# Consumer Theory and Budget Line

Topics: Consumer theory, Budget constraint, Indifference curve Pages: 6 (1298 words) Published: October 21, 2014
Exam
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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Guy has an income (Y) of \$50 with which he can purchase DVDs (D) at \$10 each and haircuts (H) at \$20 each. Which one of the following represents Guy's budget line? A) 50 = 10QD + 20Q H

B) 50 = QD + QH
C) 20Y = QD + 10Q H
D) Y = 10QD - 20Q H
E) Y = 50 + QD + QH

1)

2) David has an income of \$30 to buy movie tickets and bus tickets. The price of a movie ticket is \$6 and the price of a bus ticket is \$2. What is David's real income? A) \$38
B) \$30
C) \$32
D) 5 movie tickets or 15 bus tickets
E) 15 movie tickets or 5 bus tickets

2)

3) The magnitude of the slope of the budget line is the
A) absolute price of the good measured on the horizontal axis. B) relative price of the good measured on the vertical axis. C) price of the good measured on the vertical axis.
D) relative price of the good measured on the horizontal axis. E) real price of the good measured on the vertical axis.

3)

4) If the price of the good measured on the horizontal axis increases, the budget line A) shifts rightward and parallel to the original budget line. B) becomes steeper.
C) becomes flatter.
D) shifts leftward and becomes steeper.
E) shifts leftward and parallel to the original budget line.

4)

1

Use the figure below to answer the following questions.

Figure 9.1.2

5) Refer to Figure 9.1.2. Which budget line shows the greatest real income in terms of compact discs? A) AD
B) BD
C) CD
D) Real income is equal for all three budget lines.
E) Cannot be determined without studying the indifference curves.

5)

6) Larry consumes only beer (B) and chips (C). The magnitude of the slope of his budget line (with beer measured on the vertical axis) is
A) Y/PB.
B) PC × PB.
C) PC/PB.
D) PC/Y.
E) Y/PC.

6)

7) The magnitude of the slope of an indifference curve is
A) the marginal propensity to consume.
B) the relative price of good Y.
C) the marginal rate of transformation.
D) the marginal rate of substitution.
E) the marginal propensity to substitute.

7)

8) What is a distinguishing characteristic of goods that are perfect complements? A) upward-sloping demand curves
B) upward-sloping indifference curves
C) curved indifference curves, bowed away from the origin
D) straight-line indifference curves
E) L-shaped indifference curves

8)

2

Use the figure below to answer the following questions.

Figure 9.2.3

9) Refer to Figure 9.2.3. Rashid buys only books and albums. The figure shows his preferences. When Rashid chooses the consumption point of 3 books and 2 albums, his marginal rate of substitution is ________.

A) 1 book per album
B) zero
C) 2/3 books per album
D) 0.5 books per album
E) 3/2 books per album

9)

10) An indifference curve slopes downward because ________.
A) it shows that when a person gives up some of good X they can afford to increase their consumption of good Y
B) the quantity demanded increases as the price falls
C) it shows that when a person gives up some of good X they must increase their consumption of good Y to remain indifferent
D) it is a demand curve without prices
E) it shows that people are only happy when they increase consumption of all goods

10)

11) At the best affordable point, what is the relationship between the indifference curve and the budget line?
A) The slope of the indifference curve exceeds the slope of the budget line. B) The budget line and the indifference curve are identical. C) The slope of the budget line exceeds the slope of the indifference curve. D) The slope of the indifference curve equals the slope of the budget line. E) None of the above.

11)

3

Use the figure below to answer the following questions.

Figure 9.3.1

12) Consider the budget line and indifference curve in Figure 9.3.1. At the best affordable point, the marginal rate of substitution is...