Indifference Curves and Budget Constraints Quiz

Indifference curves always slope downwards to the right if the consumer prefers more to less.

• True

• False

Answer explanation

Yes, indifference curves always slope downwards to the right if the consumer follows the principle of non-satiation (i.e., they always prefer more of a good to less). This downward slope reflects the idea that if a consumer gives up some amount of one good, they must be compensated with more of the other good to maintain the same level of utility. A positively sloped indifference curve would imply that a consumer is indifferent between bundles where they receive more of both goods or less of both, contradicting the assumption that more is always preferred.

Indifference curves never intersect if the consumer has consistent preferences.

• True

• False

Answer explanation

Indifference curves never intersect if the consumer has consistent (rational) preferences because such an intersection would violate the assumption of transitivity in consumer choice.

If two indifference curves were to intersect, it would imply that a consumer is indifferent between two different bundles of goods while simultaneously ranking one bundle as preferable to another—an inconsistency. This contradiction undermines the logical structure of preference ordering, which assumes that if A ~ B (consumer is indifferent between A and B) and B ~ C, then it must follow that A ~ C. An intersection would imply a situation where A = C despite A containing more of at least one good, violating the assumption that more is always preferred.

The slope of the budget line depends only upon the relative prices of the two goods.

• True

• False

Answer explanation

The slope of the budget line depends only on the relative prices of the two goods, not on the consumer’s income.

The budget constraint shows the maximum quantity of one good that can be afforded given the quantity of the other good that is being purchased.

• True

• False

Answer explanation

The budget constraint represents the maximum quantity of one good a consumer can afford given their income and the amount spent on the other good.

A change in money income alters the slope and position of the budget line.

• True

• False

Answer explanation

False, A change in money income only shifts the budget line but does not alter its slope.

The marginal rate of substitution can be found by measuring the slope of the budget line.

• True

• False

Answer explanation

False. The marginal rate of substitution (MRS) is found by measuring the slope of the indifference curve, not the budget line.

The marginal rate of substitution for two goods that are perfect substitutes is zero.

• True

• False

Answer explanation

False, For perfect substitutes, the consumer is willing to exchange one good for the other at a fixed rate, meaning the indifference curves are straight lines with a constant slope.

If two goods are perfect complements, the indifference curves will be L-shaped.

• True

• False

Answer explanation

If two goods are perfect complements, the indifference curves are L-shaped because the consumer derives utility only from consuming the goods in fixed proportions.

For example, if left shoes and right shoes are perfect complements, owning more left shoes without additional right shoes does not increase utility. The consumer will only be willing to substitute one good for another at a fixed ratio, and beyond that point, additional units of one good alone provide no extra satisfaction.

The MRS is either zero or infinite, meaning the consumer does not trade one good for another unless they receive both in the required proportion. The corner of the "L" represents the optimal consumption bundle along each indifference curve.

An increase in the price of one good will cause the budget line to pivot inward.

• False

• True

Answer explanation

An increase in the price of one good will cause the budget line to pivot inward around the intercept of the other good.

The utility maximization point is where the budget line is tangent to the highest possible indifference curve.

• False

• True

Answer explanation

The utility maximisation point occurs where the budget line is tangent to the highest possible indifference curve that the consumer can reach given their income and the prices of goods.