ALA Ch4 ECON 301

The total effect of a price increase includes:

- income effect - substitution effect

Due to the complexities of human thought process:

-behavior models are simplifications of real-world human decision-making. -behavior models are abstractions of the way we make decisions.

The total effect of a price change results from the:

-effect of a change in real income. -effect of a change in relative price.

In the case of a budget constraint for two normal goods, X and Y, an increase in a consumer's income will _____.

-have the same effect as a decrease in the price of both X and Y -shift the budget constraint to the right

Price changes alter consumers':

-incentives to buy different goods. -equilibrium consumption bundles. -budget constraints.

An increase in the price of good X rotates the budget line, alters the equilibrium bundle, and

-indicates different quantities demanded at different prices. -provides two points on a demand curve.

The budget constraint can be given by which of the following expressions?

1) Y = M/Py - (Px/Py)⋅X 2) PxX + PyY = M

Moving along an indifference curve from one bundle to another, a consumer gains 1 unit of X and gives up 3 units of Y. The marginal rate of substitution is ___ between goods X and Y.

3

Given a fixed opportunity set that consists of 24 hours, workers will generally try to consume a bundle of labor and leisure that does which of the following?

Achieves the highest affordable indifference curve

True or false: It is generally the case that indifference curves have the same shape across all consumers.

False

At the point of consumer equilibrium,

MRS = Px/Py

Consumer ______ represent the possible goods and services consumers can afford to consume and consumer ______ determine which of these goods will be consumed.

Opportunities; preferences

For any two bundles of goods and/or services, A and B, if A is preferred to B, or B is preferred to A, or the consumer is indifferent between A and B, then:

Preferences are complete

The budget set can be defined as which of the following?

PxX + PyY ≤ M

When income is constant and the price of good X, PX, decreases, what is the effect on the budget line (x is measured on the horizontal axis, y on the vertical axis)?

The budget line rotates counterclockwise.

If the prices of BOTH good X and good Y double, what is the effect on the budget line (x is measured on the horizontal axis, y on the vertical axis)?

The budget line shifts to the left. it would shift to right if reduced by 1/2

T/F Economists are able to model human behavior

True

True or false: If a consumer is consuming their equilibrium consumption bundle and the price of one of the goods decreases while all other prices are unchanged, the consumer can reach a higher level of satisfaction. True false question.

True

Given the following budget constraint, PxX + PyY = M, what is the maximum affordable quantity of good X?

X = M/Px

If a consumer's income decreases and she now consumes less of good X and more of good Y, then the consumer considers X and Y to be what type of goods?

X is normal, Y is inferior

Given the following budget constraint, PxX + PYY = M, what is the maximum affordable quantity of good Y?

Y = M/Py

The substitution effect reflects how a consumer will react to

a different market rate of substitution.

Y = M/Py - (Px/Py) X, represents

an affordable combination of goods X and Y.

Y = M/Py - (Px/Py)X, represents

an affordable combination of goods X and Y.

Bundle A is preferred to bundle B. Bundle B is preferred to bundle C. If preferences are transitive, then

bundle A is preferred to bundle C.

Since workers substitute between leisure and income, what must firms do to induce workers to give up leisure?

compensate workers

Indifference curve analysis allows managers to determine the effect of price changes on

consumer equilibrium

The affordable bundle that generates the most consumer satisfaction is given at _____.

consumer equilibrium MRS = Px/Py

All affordable goods and services can be represented by which of the following?

consumer opportunities

As a consumer obtains more and more chocolate, the consumer is willing to give up less and less peanut butter. This means the consumers indifference curve between chocolate and peanut butter will be:

convex from the origin

Suppose a consumption bundle contains two goods, X and Y, and that the goods are complements. If the price of good X rises, consumption of good Y ___________.

decreases

Suppose a consumption bundle contains two goods, X and Y, and that the goods are substitutes. If the price of good X falls, consumption of good Y ___________.

decreases

When consumer income changes and prices are held constant, the slope of the budget line

does not change

A cash gift is generally preferred to an in-kind gift of equal value unless the in-kind gift is ______.

exactly what the consumer would have purchased with the cash

A change in a consumer's income changes consumption patterns because changes in income

expand or contract the budget constraint.

True or false: If a consumer is consuming their equilibrium consumption bundle and the price of one of the goods changes, this will not change the consumer's equilibrium consumption bundle.

false

Cash gifts tend to produce a _________ level of utility relative to in-kind gifts.

higher

A buy-one-get-one free deal makes the budget line between the first and the second unit of the good _______.

horizontal

The market demand curve is the ____________ summation of all the individual demand curves.

horizontal

If profits are on the y-axis and output is on the x axis and a manager's preferences depend solely on profit, their indifference curves will be __________.

horizontal lines

The movement from one indifference curve to another due to changes in real income caused by price changes is called the ____ effect.

income

Workers' behavior can be analyzed using which of the following?

indifference curves

Given fixed prices, when consumer income decreases, the budget line shifts to the ______. (Enter one word)

left

If a consumer's income decreases and she now consumes less of BOTH goods X and Y, then the consumer considers X and Y to be what type of goods?

normal goods

When income changes, the new equilibrium point will depend entirely on consumer_______.

preference

The income effect reflects the fact that as the price of a good increases, the consumer's

real income falls.

A buy-one-get-one free deal

reduces only the price of the second unit purchased.

Given fixed prices, when consumer income increases, the budget line shifts to the (left/right).

right

Given fixed prices, when consumer income increases, the budget line shifts to the _____(left/right).

right

Points on an indifference curve

show consumption bundles that generate the same amount of satisfaction.

- Px/Py equals

slope of budget curve

The movement along a given indifference curve due to a change in the relative prices of goods is called the _____ effect.

substitution

The budget set defines combinations of goods and services

that are affordable

The marginal rate of substitution (MRS) is

the absolute value of the slope of the indifference curve.

Indifference curve analysis is a helpful tool used to derive

the demand curve

Consumer equilibrium occurs at the point where the MRS is equal to

the ratio of the prices

Market demand indicates the __________ quantity all consumers would purchase at each possible price

total

If profits are on the y-axis and output is on the x axis and a manager's preferences depend solely on output, their indifference curves will be __________.

vertical lines