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