Solve all of them with explanations

True/False and Explain Multiple Choice Consumption Possibilities Consumption Possibilities 1. The budget line has a negative slope and is linear. 1. Which of the following statements best describes a 2. The magnitude of the slope of the budget line is a consumer's budget line? relative price. a. It shows all combinations of goods among which 3. An increase in income shifts the budget line out- the consumer is indifferent. ward and makes it steeper. b. It shows the limits to a consumer's set of afford- able consumption choices. Preferences and Indifference Curves c. It shows the desired level of consumption for the 4. A person is indifferent between any combination of consumer. goods on a particular indifference curve. d. It shows the consumption choices made by a consumer. 136 CHAPTER 8 2. The magnitude of the slope of the budget line 5. Suppose that the price of a movie rises and nothing a. is defined as marginal rate of substitution. else changes. This change means the budget line b. equals the relative price of the good measured a. rotates around the vertical intercept and becomes along the horizontal axis. steeper. c. increases when income increases. b. rotates around the vertical axis and becomes d. decreases when income increases. flatter. c. shifts rightward and becomes steeper. 3. The budget line can shift or rotate d. shifts rightward and does not change its slope. a. only when income changes. b. only when prices change. 6. Sue consumes apples and bananas. Suppose that c. when either income or prices change. Sue's income doubles and that the prices of apples d. None of the above because changes in income and bananas also double. Suc's budget line will and prices do not shift or rotate the budget line. shift leftward but not change slope. b. remain unchanged. Use Figure 8.5 for the next two questions. c. shift rightward but not change slope. FIGURE 8.5 d. shift rightward and become steeper. Multiple Choice Questions 4 and 5 Preferences and Indifference Curves 7. As a consumer moves rightward along an indiffer- ence curve, the consumer remains indifferent among the differ- ent combinations of goods. Soda (six-packs per month) b. consumer generally prefers the combinations of Budget line goods farther rightward along the indifference curve. C. income required to buy the combinations of the goods always increases. d. relative price of both goods falls. 8. Indifference curves shift or rotate a. only when income changes. Movies (per month) b. only when prices change- c. when either income or prices change. d. with none of the above because changes in in- 4. Suppose that this consumer's income increases and come and prices do not shift indifference curves. nothing else changes. As a result, the consumer's 9. If your local newspaper reported that wearing plaid budget line clothing was a sure way to obtain good grades, stu- a. rotates around the vertical intercept and becomes dents' steeper. b. rotates around the vertical axis and becomes a. budget lines would shift rightward to compensate for the higher price of plaid clothing shallower. b. budget lines would rotate so that more plaid c. shifts rightward and becomes steeper. d. shifts rightward and its slope does not change. clothing would be purchased. C. preferences would change in favor of more plaid clothing. d. None of the above.10. Diminishing marginal rate of substitution means 13. Which of the following statements about Figure 8.6 that is correct? a. the budget line has a negative slope. a. Point a is preferred to point a, but a is not b. the budget line does not shift when people's affordable. preferences change. . The consumer is indifferent between points d c. indifference curves might have a positive slope. and c, but c is more affordable. d. indifference curves will be concave. Point & is preferred to point d , but b is not affordable. 11. If two goods are perfect substitutes, their d. Both points a and d cost the same, but a is pre- a. indifference curves are positively sloped straight ferred to d. lines. b. indifference curves are negatively sloped straight 14. What is the best affordable point of consumption? lines. a. a C. indifference curves are L-shaped. b. b d. marginal rate of substitution is infinity. d d 12. If the indifference curves between two goods are L- shaped, the goods are 15. A consumer is in equilibrium when the consump- a. complementary goods. tion point is on b. substitute goods. a. the budget line. c. normal goods. b. an indifference curve. d. inferior goods. c. the highest indifference curve that just touches the budget line. Predicting Consumer Behavior d. None of the above. Use Figure 8.6 for the next two questions. FIGURE 8.6 16. Which of the following is true when the consumer is Multiple Choice Questions 13 and 14 at the best affordable point a. The point is on the budget line and highest at- tainable indifference curve. b. The slope of the budget line equals the slope of the indifference curve. c. The MRS equals the relative price. d. All of the above are true at the best affordable Hot dogs (quantity per month) point. 17. Which of the following statements is true? a. The law of diminishing marginal rate of substi cution means that indifference curves are convex b (bowed out). b. A demand curve can be derived from the indif- ference curve/budget line analysis. Hamburgers (quantity per month] c. Demand curves and indifference curves measure the same things. d. Demand curves and indifference curves have negative slopes for the same reason.18. When the price of an orange falls, the income effect 22. The new consumer equilibrium is at point a. increases the consumption of oranges if oranges a. a. are a normal good. b. b. b. increases the consumption of oranges if oranges C. C. are an inferior good. d. d. c. always increases the consumption of oranges. d. always decreases the consumption of oranges. 23. When you examine the effect from a change in price while (hypothetically) changing income to keep the 19. When oranges fall in price, the substitution effect consumer on the same indifference curve, you are a. increases the consumption of oranges if oranges examining the are a normal good. a. price effect. b. increases the consumption of oranges if oranges b. income effect. are an inferior good. c. substitution effect. c. always increases the consumption of oranges. d. ceterus paribus effect. d. always decreases the consumption of oranges. 24. When the price of a normal good falls, the income Use Figure 8.7 for the next three questions. effect _ _ the quantity demanded and the substi FIGURE 8.7 tution effect _ the quantity demanded. Multiple Choice Questions 20, 21, 22 a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases Tacos (quantity per month) 25. An inferior good a. has a substitution effect opposite that of a normal good b. has an income effect opposite that of a normal good c. has a price effect opposite that of a normal good. 12 d. is one that breaks after its first use. Work-Leisure Choices 26. The substitution effect from a rise in the wage rate Slices of pizza (quantity per month) a. motivates a decrease in leisure. b. motivates an increase in leisure. 20. The change in the budget line is the result of a(n) c. has the same effect on leisure as does the income a. fall in the price of a slice of pizza. effect. b. fall in the price of a taco. d. None of the above. C. increase in income. d. None of the above 27. Over the past 100 years, the quantity of labor sup- plied has decreased as wages have risen. This change 21. With the change in the budget line, the consumer's indicates that the income effect real income measured in units of tacos a. and the substitution effect have both discouraged a. definitely increased. leisure. b. definitely decreased. b. and the substitution effect have both encouraged c. did not change. leisure. d. might have changed, but it is impossible to tell c. encouraging leisure has dominated the substitut from the figure. tion effect discouraging leisure. d. has not affected the work-leisure choice.Short Answer Problems FIGURE 8.9 1. Why do indifference curves have negative slopes? Short Answer Problem 4 2. Jan and Dan eat bread and peanut butter and have the same income. Because they face the same prices, they have identical budget lines. Currently, Jan and 5 Dan consume the same quantities of bread and Lizards (number per year) peanut butter; they have the same best affordable 4 consumption point. Jan views bread and peanut butter as close (though not perfect) substitutes, 3 whereas Dan considers bread and peanut butter to be quite (but not perfectly) complementary. On the 2 same diagram, draw a budget line and representa- tive indifference curves for Jan and Dan. (Measure the quantity of bread on the horizontal axis.) FIGURE 8. 8 Short Answer Problem 3 Snakes (number per year) 4. Figure 8.9 again shows Igor's indifference curves. a. Snakes cost $20, lizards cost $20, and Igor's income is $60. Draw Igor's budget line in Fig- Lizards (number per year) ure 8.9. How many snakes does Igor buy? How many lizards? b. For his superior work in finding brains, Igor's master gives him a raise to $120. In Figure 8.9 draw Igor's new budget line. After the raise, how many snakes does Igor buy? How many lizards? For Igor, are snakes and/or lizards a normal good? 5. Ms. Muffet consumes curds and whey. The initial price of curds is $1 per unit, and the price of whey Snakes [number per year) is $1.50 per unit. Ms. Muffet's income is $12. 1. What is the relative price of curds? 3. Three of Igor's indifference curves are illustrated b. Derive Ms. Muffet's budget equation and draw Figure 8.8. her budget line on a graph. ( Measure curds on a. Suppose that the price of a snake is $10, the the horizontal axis.) price of a lizard is $20, and Igor has $60 to c. On your graph, draw an indifference curve so spend on snakes and lizards. Carefully draw his that the best affordable point corresponds to 6 budget line in Figure 8.8. How many snakes units of curds and 4 units of whey. does Igor buy? How many lizards? d. What is the marginal rate of substitution of b. Suppose that the price of a snake spirals to $20 curds for whey at this point? while the price of a lizard does not change. If e. Show that any other point on the budget line is Igor's income stays at $60, draw his new budget inferior. line in Figure 8.8. Now how many snakes does gor buy? How many lizards' Are snakes and liz- . For the initial situation described in problem 5, ands substitutes or complements? suppose that Ms. Muffet's income now increases. c. When is Igor better off. before or after snakes go a. Illustrate graphically how the consumption of up in price? How can you tell? curds and whey are affected if both goods are140 CHAPTER 8 normal. (Precise numerical answers are not nec- FIGURE 8. 1 1 essary here. In your graph, just show whether Short Answer Problem 8 (c) consumption increases or decreases but do not worry about specific numbers.) b. Draw a new graph showing the effect of an in- crease in Ms. Muffet's income if whey is an info- rior good. 7. Return to the initial circumstances in problem 5. Price of wine (dollars per bottle 2 Now, suppose that the price of curds doubles to $2 unit while the price of whey remains at $1.50 per unit and income remains at $12. . Draw the budget line before and after the price change. b. Why is the initial best affordable point (label it point a) no longer the best affordable point? c. Use your graph and show the new best afford- able point and label it d. What has happened to Wine (bottles per month] the consumption of curds? d. Use your graph to illustrate the substitution and b. The price of a bottle of wine falls to $1. The income effects from the price change. Label the price of a loaf of bread remains at $1, and point created by the substitution effect b. Carolyn's income is constant at $6. Draw her new budget line in Figure 8.10. How many FIGURE 8. 10 bottles of wine does Carolyn now buy? Short Answer Problem 8 (a) and 8 (b) c. Assume that Carolyn's demand curve is linear. In Figure 8.11 draw Carolyn's demand curve for wine. FIGURE 8. 12 Wine (bottles per month) Short Answer Problem 9 Income (dollars per week) Income-time budget line 13 Bread (loaves per month] 8. Figure 8.10 illustrates Carolyn's indifference map between bread and wine. 168 a. The price of a bottle of wine is $2, and the price Leisure (hours per week) of a loaf of bread is $1. Carolyn has $6 to spend on bread and wine. In Figure 8.10 draw her budget line. How many bottles of wine does 9. In Figure 8.12 indicate the initial hours of leisure Carolyn buy? this person enjoys. Suppose that the wage rate rises so that the person moves to another of the indiffer