1. What information is embodied in a budget line? What shifts occur in the budget line when money income (a) increases and (b) decreases? What shifts occur in the budget line when the price of the product shown on the vertical axis (a) increases and (b) decreases?
2. What information is contained in an indifference curve? Why are such curves (a) downward sloping and (b) convex from the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? Why can't indifference curves intersect?
3. APPENDIX KEY QUESTION Using Figure A7-4, explain why the point of tan-gency of the budget line with an indifference curve is the consumer's equilibrium position. Explain why any point where the budget line intersects an indifference curve is not equilibrium. Explain: "The consumer is in equilibrium where MRS = PbiPA."
4. Assume that the data in the accompanying table give an indifference curve for Mr. Chen.
Graph this curve, putting A on the vertical axis and B on the horizontal axis. Assuming that the prices of A and B are $1.50 and $1.00, respectively, and that Mr. Chen has $24 to spend, add his budget line to your graph. What combination of A and B will Mr. Chen purchase? Does your answer meet the MRS = Pb/Pa rule for equilibrium?
Units of A
Units of B
1e 12 B
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