Review Questions 3

Revision Questions
1. What does it mean when you experience indifference between two products?
a. You feel that one product is inferior to the other product.

b. You have no preference for any combination of the two products.
c. You prefer to have equal amounts of the two products.
d. You prefer to have only one of the two products, but it does not matter which one.
2. Why is an indifference curve convex to the origin?
a. Marginal utility of goods decreases as consumption increases.

b. Marginal utility of goods increases as consumption increases.
c. It represents a higher level of satisfaction at the origin of the curve.
d. It represents a lower level of satisfaction at the origin of the curve.
3. The more convex the indifference curve of two goods is:
a. The more indifferent you are between the two goods

b. The more substitutable the goods are
c. The more complementary the goods are
d. The smaller the slope becomes
4. The closer the indifference curve is to the origin:
a. The lower the level of satisfaction

b. The higher the level of satisfaction
c. The lower the level of indifference
d. The higher the level of indifference
Study the indifference curve (I) below and answer questions 5–8.
5. What does the equilibrium point (E) on the indifference curve represent?
a. The intersection with another indifference curve

b. The point of maximum satisfaction
c. What the consumer decides to do given his income
d. What the consumer can afford
6. How many units of canned food is Tim willing to give up if he wants to increase his
consumption of fresh foods from 5 units a week to 10 units a week?
a. 5
b. 9
c. 18
d. 25
7. If canned food is an inferior good to fresh food, what will happen to the budget line (B)
and the equilibrium point with a decrease in income?
a. The budget line and equilibrium point will both move downwards.
b. The budget line and equilibrium point will both move upwards.
c. The budget line will move downwards and the equilibrium point will move up and
towards an increased level of canned food.
d. The budget line will move upwards and the equilibrium point
will move down and towards an increased level of fresh food.
8. What will happen to the budget line if the price of canned food increases?
a. It will become steeper

b. It will become less steep
c. It will move upwards
d. It will move downwards
9. Mrs Olivier is a teacher who has decided to open her own homework centre while still
teaching full time. Her teacher’s salary is R200 000 per year. She normally used her
afternoons to bake dog biscuits to sell at weekend markets and earned about R40 000
a year from sales after costs. Her homework centre (she converted the granny flat
attached to her house) earns her around R60 000 per year. The granny flat was rented
to a university student for R20 000 a year. She can still bake dog biscuits over
holidays but her sales are a lot less at R10 000 per year. Her opportunity cost in
opening the homework centre is:
a) R60 000
b) R50 000
c) R260 000
d) R240 000
10. Mrs Olivier bakes Doggie Delight biscuits for sale at weekend markets. Her revenue from
sales is R70 000. Stall and travelling costs are R18 000, packaging and ingredients cost
R25 000 and she estimates that her baking adds R5 000 to her utility account per year.
Before starting Doggie Delights she worked as a product promotion assistant on Sundays
and earned R15 000 doing this. What is her economic profit and what is her accounting
profit?
a) R7 000; R22 000
b) R22 000; R7 000
c) R22 000; loss of R43 000
d) loss of R43 000; R22 000
11. Which one of the following statements about indifference curves is false?
A. They connect points of equal utility to the consumer.
B. The indifference curve that lies furthest from the origin indicates the greatest level of
consumer satisfaction.
C. When two indifference curves cross, the one that ends on the right hand side
indicates the greatest level of consumer satisfaction.
D. Indifference curve analysis can be used to derive predictions about the impact on
quantity demanded of changes in consumer incomes.
12. The assumption that the indifference curve approach is ordinal:
A. allows individuals to compare their exact marginal utilities associated with the
consumption of a commodity.
B. means that one can establish how much more satisfaction is derived from a cup of tea
than from a cup of hot chocolate.
C. means that the satisfaction from consuming different products can be ranked or
ordered.
D. allows for two indifference curves to intersect at a common point.
13. Indifference curves are convex to the origin because of:

A. the transitivity of consumer preferences.
B. The law of substitution.
C. the assumption of non-satiation.
D. the assumption of completeness.
E. the assumption of consistency.
14. The assumption of consistent (transitive) preferences implies that indifference curves
must:
A. not cross one another.
B. have a positive slope.
C. be L-shaped.
D. be convex to the origin.
E. All of the above statements are true.
15. An individual consumes only two baskets, x and y. Which of the following
expressions represents the utility-maximising market basket?
A. MRS of x for y is at a maximum.
B. Px/Py = money income.
C. MRS of x for y = money income.
D. MUx/MUy = Px/Py.
E. All of the above.
16. In economics, the short run is a period of time:

A. of one year or less.
B. in which all inputs are variable.
C. in which all inputs are fixed.
D. in which the quantity of at least one input is fixed and the quantities of the other
inputs can be varied.
E. in which all inputs are variable but technology is fixed.
17. Which one of the following statements is correct?
A. The short run is a time period of one year or less.
B. The short run is a period of time during which the quantities of all inputs can be
varied, but technology is held constant.
C. The short run is a period of time during which the quantity of at least one input is
fixed and the quantities of the other inputs can be varied.
D. The long run is a period of time during which the quantities of all factor inputs are
fixed.
E. The time period separating the short run from the long run is at least 3 months.
Short Answers
1. Why is the indifference curve convex to the origin?
The more quantities of one product you sacrifice in favour of another, the greater the
marginal utility of that product and the greater the amounts of the alternative product
required to ensure the same amount of total satisfaction (utility). This decreasing
marginal utility is the reason for the convexity of the indifference curve.
2. What information is given by the budget line and how is its slope determined?
From the budget line you can see all the combinations of two goods that can be bought
where the prices of those goods and the amount of money available for spending is
given. The slope of the budget line can be calculated by dividing the price of the product
on the y-axis by the price of the product on the x-axis.
3. What does the equilibrium point on a consumer’s indifference curve represent?
4. Briefly explain what is meant with the ‘price effect’.

5. What does normal profit mean? Explain the difference between normal profit and
economic profit.
6. How is the short run defined in production theory? How does it differ from the long run?
7. Which of the following inputs would probably be classified as fixed, and which as
variable, over a period of one month? Why?
a) Cars to Budget Rent-a-car.
b) Labour to a Nando’s franchise.
c) Apples to Liquifruit.
d) Ovens to Albany Bakeries.
e) Timber to Bakker & Steyger, a furniture manufacturer.
8.

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Revision Questions

a. You feel that one product is inferior to the other product.

2. Why is an indifference curve convex to the origin?

a. Marginal utility of goods decreases as consumption increases.

3. The more convex the indifference curve of two goods is:

a. The more indifferent you are between the two goods

4. The closer the indifference curve is to the origin:

a. The lower the level of satisfaction

a. The intersection with another indifference curve

a. It will become steeper

13. Indifference curves are convex to the origin because of:

16. In economics, the short run is a period of time:

1. Why is the indifference curve convex to the origin?

3. What does the equilibrium point on a consumer’s indifference curve represent?

4. Briefly explain what is meant with the ‘price effect’.

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