Podcast
Questions and Answers
What happens to the budget line when the price of good 1 increases?
What happens to the budget line when the price of good 1 increases?
- The budget line becomes flatter.
- The budget line shifts outward.
- The budget line remains unchanged.
- The budget line becomes steeper. (correct)
If both prices of goods 1 and 2 are doubled, what is the effect on the budget line?
If both prices of goods 1 and 2 are doubled, what is the effect on the budget line?
- The budget line shifts inward by a factor of one-half. (correct)
- The shape of the budget line changes but the intercepts do not.
- The budget line stops reflecting the consumer's budget.
- The budget line shifts an equal distance outward.
When analyzing the budget line, how does a decrease in income while both prices increase affect the line?
When analyzing the budget line, how does a decrease in income while both prices increase affect the line?
- The budget line will shift outward.
- The budget line will stay the same.
- The budget line will pivot around the horizontal intercept.
- The budget line will shift inward. (correct)
How does an increase in the price of good 2 compared to good 1 affect the slope of the budget line?
How does an increase in the price of good 2 compared to good 1 affect the slope of the budget line?
Which statement correctly describes the relationship of multiplying both prices and income by the same constant?
Which statement correctly describes the relationship of multiplying both prices and income by the same constant?
What is the effect on both intercepts of the budget line when both prices increase and income decreases?
What is the effect on both intercepts of the budget line when both prices increase and income decreases?
What does the equation $p1 x1 + p2 x2 = m$ represent in the context of a budget line?
What does the equation $p1 x1 + p2 x2 = m$ represent in the context of a budget line?
What is the significance of pegging one price or income to a fixed value in the context of the budget line?
What is the significance of pegging one price or income to a fixed value in the context of the budget line?
What happens to the budget line when income increases?
What happens to the budget line when income increases?
What effect does an increase in the price of good 1 have on the budget line?
What effect does an increase in the price of good 1 have on the budget line?
How does decreasing income affect the budget line?
How does decreasing income affect the budget line?
If prices of both goods remain constant, what is the result of an increase in income?
If prices of both goods remain constant, what is the result of an increase in income?
What remains unchanged when income increases?
What remains unchanged when income increases?
If the price of good 1 increases but the price of good 2 remains constant, what happens to the budget line?
If the price of good 1 increases but the price of good 2 remains constant, what happens to the budget line?
When the price of good 2 is held constant, what effect does an increase in the price of good 1 have on consumers' maximum consumption of good 2?
When the price of good 2 is held constant, what effect does an increase in the price of good 1 have on consumers' maximum consumption of good 2?
How is the economic cost of consuming more of good 1 represented?
How is the economic cost of consuming more of good 1 represented?
How does receiving a $200 food stamp grant affect a household's budget line?
How does receiving a $200 food stamp grant affect a household's budget line?
What is a characteristic of food stamps as described?
What is a characteristic of food stamps as described?
If a consumer's income increases while all prices remain the same, what happens to the consumer's budget line?
If a consumer's income increases while all prices remain the same, what happens to the consumer's budget line?
What is the effect of balanced inflation on a consumer's budget set?
What is the effect of balanced inflation on a consumer's budget set?
What happens when one price declines while all other prices stay constant?
What happens when one price declines while all other prices stay constant?
Why can't food stamps simply be considered cash?
Why can't food stamps simply be considered cash?
What is implied when a budget line shifts outward due to increased income?
What is implied when a budget line shifts outward due to increased income?
When analyzing changes in the budget set, what is a key observation regarding price increases?
When analyzing changes in the budget set, what is a key observation regarding price increases?
Flashcards
Opportunity Cost
Opportunity Cost
The amount of one good that must be given up to consume one more unit of another good.
Budget Line
Budget Line
The line representing all possible combinations of two goods that a consumer can afford given their income and the prices of the goods.
Slope of Budget Line
Slope of Budget Line
The slope of the budget line represents the rate at which a consumer must give up one good to consume one more unit of another good.
Income Change
Income Change
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Price Increase
Price Increase
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Vertical intercept
Vertical intercept
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Horizontal Intercept
Horizontal Intercept
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Price Decrease
Price Decrease
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Perfectly balanced inflation
Perfectly balanced inflation
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Budget set
Budget set
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Lump-sum subsidy
Lump-sum subsidy
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Parallel shift outward of the budget line
Parallel shift outward of the budget line
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Pivot of the budget line
Pivot of the budget line
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Parallel shift inward of the budget line
Parallel shift inward of the budget line
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Marginal rate of substitution (MRS)
Marginal rate of substitution (MRS)
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What happens to the budget line when good 1 becomes more expensive?
What happens to the budget line when good 1 becomes more expensive?
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What happens to the budget line when both good 1 and good 2 become more expensive?
What happens to the budget line when both good 1 and good 2 become more expensive?
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What happens to the budget line if both prices and income increase by the same factor?
What happens to the budget line if both prices and income increase by the same factor?
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How does the budget line change when income decreases and both prices increase:
How does the budget line change when income decreases and both prices increase:
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What happens to the slope of the budget line when the price of good 2 increases more than the price of good 1?
What happens to the slope of the budget line when the price of good 2 increases more than the price of good 1?
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What is the Numeraire and why is it important?
What is the Numeraire and why is it important?
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Study Notes
Budget Constraint Changes
- Budget lines illustrate the combinations of goods a consumer can afford.
- Changes in prices and income shift the budget line.
Income Changes
- Increasing income shifts the budget line outward (parallel).
- Decreasing income shifts the budget line inward (parallel).
- Income changes affect the vertical intercept but not the slope.
Price Changes
- Increasing price 1, holding other factors constant, makes the budget line steeper.
- The vertical intercept does not change with a price 1 increase, as the maximum amount of good 2 remains unaffected.
- The horizontal intercept shifts inward when price 1 increases, reflecting a reduced maximum consumption of good 1.
- The slope of the budget line is affected by the ratio of prices; if p1 increases, the slope steepens.
Food Stamps as a Subsidy
- Food stamps are a lump-sum subsidy, allowing more food consumption regardless of other spending.
- The budget line shifts right by the value of the food stamp grant.
- The slope remains unchanged because the opportunity cost of food remains constant.
- Food stamps cannot be sold, limiting the maximum spending on other goods
Budget Line Changes: Multiple Price Changes
- Doubling both prices is like halving income, thus shifts the budget line inward.
- Multiplying both prices by 't' is equivalent to dividing income by 't'.
- Changing both prices and income simultaneously shifts the budget line inward if p1 and p2 increase and m decreases.
- The slope changes depending on the relative increase of the two prices.
Numeraire Concept
- One variable (price or income) is redundant in defining a budget line.
- The same budget set can be described by different combinations of prices and income using a fixed numeraire.
Budget Set Invariance
- Multiplying all prices and income by a positive number does not change the budget set.
- This means perfect inflation (all prices and income rising at the same rate) doesn't impact individual budget sets or optimal choices.
Consumer Welfare
- Increased income with static prices expands the budget set; a consumer is at least as well off at the higher income.
- A price decrease with static prices leads to a wider budget set and the consumer must be at least as well off.
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Description
Explore the intricacies of budget constraints in consumer economics. This quiz covers how changes in income and prices shift the budget line, as well as the implications of food stamps as a subsidy. Test your understanding of these fundamental economic concepts.
