Chapter 07 Appendix
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Chapter 07 Appendix
McConnell Brue Flynn 21e
APPENDIX DISCUSSION QUESTIONS
1. What information is embodied in a budget line? What shifts occur in the budget line when
money income (a) increases and (b) decreases? What shifts occur in the budget line when the
price of the product shown on the vertical axis (c) increases and (d) decreases? LO6
2. What information is contained in an indifference curve? Why are such curves (a) downsloping
and (b) convex to the origin? Why does total utility increase as the consumer moves to
indifference curves farther from the origin? Why can’t indifference curves intersect? LO6
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3. Using Figure 4, explain why the point of tangency of the budget line with an indifference curve
is the consumer’s equilibrium position. Explain why any point where the budget line intersects an
indifference curve is not equilibrium. Explain: “The consumer is in equilibrium where MRS =
PB/PA.” LO6
Chapter 07 Appendix
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APPENDIX REVIEW QUESTIONS
1. Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle
consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of
coffee and three chocolate bars. If the first bundle gives Ted a total utility of 18 utils while the
second bundle gives Ted a total utility of 19 bundles, could the two bundles be on the same
indifference curve? Answer yes or no. LO6
2. Bill spends his money on flowers and cookies so as to maximize his total utility. Both flowers
and cookies start off costing $2 each. At that price, Bill buys three flowers and two cookies.
When the price of flowers is lowered to $1, Bill buys eight flowers and one cookie. Which of the
following statements about Bill’s reaction to the price change is not true? LO7
a. Bill’s budget line shifted outward when the price of flowers fell.
b. Bill moved to a higher indifference curve after the price of flowers fell.
c. Bill’s demand curve for flowers shifted to the right.
d. Bill’s attainable set was smaller before the price of flowers fell.
Answer: b. and c. Bill’s budget line does not shift outward. When the price of flowers
Chapter 07 Appendix
APPENDIX PROBLEMS
1. Assume that the data in the following table give an indifference curve for Mr. Chen. Graph this
curve, putting A on the vertical axis and B on the horizontal axis. Assuming that the prices of A
and B are $1.50 and $1, respectively, and that Mr. Chen has $24 to spend, add his budget line to
your graph. What combination of A and B will Mr. Chen purchase? Does your answer meet the
MRS = PB/PA rule for equilibrium? LO6
Chapter 07 Appendix
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A= 8 units, B = 12 units. Yes, the answer meet the MRS = PB/PA rule for
equilibrium.
Feedback:
The budget constraint for Mr. Chen is as follows: $1.50A + $1.00B = $24. The most A
units Mr. Chen can consume is 16 (= $24/$1.50; set B units to zero and solve for A). This
is the vertical intercept. The most B units Mr. Chen can consume is 24 (= $24/$1.00; set
A units to zero and solve for B). This is the horizontal intercept. To determine the bundle
Mr. Chen will (can) consume, we check the combinations in the table above to see which
bundle is affordable (satisfies the budget constraint).
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2. Explain graphically how indifference analysis can be used to derive a demand curve. LO6
Answers:
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Feedback: The solid maroon budget line corresponds to the highest price, $8. At this
price, the consumer chooses 4 units of good X. At a lower price of $4 (shown by the
dashed maroon line), the consumer chooses 8 units of good X (and a smaller quantity of
3. ADVANCED ANALYSIS First, graphically illustrate a doubling of income without price
changes in the indifference curve model. Next, on the same graph, show a situation in which the
person whose indifference curves you are drawing buys considerably more of good B than good
A after the income increase. What can you conclude about the relative coefficients of the income
elasticity of demand for goods A and B? LO7
Answers:
Chapter 07 Appendix
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consent of McGraw-Hill Education.
Given this change in income, the consumer will buy relatively less of good A and
more of good B. Good B is more income-elastic than good A.
Feedback: First, the new budget line will have the same slope as the original, and both
intercepts will be doubled.