Budget Line and Indifference Curves

A consumption point inside the budget line

• is unaffordable.

• shows that the consumer spends income on only one of the goods.

• shows that the consumer has chosen to spend all of his or her income on both products.

• is affordable and, because it is inside the budget line, means that all the person's budget has been spent.

• is possible to afford but has some unspent income.

Which of the following statements is correct?

• Along the budget line, consuming more of one good implies consuming more of the other.

• The slope of the budget line shows there is no tradeoff between the two goods because the consumer can buy each of them.

• If the consumer's budget increases, the budget line shifts leftward and its slope does not change.

• The slope of the budget line shows the opportunity cost of the good measured along the x-axis.

• None of the above answers is correct.

A budget line

• has a slope equal to a relative price.

• shows the limits to what can be consumed.

• rotates or shifts only when the consumer's budget changes.

• Answers B and C are both correct.

• Answers A and B are both correct.

Suppose a consumer has $100 to spend on two goods, shoes and shirts. If the price of a pair of shoes is $20 per pair and the price of a shirt is $15 each, which of the following combinations is unaffordable to the consumer?

• 0 pairs of shoes and 0 shirts

• 2 pairs of shoes and 4 shirts

• 5 pairs of shoes and 0 shirts

• 0 pairs of shoes and 7 shirts

• 2 pairs of shoes and 3 shirts

Which of the following describes what happens to a consumer's budget line if that consumer's budget increases? The budget line

• becomes steeper.

• shifts farther away from the origin of the graph.

• does not change.

• becomes more horizontal.

• shifts closer to the origin of the graph.

In the above figures, which one reflects an increase in the price of chicken?

• Figure A

• Figure B

• Figure C

• Figure D

• Both Figure B and Figure C

In the above figures, which one reflects a decrease in the price of chicken?

• Figure A

• Figure B

• Figure C

• Figure D

• Both Figure A and Figure D

In the above figures, which one reflects an increase in the consumer's income?

• Figure A

• Figure B

• Figure C

• Figure D

• Both Figure A and Figure D

In the above figures, which one reflects an increase in the price of fish?

• Figure A

• Figure B

• Figure C

• Figure D

• Both Figure B and Figure C

Bobby buys cat food for his cat, Pearl. If the price of cat food falls (catfood is on the x axis), then Bobby's budget line will

• rotate outward and its slope will change.

• shift inward and its slope will not change.

• shift outward and its slope will not change.

• rotate inward and its slope will change.

• either rotate or shift outward depending on whether cat food has positive or negative marginal utility.