Micro Economics

Chapter 21

Questions for Review

1. Figure 4 shows the consumer's budget constraint. The intercept on the horizontal axis shows how much cheese the consumer could buy if she bought only cheese; with income of $3,000 and the price of cheese $6 a pound, she could buy 500 pounds of cheese. The intercept on the vertical axis shows how much wine the consumer could buy if she bought only wine; with income of $3,000 and the price of wine $3 a glass, she could buy 1,000 glasses of wine. With cheese on the horizontal axis and wine on the vertical axis, the budget constraint has a slope of -1,000/500 = -2. Note that if you had put wine on the horizontal axis and cheese on the vertical axis, the budget constraint would have a slope of -500/1,000 = -1/2.

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Figure 4

2. Figure 5 shows a consumer's indifference curves for wine and cheese. Four properties of these indifference curves are: (1) higher indifference curves are preferred to lower ones because more is preferred to less; (2) indifference curves are downward sloping because if the quantity of wine is reduced, the quantity of cheese must increase for the consumer to be equally happy; (3) indifference curves do not cross because a consumer prefers more to less; and (4) indifference curves are bowed inward because a consumer is more willing to trade away wine if she has a lot of it and less willing to trade away cheese if she has little of it.

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Figure 5

3. In Figure 5, the marginal rate of substitution (MRS) of one point on an indifference curve is shown. The marginal rate of substitution shows the amount of wine the consumer would be willing to give up to get one more pound of cheese.

4. Figure 6 shows the consumer's budget constraint and indifference curves for wine and cheese. The consumer's optimum consumption choice is shown as w* and c*. Because the marginal rate of substitution equals the relative price of the two goods at the optimum, the marginal rate of...