# POSSIBILITIES, PREFERENCES, AND CHOICES

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POSSIBILITIES, PREFERENCES, AND CHOICES
8 POSSIBILITIES, PREFERENCES, AND CHOICES

Q1: The Economics Student Club has \$30 to spend on pizza and pop at each of its meetings. If pizza costs \$8 and the club buys 3 pizzas, how much money can be spent on pop? A \$6 B \$30 C \$24 D \$3 A \$6 © 2012 Pearson Addison-Wesley

A in terms of pizza or pop falls
Q2: The Economics Student Club has \$30 to spend on pizza and pop at each of its meetings. If pizza costs \$8, the club buys 3 pizzas. If the price of pizza rises to \$10, the club’s real income ________. A in terms of pizza or pop falls B is unchanged, but the relative price changes C in terms of pizza falls, but it does not change in terms of pop D in terms of pop falls, but it does not fall in terms of pizza C in terms of pizza falls, but it does not change in terms of pop © 2012 Pearson Addison-Wesley 3

A shift leftward but its slope will not change B remain unchanged
Q3: Sue consumes apples and bananas. Suppose that Sue’s income doubles and that the prices of apples and bananas also double. Sue’s budget line will _________. A shift leftward but its slope will not change B remain unchanged C shift rightward but its slope will not change D shift rightward and become steeper B remain unchanged © 2012 Pearson Addison-Wesley

A the budget line has a negative slope
Q4: The assumption of diminishing marginal rate of substitution means that _________. A the budget line has a negative slope B indifference curves might have a positive slope C the budget line does not shift when people’s preferences change D indifference curves are concave (bend toward the origin) D indifference curve are concave ( bend toward the origin) © 2012 Pearson Addison-Wesley

D Cannot determine without knowing Neil’s income
Q5: Associated Press found football fans who said they are making concessions yet determined to indulge their passion. “We basically don’t eat for a week, so we can go to the game,” joked Neil Plotkin, a freshman. If Neil’s marginal rate of substitution between food and the first game for the season is 1, what do you predict is his marginal rate of substitution between food and subsequent games is? A Less than one B Greater than one C Equal to one D Cannot determine without knowing Neil’s income A Less than one © 2012 Pearson Addison-Wesley

A wraps and lattes are perfect complements
Q6: For lunch, Cathy buys a wrap and a latte every day except on Friday when she buys an additional wrap and latte, as well as a slice of chocolate cake. For Cathy, _________. A wraps and lattes are perfect complements B wraps and lattes ordinary goods C wraps and chocolate cake are normal goods D lattes and chocolate cake are perfect substitutes A wraps and lattes are perfect complements © 2012 Pearson Addison-Wesley

C The marginal rate of substitution equals the relative price.
Q7: Which of the following is true when the consumer is at the best affordable point? A The point is on the budget line and highest attainable indifference curve. B The slope of the budget line equals the slope of the indifference curve. C The marginal rate of substitution equals the relative price. D All of the above are true at the best affordable point. D All the above are true at the best affordable point. © 2012 Pearson Addison-Wesley

Q8: The price effect refers to how a change in _____.
A the price influences real income B the price influences the quantity of a good bought C income influences the prices of the goods bought D preferences influences the prices of the goods B the price influences the quantity of a good bought. © 2012 Pearson Addison-Wesley

C lower indifference curve D higher indifference curve
Q9: Sue consumes at a point on her budget line where her marginal rate of substitution exceeds the magnitude of the slope of her budget line. As Sue moves toward her consumer equilibrium point, she will move to a _________. A lower budget line B higher budget line C lower indifference curve D higher indifference curve D higher indifference curve © 2012 Pearson Addison-Wesley

Q10: During November 2008, gasoline prices were falling, which made travel by car less expensive. But air fares remained as high as ever. If income remained the same and air travel is a normal good, _________. A the substitution effect is an increase in air travel and the income effect is a decrease in air travel B both the substitution and income effects decrease air travel C the substitution effect is a decrease in air travel and the income effect is an increase in air travel D both the substitution and income effects increase air travel C the substitution effect is a decrease in air travel and the income effect is an increase in air travel © 2012 Pearson Addison-Wesley