Chapter 6A
Indifference Curve Analysis
1. The slope of an indifference curve is _____________ and a movement along the curve
causes the loss in marginal utility (MU) of one good to __________ the marginal utility
(MU) gained from another good.
a. zero; maximize
b. positive; exceed
c. concave; reduce
d. negative; equal
ANS
a. Incorrect. An indifference curve is downward sloping so that total utility remains
unchanged with movements along it.
b. Incorrect. An indifference curve is downward sloping so that total utility remains
unchanged with movements along it.
c. Incorrect. An indifference curve is downward sloping so that total utility remains
unchanged with movements along it.
d. Correct. An indifference curve is downward sloping so that total utility remains
unchanged with movements along it.
2. The _____________________ is the absolute value of the slope of the indifference
curve.
a. marginal rate of substitution
b. average rate of transitivity
c. relative rate of utility
d. marginal rate of transposition
ANS
a. Correct. This is the rate at which a consumer is willing to substitute one good for
another.
b. Incorrect. This term is meaningless.
c. Incorrect. This term is meaningless.
d. Incorrect.. This term is meaningless.
3. Consumers always ________indifference curves that are farther from the origin.
a. reject
b. cross
c. prefer
d. maximize
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ANS
a. Incorrect. Curves farther from the origin yield higher levels of total utility.
b. Incorrect. Curves farther from the origin yield higher levels of total utility.
c. Correct. Curves farther from the origin yield higher levels of total utility.
d. Incorrect. Curves farther from the origin yield higher levels of total utility.
4. Given the prices of two goods, all quantity combinations inside the budget line are
a. indifferent.
b. efficient.
c. unattainable.
d. attainable.
ANS
a. Incorrect. This refers to all points along the indifference curve.
b. Incorrect. Consumer equilibrium occurs where the budget line equals the indifference
curve.
c Incorrect. These are points outside the budget line are unaffordable.
d. Correct. All combinations of goods inside the budet line are affordable.
5. Consumer equilibrium occurs where the budget line is ___________ to the
___________ possible indifference curve.
a. tangent; highest
b. equal; lowest
c. marginal; maximum
d. differential; highest
ANS
a. Correct. Only at the highest possible indifference curve will maximum total
satisfaction be achieved.
b. Incorrect. Only at the highest possible indifference curve will maximum total
satisfaction be achieved.
c Incorrect. Only at the highest possible indifference curve will maximum total
satisfaction be achieved.
d. Incorrect. Only at the highest possible indifference curve will maximum total
satisfaction be achieved.
6. An indifference curve consists of quantity combinations of two goods that yield
a. equal marginal utilities.
b. negative marginal utilities.
c. the same price ratios.
d. the same total satisfaction.
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ANS
a. Incorrect. Marginal utility varies along the indifference curve.
b. Incorrect. Marginal utility can be positive for one good and negative for another
moving along the indifference curve.
c. Incorrect. Price ratios are involved in the budget line computation.
d. Correct. This is the definition of an indifference curve.
7. The slope of an indifference curve is equal to the ratio of the _____________ of the good
on the horizontal axis to the _____________ of the good on the vertical axis.
a. marginal utility (MU); marginal utility (MU)
b. total utility (TU); total utility (TU)
c. marginal product (MP); marginal product (MP)
d. price (P); total utility (TU)
ANS
a. Correct. Along an indifference curve, the marginal utility of losing one good equals the
marginal utility gained from the other good.
b. Incorrect. Along an indifference curve, the marginal utility of losing one good equals
the marginal utility gained from the other good.
c. Incorrect. Along an indifference curve, the marginal utility of losing one good equals
the marginal utility gained from the other good.
d. Incorrect. Along an indifference curve, the marginal utility of losing one good equals
the marginal utility gained from the other good.
8. The equation for a budget line for goods X and Y, with Px being the price of X, Py being
the price of Y, and B being the budget, can be written as
a. PxX + PyY = B.
b. PxX + PyY = 1/B.
c. PxX = B + PyY.
d. PxX / PyY = 1 - B.
ANS
a. Correct. The price times the quantity of goods gives the amount spent which equals the
amount of budget.
b. Incorrect. The price times the quantity of goods gives the amount spent which equals
the amount of budget.
c. Incorrect. The price times the quantity of goods gives the amount spent which equals
the amount of budget.
d. Incorrect. The price times the quantity of goods gives the amount spent which equals
the amount of budget.
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Exhibit A.6 Consumer equilibrium
9. Given the budget line and indifference curves shown in Exhibit A.6, consumer
equilibrium occurs at point
a. A.
b. B.
c. C.
d. D.
e. E.
ANS
a. Incorrect. At this point satisfaction could be increased at point D and higher indifference
curve I2.
b. Incorrect. At this point satisfaction could be increased at point D and higher indifference
curve I2.
c. Incorrect. At this point satisfaction could be increased at point D and higher indifference
curve I2.
d. Correct. At point D, the budget line is tangent to the highest attainable indifference curve.
e. Incorrect. This point is outside the budget line and therefore unattainable.
10. Given the budget line and indifference curves shown in Exhibit A.6, assume the
consumer is initially at point C. To maximize total utility, the consumer should
a. purchase more of good X and less of good Y.
b. remain at point C.
c. move to point B and then to point A.
d. purchase more of good Y and less of good X.
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ANS
a. Incorrect. This moves farther away from the optimal point D.
b. Incorrect. This is on a lower indifference curve I1 than at point D on point I2.
c. Incorrect. Given the budget line, the consumer can move directly from point C to point A.
d. Correct. This moves upward along the budget line from the optimal point D.
11. An indifference curve has a negative slope because movement along the curve
requires the consumer to give up the
a. marginal utility of one good.
b. total utility of one good.
c. marginal substitution value (MSV).
d. marginal transitivity of one good.
ANS
a. Correct. An indifference curve has a negative slope because movement along the curve
requires the consumer to give up the marginal utility of one good.
b. Incorrect. An indifference curve has a negative slope because movement along the
curve requires the consumer to give up the marginal utility of one good.
c. Incorrect. This is a meaningless term.
d. Incorrect. This is a meaningless term.
12. The marginal rate of substitution _________ as one moves downward along the
indifference curve.
a. increase
b. remains constant
c. decreases
d. increases and then decreases
ANS
a. Incorrect. The marginal rate of substitution decreases as one moves downward along
the indifference curve.
b. Incorrect. The marginal rate of substitution decreases as one moves downward along
the indifference curve.
c. Correct. The marginal rate of substitution decreases as one moves downward along the
indifference curve.
d. Incorrect. The marginal rate of substitution decreases as one moves downward along
the indifference curve.
13. Assume Px is the price of good X on the horizontal axis and Py is the price of good Y on
the vertical axis. The slope of the budget line equals
a. Py / PxY.
b. PyQy / Px Qx.
c. (1 - Py / Px).
d. Px / Py.
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ANS
a. Incorrect. The slope of the budget line equals Px / Py.
b. Incorrect. The slope of the budget line equals Px / Py.
c. Incorrect. The slope of the budget line equals Px / Py.
d. Correct. The slope of the budget line equals Px / Py.
Exhibit A.7 Consumer equilibrium
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5
Quantity
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of Good Y 3
2
1
A
B
I1
I2
0 1 2 3 4 5 6 7 8 9 10
Quantity of Good X
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14. As shown in Exhibit A.7, the marginal rate of substitution (MRS) at point B is equal to
a. 0.33.
b. 2.0.
c. 0.5.
d. 3.0.
ANS
a. Incorrect. Slope of the budget line at point B equals Y/X = 5 = 0.5
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b. Incorrect. Slope of the budget line at point B equals Y/X = 5 = 0.5
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c. Correct. Slope of the budget line at point B equals Y/X = 5 = 0.5
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d. Incorrect. Slope of the budget line at point B equals Y/X = 5 = 0.5
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15. As shown in Exhibit A., movement from consumer equilibrium at point A to point B is
caused by a (an)
a. increase in the price of good X.
b. decrease in the price of good X.
c. increase in the price of good Y.
d. decrease in the price of good Y.
ANS
a. Incorrect. An increase in the price of good X shifts the budget line leftward along the
horizontal axis and point B would not be the tangent point.
b. Correct. A decrease in the price of good X shifts the budge line rightward along the
horizontal axis and point B is the tangent point.
c. Incorrect. An increase in the price of good Y shifts the budget line upward along the
vertical axis and point B would not be the tangent point.
d. Incorrect. A decrease in the price of good Y shifts the budget line downward along the
vertical axis and point B would not be the tangent point.
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