89) The income effect from a fall in the price of a gallon of gasoline is shown in the above figure
by the movement from
A) point A to point C.
B) point A to point B.
C) point B to point C.
D) point A to point B and then to point C.
90) In the above figure, when the price of a gallon of gasoline falls, which points in the above
figure are used to derive points on the consumer’s demand curve for gasoline?
A) points A and B
B) points A and C
C) points B and C
D) points A, B, and C
91) In the above figure, the movement from point C to point A is the result of
A) a decrease in the price of coffee.
B) an increase in the price of coffee.
C) a decrease in the price of gasoline.
D) an increase in the price of gasoline.
92) In the above figure, the rise in the price of a gallon of gasoline that created the movement
from point C to point A would be shown as a movement ________ along the demand curve for
________.
A) upward; coffee
B) downward; coffee
C) upward; gasoline
D) downward; gasoline
93) In the above figure, if income is $8, the initial price of a soft drink is $1, and the initial price
of a milkshake is $2, a decrease in the price of a milkshake to $1 will move the consumer from
point ________ to point ________.
A) a; b
B) b; c
C) a; d
D) a; c
94) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a
milkshake is $2. If the price of a milkshake decreases to $1, the income effect is the movement
from point ________ to point ________.
A) a; b
B) b; d
C) b; c
D) a; c
95) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a
milkshake is $2. If the price of a milkshake decreases to $1, the substitution effect is the
movement from point ________ to point ________.
A) a; b
B) b; d
C) b; c
D) a; c
96) In the above figure, income is $8, the price of a soft drink is $1, and the initial price of a
milkshake is $2. If the price of a milkshake decreases to $1, milkshakes are revealed to be
A) an inferior good.
B) a normal good.
C) less preferred than soft drinks.
D) None of the above answers is correct.
97) The figure illustrates Elijah’s preferences. He is currently at point A. The price of pizza
decreases. The move from point A to point ________ is the substitution effect and the move from
point ________ to point ________ is the income effect.
A) B; B; C
B) E; E; C
C) D; D; B
D) C; C; B
98) In the figure above, the marginal rate of substitution (MRS) at point A is
A) greater than the MRS at any other point on the indifference curve.
B) equals the MRS at all other points on the indifference curve.
C) less than the MRS at any other point on the indifference curve.
D) equal to the slope of the budget line.
99) In the figure above, the marginal rate of substitution (MRS) at point A is equal to ________
pounds of pickles per pound of olives.
A) 8
B) 6
C) 1 1/3
D) 2
100) In the figure above, at point A the consumer is willing to give up ________ pounds of
pickles to get one additional pound of olives.
A) 8
B) 6
C) 1 1/3
D) 2
101) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds
of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives
falls so that his budget line rotates but it still goes through point A. Sam’s consumption of olives
A) definitely will rise.
B) definitely will fall.
C) definitely will stay the same.
D) could rise, fall, or stay the same.
102) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds
of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives
falls so that his budget line rotates but it still goes through point A. Sam’s consumption of pickles
A) definitely will rise.
B) definitely will fall.
C) definitely will stay the same.
D) could rise, fall, or stay the same.
103) In the figure above, Sam originally selects his consumption bundle at point A with 3 pounds
of olives and 4 pounds of pickles a year. Then the price of pickles rises and the price of olives
falls so that his budget line rotates but it still goes through point A. At point A, the slope of the
indifference curve I1 ________ the slope of the new budget line.
A) is steeper than
B) is flatter than
C) has the same slope as
D) could be steeper than, flatter than, or have the same slope as
104) A consumer is in equilibrium when the consumption point is on
A) the budget line.
B) an indifference curve.
C) the highest indifference curve that just touches the budget line.
D) none of the above.
105) When oranges increase in price, the income effect
A) decreases the consumption of oranges only if oranges are a normal good.
B) decreases the consumption of oranges only if oranges are an inferior good.
C) always increases the consumption of oranges.
D) always decreases the consumption of oranges.
106) When the price of a normal good rises, the income effect results in ________ in the quantity
demanded and the substitution effect results in ________ in the quantity demanded.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
4 News Based Questions
1) Bananas cost about $1 a pound and ground beef costs about $3 a pound. If Jenna has $18 to
spend on groceries and she only buys bananas and beef, which of the following is a possible
combination of these goods that could maximize her total utility?
A) 18 lbs of bananas and 6 lbs of beef
B) 10 lbs of bananas and 8 lbs of beef
C) 8 lbs of bananas and 3 lbs of beef
D) 3 lbs of bananas and 5 lbs of beef
2) Beta Alpha Psi is an accounting student professional organization with chapters on 279
campuses nationwide. Suppose each meeting the local chapter has $30 to spend on pizza and
soda. If pizza costs $8 and the chapter buys 3, how much money can be spent on soda?
A) $6
B) $30
C) $24
D) $3
3) Some parents struggling with back-to-school buys. “A couple of years ago, I was able to buy
everything practically new,” said Charles Lane-Bey, a U.S. Postal Service worker who’s
struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for
his son, and pants cost 50 cents and shirts cost $1. Which of the following combinations of pants
and shirts is affordable?
A) 10 pants and 6 shirts
B) 7 pants and 7 shirts
C) 3 pants and 8 shirts
D) 6 pants and 2 shirts
4) Some parents struggling with back-to-school buys. “A couple of years ago, I was able to buy
everything practically new,” said Charles Lane-Bey, a U.S. Postal Service worker who’s
struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for
his son, and pants cost 50 cents and shirts cost $1. What is the slope of Charles’s budget line if it
is drawn with pants on the x-axis?
A) 2
B) -2
C) -1/2
D) 1/2
5) Some parents struggling with back-to-school buys. “A couple of years ago, I was able to buy
everything practically new,” said Charles Lane-Bey, a U.S. Postal Service worker who’s
struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for
his son, and pants cost 50 cents and the price of shirts has decreased from $1 to 50 cents. What is
the effect of the fall in price of shirts on Charles’s real income in terms of pants?
A) It increases from 10 to 20.
B) It decreases from 10 to 5.
C) It does not change.
D) It increases from 20 to 40.
6) Ramen noodles were hotter than ever in 2010. Considered a bargain meal for cash-starved
college students… in 2010, 4 billion individual packets were devoured in the United States, a 4
percent increase over 2006. If once college students graduated, they stopped eating ramen, would
ramen be considered a normal or inferior good?
A) inferior because students only eat ramen when income is low
B) normal because students only eat ramen when income is low
C) inferior because students only eat ramen when income is high
D) normal because students only eat ramen when income is high
7) Ramen noodles were hotter than ever in 2010. Considered a bargain meal for cash-starved
college students… In 2010, 4 billion individual packets were devoured in the United States, a 4
percent increase over 2006. Once students leave college for that first well-paying job, however,
they stop eating Ramen. If the price of ramen falls, and income remains the same, describe the
substitution and income effects that occur.
A) Both the substitution and income effects would be positive.
B) The substitution effect would be negative and the income effect would be positive.
C) Both the substitution and income effects would be negative.
D) The substitution effect would be positive and the income effect would be negative.
8) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each)
for her iTouch. If she makes her best affordable choice, she purchases 20 songs and 4
applications, what is her income?
A) $40
B) $20
C) $30
D) $25
9) Janelle spends all of her $40 income on songs from iTunes ($1 each) and applications ($4
each) for her iTouch. What is her budget equation?
A) $1 × Qsong – $5 × Qapp = Y
B) Qsong = 10 – 4 × Qapp
C) $40 + $1 × Qsong = $4 × Qapp
D) Qapp = 10 – 1/4 × Qsong
10) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each)
for her iTouch. If she makes her best affordable choice, she purchases 20 songs and 4
applications, what is her real income in terms of applications?
A) 40 applications
B) 4 applications
C) 10 applications
D) 20 songs
11) Janelle spends all of her income on songs from iTunes ($1 each) and applications ($5 each)
for her iTouch. At current prices, she makes her best affordable choice and purchases 20 songs
and 4 applications. Suppose, for a limited time only, applications are buy-one, get-one-free and
she purchases 30 songs and 4 applications. Which of the following statements is TRUE?
A) For songs, the substitution effect just equals the income effect.
B) For songs, the income effect is stronger than the income effect for applications.
C) For applications, the substitution effect is stronger than the income effect.
D) For applications, the income effect is stronger the income effect for songs.
12) On a big weekend of college football in 2010, the Associated Press found fans… who said
they are making concessions yet determined to indulge their passion. “We basically let the wife
and children not eat for a week so we can do this,” joked Neil Plotkin, who was attending his
first Penn State game. If Neil’s marginal rate of substitution between weeks of food and his first
Penn State game is 1, what do you predict the marginal rate of substitution between food and
subsequent Penn State games is for Neil?
A) less than one
B) greater than one
C) equal to one
D) cannot determine without knowing Neil’s income
13) On a big weekend of college football in 2010, the Associated Press found fans… who said
they are making concessions yet determined to indulge their passion. “We basically let the wife
and children not eat for a week so we can do this,” joked Neil Plotkin, who was attending his
first Penn State game. If Neil views eating and football games as perfect substitutes, how would
his indifference curve be shaped?
A) downward sloping line that is bowed out
B) downward sloping line that is bowed in
C) “L” shaped
D) straight line that is downward sloping
14) Barth Anderson states that the 2008 “downturn in the economy has really brought a lot of
people home. They don’t say, ‘Well, we’re going to order a pizza.’ They actually cook.”
Assuming that restaurant meals and eating at home are substitutes for one another and only
consumers’ income decreases, what is TRUE?
A) Restaurant meals are an inferior good and eating at home is a normal good.
B) Restaurant meals are a normal good and eating at home is an inferior good.
C) Restaurant meals are an inferior good and eating at home is an inferior good.
D) Restaurant meals are a normal good and eating at home is a normal good.
15) Organic food might be good for your health but in light of the 2008 downturn in the
economy and falling incomes, consumers are buying less organic and more non-organic food.
Based on these events, what is TRUE?
A) Organic food is a normal good and non-organic food is an inferior good.
B) Organic food is an inferior good and non-organic food is a normal good.
C) Organic food is a normal good and non-organic food is a normal good.
D) Organic food is an inferior good and non-organic food is an inferior good.
16) During October and November 2008, gasoline prices were falling dramatically making travel
by car less expensive but air travel prices were as high as ever. How does the fall in gasoline
price affect the relative price of air travel in terms of travel by car?
A) decreases
B) does not change
C) decreases then increases
D) increases
17) During October and November 2008, gasoline prices were falling dramatically making travel
by car less expensive but air travel prices were as high as ever. If travel by car is less expensive,
and income remains the same, describe the substitution and income effects that occur for air
travel.
A) If air travel is a normal good, the substitution effect would cause an increase and the income
effect would cause a decrease in air travel.
B) If air travel is a normal good, both the substitution and income effects would cause a decrease
in air travel.
C) If air travel is a normal good, the substitution effect would cause a decrease and the income
effect would cause an increase in air travel.
D) If air travel is a normal good, both the substitution and income effects would be cause an
increase in air travel.
18) During October and November 2008, gasoline prices were falling dramatically making travel
by car less expensive but air travel prices were as high as ever. If travel by car is less expensive,
and income remains the same, describe the substitution and income effects that occur for
travelling by car.
A) If travelling by car is a normal good, the substitution effect would cause an increase and the
income effect would cause a decrease in travelling by car.
B) If travelling by car is a normal good, both the substitution and income effects would be cause
an increase in travelling by car.
C) If travelling by car is a normal good, the substitution effect would cause a decrease and the
income effect would cause an increase in travelling by car.
D) If travelling by car is a normal good, both the substitution and income effects would cause a
decrease in travelling by car.
19) During October and November 2008, gasoline prices were falling dramatically, making
travel by car less expensive but air travel prices were as high as ever. What is TRUE about
consumer preferences, possibilities, or choices?
A) The relative price of air travel in terms of travelling by car decreases.
B) If travelling by car is a normal good, both the substitution and income effects would lead to a
decrease in travelling by car.
C) The consumers’ budget line would shift outward and its slope would not change.
D) If air travel is a normal good, both the substitution and income effects would lead to an
increase in air travel.
5 Essay Questions
1) “Consumption possibilities are limited by total utility.” True or false? Explain.
2) You are studying with a friend and your friend says “A budget line shows the various
combinations of two goods that can be purchased with the buyer’s income at current prices.” Is
your friend’s assessment correct or not?
3) How is a budget line similar to a production possibilities frontier? How do they differ?
4) What information do you need to draw your budget line? What is your budget line? What does
it show for any pair of goods?
5) What is a household’s real income?
6) Why is the budget line negatively sloped?
7) Suppose a budget line is drawn between pizza, on the horizontal axis, and tacos, on the
vertical axis. How does a change in the price of a pizza affect the budget line?
8) What does the slope of the budget line equal?
9) If the price of a good rises and the consumer’s budget remains the same, what happens to the
consumer’s consumption possibilities?
10) If your income increases, what is the effect on your budget line?
11) “If Bill’s income increases from $80,000 per year to $91,000 per year and he consumes
pickup trucks and lamb chops with his money, Bill’s budget line shifts outward and the increase
in income means he can consume more trucks and more lamb.” Is this statement true or false?
Briefly explain your answer.
12) Explain how changes in the price of goods and the consumer’s budget affect the budget line.
13) What is an indifference curve?
14) “If Ivan says he is indifferent between the consumption of a new pair of jeans or a set of
earrings, he means that he does not want either product.” Is the previous analysis CORRECT?
Explain your answer.
15) Why do consumers prefer higher indifference curves (farther to the right) to lower
indifference curves?
16) “Every point on a budget line has an indifference curve passing through it.” Explain whether
the previous statement is correct or not.
17) What is the meaning of the term “marginal rate of substitution”?
18) What is the marginal rate of substitution and how does it relate to an indifference curve?
19) Why does your marginal rate of substitution between chocolate and vanilla ice cream decline
continuously as you move rightward on your indifference curve between the two?
20) “The marginal rate of substitution of the good measured along the x-axis increases as a
consumer moves downward along an indifference curve.” Is the previous statement correct or
not?
21) “As Jake consumes more sodas over the course of a day, it is likely that his marginal rate of
substitution of sodas for other goods will rise.” Is the previous statement correct or incorrect?
22) What will an indifference curve look like between two commodities that are perfect
complements, such as right shoes and left shoes?
23) Suppose that Dell computers and Gateway computers are very close substitutes. Then the
indifference curves between Dell computers and Gateway computers are almost straight lines. Is
this analysis correct or incorrect? Explain.
24) In an indifference curve/budget line framework, how does a consumer decide which of all
possible combinations of goods to purchase?
25) Describe the consumer equilibrium in the indifference curve/budget line model.
26) In a budget line/indifference curve figure, how do you identify the best affordable
combination of any two goods?
27) Hermione and Ron are at a sweet shop in London. Hermione looks at the prices of ice cream
and chocolate bars and says to Ron: “I can tell you what your marginal rate of substitution
between ice cream and chocolate bars is at your best affordable point.” “No, you can’t,” says
Ron. “You don’t know my preferences and how much money I have.” “I don’t need to know all
this because I know the prices,” Hermione replies. Is she right? Explain.