Question 1

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.

Accepted Answer

A)  must exceed 
B)  must be less than the 
C)  must equal 
D)  might exceed or be less than but not equal to

Question 2

-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?

Accepted Answer

A)  QM = 20 - 2QC 
B)  20 = QC + QM 
C)  20 = QC + 2QM 
D)  QM = 20 + QC

Question 3

-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

Accepted Answer

A)  indifference curves flatter. 
B)  indifference curves steeper. 
C)  budget line flatter. 
D)  budget line steeper.

Question 4

-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

Accepted Answer

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.

Question 5

-The figure above shows Ilene's budget line. If Ilene's income rises, her budget line will

Accepted Answer

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.

Question 6

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

Accepted Answer

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.

Question 7

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

Accepted Answer

A)  the price effect. 
B)  a diminishing marginal rate of substitution. 
C)  an increasing marginal rate of substitution. 
D)  an indifference curve effect.

Question 8

-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

Accepted Answer

A)  both lower in price. 
B)  both inferior goods. 
C)  neither substitutes nor complements. 
D)  None of the above answers is correct.

Question 9

In a budget line/indifference curve figure, how do you identify the best affordable combination of any two goods?

Accepted Answer

The answer of In a budget line/indifference curve figure, how...

Question 10

Janelle spends all of her $40 income on songs from iTunes ($1 each) and applications ($4 each) for her iTouch. What is her budget equation?

Accepted Answer

A)  $1 × Qsong - $5 × Qapp = Y 
B)  Qsong = 10 - 4 × Qapp 
C)  $40 + $1 × Qsong = $4 × Qapp 
D)  Qapp = 10 - 1/4 × Qsong

Question 11

-In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move from

Accepted Answer

A)  a to b. 
B)  a to c. 
C)  b to c. 
D)  T to S.

Question 12

What is the marginal rate of substitution and how does it relate to an indifference curve?

Accepted Answer

The answer of What is the marginal rate of substitution...

Question 13

-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

Accepted Answer

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

Question 14

-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 ________.

Accepted Answer

A)  1/2 hot dog 
B)  5 hot dogs 
C)  $20 
D)  2 hot dogs

Question 15

-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 ________.

Accepted Answer

A)  Qm = 10 - Qc 
B)  Qm + Qc = 20 
C)  $1 × Qc + $2 × Qm = $10 
D)  Qm = 10 - 2 × Qc

Question 16

Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each) for her iTouch. If she makes her best affordable choice, she purchases 20 songs and 4 applications, what is her income?

Accepted Answer

A)  $40 
B)  $20 
C)  $30 
D)  $25

Question 17

-If an individual's income increases,

Accepted Answer

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.

Question 18

-The substitution effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from

Accepted Answer

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.

Question 19

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

Accepted Answer

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.

Question 20

All points above the budget line are

Accepted Answer

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.

Exam 9: Possibilities, Preferences, and Choices