1. Given the budget equation 5M + 10P = 100, where M represents movies and P represents pizza, the slope of the budget line is
A) the relative price of one good in terms of the other.
B) the price of good M.
C) the price of good P.
D) dependent upon the quantities of the goods consumed.
2. Lizzie's preferences are shown in the figure below. Lizzie is just as happy to have ____ as she is to have ____.
A) 6 comic books and 6 cookies; 5 comic books and 13 cookies.
B) 2 comic book and 12 cookies; 8 comic books and 8 cookies.
C) 4 comic books and 8 cookies; 6 comic books and 12 cookies.
D) 2 comic books and 12 cookies; 4 comic books and 8 cookies.
3. Henry initially consumes the quantity of pens and pencils shown as B in figure 2. After the prices of both goods change, he buys combination A. From figure 2 and these facts, it must be true that . . .
A) Henry prefers A to B.
B) Henry prefers B to A.
C) Henry is indifferent between A and B.
D) Henry considers pens and pencils to be perfect substitutes.
E) Henry preferences cannot be determined from the information given.
4. Chris chooses between two goods, X and Y (see figure below). At first, the price of X is low and the price of Y is high (budget line B1). Chris tells you his best affordable combination of X and Y is at point A. Then the price of X rises, while the price of Y falls (budget B2). Chris tells you that at these new prices, his optimal consumption bundle is still point A. What must be true of Chris's preferences?
A) Chris prefers X to Y.
B) Chris prefers Y to X.
C) X and Y are perfect complements.
D) X and Y are perfect substitutes.
E) Chris's preferences must violate one of our assumptions about consumer behavior.
5. The substitution effect from a fall in the price of a gallon of gasoline is shown in the below 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.
6. In the following figure, Daniel has an income of $40 per month. He spends his income on either Potato Chips or Coke. The price of Potato Chip is $5 per bag and the price of Coke is $4 per bottle.
(a) Graph Daniel's budget constraint with potato chips on the vertical axis. Also write down the corresponding budget constraint equation.
(b) Then suppose that Daniel's income increases to $60, what's the change of Daniel's budget line?
(c) Shortly after the increase of Daniel's income, the price of potato chips falls to $3 per bag. Coke's price remains the same. Draw Daniel's new budget constraint.
(d) Consider budget constraints in part (b) and (c). Suppose Daniel is initially consuming at point A. After the price change in part (c), Daniel chooses the consumption bundle
C. Indicate what portion of the change corresponds to the income effect and what part corresponds to the substitution effect.
(e) Are potato chips a normal good? Why?
(f) Is Coke a substitute for potato chips? Why?
7. Suppose that Joe has an income of $480 per month to purchase food and clothing. The price of food is $10 per meal, and the price of clothing is $12 per article. At his optimal consumption bundle Joe decides to purchase 30 meals and 15 articles of clothing.
One day, Joe sees that a local discount store (CostCo) advertises a deal. He can become a member of the store for $ 120 per month. As a member, Joe's price for food will be $9 and his price for clothing will be $6.
Should Joe join, and why? (Hint: draw your budget lines in the same graph and assume a set of "typical" indifference curves).
8. Over the past decade, medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 100, Px = 4, and Py = 5.
a. Graph the budget line, and determine the market rate of substitution.
b. Illustrate the budget set.
c. Show in your graph what happens to the budget constraint if Px increases to $10.
d. What is the meaning of the slope of the two budget constraints?