ch 9

real income

a household's income expressed as a quantity of goods that the household can afford to buy

indifference curve

a line that shows combinations of goods among which a consumer is indifferent

True/false: an increase in income shifts the budget line outward and makes it steeper.

false: an increase in income shifts the budget line outward, but does not change its slope.

True/false: an indifference curve measures the same things as does a demand curve.

false: an indifference curve shows different combinations of two goods among which the consumer is indifferent; a demand curve shows how the quantity of one good changes when its price changes.

True/false: goods that are perfect substitutes have L-shaped indifference curves.

false: goods that are complements have L-shaped indifference curves.

True/false: for an inferior good, an increase in income shifts the budget line leftward.

false: the budget line shifts rightward, but the equilibrium amount of the good consumed decreases.

True/false: when the price of a good falls, the income effect always leads to increased consumption of the good.

false: the income effect leads to increased consumption for normal goods and decreased consumption for inferior goods.

True/false: the substitution effect can be divided into the price effect and the income effect.

false: the price effect can be divided into the substitution effect and the income effect.

True/false: the marginal rate of substitution falls when moving upward along an indifference curve.

false: the principle of diminishing marginal rate of substitution means that the marginal rate of substitution falls while moving downward along an indifference curve.

income effect

the effect of a change in income on buying plans, other things remaining the same

substitution effect

the effect of a change in price of a good or service on the quantity bought when the consumer (hypothetically) remains indifferent between the original and the new consumption situations - that is, the consumer remains on the same indifference curve

price effect

the effect of a change in the price of a good on the quantity of the good consumed, other things remaining the same

diminishing marginal rate of substitution

the general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remaining indifferent as the quantity of good x increases

budget line

the limit to a household's consumption choices; marks the boundary between those combinations of goods and services that a household can afford to buy and those that it cannot afford

marginal rate of substitution

the rate at which a person will give up good y (the good measured on the y-axis) to get an additional unit of good x (the good measured on the x-axis) while at the same time remaining indifferent (remaining on the same indifference curve) as the quantity of x increases

relative price

the ratio of the price of one good or service to the price of another good or service; an opportunity cost

True/false: for a normal good, both the substitution effect and income effect from a higher price lead to a decrease in the consumption of the good.

true: for a normal good, the income effect and the substitution effect always have the same impact on consumption of the good.

True/false: indifference curves farther from the origin are preferred to those closer to the origin.

true: indifference curves farther from the origin have more potential consumption of all goods and services and so are preferred.

True/false: the best affordable point of consumption is on the budget line and on the highest attainable indifference curve.

true: the best affordable point is best because it is on the highest indifference curve and is affordable because it is on the budget line.

True/false: the budget line has a negative slope and is linear.

true: the budget line is straight; indifference curves are concave (bowed toward the origin).

True/false: the magnitude of the slope of the budget line is a relative price.

true: the magnitude of the slope of the budget line is the relative price of the good on the horizontal axis in terms of the good on the vertical axis.

True/false: the law of demand can be derived from an indifference curve diagram by using the diagram to determine the impact changes in price have on the person's consumption bundle.

true: the question tells how a demand curve can be derived.

True/false: the magnitude of the slope of a person's indifference curve is the marginal rate of substitution.

true: the statement tells how to measure the marginal rate of substitution.

True/false: a person is indifferent between any combination of goods on a particular indifference curve.

true: this definition is why a consumer is indifferent between points on a particular indifference curve.