The figure above shows the markets for water and diamonds.
5) Based on the figures above, it is the case that the consumer surplus from water ________ the
consumer surplus from diamonds and the marginal utility from water ________ the marginal
utility from diamonds.
A) is equal to; is equal to
B) is larger than; is equal to
C) is larger than; is larger than
D) is larger than; is smaller than
E) is smaller than; is smaller than
12.5 Appendix
1) Consumers’ preferences are described by
A) budget lines.
B) indifference curves.
C) relative prices.
D) household income.
E) demand curves.
2) An indifference curve shows
A) different combinations of two goods among which the consumer is indifferent.
B) consumption possibilities that a consumer faces at different prices and income.
C) affordable combinations of goods.
D) the opportunity cost of one good relative to another.
E) the relative price of one good relative to another.
3) An indifference curve shows all combinations of two goods
A) that can be purchased with a given income.
B) that can be purchased if relative prices are constant.
C) among which the consumer is indifferent.
D) that have the same marginal rate of substitution.
E) that have the same opportunity cost.
4) An indifference curve is a line that shows
A) what the consumer can afford to buy.
B) how the quantity demanded of a good changes as its price changes.
C) combinations of goods among which the consumer is indifferent.
D) combinations of goods that have the same marginal rate of substitution.
E) combinations of goods that are affordable.
5) An indifference curve is a line that shows
A) combinations of goods among which a consumer is indifferent.
B) different combinations of goods a consumer is able to buy.
C) the indifference of consumers for the budget constraint.
D) Both answers B and C are correct.
E) Both answers A and C are correct.
6) An indifference curve shows
A) utility maximizing levels of consumption.
B) preferred combinations of goods.
C) a diminishing marginal rate of substitution as more of both goods are consumed.
D) combinations of goods among which a person is indifferent.
E) an increasing marginal rate of substitution for a good as more of it is consumed.
7) A curve that shows combinations of goods among which a consumer does not prefer one
combination to another is
A) a budget line.
B) an indifference curve.
C) a production possibilities curve.
D) a demand curve.
E) a marginal rate of substitution curve.
8) Sam’s budget is $60.00. The combinations of gasoline and coffee along one of Sam’s
indifference curves are combinations
A) that require the same total expenditure.
B) that he can afford with his $60.00 budget.
C) among which he is indifferent.
D) that give him the same marginal rate of substitution.
E) None of the above answers are correct.
9) Moving along an indifference curve the
A) marginal rate of substitution is constant.
B) consumer does not prefer one consumption point to another.
C) marginal rate of substitution is equal to 0.
D) consumer prefers some of the consumption points to others.
E) marginal rate of substitution for a good increases as more of the good is consumed.
10) As a consumer moves away from the origin onto higher indifference curves, what happens?
A) Nothing
B) The consumer reaches more preferred combinations of goods.
C) The consumer reaches less preferred combinations of goods.
D) The consumer reaches more affordable combinations of goods.
E) None of the above because it is impossible to move from one indifference curve to another.
11) Any point above a given indifference curve ________ affordable and is ________ to any
point on the indifference curve.
A) is not; inferior
B) might or might not be; preferred
C) is not; preferred
D) might or might not be; inferior
E) is; preferred
12) Any point below a given indifference curve is
A) inferior to any point on the indifference curve.
B) preferred to any point on the indifference curve.
C) definitely affordable.
D) definitely unaffordable.
E) More information is needed to determine if the point is or is not affordable and if the point is
or is not preferred.
13) We have asked Mac to rank his preferences between three market baskets, A, B, and C. If
Mac prefers B to C but does not care if he gets A or B, then
A) A is on a higher indifference curve than B.
B) B and C are on the same indifference curve.
C) Both A and B are on a higher indifference curve than C.
D) C is on a higher indifference curve than A.
E) B is on a higher indifference curve than C but it is not possible to determine whether C is on a
higher, lower, or the same indifference curve as A.
14) A preference map is a set of
A) indifference curves.
B) budget lines.
C) demand curves.
D) substitution curves.
E) marginal rate of substitution curves.
15) Which of the following statements is FALSE?
A) A consumer has only one indifference curve.
B) A consumer possesses a preference map.
C) An indifference curve is a curve that shows the combination of goods among which a
consumer is indifferent.
D) The marginal rate of substitution is equal to the magnitude of the slope of the indifference
curve.
E) Diminishing marginal rate of substitution means that the marginal rate of substitution
decreases as more of the good is consumed.
16) A preference map is a
A) series of indifference curves.
B) positively sloped series of curves, which reflect a consumer’s preferences.
C) contour map of a consumer’s budget.
D) map showing how much a consumer prefers one good for another.
E) None of the above answers is correct.
17) An indifference curve is a line that shows combinations of goods among which a consumer
A) prefers one over the other.
B) places no value on any of the items.
C) can afford to buy all the combinations.
D) is indifferent.
E) believes that all combinations have the same marginal rate of substitution.
18) What is the difference between a budget line and an indifference curve?
A) One is measured in dollars while the other in units of goods.
B) One shows what is possible while the other shows what is preferred.
C) One shows a positive relationship and the other shows a negative relationship.
D) The budget line is bowed in toward the origin and the indifference curves are linear.
E) There is no difference.
19) In a preference map, consumption combinations on higher indifference curves
A) always cost more than any combination on a lower indifference curve.
B) always are preferred to combinations on lower indifference curves.
C) always cost less than any combination on a lower indifference curve.
D) always are less preferred than combinations on lower indifference curves.
E) are sometimes more preferred, sometimes less preferred, and sometimes equally preferred
than any combination on a lower indifference curve.
20) The marginal rate of substitution is equal to the magnitude of the
A) slope of the demand curve.
B) price of the good measured along the x-axis.
C) slope of the indifference curve.
D) relative prices of the two goods.
E) price of the good measured along the y-axis.
21) The marginal rate of substitution of one good for another is measured by moving
A) along an indifference curve.
B) among different indifference curves.
C) along a budget line.
D) among different budget lines.
E) along a demand curve.
22) The magnitude of the slope of an indifference curve is the
A) marginal rate of substitution.
B) rate of relative prices.
C) marginal utility of substitution.
D) marginal rate of utility of income.
E) rate of increasing opportunity cost.
23) The magnitude of the slope of an indifference curve at a particular point measures the
A) total utility.
B) marginal utility.
C) marginal rate of substitution.
D) total rate of substitution.
E) demand.
24) Normally shaped indifference curves are bowed towards the origin of the graph. The reason
for this shape is
A) that indifference curves farther away from the origin represent higher levels of utility.
B) diminishing marginal rate of substitution.
C) the law of demand.
D) that the marginal rate of substitution is constant along an indifference curve.
E) the principle of diminishing marginal rate of relative price.
25) As Sam moves rightward along his indifference curve, his marginal rate of substitution for
the good on the horizontal axis
A) is diminishing.
B) is increasing.
C) remains constant.
D) shows the change in his income.
E) first increases and then diminishes.
26) When the indifference curve is steep, the consumer has a
A) high marginal rate of substitution for the good on the horizontal axis.
B) low marginal rate of substitution for the good on the horizontal axis.
C) large budget.
D) small budget.
E) steep budget line.
27) Moving along an indifference curve, if a consumer requires a large amount of the good
measured along the y-axis to make up for one unit less of the good measured on the x-axis, then
A) total utility is increasing.
B) the marginal rate of substitution is low and the indifference curve is flat.
C) the marginal rate of substitution is low and the indifference curve is steep.
D) the marginal rate of substitution is high and the indifference curve is steep.
E) the marginal rate of substitution is high and the indifference curve is flat.
28) Moving along an indifference curve, if a consumer requires a small amount of the good
measured along the y-axis to make up for one unit less of the good measured on the x-axis, then
A) total utility is increasing.
B) the marginal rate of substitution is low and the indifference curve is flat.
C) the marginal rate of substitution is low and the indifference curve is steep.
D) the marginal rate of substitution is high and the indifference curve is steep.
E) the marginal rate of substitution is high and the indifference curve is flat.
29) Suppose the quantity of burgers is measured on the horizontal axis and the quantity of bags
of French fries is measured on the vertical axis. The marginal rate of substitution for burgers is
A) the ratio of burgers consumed to bags of fries consumed.
B) the ratio of bags of fries consumed to burgers consumed.
C) the rate at which a person is willing to give up burgers to get more bags of fries while staying
on the same indifference curve.
D) the rate at which a person is willing to give up bags of fries to get more burgers while staying
on the same indifference curve.
E) the number of burgers consumed minus the number of bags of fries consumed.
30) Suppose the quantity of burgers is on the horizontal axis and the quantity of bags of French
fries is measured on the vertical axis and Carol’s indifference curves are drawn in the graph. As
Carol consumes more
A) burgers, moving along an indifference curve her marginal rate of substitution for burgers
decreases.
B) bags of fries, moving along an indifference curve her marginal rate of substitution for burgers
decreases.
C) burgers and bags of fries moving along an indifference curve, Carol reaches her best
affordable point.
D) of either good, moving along an indifference curve her marginal rate of substitution for
burgers increases.
E) of both goods, moving from one indifference curve to a higher indifference curve, her
marginal rate of substitution definitely does not change.
31) Along an indifference curve, if the marginal rate of substitution is 3, then the consumer is
willing to
A) give up 1 unit of the good measured along the y-axis for 3 units of the good measured along
the x-axis.
B) give up 3 units of the good measured along the y-axis for 1 unit of the good measured along
the x-axis.
C) pay $3 for one unit of the good measured along the y-axis.
D) pay $3 for one unit of the good measured along the x-axis.
E) give up 3 units of the good measured along the y-axis for 1 unit of income, that is, $1 of
income.
32) The marginal rate of substitution for the good on the horizontal axis is
A) the consumer surplus.
B) the same as the consumer’s budget line.
C) equal to the magnitude of the slope of the indifference curve.
D) equal to the magnitude of the slope of the consumer surplus curve.
E) equal to 1.0 if the indifference curves are linear.
33) In an indifference curve/budget line diagram, a consumer’s equilibrium consumption
combination will occur
A) always inside the budget line.
B) always outside the budget line.
C) always on the budget line.
D) sometimes on and sometimes inside the budget line depending on the indifference curves.
E) at the origin.
34) Which of the following is true if Clarice is at her consumer equilibrium?
i. Clarice is on her budget line.
ii. Clarice is on her highest attainable indifference curve.
iii. Clarice is dividing her budget equally across all goods.
A) i only
B) i and ii
C) i and ii
D) ii and iii
E) iii only
35) The indifference curve/budget line diagram concludes that Jim is definitely in equilibrium
when he is
A) spending all his budget.
B) saving some of his budget.
C) consuming the combination of goods and services that is affordable and on the highest
attainable indifference curve.
D) consuming a combination of goods and services that is on an indifference curve.
E) None of the above answers is correct.
36) A point where the budget line is just touching an indifference curve at one point is
A) the least affordable point.
B) the best affordable point.
C) on the lowest attainable indifference curve.
D) Both answers B and C are correct.
E) Both answers A and C are correct.
37) In the indifference curve/budget line framework, at the consumer equilibrium, the consumer
A) is on the budget line.
B) is on the highest attainable indifference curve.
C) has a marginal rate of substitution equal to the relative price of the goods.
D) Only answers A and B are correct.
E) Answers A, B, and C are correct.
38) In an indifference curve/budget line diagram, at the consumer equilibrium the slope of the
budget line
A) equals the slope of the indifference curve.
B) is greater than the slope of the indifference curve.
C) is less than the slope of the indifference curve.
D) may be greater than, equal to, or less than the slope of the indifference curve.
E) has nothing to do with the equilibrium.
39) At the best affordable point,
A) the marginal rate of substitution reaches its minimum value.
B) relative prices reach their minimum value.
C) the marginal rate of substitution equals the relative price.
D) the marginal rate of substitution equals real income.
E) the marginal rate of substitution reaches its maximum value.
40) At the point where the budget line is just touching an indifference curve at one point,
A) the slope of the budget line is equal to the slope of the indifference curve.
B) the marginal rate of substitution equals the relative price.
C) the consumer can change his or her consumption and can move to a higher indifference curve.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
41) A consumer is in equilibrium when the
A) consumer is buying any combination of goods and services on his or her budget line.
B) consumer is buying the combination of goods and services on the budget line and on the
highest attainable indifference curve.
C) marginal rate of substitution is as small as possible.
D) marginal rate of substitution is as large as possible.
E) marginal rate of substitution exceeds the relative price of the two goods by as much as
possible.
42) Luke enjoys eating tuna sashimi and drinking Pepsi. His consumer equilibrium occurs where
his budget line
A) just touches the lowest indifference curve at one point.
B) just touches the highest indifference curve at one point.
C) touches every indifference curve.
D) is below every indifference curve.
E) More information about Luke’s budget is needed to determine his consumer equilibrium.
43) The point where an indifference curve just touches the budget line at one point
A) is the best affordable point.
B) is where the marginal rate of substitution exceeds the relative price by as much as possible.
C) is a point on the consumer’s supply of spending curve.
D) cannot be possible because indifference curves always cross the budget line at two points.
E) None of the above answers is correct.
44) In a budget line/indifference curve diagram, at the consumer’s equilibrium at the best
affordable point,
A) any movement upward or downward on the budget line will move the consumer to a less
preferred point.
B) any movement to the northeast to higher indifference curves moves the consumer to a less
preferred point.
C) the slope of the budget line exceeds the marginal rate of substitution by as much as possible.
D) the budget line has a positive slope and the indifference curve has a negative slope.
E) the budget line has a negative slope and the indifference curve has a positive slope.
45) If a person consumes only two goods, which of the following is NOT necessary for a
consumer to be at his or her best affordable point of consumption?
A) The consumer chooses a bundle of goods that lies on his or her budget line.
B) The consumer is on his or her highest attainable indifference curve.
C) The consumer chooses equal amounts of both goods.
D) The marginal rate of substitution between the two goods is equal to the relative price of those
two goods.
E) The indifference curve is tangent to the budget line.
46) If a consumer’s marginal rate of substitution is greater than the relative price of the goods,
the consumer is
A) at his or her best affordable point.
B) perhaps at his or her best affordable point.
C) not at his or her best affordable point and should move along his or her indifference curve to a
higher budget line.
D) not at his or her best affordable point and should move along his or her budget line to a higher
indifference curve.
E) More information is needed to determine if the consumer is or is not at his or her best
affordable point.
47) At her best affordable point, Kris
i. is on her budget line.
ii. is on the highest attainable indifference curve.
iii. has a marginal rate of substitution equal to the relative price of the goods.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
48) When Bo is at his best affordable consumption point, his marginal rate of substitution is
A) greater than the relative price.
B) equal to the relative price.
C) less than the relative price.
D) equal to one.
E) maximized.
49) A consumer’s demand for tuna can be found from an indifference curve diagram by doing
which of the following?
A) observing what happens to the consumption of tuna for different income levels
B) finding where the budget line is tangent to an indifference curve for one price of tuna
C) allowing the price of tuna to change and observing the different best, affordable levels of tuna
D) changing the indifference curves and seeing the changes in the quantity of tuna the consumer
demands
E) it is impossible to derive a demand curve from an indifference curve graph
50) Using Gabriel’s budget line and his indifference curves between horseback riding lessons and
baseball lessons, and then changing the prices of each activity holding his income constant,
which of the following can be derived?
A) Gabriel’s demand curve for each activity
B) Gabriel’s supply curve for each activity
C) Gabriel’s marginal benefit for each activity
D) Gabriel’s net gain for each activity
E) Both answers A and B are correct.
51) In the indifference curve/budget line diagram, consumers reach higher indifference curves
when
A) their budget decreases.
B) the price of only the good measured along the y-axis increases.
C) the price of only the good measured along the x-axis increases.
D) the price of either good falls.
E) the price of either good rises.
52) In an indifference curve/budget line diagram, generally when the price of a good increases,
the consumer purchases
A) less of the good and moves to a lower indifference curve.
B) less of the good and moves to a higher indifference curve.
C) more of the good and moves to a higher indifference curve.
D) more of the good and moves to a lower indifference curve.
E) the same amount of the good and moves to a higher indifference curve.
53) Gertrude has a $15 budget to spend on soda and crackers. Soda costs $1 per bottle and
crackers cost 50¢ each. If the price of soda increases to $2 per bottle, the ________ rotates
inward and there is a movement along the ________.
A) budget line; demand curve for crackers
B) demand curve; indifference curve for crackers
C) budget line; demand curve for soda
D) demand curve; indifference curve for soda
E) indifference curves; demand curve for soda
54) Gertrude has a $15 budget to spend on soda and crackers. Soda costs $1 per bottle and
crackers cost 50¢ each. The quantity of soda is measured on the vertical axis. If the price of soda
increases to $2 per bottle and the price of crackers increase to $1 each, the
A) indifference curves shift inward.
B) indifference curves shift outward.
C) budget line shifts inward.
D) budget line shifts outward.
E) demand curve for soda shifts leftward.
55) Moving down along an indifference curve,
A) the price of the good measured on the vertical axis decreases.
B) total utility decreases.
C) the marginal rate of substitution for the good on the horizontal axis decreases.
D) the slope of the budget line decreases.
E) the consumer increasingly prefers the new consumption points to the old consumption points.