Question 1

In a graph of choice sets, a price change causes the slope of budget lines to change.

Accepted Answer

A) True 
 B)False

Question 2

While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.

Accepted Answer

A) True 
 B)False

Question 3

The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)

Accepted Answer

A) A k percent decrease in the price of good 2 combined with a k percent decrease in income 
B) A k percent increase in the price of good 2 combined with a k percent decrease in income 
C) A k percent decrease in the price of good 2 combined with a k percent increase in income 
D) A k percent increase in the price of good 2 combined with a k percent increase in income. 
E) None of the above

Question 4

Suppose inflation comes in the form of an across-the board increase in all prices by some percentage k.For a consumer with exogenous income operating in a 2-good world, this will cause the budget constraint to

Accepted Answer

A) rotate inward 
B) rotate outward 
C) shift out in a parallel way 
D) shift inward in a parallel way 
E) none of the above

Question 5

Suppose you are given a coupon for pizza.This coupon lowers the price for each additional pizza you buy by 5% for each addition pizza you buy.What happens to your budget constraint, with pizza on the horizontal axis and a composite good on the vertical?

Accepted Answer

A) The vertical intercept remains the same but the slope becomes steeper as more pizzas are bought. 
B) The vertical intercept increases and the slope becomes steeper as more pizzas are bought. 
C) The vertical intercept remains the same but the slope becomes shallower as more pizzas are bought. 
D) The vertical intercept increases but the slope becomes shallower as more pizzas are bought. 
E) None of the above.

Question 6

Suppose a business offers a 10% discount on the good x₁ that it sells. a.Illustrate a consumer's before and after-discount budget constraint by modeling x₂ as a composite good. b.Suppose you observe only the after-discount consumption decision of the consumer.Can you tell from this information how much revenue the firm is giving up (from this consumer) by offering the discount? If so, illustrate this in your graph. c.Suppose that, instead of the firm offering the 10% discount, the government subsidized consumption of x₁ sufficiently to reduce p₁ by 10%.Suppose again that you only observe the after-subsidy decision of the consumer.Can you tell how much of a subsidy payment is made to this consumer by the government? If so, illustrate it in your graph. d.Why are your answers to (b) and (c) different?

Accepted Answer

The answer of Suppose a business offers a 10% discount...

Exam 2: A Consumers Economic Circumstances

In a graph of choice sets, a price change causes the slope of budget lines to change.

While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.

The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)

Suppose inflation comes in the form of an across-the board increase in all prices by some percentage k.For a consumer with exogenous income operating in a 2-good world, this will cause the budget constraint to

Suppose you are given a coupon for pizza.This coupon lowers the price for each additional pizza you buy by 5% for each addition pizza you buy.What happens to your budget constraint, with pizza on the horizontal axis and a composite good on the vertical?