If Leon's marginal rate of substitution of chicken for steak is 2, then we know that

The correct answer: he is willing to give up 2 units of steak to get the next unit of chicken.

Marginal rate of substitution of x for y tells us how much y one is willing to give up to get the next unit of x.

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When Sally had only one gallon of water in the cupboard, she said she was willing to give up a week's worth of television to get another gallon. Now that she has ten gallons of water in the cupboard, she refuses to part with anything when offered another gallon of water. Sally's behavior demonstrates

The correct answer: diminishing marginal rate of substitution.

It is completely rational to have a diminishing marginal rate of substitution.

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The vertical intercept of the budget line represents

The correct answer: the consumer's real income in terms of the good measured on the vertical axis.

The intercept is I/PY which represents the consumer's real income in terms of good Y being measured on the vertical axis.

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Liz has $10 to spend on soda (S) and pretzels (P). Sodas cost $1 each and pretzels cost $0.50 each. Which of the following represents Liz's budget constraint?

The correct answer: P = 20 – 2S

P = (10/0.5) – (1/0.5)S = 20 – 2S.

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Suppose that the quantity of pretzels consumed is measured on the vertical axis and the quantity of soda consumed is measured on the horizontal axis. If the budget line becomes flatter while the vertical intercept is unchanged, then which of the following may have occurred?

The correct answer: The price of soda decreased while other things remained constant.

For the slope to become flatter, either the price of soda fell or the price of pretzels rose. If the price of pretzels rose, then income must have risen.

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If a consumer's budget line for food (F) and clothing (C) can be written as F = 500 – 4C, then we know that

The correct answer: clothing costs 4 times as much as food.

The intercept (500) is nominal income divided by the price of food. The slope (4) is the price of clothing divided by the price food.

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If all prices and income increase by 5%, then what will happen to the budget line?

The correct answer: Nothing.

Since, the budget line for two goods, X and Y, is Y = I/PY – (PX/PY)X, then neither the slope nor the intercept would change. In real terms, the consumer's buying opportunities have not changed.

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By selecting the combination of goods for which MRS = PX/PY , the consumer is saying

The correct answer: "I get the same marginal utility from my last dollar spent on X as I do from my last dollar spent on Y."

This would only be true for certain utility functions but it is not true in general.

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Mary and Sue each consume apples and chocolate. They each pay the same price for each of the two goods, and both women claim to be in equilibrium. It must be true that

The correct answer: Mary and Sue have the same marginal rate of substitution of apples for chocolate.

The utility functions need not be the same for MUX/MUY to be the same.

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Rocky thinks that a sip of Coke and a sip of Pepsi are perfect substitutes. If Coke sells for $4 per case and Pepsi sells for $2 per case, then

The correct answer: Rocky will not buy any Coke.

The slope of the indifference curve is –1. The slope of the budget line is –2. Rocky will reach the highest indifference curve at a corner solution where he spends his entire cola budget on Pepsi and buys no Coke.

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Stefan has $50 to allocate between plays and movies. Plays cost $10 each and movies cost $4 each. Stefan maximizes his utility by buying tickets to 10 movies and 1 play. For his birthday, Stefan receives tickets to 2 plays. Which of the following statements is false?

The correct answer: Stefan is definitely now on a higher indifference curve than he would be if he had just received the $20 cash.

This statement is true. Stefan's budget line has shifted outward.

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If Liz's marginal rate of substitution of apples for chocolate is 3, while the price of chocolate is $6 per unit and the price of apples is $1 per unit, then Liz will

The correct answer: Liz will reduce her chocolate consumption and buy more apples.

Apples yield 3 times the marginal utility of chocolate while costing only 1/6 as much as chocolate. Liz can make herself better off by buying more apples and less chocolate.

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Herbert's utility function for food (F) and clothing (C) can be written as U = F*C. If the price of food is $4 per unit and the price of clothing is $2 per unit, how will Herbert allocate his $40 budget?

The correct answer: 10 units of clothing and 5 units of food

Herbert's MRS of clothing for food equals F/C. Set this equal to the price ratio of 2/4. Rearranging yields C =2F. Substituting this equilibrium condition into the budget equation yields F = 10 –F, or F =5, and therefore C = 10.

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When the price of clothing was $2 per unit and the price of food was $5 per unit, Jill would spend her $100 budget on 25 units of clothing and 10 units of food. When the price of food doubled to $10 per unit, Jill's mother gave her an extra $50 so that Jill could buy the same bundle that she did before the price change. Assuming convex indifference curves, which of the following statements is true?

The correct answer: Jill is actually better off now than she was before.

The new budget will intersect the original equilibrium but with a different slope than the original budget line. Jill can now reach a higher indifference curve.

Chapter 4 : Individual and Market Demand

Multiple Choice

Assuming convex indifference curves for two goods, as the price of one good falls, a consumer will always

The correct answer: reach a higher level of utility.

As the price of a good decreases, the budget line rotates outward. In real terms, the consumer is able to purchase more. Therefore, the consumer will reach a higher level of utility. How the consumer allocates her budget depends on the actual shape of the indifference curves.

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A price consumption path is derived by

The correct answer: connecting all of the tangency points as the price of a good changes.

The price consumption path is derived by drawing a line to connect all of the equilibrium points that result from a change in the price of one good, holding income and all other prices constant.

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Along an individual demand curve for food, which one of the following is not held constant?

The correct answer: The consumer's level of utility.

The demand curve for a good is derived by mapping out the equilibrium quantities of that good that result from changing the price of that good, holding income and the price of all other goods constant.

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Suppose that the quantity of food is measured on the horizontal axis and the quantity of clothing is measured on the vertical axis. If the price consumption path for food is vertical then

The correct answer: the demand for food is perfectly inelastic.

A vertical price consumption path implies that the quantity of food demanded is the same at every price.

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Suppose that the quantity of food is measured on the horizontal axis and the quantity of clothing is measured on the vertical axis. As income rises, the consumption of food also rises. Therefore, it must be true that

The correct answer: food is a normal good.

A normal good is defined as a good for which quantity demanded increases as income increases.

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