Chapter 8: Possibilities, Preferences, and Choices Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

The price of one good divided by the price of another good is a relative price. divisible good. money price. budget constraint. Answer: A Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

stays the same, but the relative price of Jolt cola increases. Suppose that initially the price of a bag of jellybeans is $6, and the price of a bottle of Jolt cola is $2. If the price of a bottle of Jolt cola increases, then the relative price of jellybeans increases. stays the same, but the relative price of Jolt cola increases. decreases. stays the same, but the relative price of Jolt cola decreases. Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

Lizzie’s budget line is shown in the figure Lizzie’s budget line is shown in the figure. The relative price of a magazine is ________ per magazine. $2 $1 2 cookies 0.5 of a cookie Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

the relative price of good Y in terms of good X. In an indifference curve diagram, the quantities of good Y are measured along the vertical axis and the quantities of good X are measured along the horizontal axis. The marginal rate of substitution is defined as the relative price of good Y in terms of good X. how much good Y you are willing to give up to get one more unit of good X. how much you prefer to substitute good X for good Y. how much good Y you must give up to get one more unit of good X. Answer: B Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

An indifference curve diagram has movies on the vertical axis and sodas on the horizontal. As the consumption of sodas increases and movies decreases (moving southeast along an indifference curve) the marginal rate of substitution of sodas for movies rises. does not change. falls. probably changes, but more information is needed to determine if it rises or falls. Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

The point where the indifference curve is tangent to the budget line is a point on consumer’s demand curve. is where the marginal rate of substitution exceeds the relative price by as much as possible. is the best affordable point. All of the above answers are correct. Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

The effect of a change in price on the quantity bought, keeping the consumer on the same indifference curve, is called the real effect. price effect. substitution effect. income effect. Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

The figure shows Jane’s budget line and two of her indifference curves The figure shows Jane’s budget line and two of her indifference curves. Which of the following happens to Jane's budget line if there were an increase in her monthly dining-out budget? It would bend away from the origin, becoming more concave. It would bend toward the origin, becoming more convex. It would shift leftward and not change its slope. It would shift rightward and not change its slope. Answer: D Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

an increase in the slope of all indifference curves When his wage rate increases from $5.00 per hour to $7.50 per hour, which of the following does Bobby experience? an increase in the slope of all indifference curves an increase in the opportunity cost of leisure an increase in the opportunity cost of working all of the above Answer: B Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition

in the same direction as his substitution effect. When Bob is on the negatively sloped portion of his labor supply curve between points B and C in the figure, his income effect from a wage rate increase is in the same direction as his substitution effect. exactly equal to his substitution effect. greater than his substitution effect. less than his substitution effect. Answer: C Parkin © 2008 Pearson Addison-Wesley. All rights reserved. Microeconomics, Eighth Edition