Exam 9: Possibilities, Preferences, and Choices

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?

"Every point on a demand curve represents a consumer equilibrium in the indifference curve model." Explain why the previous statement is correct or not.

-The figure above shows Sam's budget line. Why will Sam not purchase 36 gallons of gasoline and 4 pounds of coffee?

-An increase in a consumer's income creates a

-Gasoline is a normal good. If the price of gasoline falls, a consumer buys more gasoline because of

-Consider the budget line in the above figure. If the consumer's income is $120, then the price of a movie is

-The lower the price of the good measured on the vertical axis, other thing remaining the same, the flatter the budget line.

When the price of only one good rises, the relative price of that good

Sam buys gasoline and coffee each week. In order to draw his budget line between gasoline and coffee, Sam would have to know

-In the figure above, which budget line has the lowest relative price of compact discs?

If you considered steak and lobster to be perfect substitutes for each other, your indifference curves between them would be L-shaped.

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

What is the substitution effect?

-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 ________.

-In the figure above, an increase in income would result in the budget line

-The magnitude of the slope of the budget line

Indifference curves are drawn on a diagram with the

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

-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 Q_T, and the quantity of concert tickets is Q_C, Melissa's budget line equation is

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?