Question 1

Suppose a consumer faces the following budget constraint: $$P_F F + P_C C = I. If $$the price of food ($$P_F) $$increases while income ($$I) $$and the price of clothing ($$P_C) $$remain constant, what happens to the budget line?

Accepted Answer

The budget line rotates inward, becoming steeper.

Question 2

A consumer chooses a basket of goods that lies on the highest possible indifference curve that they can afford. What does this point represent?

Accepted Answer

A point where the consumer maximizes utility subject to their budget constraint.

Question 3

Given the budget constraint $$P_F F + P_C C = I$$, what is the slope of the budget line in terms of $$F ($$food) and $$C ($$clothing)?

Accepted Answer

$$-\frac{P_F}{P_C}$$

Question 4

If a consumer's income increases, holding prices constant, what happens to the consumer's budget line?

Accepted Answer

It shifts outward, parallel to the original line.

Question 5

At the optimal consumption bundle, the slope of the indifference curve is equal to the slope of the budget line. In mathematical terms, this is:

Accepted Answer

$$MRS = \frac{P_F}{P_C}$$

Question 6

Suppose Karen and James have the same marginal rate of substitution (MRS) at equilibrium, but Karen has a higher income than James. What can we conclude about their consumption bundles?

Accepted Answer

Karen will consume more of both goods than James.

Question 7

Which of the following statements best describes the First Fundamental Welfare Theorem as discussed in the materials?

Accepted Answer

Competitive markets yield efficiency in exchange.

Question 8

If the price of clothing ($$P_C) $$increases, what happens to the maximum amount of clothing a consumer can buy, assuming income and the price of food remain constant?

Accepted Answer

It decreases.

Question 9

In a two-good world (food and clothing), the aggregate demand for food is given by $$F = F^K + F^J. $$What does this equation represent?

Accepted Answer

The total quantity of food demanded by both Karen and James.

Question 10

Suppose the market for food is not in equilibrium but the market for clothing is. According to the materials, what will happen?

Accepted Answer

The price of food ($$P_F) $$will adjust, shifting the demand curve for food.

Question 11

Which of the following is a necessary precondition for the First Fundamental Welfare Theorem to hold?

Accepted Answer

Markets are competitive and consumers take prices as given.

Question 12

If a consumer is at a point inside the budget line (not on it), what does this imply?

Accepted Answer

The consumer is not spending all of their income.

Question 13

In the Edgeworth box, what does a point on the contract line represent?

Accepted Answer

A Pareto efficient allocation of goods between two consumers.

Question 14

If two consumers have different shaped indifference curves but the same income, what can we say about their consumption bundles at equilibrium?

Accepted Answer

They will have the same marginal rate of substitution but different quantities.

Question 15

Which of the following best describes the meaning of $$MRS = \frac{P_F}{P_C} at $$the consumer's optimal choice?

Accepted Answer

The consumer's willingness to trade one good for another matches the market's rate of exchange.

Question 16

Suppose a consumer's income is $$I = 100$$, the price of food is $$P_F = 5$$, and the price of clothing is $$P_C = 10. $$What is the maximum amount of food the consumer can buy if they spend all their income on food?

Accepted Answer

$$20$$

Question 17

If the marginal rate of substitution (MRS) between food and clothing for Karen is greater than the market price ratio $$\frac{P_F}{P_C}$$, what should Karen do to maximize her utility?

Accepted Answer

Buy more clothing and less food.

Question 18

Which of the following is true about aggregate demand in a two-consumer, two-good economy?

Accepted Answer

Aggregate demand is the sum of individual demands for each good.

Question 19

In a competitive market, what does it mean for all markets to be in equilibrium simultaneously?

Accepted Answer

All markets clear, meaning quantity demanded equals quantity supplied in every market.

Topic 3

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