Question

1. All feasible bundles will maximize consumer utility:

True

False

2. The point to the right of the budget constraint is infeasible.

True

False

3. For a budget constraint involving 2 goods, good X is on the x-axis and good Y on the y-axis. If the price of good X increases,

A.the slope of the budget constraint becomes steeper and the x-intercept of the budget constraint slides in along the x-axis.

B.the slope of the budget constraint becomes flatter and the x-intercept of the budget constraint slides out along the y-axis.

C.the budget constraint shifts out, but its slope does not change.

D. the budget constraint shifts in, but its slope does not change.

4. If the consumer's income increases:

A. the slope of the budget constraint becomes steeper and the x-intercept of the budget constraint slides in along the x-axis.

B.the slope of the budget constraint becomes flatter and the x-intercept of the budget constraint slides out along the x-axis.

C. the budget constraint shifts out, but its slope does not change.

D. the budget constraint shifts in, but its slope does not change.

5. What is the tangency condition to optimize utility, given there is a budget constraint?

A.Income = ?x ?x + ?y ?y

B. when the marginal rate of substitution is equal to income

C. Slope of indifference curve=Slope of budget constraint

Answer 1

Ans 1: False, not all feasible bundles maximizes the utility. When Indifference curve is tangent to budget line, at that point, only those bundles maximizes the consumer's utility.

Ans 2: True. The bundles which are beyond the reach of budget line, to the right of it, are not affordable.

Ans 3: A. The slope of the budget constraint becomes steeper and the x-intercept of the budget constraint slides in along the x-axis. (With an increase in price of good x, he will consume less of good x)

Ans 4: C. The budget constraint shifts out, but its slope does not change. (The slope of the budget line is the ratio of prices of two goods. So, when there is change in prices of the good only then the slope of the budget line changes. An increase in the income shifts the budget line to right side. The shift will be parallel and indicates more can be consumed).

Ans 5: C. Slope of indifference curve=Slope of budget constraint (This is the consumer's equilibrium situation. The slope of the indifference curve is MRS whereas, the slope of the budget line is ratio of prices of two goods. Therefore,

MRS = Px / Py