Economics 172 Name:__________________________

Fall 2007 Quiz 3

1. All consumers

a. face the same budget line (same slope and same y intercept) for the same pair of goods. Not the same y intercept, unless their incomes are the same.

b. face a budget line with the same slope for the same pair of goods. Yes, the slopes are the same since to all consumers, all prices are the same.

c. face a budget line with different slopes for the same pair of goods. No, the slopes are the same.

d. face a budget line with different slopes and a different y intercept for the same pair of goods. No

2 With respect to consuming food and shelter, two consumers face the same prices and both claim to be in equilibrium. We therefore know that

a. they both have the same marginal utility for food. No.

b. they both have the same marginal utility for shelter. No

c. they both have the same MRS of food for shelter. Yes, since their budget lines are identical, MRT are identical. And since MRS = MRT in equilibrium the MRS must be the same.

d. All of the above.

3. A consumer buys food (F) and shelter (S). If the consumer’s income rises and there is no change in the prices of F or S, the marginal rate of transformation of F for S will

a. increase. No, there is no change in the relative prices, which determines the slope.

b. decrease. No, there is no change in the relative prices, which determines the slope.

c. stay the same. Yes, since the slope does not change.

d. change, but there is not enough information to know what the direction of magnitude of the change will be.

4. If two bundles are on the same indifference curve, then

a. the consumer derives the same level of total utility from each bundle. Yes, that’s how the indifference curve is constructed.

b. the consumer derives the same level of marginal utility from each good everywhere on the indifference curve. No, MU changes along the curve.

c. the consumer will always choose to consume equal quantities of each good. No.

d. the marginal rate of substitution between the two bundles equals one, since there are two goods. No.

5. Which of the following will make the budget line steeper?

a. A rise in a consumer’s income. No change in slope.

b. A rise in the price of good X (where X is the good on the X axis). If the price of good x rises, the line shifts inward, raising its slope.

c. A rise in the price of good Y (where Y is the good on the Y axis). This will make the slope less steep.

d. A rise in the consumer’s marginal value of X and no change in the consumer’s marginal value of good Y (ie a change in relative preferences for the two goods).

This does not affect the budget line.