Upgrade to remove ads
Only $2.99/month

Intermediate Micro Exam 1 Review

Terms in this set (36)

What are the four basic assumptions about individual​ preferences? Explain the significance or meaning of each.
Consumer theory assumes​ that::
​(1) preferences are ___________​, which means that consumers are able to rank all possible​ baskets;
​(2) preferences are _____________​, which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle​ C, ___________________;
​(3) more is ____________ preferred to less because ____________ and
​(4) the marginal rate of substitution is diminishing​, where indifference curves are convex. ________.
1) complete
2) transitive, A is preferred to C
3) always, all goods are desirable
4) true
Can a set of indifference curves be upward​ sloping? If​ so, what would this tell you about the two​ goods?
A set of indifference curves cannot be upward sloping because this violates the assumption that more is better than less, indicating that on of the goods is a "bad"
Explain why two indifference curves cannot intersect?
If two indifference curves intersect, then both transitivity and the more is better than less assumptions are violates
Jon is always willing to trade one can of Coke for one can of​ Sprite, or one can of Sprite for one can of Coke.
What can you say about​ Jon's marginal rate of​ substitution?
Jon's marginal rate of substitution is 1
What happens to the marginal rate of substitution as you move down along a convex indifference​ curve?
Along a convex indifference curve, the marginal rate of substitution decreases
What happens to the marginal rate of substitution as you move along a linear indifference​ curve?
Along a linear indifference curve, the marginal rate of substitution is constant
Describe the indifference curves associated with two goods that are perfect substitutes.
The indifference curves for two goods that are perfect substitutes
are downward sloping straight lines
Describe the indifference curves associated with two goods that are perfect complements.
The indifference curves for two goods that are perfect complements
are shaped as right angles
Jane loves hamburgers and dislikes soft drinks. If she is served a soft​ drink, she will pour it down the drain rather than drink it.
Since she despises soft drinks this will be a horizontal line with soft drinks on the x axis
Molly loves hamburgers and soft​ drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats.
Since these are perfect complements it will be a right angle
Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink.
Since she gets twice the satisfaction from a soda than a burger, her intercept for soft drinks is going to be double that of the burger
#10 Bartolo and Emilio
...
A consumer says he prefers a Toyota automobile to a Ford and a Ford to a Jeep. He also says he prefers a Jeep to a Toyota. Which basic assumption about preferences does this consumer​ violate?
Transitivity
An indifference curve shows all combinations of two goods that
provide the consumer with the same level of satisfaction
If two goods are perfect substitutes for a​ consumer, the​ consumer's indifference curves for the two goods will be
straight lines
Suppose you have drawn a​ consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the prices of food and clothing remain the same and the​ consumer's income​ increases,
the budget line shifts outward in a parallel fashion
Suppose you have drawn a​ consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the price of food​ increases,
the budget line will become steeper
Upon merging with the West German​ economy, East German consumers indicated a preference for​ Mercedes-Benz automobiles over Volkswagens.​ However, when they converted their savings into deutsche​ marks, they flocked to Volkswagen dealerships. How can you explain this apparent​ paradox?
Assume that a​ Mercedes-Benz costs more than a​ Volkswagen, that East German consumers gain satisfaction from automobiles and all other goods​ (evaluated in deutsche​ marks), and that East Germans have income.
For East​ Germans,
the marginal utility per dollar spent on a Volkswagen was greater than the marginal utility per dollar spent on a​ Mercedes-Benz.
Consumers in Florida pay twice as much for grapes as they do for oranges. However, grapes and oranges are the same price in
California. If consumers in both states maximize​ utility, will the marginal rate of substitution of oranges for grapes be the same for consumers in both states? If​ not, which will be higher?
The marginal rate of substitution of oranges for grapes will be
higher in California
At the optimal point on an indifference curve and budget line diagram​ (assuming an interior​ solution)
the marginal rate of substitution between the two goods equals the ratio of their prices, the consumer spends his or her entire budget on the two goods, and the optimal indifference curve is tangent to the budget line.
When the optimal point on an indifference curve and budget line diagram is a corner​ solution,
the marginal rate of substitution usually does not equal the ratio of prices for the two goods.
Which of the following best describes the basic idea of revealed​ preference?
If a consumer chooses one market basket over​ another, and if the chosen market basket is more expensive than the​ alternative, then the consumer must prefer the chosen market basket.
The government rations the amount of gasoline that consumers can purchase. A consumer who would have purchased more than the rationed amount of gasoline will instead
purchase less​ gasoline, more of other​ goods, and be on a lower indifference curve.
Suppose that an individual allocates his or her entire budget between two​ goods, food and clothing. Can both goods be​ inferior? Explain.
both goods cannot be inferior because an increase in income must be spent on one of the goods
Explain whether each of the following statements is true or false.
The marginal rate of substitution​ (MRS) diminishes as an individual moves downward along the demand curve. (T/F)
true because the MRS equals
(PX/PY​),
which decreases as an individual moves downward along the demand curve.
The level of utility increases as an individual moves downward along the demand curve. This statement is (T/F)
true because price decreases pivot the budget line outward.
Engel curves always slope upward. This statement is
false because Engel curves slope downward for Giffen goods.
An inferior good
will experience decreases in demand as consumers' incomes increases
In tracing out a price consumption curve (PCC) for good X, which of the following variables is held constant?
consumer income
When the price of good X​ increases, the substitution effect leads consumers to buy
less of good C and more of substitute goods
When the price of good X increases and all goods​ (including X) are normal​ goods, the income effect leads consumers to buy
less of all goods
The substitution effect shows the change in consumption for all goods in reaction to a change in ____________ holding
_________ constant.
relative prices, utility
The income effect shows the change in consumption for all goods in reaction to a change in _____________ holding ______________
constant.
purchasing power, relative prices
Which of the following events would cause a movement along the demand curve for​ U.S.-produced clothing, and which would cause a shift in the demand​ curve?
​(i) The removal of quotas on the importation of foreign​ clothes,
​(ii) An increase in the income of U.S.​ citizens, and
​(iii) A cut in the​ industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices.

​1) the removal of quotas on the importation of foreign clothes would cause a _________ he demand curve for​ U.S.-produced clothing.
2) an increase in the income of U.S. citizens would cause a ___________ the demand curve for​ U.S.-produced clothing.
3) a cut in the​ industry's cost of producing domestic clothes that is passed on to the market in the form of lower prices would cause a ___________ the demand curve for​ U.S.-produced clothing.
1) shift in
2) shift in
3) movement along
​Pablo's demand for pizza is inelastic. If the price of pizza
decrease​s, we can predict that Pablo will
eat more pizza and spend less
on pizza than he did before the price decrease.
Consumer Surplus
the area under the demand curve above price
YOU MIGHT ALSO LIKE...