mankiw question

• Is the statement "A budget constraint is a set of commodity bundles that provide the consumer with the same level of satisfaction" true or false?

  False

  
• What do indifference curves measure?

  Indifference curves measure the consumer's willingness to trade one good for another while maintaining a constant level of satisfaction.
• Are indifference curves usually straight lines that slope downward?

  No, that statement is false.
• What happens to the indifference curves if two goods are perfect complements?

  The indifference curves associated with these two goods would not cross each other at the optimum.
• Why do indifference curves tend to be bowed inward?

  Because a consumer is willing to trade a greater amount of a good for another if they have an abundance of the good they are trading away.
• At the consumer's optimum point, what is the relationship between the marginal rate of substitution and the price ratio?

  The marginal rate of substitution of apples for oranges is equal to the ratio of the price of oranges to the price of apples.
• What does it mean if the more difficult it is to substitute one good for another?

  Indifference curves become more bowed inward.
• What effect does a fall in the price of a good have on the quantity demanded?

  The substitution effect always causes an increase in the quantity demanded of that good.
• If the price of a good falls and it is a normal good, what does the income effect cause?

  The income effect causes an increase in the quantity demanded of that good.
• What happens to the quantity demanded of an inferior good when its price falls?

  The income effect causes a decrease in the quantity demanded of that good.
• How is the income effect measured?

  It is measured as the change in consumption that results when a price change moves the consumer along a given indifference curve.

  
• What is a Giffen good?

  A Giffen good is an extremely inferior good.
• What does the theory of consumer choice demonstrate about labor supply curves?

  It demonstrates that labor supply curves do not necessarily have to be upward sloping.

  
• What is the limit on the consumption bundles that a consumer can afford called?


  The budget constraint.
• Which pair of goods would likely cause the smallest substitution effect?

  Right shoes and left shoes.
• What are the indifference curves for perfect substitutes like?

  They are straight lines.
• If the price of pizza is €10 and the price of a sandwich is €5, what is the slope of the budget constraint?

  2
• What is the slope at any point on an indifference curve known as?

  The marginal rate of substitution.
• Which statement is not true regarding the standard properties of indifference curves?

  Indifference curves are bowed outward.
• Where is the consumer's optimal purchase of any two goods located?

  At the point where the consumer reaches the highest indifference curve subject to remaining on the budget constraint.
• What is true about the consumer's optimum consumption bundle?

  At the optimum, the slope of the indifference curve equals the slope of the budget constraint.

  
• What happens to the marginal rate of substitution of good Y for good X as we move from having an abundance of good X to having an abundance of good Y?

  The marginal rate of substitution of good Y for good X rises.
• If an increase in a consumer's income causes the consumer to increase his quantity demanded of a good, what type of good is it?

  It is a normal good.
• If an increase in a consumer's income causes the consumer to decrease her quantity demanded of a good, what type of good is it?

  It is an inferior good.
• If the price of a pair of socks falls from €5 to €2, what does the substitution effect represent?

  The movement from point Z to point X.

  
• What does the income effect represent when the price of a pair of socks falls from €5 to €2?

  The movement from point X to point Y.

  
• What type of good is a pair of socks if the consumer's income is €100 and they choose to buy it?

  A pair of socks is a normal good.

  
• What is the change in consumption that results when a price change moves the consumer along a given indifference curve called?

  The substitution effect.
• If income were to double and prices were to double, what would happen to the budget line?

  The budget line would stay the same.
• If leisure is a normal good, what will happen to the amount of labor supplied when the wage increases?

  The amount of labor supplied will increase if the substitution effect outweighs the income effect.
• If consumption when young and when old are both normal goods, what will happen to the quantity of saving if the interest rate increases?

  The quantity of saving will increase if the substitution effect outweighs the income effect.
• Which of the following is not true regarding the outcome of a consumer's optimization process?

  The consumer is indifferent between any two points on his budget constraint.
• What is a compensating differential?

  It is the difference in wages paid to workers who are discriminated against and those who are not.
• Why do workers on the night shift receive a compensating differential?

  To offset the disagreeable nature of working at night.
• What has happened to the gap between the wages of university graduates and non-graduates in the last 25 years in the UK?


  The gap has not been closing.
• Why are firms willing to pay more for workers with greater human capital?

  Because workers with greater human capital have a greater value of marginal product.
• How is human capital increased?

  By education and on-the-job training.
• Why does an apprentice work for a relatively low wage?

  Because some of the apprentice's pay is in terms of on-the-job training.
• Why can some superstars earn astronomical salaries?

  Because technology has made it possible for the best producer to satisfy every customer at low cost.
• What does the signalling view of education imply?

  If true, a policy of increasing the education of workers will not necessarily increase the wages of all workers.