B| Indifference Curves

Question 1

What is the general shape of an indifference curve?

Answer 1

Downward sloping, steeper on the left and flatter on the right

Question 2

What is the concept of indifference curves?

Answer 2

Tradeoffs to any household choice

Question 3

______ each indifference curve shows the combinations of leisure and income that provide a certain level of utility.

Answer 3

Labor-Leisure Choice

Question 4

In an ________ each indifference curve shows the combinations that provide a certain level of utility.

Answer 4

Intertemporal Choice

Question 5

________ provide the basis for a more in depth look at complementary motivations that arise in response to a change in price, wage, or rate of return.

Answer 5

Indiffrence Curves

Question 6

what do indifference curves illiminate the need of?

Answer 6

Placing numerical values on utility

the process of making utility maximizing decisions

Question 7

all points along a single ______ curve provide the same level of utility.

Answer 7

indifference

Question 8

Higher indifference curves indicate a _____ level of utility.

Answer 8

Higher

Question 9

Why do indifference curves slope downward?

Answer 9

because utility is to remain the same;
reduction /increase in quantity on the vertical axis must be counterbalanced by and increase/reduction of the quantity of the good on the horizontal axis.

Question 10

Why are indifference curves steeper on the far left and flatter on the far right?

Answer 10

Because of the law of diminishing marginal utility.

Question 11

What are two effects the change in the price on any good has?

Answer 11

1. a substitution effect

2. Income effect

Question 12

What does an indifference curve show on a budget constraint diagram?

Answer 12

The tradeoffs between two goods

Question 13

the ______ choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point.

Answer 13

Utility maximizing choice.

Question 14

The _____ effect motivation encourages a utility maximizer to buy less of what is relatively more expensive and more of what is relatively cheaper.

Answer 14

Substitution effect

Question 15

The ______ effect motivation encourages a utility maximizer to buy more of both goods if utility rises or less of both goods if utility falls. (Both Normal Goods)

Answer 15

Income Effect

Question 16

What is the substitution of a wage increase?

Answer 16

Choose more income; less expensive to earn

Less Leisure; Since opportunity cost has risen

Question 17

What is the income effect of a wage increase?

Answer 17

Choose more income and leisure; since they are both normal goods

Question 18

In the _________ every interest rate change has a substitution and income effect.

Answer 18

Intertemporal Consumption Choice

Question 19

What is the substitution effect of an interest rate increase?

Answer 19

more future consumption; cheaper now
less present consumption; since opportunity cost of present consumption in terms of what is given up in the future has increased.

Question 20

What is the income effect of an interest rate increase?

Answer 20

More of both present and future consumption; since they are both normal goods

Question 21

What are two similarities with indifference curves?

Answer 21

1. They are downward sloping from left to right
2. They are convex with respect to the origin
   ——In other words——
   Steeper on the left and flatter on the right

Question 22

the ______ of the indifference curve means a trade off of one less of a good is necessary to get more of the other, while holding utility constant.

Answer 22

downward slope

Question 23

What is the reasoning behind an indifference curve that is steeper onthe left and flatter on the right?

Answer 23

Dminishing marginal utility

Question 24

How does the marginal rate of substituion apply to the indifference curve?

Answer 24

it is the rate at which a person is willing to trade one food for another so the utility will remain the same.

Question 25

Two reasons the slope of the indifference curve changes?

Answer 25

the marginal rate of substitution;
quantity of one good traded for the other to keep utility constant

diminishing marginal utility of both goods

Question 26

Every level of _____ will have its own indifference curve.

Answer 26

Utility

Question 27

True or False:

All point on higher indifference curves have greater utility then all points on lower indifference curves.

Answer 27

True

Question 28

What assumption is the argument about the shapes of indifference curves based on?

Answer 28

The assumptions that when people have less of one good they need more of another to make up for it.

Question 29

A _____ can be mapped out to describe the preferences of any individual.

Answer 29

Field of Indifference Curves

Question 30

True or False;
Because each person determines his/her own preferences and utility. The specific shape of indifference curves can be different for everybody.

Answer 30

True

Question 31

The highest achievable indifference curve touches the _______ at a a single point of tangency.

Answer 31

Opportunity Set

Question 32

Why will there always be one indifference curve that touches the budget line at a single point of tangency?

Answer 32

Because an infinite number of indifference curves exist.

Question 33

All _____ will be completely above the budget line;

though they have higher utility they are not affordable.

Answer 33

higher indifference curves

Question 34

What two ways will the lower indifference curves cross the budget line?

Answer 34

1. when one indifference curve crosses the budget line in two places there will always be another higher attainable indifference curve touching the budget line at one point of tangency.

Question 35

How do changes in income affect the budget constraint?

Answer 35

rise in income = shift to the right

reduction in income= shift to the left

Question 36

What does a higher/lower indifference curve respresent in terms of income?

Answer 36

higher indifference curve = higher utility

lower indifference curve = lower utility

Question 37

The ____ on the original budget set occurs where the opportunity set is tangent to the higher possible indifference curve.

Answer 37

Utility Maximizing Choice

Question 38

What can cause differences even when budget constraints are the same?

Answer 38

• Personal Preferences

- Different reactions to a response to a change in income

Question 39

What is the response to a higher level of income when it comes to normal goods?

Answer 39

Purchase more of them

Question 40

What is the response to higher income when goods are inferior?

Answer 40

Purchase less of them

Question 41

______ is when a change in price results in people seeking substitutes.

Answer 41

Substitution Effect

Question 42

_____ is how a change in price of a good alter the effective buying power of ones income.

Answer 42

The Income effect

Question 43

If the price of a good ____ then buying power has risen

Answer 43

fallen

Question 44

If the price of a good _____ buying power of a given amount of income is diminished.

Answer 44

Rises

Question 45

The _______ is the point of tangency between the original budget constraint and indifference curve.

Answer 45

original choice

Question 46

The _____ is the point of tangency between the new budget constraint and the lower indifference curve.

Answer 46

New Point

Question 47

The _______ in a substitution and income diagram is used to separate the two effects.

Answer 47

Dashed line

Question 48

What determines the slope of the budget constraint?

Answer 48

The relative price of two goods.

Question 49

The slope of the _______ is determined by the original relative prices

Answer 49

original budget line

Question 50

The slope of the ______ is determined by the new relative prices.

Answer 50

New Budget Line