Micro - Unit #3

Which of the following properties of indifference curves best illustrates the assumption of diminishing marginal rate of substitution (MRS)?

• Indifference curves are downward sloping

• Indifference curves are convex to the origin

• Indifference curves do not intersect each other

• Higher indifference curves represent higher levels of satisfaction

When a consumer reaches equilibrium at a point on the indifference curve tangent to the budget line:

• • The consumer has exhausted their budget but not maximized utility

• • The MRS between the two goods is greater than the price ratio

• • The MRS between the two goods is equal to the price ratio

• • The consumer is indifferent to all other bundles on the budget line

Answer explanation

Explanation: At equilibrium, the MRS between two goods must equal the ratio of their prices, ensuring maximum satisfaction given the budget.

Which of the following scenarios would result in a rotation of the budget line rather than a parallel shift?

• A proportional increase in the price of both goods

• A change in the consumer’s income

• An increase in the price of one good while the other remains constant

• A decrease in the consumer’s income

If two indifference curves intersect, this implies:

• The consumer’s preferences are inconsistent

• The MRS is increasing between the goods

• The budget constraint is violated

• The consumer’s income is too low

Answer explanation

Explanation: Indifference curves cannot intersect if preferences are consistent, as it would imply contradictory levels of satisfaction for the same consumption bundles.

Which of the following statements about the marginal rate of substitution (MRS) is true?

• The MRS is constant along an indifference curve

• The MRS diminishes as more of one good is consumed

• The MRS is higher for inferior goods

• The MRS is always greater than one

Answer explanation

Explanation: The MRS diminishes along an indifference curve due to the principle of diminishing marginal utility, where additional units of a good provide less added satisfaction.

The point where a consumer's budget line is tangent to an indifference curve:

• Indicates an infeasible consumption bundle

• Shows where the MRS equals the ratio of marginal utilities

• Reflects maximum utility within budget constraints

• Occurs only for luxury goods

The substitution effect, resulting from a price decrease of a normal good, will cause:

• An increase in the quantity demanded of that good

• A decrease in the consumer’s real income

• An increase in the quantity demanded of the substitute good

• A shift in the budget line without changing the consumption bundle

Answer explanation

For a normal good, the substitution effect from a price decrease leads consumers to substitute toward the cheaper good, raising its quantity demanded.

When there is a decrease in the consumer’s income, and both goods are normal goods:

• The budget line shifts outward

• The budget line pivots outward from the origin

• The budget line shifts inward parallel to its original position

• The budget line remains unchanged

Answer explanation

Explanation: A decrease in income lowers the purchasing power across both goods equally, resulting in a parallel inward shift of the budget line.

A consumer is at equilibrium on an indifference curve and budget line tangent. If the price of one good falls, what happens to the consumer’s equilibrium point?

• It moves to a higher indifference curve

• It moves to a lower indifference curve

• It remains on the same indifference curve

• It moves to a point of higher MRS than the previous equilibrium

Answer explanation

Explanation: A price decrease increases purchasing power, forcing the consumer to a higher indifference curve and a new equilibrium with high overall satisfaction.

If the marginal rate of substitution of good X for good Y is equal to the price ratio of X to Y, then the consumer:

• Is at a point of consumer disequilibrium

• Should consume less of good X

• Has achieved consumer equilibrium

• Should consume more of good Y