Consumer Theory and Horizontal Axis

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Chapter 2

1. A consumer prefers more to less of every good. Her income rises, and the price of one of the goods falls while other prices stay constant. These changes must have made her better of. TRUE 2. A decrease in income pivots the budget line around the bundle initially consumed. FALSE 3. If all prices are doubled and money income is left the same, the budget set does not change because relative prices don 't change. FALSE 4. If all prices double and income triples, then the budget line will become steeper. FALSE 5. If good 1 is measured on the horizontal axis and good 2 is measured on the vertical axis, and if the price of good 1 is p1 and the price of good 2 is p2; then the slope of the budget line is ��p2=p1. FALSE 6. If Good 1 is on the horizontal axis and Good 2 is on the vertical axis, then an increase in the price of Good 1 will not change the horizontal intercept of the budget line. FALSE 7. If there are two goods and the prices of both goods rise, then the budget line must become steeper. FALSE 8. If there are two goods with positive prices and the price of one good is reduced, while income and other prices remain constant, then the size of the budget set is reduced. FALSE 9. If there are two goods, and if one good has a negative price and the other has a positive price, then the slope of the budget line will be positive. TRUE 10. There are 3 goods. The price of good 1 is ��1; the price of good 2 is +1; and the price of good 3 is +2. It is physically possible for a consumer to consume any commodity bundle with non-negative amounts of each good. A consumer who has income of 10 could afford to consume some commodity bundles that include 5 units of good 1 and 6 units of good 2. TRUE 11. There are two goods. You know how much of good 1 a consumer can afford if she spends all of her income on good 1. If you know the ratio of the prices of the two goods, then you could draw the consumer 's budget line without any

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