster dinners.
C) It would rotate inward around the horizontal intercept, 20 steak dinners.
D) It would rotate outward around the horizontal intercept, 20 steak dinners.
Answer: D
Skill: Graphing
Status: Old
happens to Jane's budget line if the price of a lobster dinner increased?
Answer: C
Skill: Graphing
Status: Old
131
happens to Jane's budget line if the price of a steak dinner fell?
Answer: B
Skill: Graphing
Status: Old
happens to Jane's budget line if there were an increase in her monthly dining-out budget?
A) It would bend toward the origin, becoming more convex.
B) It would bend away from the origin, becoming more concave.
C) It would shift rightward and not change its slope.
D) It would shift leftward and not change its slope.
Answer: C
Skill: Graphing
Status: Old
happens to Jane's budget line if there were a decrease in her monthly dining out budget?
A) It would bend toward the origin, becoming more convex.
B) It would bend away from the origin, becoming more concave.
C) It would shift rightward and not change its slope.
D) It would shift leftward and not change its slope.
Answer: D
Skill: Graphing
Status: Old
132
84) The above figure shows Jane's budget line and two of her indifference curves. How many steak
dinners will Jane purchase each month?
A) 4 steak dinners
B) 6 steak dinners
C) 8 steak dinners
D) 10 steak dinners
Answer: D
Skill: Graphing
Status: Old
85) The above figure shows Jane's budget line and two of her indifference curves. How many lobster
dinners will Jane purchase each month?
A) 4 lobster dinners
B) 5 lobster dinners
C) 8 lobster dinners
D) 10 lobster dinners
Answer: B
Skill: Graphing
Status: Old
86) The above figure shows Jane's budget line and two of her indifference curves. Jane's marginal rate of
substitution is
A) the rate at which she would give up a lobster dinner for a steak dinner and consider herself just as well
off.
B) equal to the ratio of the price of a steak dinner to the price of a lobster dinner when she is at her best
affordable point.
C) equal to 2 lobster dinners per steak dinner at her best affordable point.
Answer: D
Skill: Graphing
Status: Old
133
87) The above figure shows Jane's budget line and two of her indifference curves. When Jane is
consuming at her best affordable point, what is her marginal rate of substitution?
A) 2.0 lobster dinners per steak dinner
B) 1.0 lobster dinners per steak dinner
C) 0.5 lobster dinners per steak dinner
D) 0.33 lobster dinners per steak dinner
Answer: C
Skill: Graphing
Status: Old
88) The above figure shows Jane's budget line and two of her indifference curves. If the price of a lobster
dinner falls so that Jane can now purchase the combination represented by Point B, Jane would
experience
A) an increase in the opportunity cost of a lobster dinner.
B) no change in her marginal rate of substitution.
C) an income and a substitution effect.
D) Both answers B and C are correct.
Answer: C
Skill: Graphing
Status: Old
134
89) The income effect from a fall in the price of a gallon of gasoline is shown in the above figure by the
movement from
A) point A to point C.
B) point A to point B.
C) point B to point C.
D) point A to point B and then to point C.
Answer: C
Skill: Graphing
Status: Old
90) In the above figure, when the price of a gallon of gasoline falls, which points in the above figure are
used to derive points on the consumer's demand curve for gasoline?
A) points A and B
B) points A and C
C) points B and C
D) points A, B, and C
Answer: B
Skill: Graphing
Status: Old
135
91) In the above figure, the movement from point C to point A is the result of
A) a decrease in the price of coffee.
B) an increase in the price of coffee.
C) a decrease in the price of gasoline.
D) an increase in the price of gasoline.
Answer: D
Skill: Graphing
Status: Old
92) In the above figure, the rise in the price of a gallon of gasoline that created the movement from point
C to point A would be shown as a movement ________ along the demand curve for ________.
A) upward; coffee
B) downward; coffee
C) upward; gasoline
D) downward; gasoline
Answer: C
Skill: Graphing
Status: Old
136
93) In the above figure, if income is $8, the initial price of a soft drink is $1, and the initial price of a
milkshake is $2, a decrease in the price of a milkshake to $1 will move the consumer from point ________
to point ________.
A) a; b
B) b; c
C) a; d
D) a; c
Answer: D
Skill: Graphing
Status: Old
94) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a milkshake is
$2. If the price of a milkshake decreases to $1, the income effect is the movement from point ________ to
point ________.
A) a; b
B) b; d
C) b; c
D) a; c
Answer: C
Skill: Graphing
Status: Old
137
$2. If the price of a milkshake decreases to $1, the substitution effect is the movement from point ________
to point ________.
A) a; b
B) b; d
C) b; c
D) a; c
Answer: A
Skill: Graphing
Status: Old
$2. If the price of a milkshake decreases to $1, milkshakes are revealed to be
A) an inferior good.
B) a normal good.
C) less preferred than soft drinks.
Answer: B
Skill: Graphing
Status: Old
138
97) The figure illustrates Elijah's preferences. He is currently at point A. The price of pizza decreases. The
move from point A to point ________ is the substitution effect and the move from point ________ to point
________ is the income effect.
A) B; B; C
B) E; E; C
C) D; D; B
D) C; C; B
Answer: B
Skill: Graphing
Status: Old
139
98) In the figure above, the marginal rate of substitution (MRS) at point A is
A) greater than the MRS at any other point on the indifference curve.
B) equals the MRS at all other points on the indifference curve.
C) less than the MRS at any other point on the indifference curve.
D) equal to the slope of the budget line.
Answer: D
Topic: Predicting Consumer Behavior, Marginal Rate of Substitution
Skill: Graphing
Status: Old
99) In the figure above, the marginal rate of substitution (MRS) at point A is equal to ________ pounds of
pickles per pound of olives.
A) 8
B) 6
C) 1 1/3
D) 2
Answer: C
Skill: Graphing
Status: Old
140
100) In the figure above, at point A the consumer is willing to give up ________ pounds of pickles to get
one additional pound of olives.
A) 8
B) 6
C) 1 1/3
D) 2
Answer: C
Skill: Graphing
Status: Old
101) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds of olives
and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives falls so that his
budget line rotates but it still goes through point A. Sam's consumption of olives
A) definitely will rise.
B) definitely will fall.
C) definitely will stay the same.
D) could rise, fall, or stay the same.
Answer: A
Skill: Graphing
Status: Old
budget line rotates but it still goes through point A. Sam's consumption of pickles
A) definitely will rise.
B) definitely will fall.
C) definitely will stay the same.
D) could rise, fall, or stay the same.
Answer: B
Skill: Graphing
Status: Old
141
budget line rotates but it still goes through point A. At point A, the slope of the indifference curve I1
________ the slope of the new budget line.
A) is steeper than
B) is flatter than
C) has the same slope as
D) could be steeper than, flatter than, or have the same slope as
Answer: A
Skill: Graphing
Status: Old
104) A consumer is in equilibrium when the consumption point is on

A) the budget line.
B) an indifference curve.
C) the highest indifference curve that just touches the budget line.
Answer: C
Topic: Study Guide Question, Predicting Consumer Behavior, Best Affordable Point
Skill: Conceptual
Status: Old
105) When oranges increase in price, the income effect

A) decreases the consumption of oranges only if oranges are a normal good.
B) decreases the consumption of oranges only if oranges are an inferior good.
C) always increases the consumption of oranges.
D) always decreases the consumption of oranges.
Answer: A
Topic: Study Guide Question, Predicting Consumer Behavior, Income Effect
Skill: Conceptual
Status: Old
142
106) When the price of a normal good rises, the income effect results in ________ in the quantity
demanded and the substitution effect results in ________ in the quantity demanded.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
Answer: D
Topic: Study Guide Question, Predicting Consumer Behavior, Sub. & Income Effects
Skill: Analytical
Status: Old
4 News Based Questions
1) Bananas cost about $1 a pound and ground beef costs about $3 a pound. If Jenna has $18 to spend on
groceries and she only buys bananas and beef, which of the following is a possible combination of these
goods that could maximize her total utility?
A) 18 lbs of bananas and 6 lbs of beef
B) 10 lbs of bananas and 8 lbs of beef
C) 8 lbs of bananas and 3 lbs of beef
D) 3 lbs of bananas and 5 lbs of beef
Answer: D
Skill: Conceptual
Status: Old
2) Beta Alpha Psi is an accounting student professional organization with chapters on 279 campuses
nationwide. Suppose each meeting the local chapter has $30 to spend on pizza and soda. If pizza costs $8
and the chapter buys 3, how much money can be spent on soda?
A) $6
B) $30
C) $24
D) $3
Answer: A
Skill: Analytical
Status: Old
143
3) Some parents struggling with back-to-school buys. "A couple of years ago, I was able to buy everything
practically new," said Charles Lane-Bey, a U.S. Postal Service worker who's struggling to make ends
meet. Suppose Charles has $10 to spend on back-to-school clothing for his son, and pants cost 50 cents
and shirts cost $1. Which of the following combinations of pants and shirts is affordable?
A) 10 pants and 6 shirts
B) 7 pants and 7 shirts
C) 3 pants and 8 shirts
D) 6 pants and 2 shirts
Answer: D
Skill: Analytical
Status: Old
and shirts cost $1. What is the slope of Charles's budget line if it is drawn with pants on the x-axis?
A) 2
B) -2
C) -1/2
D) 1/2
Answer: C
Topic: Budget Line
Skill: Analytical
Status: Old
and the price of shirts has decreased from $1 to 50 cents. What is the effect of the fall in price of shirts on
Charles's real income in terms of pants?
A) It increases from 10 to 20.
B) It decreases from 10 to 5.
C) It does not change.
D) It increases from 20 to 40.
Answer: C
Skill: Analytical
Status: Old
144
6) Ramen noodles were hotter than ever in 2010. Considered a bargain meal for cash-starved college
students... in 2010, 4 billion individual packets were devoured in the United States, a 4 percent increase
over 2006. If once college students graduated, they stopped eating ramen, would ramen be considered a
normal or inferior good?
A) inferior because students only eat ramen when income is low
B) normal because students only eat ramen when income is low
C) inferior because students only eat ramen when income is high
D) normal because students only eat ramen when income is high
Answer: A
Topic: Inferior Goods
Skill: Conceptual
Status: Old
7) Ramen noodles were hotter than ever in 2010. Considered a bargain meal for cash-starved college
students... In 2010, 4 billion individual packets were devoured in the United States, a 4 percent increase
over 2006. Once students leave college for that first well-paying job, however, they stop eating Ramen. If
the price of ramen falls, and income remains the same, describe the substitution and income effects that
occur.
A) Both the substitution and income effects would be positive.
B) The substitution effect would be negative and the income effect would be positive.
C) Both the substitution and income effects would be negative.
D) The substitution effect would be positive and the income effect would be negative.
Answer: D
Skill: Conceptual
Status: Old
8) Janelle spends all of her income on songs from iTunes ($1 each) and apps ($5 each) for her iPhone. If
she makes her best affordable choice, she purchases 20 songs and 4 apps, what is her income?
A) $40
B) $20
C) $30
D) $25
Answer: A
Skill: Analytical
Status: Revised
145
9) Janelle spends all of her $40 income on songs from iTunes ($1 each) and app ($4 each) for her iPhone.
What is her budget equation?
A) $1 × Qsong - $5 × Qapp = Y
B) Qsong = 10 - 4 × Qapp
C) $40 + $1 × Qsong = $4 × Qapp
D) Qapp = 10 - 1/4 × Qsong
Answer: D
Skill: Analytical
Status: Revised
10) Janelle spends all of her income on songs from iTunes ($1 each) and apps ($5 each) for her iPhone. If
she makes her best affordable choice, she purchases 20 songs and 4 apps, what is her real income in terms
of apps?
A) 40 apps
B) 4 apps
C) 10 apps
D) 20 songs
Answer: C
Skill: Conceptual
Status: Revised
11) Janelle spends all of her income on songs from iTunes ($1 each) and apps ($5 each) for her iPhone. At
current prices, she makes her best affordable choice and purchases 20 songs and 4 apps. Suppose, for a
limited time only, apps are buy-one, get-one-free and she purchases 30 songs and 4 apps. 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 apps.
C) For apps, the substitution effect is stronger than the income effect.
D) For apps, the income effect is stronger the income effect for songs.
Answer: B
Skill: Analytical
Status: Revised
146
12) 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
Answer: A
Skill: Conceptual
Status: Old
13) 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
Answer: D
Skill: Conceptual
Status: Old
14) 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.
Answer: B
Skill: Conceptual
Status: Old
147
15) 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.
Answer: A
Skill: Conceptual
Status: Old
16) 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
Answer: D
Skill: Conceptual
Status: Old
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.
Answer: C
Skill: Conceptual
Status: Old
148
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.
Answer: B
Skill: Conceptual
Status: Old
19) 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.
Answer: A
Skill: Conceptual
Status: Old
5 Essay Questions
1) "Consumption possibilities are limited by total utility." True or false? Explain.

Answer: False. Consumption possibilities are limit by the consumers' income and by the prices of goods
and services they buy. Total utility does not limit consumption, it is a measure of total benefit that
consumers get from consumption of goods and services.
Skill: Graphing
Status: Old
AACSB: Written and oral communication
149
2) 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?
Answer: Your friend's description of the budget line is accurate.
Skill: Graphing
Status: Old
3) How is a budget line similar to a production possibilities frontier? How do they differ?
Answer: Both the budget line and the production possibilities frontier illustrate limits. The budget line
describes the limits to consumption possibilities; the production possibilities frontier describes the limits
to production possibilities. A consumer is unable to consume combinations of goods that lie beyond his
or her budget line. Similarly, a nation is unable to produce combinations of goods that lie beyond its
production possibilities frontier.
Skill: Graphing
Status: Old
4) What information do you need to draw your budget line? What is your budget line? What does it show
for any pair of goods?
Answer: To draw a budget line for any pair of goods, you need to know your income and the price of
each good. The budget line shows all combinations of the two goods that you can afford. The slope of the
budget line is the ratio of the prices and shows, therefore, the rate at which the market requires you to
give up some of one for more of the other.
Skill: Conceptual
Status: Old
5) What is a household's real income?

Answer: A household's real income is the household's income expressed as a quantity of goods the
household can afford to buy. Measured using a budget line, the household's real income is the maximum
quantity of the specific goods or services plotted on the budget line.
Skill: Graphing
Status: Old
6) Why is the budget line negatively sloped?

Answer: Given the consumer's budget and the prices for two goods, if a consumer buys more of one
good, he or she must buy less of the other. The budget line shows the trade-off between the two goods,
that is, as more of one is purchased, less of the other can be purchased.
Skill: Conceptual
Status: Old
150
7) 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?
Answer: When the price of the good measured on the horizontal axis, pizza, falls, the budget line rotates
outward and becomes flatter. And, when the price of a pizza rises, the budget line rotates inward and
becomes steeper.
Skill: Conceptual
Status: Old
8) What does the slope of the budget line equal?

Answer: The slope of the budget line equals an opportunity cost. It is the same as the opportunity cost of
the good measured along the x-axis. It also equals a relative price. In particular, it is the same as the
relative price of the good measured along the x-axis.
Skill: Analytical
Status: Old
9) If the price of a good rises and the consumer's budget remains the same, what happens to the
consumer's consumption possibilities?
Answer: The consumer's consumption possibilities decrease. This decrease is reflected by the change in
the budget line, which rotates inward. The inward movement means that consumption possibilities that
had previously been affordable are no longer affordable and hence the possible consumption possibilities
have decreased.
Skill: Conceptual
Status: Old
10) If your income increases, what is the effect on your budget line?
Answer: Your budget line will shift outward and not change its slope.
Skill: Conceptual
Status: Old
11) "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.
Answer: The statement is true. The increase in Bill's income shifts his budget line outward and enables
Bill to consume more trucks and more lamb chops.
Skill: Conceptual
Status: Old
151
12) Explain how changes in the price of goods and the consumer's budget affect the budget line.
Answer: If the price of the good measured on the x-axis increases, the budget line rotates inward as the x-
intercept decreases and the budget line becomes steeper. Conversely, if the price of the good measured on
the x-axis decreases, the budget line rotates outward, the x-intercept increases, and the budget line
becomes flatter.
If the price of the good measured on the y-axis increases, the y-intercept decreases as the budget line
rotates inward and becomes flatter. However, if the price of the good measured on the y-axis decreases,
the budget line rotates outward as the y-intercept increases, and the budget line becomes steeper.
Finally, if the budget increases, the budget line shifts outward (both intercepts increase) and the slope
remains unchanged while if the budget decreases, the budget line shifts inward (both intercepts
decrease), and the slope remains unchanged.
Topic: Consumption Possibilities, Change in Prices and Income
Skill: Conceptual
Status: Old
13) What is an indifference curve?

Answer: An indifference curve measures the combinations of goods and services among which the
consumer is indifferent as to which he or she consumes.
Skill: Graphing
Status: Old
14) "If Ivan says he is indifferent between the consumption of a new pair of jeans or a set of earrings, he
means that he does not want either product." Is the previous analysis CORRECT? Explain your answer.
Answer: The analysis is incorrect. The term "indifferent" means that Ivan does not care if he gets another
pair of jeans or another set of earrings.
Skill: Graphing
Status: Old
15) Why do consumers prefer higher indifference curves (farther to the right) to lower indifference
curves?
Answer: When comparing two indifference curves, it is always possible to find consumption
combinations on the higher indifference curve that have more of both goods than any particular point on
the lower indifference curve. Consumers prefer consuming more goods rather than fewer, so they prefer
the higher indifference curve because it offers more consumption of everything.
Skill: Conceptual
Status: Old
152
16) "Every point on a budget line has an indifference curve passing through it." Explain whether the
previous statement is correct or not.
Answer: The statement is correct. The consumer has a preference map that consists of an infinite number
of indifference curves, one through every possible consumption combination. So there is an indifference
curve passing through every point on a budget line.
Skill: Conceptual
Status: Old
17) What is the meaning of the term "marginal rate of substitution"?

Answer: The marginal rate of substitution between two goods is the rate at which a consumer is willing
to give up some of one in exchange for more of the other, and remain indifferent between the old and the
new combination. It is also the slope of an indifference curve between the two goods.
Skill: Graphing
Status: Old
18) What is the marginal rate of substitution and how does it relate to an indifference curve?
Answer: The marginal rate of substitution is the rate at which a person will give up the good measured
along the y-axis in order to get more of the good measured along the x-axis. The marginal rate of
substitution equals the magnitude of the slope of the indifference curve. Because the indifference curve is
not linear, the marginal rate of substitution changes as the consumer moves along the indifference curve.
In particular, as more of the good measured along the x-axis is consumed, its marginal rate of substitution
diminishes. In general, as more of a good is consumed, its marginal rate of substitution decreases.
Skill: Graphing
Status: Old
19) Why does your marginal rate of substitution between chocolate and vanilla ice cream decline
continuously as you move rightward on your indifference curve between the two?
Answer: With chocolate on the vertical axis and vanilla on the horizontal, as you move rightward along
your indifference curve, the more chocolate you give up and the less you have remaining. As a result, you
grow to value your chocolate more and more and your vanilla less and less. You therefore become willing
to give up less chocolate to get more vanilla.
Skill: Analytical
Status: Old
153
20) "The marginal rate of substitution of the good measured along the x-axis increases as a consumer
moves downward along an indifference curve." Is the previous statement correct or not?
Answer: The statement is incorrect because the marginal rate of substitution decreases as a consumer
moves downward along an indifference curve.
Topic: Diminishing Marginal Rate of Substitution
Skill: Conceptual
Status: Old
21) "As Jake consumes more sodas over the course of a day, it is likely that his marginal rate of
substitution of sodas for other goods will rise." Is the previous statement correct or incorrect?
Answer: The statement is incorrect. The principle of diminishing marginal rate of substitution means that
as Jake consumes more sodas, he is willing to give up fewer other goods in order to get an additional
soda.
Topic: Diminishing Marginal Rate of Substitution
Skill: Conceptual
Status: Old
22) What will an indifference curve look like between two commodities that are perfect complements,
such as right shoes and left shoes?
Answer: The indifference curve will be L-shaped. This shape indicates that more of either product,
without any more of the other, would not make the consumer better off.
Skill: Conceptual
Status: Old
23) Suppose that Dell computers and Gateway computers are very close substitutes. Then the indifference
curves between Dell computers and Gateway computers are almost straight lines. Is this analysis correct
or incorrect? Explain.
Answer: The analysis is correct. When two goods are perfect substitutes, their indifference curves are
straight lines. A Dell computer and a Gateway computer are very close substitutes, so their indifference
curves are close to straight lines.
Skill: Conceptual
Status: Old
154
24) In an indifference curve/budget line framework, how does a consumer decide which of all possible
combinations of goods to purchase?
Answer: The consumer will select the combination of goods and services that he or she most prefers and
which he or she can afford to buy. Taking the latter consideration first, the consumer will buy a
combination of goods and services that lie upon the budget line because all of these combinations are
affordable. From the combinations that lie upon the budget line, the consumer will select the combination
that is on the highest indifference curve because this is the combination that is most preferred.
Skill: Conceptual
Status: Old
25) Describe the consumer equilibrium in the indifference curve/budget line model.
Answer: A consumer equilibrium occurs when the consumer is spending his or her entire income (is on
the budget line), and is on the highest attainable indifference curve (is consuming the "best" point on the
budget line).The equilibrium occurs at the point where the budget line just touches the highest
indifference curve at one point. At this point, the budget line and indifference curve have the same slope,
so the marginal rate of substitution (the slope of the indifference curve) is equal to the relative price (the
slope of the budget line).
Skill: Conceptual
Status: Old
26) In a budget line/indifference curve figure, how do you identify the best affordable combination of any
two goods?
Answer: Any combination of goods along the budget line is affordable. The best of these combinations is
on the highest indifference curve. This best combination is where the indifference curve is tangent to the
budget line, so this combination is the best affordable combination.
Skill: Conceptual
Status: Old
155
27) Hermione and Ron are at a sweet shop in London. Hermione looks at the prices of ice cream and
chocolate bars and says to Ron: "I can tell you what your marginal rate of substitution between ice cream
and chocolate bars is at your best affordable point." "No, you can't," says Ron. "You don't know my
preferences and how much money I have." "I don't need to know all this because I know the prices,"
Hermione replies. Is she right? Explain.
Answer: Yes, Hermione is correct. All information she needs is the relative price of ice cream in terms of
chocolate bars (or vice versa), which determines the slope of Ron's budget line. The marginal rate of
substitution at Ron's best affordable point is the slope of his indifference curve at this point. But because
the best affordable point is the point where the budget line is tangent to the highest attainable
indifference curve, the slope of the indifference curve at this point equals the slope of the budget line. So
if Hermione knows the relative price, she knows the slope of Ron's budget line. Then she also knows the
slope of his indifference curve at the best affordable point, which is the marginal rate of substitution at
this point.
Skill: Conceptual
Status: Old
28) Can the process of consumer choice as illustrated with a budget line/indifference curves approach
explain the downward sloping demand curves that consumers have for goods, such as Pepsi?
Answer: Yes. Measure the quantity of Pepsi consumed on the horizontal axis of the budget
line/indifference curve diagram. Holding income and other prices constant, a series of decreases in the
price of a Pepsi rotates the budget line outward. As the consumer then moves to successively higher
indifference curves, the quantity of Pepsis consumed will increase successively, thereby demonstrating
that lower prices increase the quantity demanded.
Skill: Analytical
Status: Old
29) "Every point on a demand curve represents a consumer equilibrium in the indifference curve model."
Explain why the previous statement is correct or not.
Answer: The statement is correct. The demand curve is derived using the indifference curve/budget line
diagram. Hence every point on the demand curve is the result of a consumer equilibrium in the
indifference curve/budget line diagram.
Skill: Analytical
Status: Old
30) What is the substitution effect?

Answer: The substitution effect is the effect of a change in price on the quantity bought when the
consumer (hypothetically) remains indifferent between the original situation and the new one.
Skill: Graphing
Status: Old
156
31) What is the relationship between the income effect and the substitution effect for a normal good and
what is it for an inferior good?
Answer: For a normal good, the income effect reinforces the substitution effect. In other words, if the
price falls so that a consumer's real income increases, both the substitution effect and the income effect
lead the consumer to increase his or consumption of the good. For an inferior good, the income effect
reduces the substitution effect. In this case, when the price of a good falls, the substitution effect leads to
an increase in the consumption of the good and the income effect leads to a decrease in the consumption
of the good.
Skill: Graphing
Status: Old
157
6 Numeric and Graphing Questions
1) Suppose you have a $20 budget per week, the price of soda is $1 per bottle, and the price of pizza is $4
per slice. In the above figure, draw a budget line for soda and pizza, placing soda on the horizontal axis.
Correctly label the axes.
Answer:
The budget line is illustrated in the figure above.

Skill: Graphing
Status: Old
158
2) John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday
nights is $10, a soda costs $2, and one game of pool costs $1.
a) Draw a graph of John's budget line in the figure above.
b) In your graph, label the affordable and unaffordable areas.
Answer:
a) The budget line is in the figure above.

b) The affordable area is the lighter area and the budget line itself. The unaffordable area is the darker
area.
Skill: Graphing
Status: Old
159
3) Joe spends $72 on gasoline and sandwiches. The price of a gallon of gasoline is $3 and a sandwich is $4.
Placing the quantity of sandwiches on the left side, what is Joe's budget equation? If sandwiches are
measured on the vertical axis, what is the slope of Joe's budget line?
Answer: The budget equation is QS = 18 - 0.75QG, where QS is the quantity of sandwiches and QG is the
quantity of gasoline. To determine the slope of Joe's budget line, first notice that Joe's budget line
intersects the vertical axis when Joe buys 18 sandwiches (which equals his income, $72, divided by the
price of a sandwich, $4). Second, Joe's budget line intersects the horizontal axis when he buys 24 gallons
of gasoline (which equals his income, $72, divided by the price of a gallon of gasoline, $3). So calculating
the slope of Joe's budget line over the horizontal distance from 0 gallons of gasoline to 24 gallons of
gasoline, the slope equals the vertical fall is -18 sandwiches divided by the horizontal distance of 24
gallons of gasoline, so the budget line's slope of -18 sandwiches/24 gallons of gasoline, which is -0.75 of a
sandwich per gallon of gasoline.
Skill: Analytical
Status: Old
Hamburgers Hot dogs

Possibility
(per day) (per day)
A 0 8
B 1 6
C 2 4
D 3 2
E 4 0
4) The table above has different combinations of hamburgers and hot dogs that Alex can buy. After
labeling the axes, graph Alex's budget line in the figure, putting hot dogs on the x-axis.
a) Alex's income is $8 per day. What is the price of a hot dog? Of a hamburger?
b) What is the slope of the budget line?
160
Answer:
The figure above has Alex's budget line.

a) The price of a hot dog is $1 and the price of a hamburger is $2.
b) The slope of the budget line is 1/2 of a hamburger per hot dog.
Skill: Analytical
Status: Old
161
5) Sherry is on vacation and wants to bring souvenirs home to family and friends. Her souvenir budget is
$100, and she can choose between T-shirts, which cost $20 each, and key chains, which cost $5 each.
a) Draw a graph of Sherry's budget line in the figure above.
b) What is the slope of Sherry's budget line? How does that slope represent an opportunity cost?
Suppose that Sherry now finds a store where T-shirts are on sale for $10 each. (Key chains still cost $5
each).
c) Draw the new budget line in the figure.
d) What is the slope of the new budget line? How has the opportunity cost changed?
Answer:
a) The budget line is in the figure above and is the budget line labeled BL1.
162
b) The slope of the budget line is 20 key chains divided by 5 T-shirts, which equals 4 key chains per T-
shirt. 4 key chains per T-shirt is an opportunity cost because it represents the quantity of key chains that
must be given up to acquire one more T-shirt.
c) The new budget line is in the figure above and is labeled BL2.
d) The slope of the new budget line is 2 key chains per T-shirt, which means that the opportunity cost of
one T-shirt is now 2 key chains, rather than 4. Thanks to the new store, the opportunity cost of a T-shirt
has fallen.
Skill: Graphing
Status: Old
6) The figure above contains several budget lines for Sarah, who uses her income to purchase two goods,
cheese and crackers.
a) A movement between which two budget lines represents an increase in income?
b) A movement between which two budget lines represents an increase in the price of a pound of
cheese?
c) A movement between which two budget lines represents an increase in the price of a box of crackers?
Answer:
a) A movement from BL1 to BL3 shows an increase in income.
b) A change from BL2 to BL1 shows an increase in the price of a pound of cheese.
c) A change from BL3 to BL2 shows an increase in the price of a box of crackers.
Skill: Graphing
Status: Old
163
7) Tom is stranded on a deserted island where he can only consume coconuts and crabs. Two of his
indifference curves are in the figure above.
a) Would Tom prefer his consumption to be at point a or at point b? At point b or at point c? Explain
your answers.
b) Between points a and b, what is Tom's marginal rate of substitution for a crab?
Answer:
a) Tom is indifferent between consuming at point a or at point b because both points are on the same
indifference curve, I1. Tom would prefer to consume at point c rather than point b because point c is on a
higher indifference curve, I2 versus I1.
b) Between points a and b, Tom's marginal rate of substitution for a crab is 2 coconuts per crab.
Skill: Graphing
Status: Old
164
8) The figure above shows a preference map for Sarah, who likes hamburgers and milk shakes.
a) Which two combinations contain the same amount of hamburgers but different quantities of shakes?
b) Which combination(s) does Sarah most prefer? Why?
c) Which combination(s) does Sarah least prefer? Why?
d) Between which combinations is Sarah indifferent? Why?
Answer:
a) Combinations a and b have the same amount of hamburgers but different amounts of milk shakes.
b) Sarah most prefers combination d because it is on the highest indifference curve.
c) Sarah least prefers combination a because it is on the lowest indifference curve.
d) Sarah is indifferent between combinations b and c because they are on the same indifference curve.
Skill: Graphing
Status: Old
165
9) The figure above shows one of Bob's indifference curves for CDs and books.
a) Is the indifference curve steeper at point a or point b?
b) What is Bob's marginal rate of substitution at point a?
c) What is Bob's marginal rate of substitution at point b?
Answer:
a) The indifference curve is steeper at point a.
b) The marginal rate of substitution at point a is 5 CDs per book, the slope of the line that just touches
the indifference curve at this one point.
c) The marginal rate of substitution at point b is 1 1/2 CDs per book, the slope of the line that just
touches the indifference curve at this one point.
Skill: Graphing
Status: Old
166
10) Nadya spends $200 a year to buy computer games and Barbie dolls. The price of a computer game is
$20 and the price of a Barbie doll is $10. The figure above illustrates Nadya's preferences. What
combination of computer games and Barbie dolls does Nadya buy?
Answer:
The figure above shows that Nadya buys 5 computer games and 10 Barbie dolls.
Skill: Graphing
Status: Old
167
11) Nadya spends $200 a year to buy computer games and Barbie dolls. The price of a computer game is
$40 and the price of a Barbie doll is $10. The figure above illustrates Nadya's preferences. What
combination of computer games and Barbie dolls does Nadya buy?
Answer:
The figure above shows that Nadya buys 3 computer games and 8 Barbie dolls.
Skill: Graphing
Status: Old
168
12) George has a $600 annual entertainment budget that he uses to buy trips to the movies and dinners at
local restaurants. The figure above shows indifference curves and budget lines for these two goods. The
price of a movie is $15.
a) Along budget line BL1, what is the price of a dinner?
b) What combination of dinners and movies will George select along budget line BL1?
c) Budget line BL2 represents a change in the price of dinners from that along BL1. What is the new
price of dinners along this budget line?
d) What combination of dinners and movies will George select along budget line BL2?
e) Use the information in this problem to give two points on George's demand curve for dinners.
Answer:
a) George can buy 20 dinners and his income is $600, so the price of a dinner is $30.
b) George will buy 20 movies and 10 dinners because this combination is on his budget line, and hence
is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination.
c) If George spends all his income on dinners, he can purchase 40. Therefore the price of a dinner must
be $15 (= $600 income/40 dinners = $15 per dinner).
d) George will buy 20 movies and 20 dinners because this combination is on his budget line, and hence
is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination.
e) One point on George's demand curve for dinners is a price of $30 per dinner and a quantity
demanded of 10 dinners (from part b). Another point is a price of $15 per dinner and a quantity
demanded of 20 dinners (from part d).
Skill: Graphing
Status: Old
169
7 True or False
1) To draw your budget line between steak and lobster, all you need to know is the price of a steak and
the price of a lobster.
Answer: FALSE
Skill: Conceptual
Status: Old
2) To draw your budget line between steak and lobster, all you need to know is your income.
Answer: FALSE
Skill: Conceptual
Status: Old
3) The lower the price of the good measured on the vertical axis, other thing remaining the same, the
flatter the budget line.
Answer: FALSE
Skill: Conceptual
Status: Old
4) The higher the price of the good measured on the vertical axis, other thing remaining the same, the
flatter the budget line.
Answer: TRUE
Skill: Conceptual
Status: Old
5) For a person who consumes only steak and lobster, a fall in either the price of a steak or the price of a
lobster shifts the budget line for the two leftward and does not change its slope.
Answer: FALSE
Skill: Conceptual
Status: Old
6) An increase in income shift a person's budget line rightward and does not change its slope.
Answer: TRUE
Skill: Conceptual
Status: Old
170
7) A change in a person's money income changes real income and therefore changes the slope of the
person's budget line.
Answer: FALSE
Skill: Conceptual
Status: Old
8) For a person who consumes only steak and lobster, the slope of the budget line is called the marginal
rate of substitution between steak and lobster.
Answer: FALSE
Skill: Graphing
Status: Old
9) The marginal rate of substitution is the rate at which a person is willing to substitute one good for
another good while remaining on the same indifference curve.
Answer: TRUE
Skill: Graphing
Status: Old
10) The magnitude of the slope of the indifference curve between steak and lobster is called the marginal
rate of substitution.
Answer: TRUE
Skill: Graphing
Status: Old
11) Consumption at points on a steeper part of the indifference curve will reflect a higher marginal rate of
substitution than consumption points on a flatter part of the indifference curve.
Answer: TRUE
Skill: Graphing
Status: Old
12) The slope of the indifference curve between steak and lobster is always equal to the ratio of their
prices.
Answer: FALSE
Skill: Conceptual
Status: Old
171
13) The larger the marginal rate of substitution, the larger is the amount of one good that the consumer is
willing to give up in exchange for another good and still remain at the same level of satisfaction.
Answer: TRUE
Skill: Conceptual
Status: Old
14) If you considered steak and lobster to be perfect substitutes for each other, your indifference curves
between them would be L-shaped.
Answer: FALSE
Skill: Conceptual
Status: Old
15) When two goods are perfect substitutes, their indifference curves are straight lines.
Answer: TRUE
Skill: Conceptual
Status: Old
16) In order for you to consider steak and lobster to be perfect substitutes, their prices per pound must be
identical.
Answer: FALSE
Skill: Conceptual
Status: Old
17) When your budget line is just tangent to your indifference curve, you are at the point on the budget
line that you least prefer.
Answer: FALSE
Skill: Conceptual
Status: Old
18) When your budget line is just tangent to your indifference curve, you are at your best affordable
point.
Answer: TRUE
Skill: Conceptual
Status: Old
172
19) A consumer will maximize utility, given income and prices, when the marginal rate of substitution is
equal to the ratio of the prices of the two goods.
Answer: TRUE
Skill: Conceptual
Status: Old
20) A decrease in price allows a consumer to attain a higher indifference curve.

Answer: TRUE
Skill: Analytical
Status: Old
21) Holding your income and the price of lobster constant, you can derive your demand curve for steak
from an indifference curve/budget line diagram by determining how your consumption of steak changes
when the price of a steak changes.
Answer: TRUE
Skill: Analytical
Status: Old
22) You consume only steak and lobster. Your substitution effect from a drop in the price of lobster is
measured by a movement along your indifference curve between steak and lobster.
Answer: TRUE
Skill: Analytical
Status: Old
23) You consume only steak and lobster. Your income effect from a drop in the price of lobster is
measured by a movement along your indifference curve between steak and lobster.
Answer: FALSE
Skill: Analytical
Status: Old
173
8 Extended Problems
1) Margo spends $108 a year on music CDs and movies on DVDs. Initially the price of a music CD is $18
and the price of a movie on DVD is $18. Then record companies, faced with the growing competitions
from digital music download services, lower the price of a music CD to $13.50.
a) Draw graphs showing Margo's consumption possibilities before and after the price of a CD fell.
b) How has the relative price of a CD changed? If Margo bought 4 CDs per year, how many DVDs could
she buy before and after the price of a CD fell?
Answer:
a) The figure with the budget lines is above.

b) The relative price of a CD fell from 1 DVD to 0.75 DVDs. If Margo bought 4 CDs per year, she could
buy 2 DVDs per year before the price of a CD fell and 3 DVDs after the price of a CD fell.
Topic: Budget Line
Skill: Graphing
Status: Old
174
2) Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of
a music CD is $18 and the price of a DVD is $18.
a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs?
b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD?
c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the
equation.
d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's
budget line? What determines its magnitude?
Answer:
a) Olivia's real income in terms of CDs is the maximum number of CDs that she can buy, which is the
quantity her money income can buy if she spends it all on CDs. So her real income in terms of CDs is her
money income divided by the price of a CD. So, in terms of CDs, Olivia's real income is $216/$18, which is
12 CDs. Similarly, her real income in term of DVDs is her money income divided by the price of a DVD,
which is $216/$18 or 12 DVDs.
b) The relative price of a CD in terms of DVDs is the money price of a CD divided by the money price of
a DVD. So the relative price of a CD is $18/$18, which is 1 DVD per CD. The opportunity cost of a DVD is
the quantity of CDs that must be given up to get a DVD. The price of a DVD is $18. To get a DVD, Olivia
must give up $18, which is what she pays to get a CD. So the opportunity cost of a DVD is 1 CD.
c) The amount that Olivia spends on CDs is $18 × QCD, where QCD is the quantity of CDs she buys.
The amount that she spends on DVDs is $18 × QDVD, where QDVD is the quantity of DVDs she buys.
Since Olivia spends all her income of $216 on CDs and DVDs, we can write $18 × QCD + $18 × QDVD =
$216. Solving for QDVD gives the budget equation as QDVD = 12 - QCD.
d) The budget line is in the figure above. The slope of the budget line over is the change in DVDs over a
range divided by the resulting change in CDs. Because the budget line is a straight line, the slope can be
calculated over any range. When the quantity of CDs increases by 1 CD, the quantity of DVDs decreases
by 1 DVD, so the slope is -1 DVD/1 CD, which equals -1 DVD per CD.
Topic: Budget Line
Skill: Graphing
Status: Old
175
3) Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of
a music CD is $18 and the price of a DVD is $18. The figure above illustrates Olivia's preferences.
a) What quantities of CDs and DVDs does Olivia buy? Explain your solution.
b) What is Olivia's marginal rate of substitution at the point at which she consumes? Explain.
176
Answer:
a) Olivia chooses the quantities of CDs and DVDs on her budget line that are on the highest indifference
curve. At this point the budget line is tangent to the indifference curve. The highest indifference curve
that Olivia can reach on the budget line shows that so Olivia buys 5 CDs and 7 DVDs.
b) The marginal rate of substitution is the rate at which Olivia will give up DVDs to get an additional
CD. The marginal rate of substitution is measured by the magnitude of the slope of an indifference curve.
At the point where Olivia consumes, the slope of the indifference curve is the same as that of the budget
line. The slope of the budget line is -1, so the marginal rate of substitution is 1.
Skill: Graphing
Status: Old
177
4) Record companies, faced with the growing competitions from digital music download services, lower
the price of a music CD from $18.00 to $13.50. The price of a DVD is $18. Olivia's income is $216 a year
and she spends all of it on music CDs and movies on DVDs.
a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs?
b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD?
c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the
equation.
d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's
budget line? What determines its magnitude?
The figure above illustrates Olivia's preferences.

e) Given the price of a CD, the price of a DVD, and Olivia's income, what quantities of CDs and DVDs
does Olivia buy? Explain your solution.
f) What is Olivia's marginal rate of substitution at the point at which she consumes? Explain.
g) Determine how many CDs Olivia buys if the price of a CD is $18 and there is no change in the price
of DVD nor in Olivia's income. Derive Olivia's demand curve for CDs for the price change from $18 to
$13.50 per CD.
Answer:
a) Olivia's real income in terms of CDs is the maximum number of CDs that she can buy, which is the
quantity her money income can buy if she spends it all on CDs. So her real income in terms of CDs is her
money income divided by the price of a CD. So, in terms of CDs, Olivia's real income is $216/$13.50,
which is 16 CDs. Similarly, her real income in term of DVDs is her money income divided by the price of
a DVD, which is $216/$18 or 12 DVDs.
b) The relative price of a CD in terms of DVDs is the money price of a CD divided by the money price of
a DVD. So the relative price of a CD is $13.50/$18.00, which is 0.75 of a DVD per CD. The opportunity cost
of a DVD is the quantity of CDs that must be given up to get a DVD. The price of a DVD is $18. To get a
DVD, Olivia must give up $18, which is what she pays to get 1.33 CDs. So the opportunity cost of a DVD
is 1.33 CDs.
178
c) The amount that Olivia spends on CDs is $13.50 × QCD, where QCD is the quantity of CDs she buys.
The amount that she spends on DVDs is $18.00 × QDVD, where QDVD is the quantity of DVDs she buys.
Since Olivia spends all her income of $216 on CDs and DVDs, we can write $13.50 × QCD + $18.00 ×
QDVD = $216. Solving for QDVD gives the budget equation as QDVD = 12 - 0.75QCD.
d) The budget line is in the figure above. The slope of the budget line over is the change in DVDs over a
range divided by the resulting change in CDs. Because the budget line is a straight line, the slope can be
calculated over any range. When the quantity of CDs increases by 1 CD, the quantity of DVDs decreases
by 0.75 of a DVD, so the slope is -0.75 DVD/1 CD, which equals -0.75 of a DVD per CD.
e) Olivia chooses the quantities of CDs and DVDs on her budget line that are on the highest indifference
curve. At this point the budget line is tangent to the indifference curve. The highest indifference curve
that Olivia can reach on the budget line shows that so Olivia buys 8 CDs and 6 DVDs.
179
Test Bank for Microeconomics 13th Edition Michael Parkin
f) The marginal rate of substitution is the rate at which Olivia will give up DVDs to get an additional
CD. The marginal rate of substitution is measured by the magnitude of the slope of an indifference curve.
At the point where Olivia consumes, the slope of the indifference curve is the same as that of the budget
line. The slope of the budget line is -0.75, so the marginal rate of substitution is 0.75.
g) The demand curve is illustrated in the figure above. When the price of a CD is $18, Olivia buys 5
CDs. When the price of a CD is $13.50, Olivia buys 8 CDs.
Skill: Graphing
Status: Old
180
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1) Goods that can be bought in any quantity desired are called

2) Which of the following is NOT a divisible good?

3) Budget lines are drawn on a diagram with the

5) A budget line shows the

6) The budget line

7) For a consumer, a budget line shows the boundary between

9) In order to determine a household's budget line, you must know the

11) In order to draw an individual's budget line, we must know

13) All points below the budget line are

14) All points above the budget line are

57) Real income can be measured by

59) Real income is

60) Real income equals a household's income

69) A relative price is the

80) The magnitude of the slope of the budget line is determined by

92) In the table above, in terms of units of pizza, real income is

93) In the table above, in terms of units of hamburgers, real income is

117) When your income increases

119) If an individual's income increases

139) As Judy moves down along her budget line

171) The magnitude of the slope of the budget line

172) The budget line can shift or rotate

2 Preferences and Indifference Curves

2) Preferences can be described as

4) Which of the following statements is FALSE?

7) An indifference curve shows combinations of goods

8) An indifference curve shows

11) Indifference curves are drawn on a diagram with the

18) If the combination of goods consumed at point C is preferred to combination D then

21) Except for perfect substitutes or perfect complements, indifference curves

22) All points above a given indifference curve are

36) The marginal rate of substitution is

38) The marginal rate of substitution is equal to the

39) The magnitude of the slope of an indifference curve

40) The magnitude of the slope of an indifference curve is the marginal

52) The concept of diminishing marginal rate of substitution indicates that

74) The indifference curve in the above figure

82) The indifference curve in the above figure

84) The MRS of the indifference curves in the above figure

86) As a consumer moves rightward along an indifference curve, the

87) Indifference curves shift or rotate

90) If two goods are complements, then their

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

2) Which of the following statements is TRUE?

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

25) In the above figure, point B

26) In the above figure, which of the following statements is TRUE?

28) In the above figure, the best affordable point is

46) The price effect is equal to the

54) The substitution effect

55) The substitution effect from a rise in the price of pizza

62) Suppose the price of a good rises. The income effect

64) Which of the following statements is FALSE?

65) The concept of inferior goods can be used to show that

104) A consumer is in equilibrium when the consumption point is on

105) When oranges increase in price, the income effect

4 News Based Questions

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

5) What is a household's real income?