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Test Bank for Microeconomics An Intuitive Approach with Calculus 2nd Edition Thomas Nechyb
TEST BANK FOR
MICROECONOMICS AN
INTUITIVE APPROACH WITH
CALCULUS 2NDEDITION
THOMAS NECHYBA
Test Bank for Microeconomics An Intuitive Approach with Calculus 2nd
Edition Thomas Nechyba
Chapter 02 A Consumer apos s Economic Circumstances
TRUEFALSE
1. If all consumers are price-takers facing the same prices, then their budget lines will all have the
same slope.
(A) True (B)
False
Answer : (A)
2. If all consumers are price-takers facing the same prices, then all choice sets are the same.
(A) True
(B) False
Answer : (B)
3. Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of
her available income.
(A) True (B)
False
Answer : (B)
4. In a graph of choice sets, a price change causes the slope of budget lines to change.
(A) True
(B) False
Answer : (A)
5. If a consumer's fixed income increases, his opportunity cost also increases.
(A) True
(B) False
Answer : (B)
6. When the good on the vertical axis is a composite good, the slope of the budget line is equal to
minus the price of the good on the horizontal axis.
(A) True (B)
False
Answer : (A)
7. When the good on the horizontal axis is a composite good, the slope of the budget constraint is
minus the price of the good on the vertical axis.
(A) True (B)
False
Answer : (B)
8. While the endowment bundle must lie on the original budget line, it need not lie on the budget line
when prices change.
(A) True (B)
False
Answer : (B)
9. For choice sets emerging from "exogenous" income, the budget line will shift parallel whenever
both prices change by the same percentage.
(A) True (B)
False
Answer : (B)
10. For choice sets generated from endowment bundles, the budget line will shift parallel if both
prices change by the same proportion.
(A) True (B)
False
Answer : (B)
11. The budget line on a graph represents choices which exhaust all resources.
(A) True
(B) False
Answer : (A)
12. In a graph of choice sets, a price change affects the ratio but does not affect the budget line.
(A) True
(B) False
Answer : (B)
MULTICHOICE
13. The following changes in a consumer's economic circumstances result in a steeper budget line with
the vertical intercept unchanged. (Denote the good on the horizontal as good 1 and the good on the
vertical as good 2.)
(A) A k percent decrease in the price of good 2 combined with a k percent decrease in income
(B) A k percent increase in the price of good 2 combined with a k percent decrease in income
(C) A k percent decrease in the price of good 2 combined with a k percent increase in income
(D) A k percent increase in the price of good 2 combined with a k percent increase in income.
(E) None of the above
Answer : (A)
14. Suppose inflation comes in the form of an across-the board increase in all prices by some
percentage k. For a consumer with exogenous income operating in a 2-good world, this will cause
the budget constraint to
(A) rotate inward
(B) rotate outward
(C) shift out in a parallel way
(D) shift inward in a parallel way
(E) none of the above
Answer : (D)
15. Suppose you are given a coupon for pizza. This coupon lowers the price for each additional pizza
you buy by 5% for each addition pizza you buy. What happens to your budget constraint, with pizza on
the horizontal axis and a composite good on the vertical?
(A) The vertical intercept remains the same but the slope becomes steeper as more pizzas are
bought.
(B) The vertical intercept increases and the slope becomes steeper as more pizzas are bought.
(C) The vertical intercept remains the same but the slope becomes shallower as more pizzas are
bought.
(D) The vertical intercept increases but the slope becomes shallower as more pizzas are bought.
(E) None of the above.
Answer : (C)
16. Suppose the government wants to discourage excessive consumption of alcohol. It therefore
imposes a per-unit tax on alcohol that increases as more alcohol is bought by a consumer at a store.
What happens to a consumer's budget at a liquor store (with liters of alcohol on the horizontal axis and
a composite good on the vertical) --- assuming the consumer takes only one trip to the store.
(A) The vertical intercept decreases and the slope becomes shallower as more alcohol is bought.
(B) The vertical intercept remains constant but the slope becomes shallower as more alcohol is
bought.
(C) The vertical intercept decreases and the slope becomes steeper as more alcohol is bought.
(D) The vertical intercept remains constant but the slope becomes steeper as more alcohol is bought.
(E) None of the above.
Answer : (D)
ESSAY
17. Consider a consumer with a choice set that emerges from an exogenous income I. Suppose that,
as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with
the vertical intercept remaining unchanged but the horizontal intercept shifting to the right. How could
this have happened if the price of the good on the horizontal axis did not change?
Graders Info :
If the price of the good on the vertical axis increases by the same proportion as income does. (The
increase in income along causes a parallel shift outward, and the increase in the price of good 2
causes the slope to become shallower. If the two increase by the same percentage, the amount of
good 2 that is affordable remains unchanged while the amount of good 1 that is affordable
increases.)
18. Consider a consumer with a choice set that emerges from an exogenous income I. Suppose that,
as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with
the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.
Demonstrate, using the budget line equation, how this could have happened if the price of the good on
the horizontal axis did not change?
Graders Info :
The budget equation is x
2
=I/p
2
- (p
1
/p
2
)x
12
, with the first term representing the intercept and the term
in parenthesis representing the slope. The rotation of the budget that is described implies the intercept
remains constant and the slope falls in absolute value. If p
1
does not change, this can happen only if I
and p
2
change by the same factor k --- which then cancels in the first term (leaving the intercept
unchanged) and causes the second term to fall in absolute value.
19. Suppose that the price of a TV is $200 and he price of an MP3 player is $50. What is the
opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3
player (in terms of TVs)?
Graders Info :
The opportunity cost of a TV is 4 MP3 players, and the opportunity cost of an MP3 player is one
fourth of a TV.
20. Derive the budget line equation for the case where good 2 is a composite good. What is the
vertical intercept and what is the slope?
Graders Info :
Since p
2
= 1, the usual budget line equation x
2
=I/p
2
- (p
1
/p
2
)x
1
becomes x
2
=I - p
1
x
1
, an equation
with a vertical intercept of I and a slope of - p
1
.
21. Derive the budget line equation for the case where good 1 is a composite good. What is the
vertical intercept and what is the slope?
Graders Info :
Since p
1
= 1, the usual budget line equation x
2
=I/p
2
- (p
1
/p
2
)x
1
becomes
x
2
=I/p
2
- (1/p
2
)x
1
, an equation with a vertical intercept of I/p
2
and a slope of - (1/p
2
).
22. A consumer has $1,000 a week to spend on renting square feet of housing (at a price of $5 per
square foot) and eating out (at a price of $20 per meal). With square feet of housing on the horizontal
and meals on the vertical axis, what is the vertical intercept and what is the slope of this consumer's
budget constraint?
Graders Info :
The most meals that can be consumed with $1,000 is 50 per week --- implying a vertical intercept of
50. The most square feet that can be rented with $1,000 per week is 200, implying a horizontal
intercept of 200. The slope is then -50/200=-1/4.
23. A consumer has $1,000 a week to spend on renting square feet of housing x
1
(at a price of $5 per
square foot) and eating out meals x
2
(at a price of $20 per meal). Derive the budget line equation and
find the opportunity cost of housing in terms of meals in your equation.
Graders Info :
The budget equation x
2
=I/p
2
- (p
1
/p
2
)x
1
becomes x
2
=1000/20 - (5/20)x
1
or x
2
=50 - (1/4)x
1
. The slope of
the budget line is equal to the opportunity cost of housing in terms of meals --- and this slope is -1/4 in
the equation.
24. Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by
$10.
a. On a graph with TVs on the horizontal axis and "$'s of other consumption" on the vertical, illustrate
how the budget constraint for a consumer with exogenous income changes as a result of the tax.
b. Suppose you know the bundle on the after-tax budget that is chosen by the consumer. Illustrate on
your graph how much in tax revenue the government is raising from this consumer.
c. If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but
raises the same amount of revenue from the consumer, how would this consumer's budget constraint
change?
Graders Info :
a. The graph should have two budget constraints with the same vertical intercept but different
slopes --- with the steeper budget line representing the after tax case.
b. The tax revenue the government collects is the vertical distance between the after-tax bundle that is
bought and the before-tax budget line.
c. The consumer's after-tax budget constraint would rotate through the previous after-tax bundle ---
becoming shallower as the price distortion from the TV tax is lifted and ending up parallel to the
before-tax budget.
25. Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by
$100. Model TVs as x
1
and all other goods as a composite good x
2
.
a. For a consumer with income I, write down an equation for the before-tax budget line.
b. Write down the after-tax budget line equation.
c. Suppose you know the bundle on the after-tax budget that is chosen by the consumer contains 3
TVs. How much in tax revenue is the government raising from this consumer?
d. If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but
raises the same amount of revenue from the consumer, how would this change the consumer's
budget line equation?
Graders Info :
a. x
2
=I - p
1
x
1
or I= p
1
x
1
+ x
2
b. x
2
=I - (p
1
+100)x
1
or I= (p
1
+100)x
1
+ x
2
c. $300
d. x
2
=(I - 300)/p
2
- (p
1
/p
2
)x
1
or I= p
1
x
1
+ x
2
+ 300
26. Suppose a business offers a 10% discount on the good x
1
that it sells.
a. Illustrate a consumer's before and after-discount budget constraint by modeling x
2
as a composite
good.
b. Suppose you observe only the after-discount consumption decision of the consumer. Can you tell from
this information how much revenue the firm is giving up (from this consumer) by offering the discount?
If so, illustrate this in your graph.
c. Suppose that, instead of the firm offering the 10% discount, the government subsidized
consumption of x
1
sufficiently to reduce p
1
by 10%. Suppose again that you only observe the after-
subsidy decision of the consumer. Can you tell how much of a subsidy payment is made to this
consumer by the government? If so, illustrate it in your graph.
d. Why are your answers to (b) and (c) different?
Graders Info :
a. The graph should contain two budget lines with the same vertical intercept but different slopes ---
with the shallower constraint representing the after-discount budget constraint.
b. No, you cannot. The reason for this is that we do not know what decision the consumer would have
made in the absence of the discount --- and so we can't tell whether (or how much) revenue was lost.
c. Yes, you can. The subsidy payment by the government is the vertical difference between the
before and after-subsidy constraints measured at the after-subsidy consumption bundle.
d. If you are a firm and you want to assess the impact on revenues of a discount policy, you need to
know what consumers do both before and after the discount --- because you need to calculate the
difference in revenues. If you are a government subsidizing a good, you don't have to know what
consumers do before the subsidy in order to calculate how much the subsidy will cost --- because all
that matters is how much consumers will buy under the subsidy.
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