Cambridge International A Level · Economics (9708)
5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Indifference curves and budget lines.
A consumer has an initial budget line represented by the equation \(10X + 5Y = 100\). If the price of good Y increases to \(10\) and the consumer's total money income increases to \(200\), while the price of good X remains unchanged, how does the budget line change?
Following a decrease in the price of an inferior good (which is not a Giffen good), how do the substitution effect and the income effect impact the quantity demanded of that good?
A consumer faces a budget line for Good X and Good Y. If the price of Good X falls while the consumer\'s money income and the price of Good Y remain constant, how will the budget line change?
A consumer considers good X and good Y to be perfect complements in a \(1:1\) ratio, resulting in L-shaped indifference curves. If the price of good X falls while income and the price of good Y remain constant, what will be the nature of the substitution effect for good X?
A consumer is currently at a point on a convex indifference curve where the marginal rate of substitution (MRS) of good X for good Y is \(3\). If the consumer moves to a different point further down the curve to the right by consuming more of good X and less of good Y, what is the most likely value of the new MRS of good X for good Y?
State the condition for consumer equilibrium in terms of the slope of the budget line and the slope of the indifference curve.
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Explain the effect on the budget line for Goods X and Y if the consumer's nominal income doubles while the prices of both goods also double simultaneously.
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An Income-Consumption Curve (ICC) for a consumer is downward-sloping (has a negative slope) for Good X as income increases. Explain what this indicates about the nature of Good X and how the income effect would behave if its price fell.
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A consumer allocates their fixed monthly budget between two products: Product A and Product B. Both are considered normal goods.
(a) Explain how a 50% increase in the consumer's money income would affect the position and slope of the budget line.
(b) With the aid of indifference curve analysis, explain the impact of a decrease in the price of Product A. Your explanation should distinguish between the substitution effect and the income effect and show how these two effects determine the total change in the quantity of Product A demanded.
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Using indifference curve analysis, compare the impact on consumer welfare of the following two government policies designed to raise the same amount of tax revenue:
(i) A specific indirect tax imposed on the price of Good X.
(ii) A direct lump-sum tax on the consumer's income.
In your explanation, include the shifts in the budget line for both cases and explain why the lump-sum tax is generally considered to be more efficient in terms of maintaining a higher level of utility for the consumer. Use the concept of the substitution effect to support your reasoning.
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