EXAM2TH

A parallel shift in the budget line is caused by changes in the relative prices of the two goods.

false

An Engel curve shows the relationship between price and quantity demanded.

false

An inferior good is one that is of lower quality than a substitute.

false

An ordinary demand curve contains both substitution and income effects, while a compensated demand curve contains only income effects.

false

Estimates of the price elasticity of demand depend, in part, on the units used to measure price and quantity.

false

If the consumer's income doubles, then his optimal purchases of all goods will double

false

Parallel shifts in the budget line are considered when deriving the demand curve for a good.

false

Since the quantity of good X is measured along the horizontal axis when drawing indifference curves and demand curves, both can be drawn in the same diagram.

false

The income elasticity of demand is equal to the slope of the Engel curve.

false

The slope of the budget line always equals the consumer's marginal value

false

When the price of a good rises, the income effect always reduces the quantity demanded of the good.

false

In order to isolate the substitution effect of a price increase, a consumer

must be given enough additional income to allow him to achieve his original indifference curve

With an increase in income, we can predict that a consumer will choose a new market basket

on a higher indifference curve that is tangent to the new budget line

Comparing a market basket A to other market baskets, we can say that for a typical consumer, A is preferred to baskets to the

southwest but less preferred to baskets to the northwest

Refer to Goods X and Y. If the marginal rate of good X in terms of good Y is large, then the indifference curve will be

steep

Suppose we examine how the consumer's optimum changes when the price of good X changes, while the consumer's tastes, income, and the price of all other goods are held constant. This procedure is used to derive

the (ordinary) demand curve for good X

Refer to Goods X and Y. When the price of good X rises, what happens to the budget line?

the budget line becomes steeper, with no change in the vertical intercept

Suppose that good X is on the horizontal axis and all other goods (measured in dollars) are on the vertical axis in the consumer-choice diagram. If the consumer gains $10 in income, then

the budget line shifts up by 10 dollars, with no change in the slope

A budget line is constructed to show

the sets of all baskets that the consumer can afford, given prices and his or her income

Under standard assumptions, which of the following is not a property of indifference curves?

their slope is equal, in magnitude, to the relative price of goods

If the marginal value of 1 bottle of shampoo is 4 soap bars, then

trading away 1 bottle of shampoo for 4 bars of soap will not affect the consumer's level of satisfaction

A doubling of all prices has the same effect on the budget line as reducing income by half

true

All Giffen goods must be inferior goods, but not all inferior goods are Giffen goods.

true

If the consumer's income and all prices simultaneously triple, then his optimum will not change

true

Normal goods have upward-sloping Engel curves.

true

The (ordinary) demand curve for a normal good must be downward sloping.

true

The cross elasticity of demand will be positive when goods are substitutes and negative when goods are complements.

true

The substitution and income effects are in opposition when the price of an inferior good changes.

true

When Homer has 5 doughnuts, his marginal value is 15¢ per doughnut. We can conclude that Homer

would refuse to pay more than 15 cents for the sixth doughnut

Suppose Joe purchases 10 lottery tickets per month when his monthly income is $200. Joe receives a raise at work, giving him an extra $40 per month in take-home pay, and Joe now purchases 12 lottery tickets per month. What is Joe's income elasticity of demand for lottery tickets?

1

Suppose that an indifference curve for Jack is drawn measuring quantities of pencils along the horizontal axis and quantities of pens along the vertical axis. If the marginal value of an additional pencil is 3 pens for Jack, the slope of his indifference curve in this range is

3

The price elasticity of demand for electricity is -0.40. By how much must the price of the electricity decrease in order for sales to rise by 12%?

30%

Along a convex indifference curve, the marginal value of a good rises as the quantity of the good rises

False

If marginal value is constant, then the consumer's indifference curves are straight lines

True

If the marginal value of beef is $8 per pound, then the consumer is willing to pay at most $8 for an additional pound of beef

True

The consumer's income has no effect of the slope of the consumer's budget line

True

There are an infinite number of choices faced by a consumer that are shown along an indifference curve

True

Refer to Goods X and Y. If the indifference curves are horizontal, then we can conclude that

X does not affect the individual's utility

Which of the following best describes the substitution effect caused by a price increase?

a change in consumption due to the fact that you will not buy goods whose marginal value is below the new price

Refer to Goods X and Y. Which of the following would cause the vertical intercept to move upwards?

a decrease in the price of good Y

Refer to Goods X and Y. Which of the following can cause a parallel, outward shift in the budget line?

a rise in the consumer's income

The set of income-quantity pairs showing the amount of a good the consumer buys at various levels of income is called

an engel curve

When deriving an Engel curve, if the optimum point for good X lies to the left as income increases, good X is

an inferior good

An indifference curve shows the baskets of goods which

are all equally desirable, providing the consumer with some fixed level of satisfaction

If the substitution and income effects are in opposite directions, the law of demand will hold

as long as the substitution effect outweighs the income effect

To construct an ordinary demand curve for good X,

change the price of good X in the consumer choice diagram and observe the change in the quantity of good X among the optimum market baskets

When the price of a good rises, the resulting change in quantity demanded due solely to the decline in your income's purchasing power is called the

income effect

In using the composite-good convention in an indifference curve diagram, economists

lump together all goods but one into a single good measured in a single unit, like dollars

As the price of good X increases, the budget line

pivots inward

Market basket B is to the northwest of basket A but lies on the same indifference curve for a consumer. Market basket C also lies to the northwest of A but is above the indifference curve. This consumer

prefers C to A

Which of the following is not held constant when we use indifference-curve analysis to derive the Engel curve for good X?

the consumer's income

An outward, parallel shift in the budget line indicates that

the consumer's income has risen

If the income elasticity of a good is negative, then

the engel curve for this good must be downward sloping

An upward-sloping Engel curve indicates that

the good is normal

Refer to Goods X and Y. The relative price of good X in terms of good Y is always equal to

the magnitude of the slope of the budget line

Refer to Goods X and Y. Suppose the consumer is at an optimum, spending all his income on good X. How are the marginal value of X and the relative price of X related at this corner solution?

the marginal value of X must be greater than or equal to the relative price of X

Facing choices between beer and pizza, the number of pizzas a consumer would be willing to trade for just one beer is called

the marginal value of beer in terms of pizza

Elasticity measures are preferred by economists to measures of slope when analyzing changes in the quantity of a good consumers purchase because

the measure of slope is dependent upon the units of measurement, elasticity is not

If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows, then

the optimum contains fewer marshmallows than the consumer is currently buying

Consider the ordinary and compensated demand curves for a normal good. If the price of the good falls, then

the ordinary demand curve will show the larger increase in quantity demanded