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Intermediate Micro Exam 1 Review
Based off of the My. Pearson Lab Homework 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. ________.
2) transitive, A is preferred to C
3) always, all goods are desirable
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?
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
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
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?
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
relative prices, utility
The income effect shows the change in consumption for all goods in reaction to a change in _____________ holding ______________
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
decreases, we can predict that Pablo will
eat more pizza and spend less
on pizza than he did before the price decrease.
the area under the demand curve above price
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