1. What does an indifference curve show?

A the amount of two products achievable with given income and prices
B the different combinations of two goods that give a consumer equal utility
C the income available to buy the two goods
D the rate at which marginal utility changes as consumption changes
2. A budget line (b–b) shows the combinations of two goods, X and Y, that a consumer can obtain
within a fixed income of $60 per week, when the price of Y = $1 and X = $2.

If the price of X rises to $3, what will be the new budget line?

A b–b1 B b–b2 C b–b3 D b–b4

3. When choosing to buy two products, the satisfaction gained by the consumption of different
combinations of these two products can be represented by an indifference curve. Which
statement about such an indifference curve diagram is correct?
A The range of indifference curves shows the combination of products a consumer can purchase
with a given income.
B If an indifference curve is a downward-sloping straight line, the principle of diminishing
marginal utility must be operating.
C Indifference curves never cross, because this means that a consumer would be indifferent
between combinations of two goods, even when one combination provides more of each good.
D The gap between indifference curves is always constant.

4. An indifference curve is typically drawn with a convex shape. Which economic concept explains
the reason for this convex shape?
A allocative efficiency
B diminishing marginal rate of substitution
C Pareto optimality
D the equi-marginal principle

5. Which assumption in relation to an indifference theory diagram is not correct?

 A The consumer’s income may change.
B The consumer may change their satisfaction-maximising objective.
C The consumers may change their tastes and preferences.
D The relative prices of products may change.

6. The diagram shows an individual’s indifference curve, I1, for apples and pears.

What can be concluded from the movement from point X to point Y on this curve?

A The individual can afford more apples than pears.

B The individual has not changed their total utility.

C The individual prefers apples to pears.

D The individual has gained more utility by moving from point X to point Y.

7. Which assumption in relation to an indifference theory diagram is not correct?

A The consumer’s income may change.
B The consumer may change their satisfaction-maximising objective.
C The consumers may change their tastes and preferences.
D The relative prices of products may change.

8. The diagram shows the effect of a price change on an individual consumer’s equilibrium, moving
from E1 to E2.

What can be deduced from the diagram about the price change, the substitution effect and the income
effect?
 9. Which statement is correct?
A A budget line shows the combinations of two goods which can be bought with a given income.
B A budget line shows the combinations of two goods which a consumer wants to buy.
C A budget line shows the difference between income and expenditure.
D A budget line shows the maximum potential output of two goods with given resources.

10. In the diagram, YL and YM show two budget lines for a consumer of a product, X, when its price
changes. IC1 and IC2 are two indifference curves, representing the consumer’s preferences
between product X and spending on other goods.

What is not a valid statement?

A Product X must be a Giffen good, since the consumer spends more on other goods after the price
change.

B The consumer has greater satisfaction at E2 than at E1.

C The prices of other goods are assumed to be held constant when drawing the budget lines.

D The shift from YL to YM represents a fall in the price of product X.

11. Which statement about a budget line in consumer behaviour theory is correct?
A It illustrates consumer preference between two goods.
B It illustrates combinations of two goods that consumers are able to purchase with a given
income.
 C It illustrates the least cost combination of goods that yield the same level of utility.
D It illustrates the income effect of a price change.

12. When the price of a good increases, which statement is correct according to the analysis that
uses budget lines and indifference curves?
A The income and substitution effects of the price increase will work in opposite directions in
the case of a Giffen good.
B The income effect of the price increase will result in reduced consumption for all goods.
C The new equilibrium position will be where the new budget line meets the original
indifference curve.
D The price rise will be represented by a parallel shift inwards of the original budget line.

13. The diagram shows a consumer’s initial budget line is GH and a set of indifference curves IC1,
IC2 and IC3 for goods R and S. The original equilibrium for the consumer is point X. The inflation
rate is rising faster than money incomes. What will be the most likely new equilibrium for the
consumer if all real income is spent?

14. The diagram shows an individual’s budget lines and indifference curves. The initial budget line is
JL. There is then an increase in the price of good Y.

Which distance represents the substitution effect of the increase in price of good Y?
A LK B SR C TS D TR

15. The diagram shows five budget lines. Line 1 is the original budget line.

Which pair of budget lines shows a relatively higher price for drink compared with food after a move
from budget line 1?

A 2 and 3 B 2 and 4 C 3 and 5 D 4 and 5

16. Broken rice is an inferior good. What would be the resulting income and substitution effect on
the quantity demanded of broken rice if its price falls?

What does a budget line show?

A the behaviour of a utility-maximising consumer

B the difference between an individual’s consumption and saving

C the monetary value of the disposable income of a consumer

D the maximum combinations of two products that a consumer can buy with a given level of income

17. When the price of a good falls, the overall effect on the quantity demanded can be separated
into income and substitution effects. Which statement describes a Giffen good?
 A The income effect is irrelevant for a Giffen good.
B The income effect works in the same direction as the substitution effect.
C The income effect works against the substitution effect and is of a greater magnitude.
D The income effect works against the substitution effect but is of a smaller magnitude.

18. The diagram shows five budget lines. Line 1 is the original budget line.

Which pair of budget lines shows a relatively higher price for drink compared with food after a move
from budget line 1?

A 2 and 3 B 2 and 4 C 3 and 5 D 4 and 5

19. Broken rice is an inferior good. What would be the resulting income and substitution effect on
the quantity demanded of broken rice if its price falls?

20. XY is the budget line of an individual consumer.

Which changes could leave the position of XY unchanged?

 21. The diagram shows an indifference map and two budget lines. When the consumer’s budget line
shifts from BL1 to BL2, consumption changes from point W to point Z.

What do these changes indicate about the nature of goods X and Y?

22. What does a budget line on an indifference curve diagram show?

A the amount that a household has available to spend plotted against time
B the combinations of two goods that can be purchased when all income is spent
C the difference between a government’s income and expenditure plotted against time
D the relationship between the price of a good and the amount demanded

23. A consumer currently consumes 10 units of good X and 10 units of good Y at point Z on an
indifference curve. The consumer’s marginal utilities from consuming both good X and good Y
are positive. Which combination of good X and good Y could be on the same indifference curve
as point Z?B
 24. The diagram shows two indifference curves and two budget lines for goods X and Y. The
consumer’s initial equilibrium is point R.

There is a shift in the budget line from Y1X1 to Y2X2 and the new equilibrium for the consumer is point
S. What can definitely be concluded about good X?

A It is a Giffen good.

B It is an inferior good.

C It is a normal good.

D It is a public good.

25. The diagrams show changes in a consumer’s budget line (BL) for two goods. The government
increases the price of both goods by imposing a sales tax of 25%. Which diagram shows the
effect of this tax?
 26. A consumer demands two goods, X and Y. The consumer’s initial equilibrium is at R and final
equilibrium at T. The indifference curve diagram shows the effect of a fall in the price of good X
and the resulting income and substitution effects.

What can be concluded from the diagram about the nature of good X and the nature of its relationship
with good Y?

27. The graph shows the budget line for a household as used in indifference curve analysis.
What can be concluded about the amount of income that could be spent by the household?

A It is greater at point R than point S.

B It is greater at point T than point S.

C It is greatest at point S.

D It is the same at points R, S and T.

28. A utility-maximising consumer has a fixed income and can choose between good X and good Y.
The diagram shows her budget line and different consumption combinations (F, G, H, J, K and L)
of products X and Y.

Which consumption combinations are currently available to her?

A F, G, H and L B F, G, J, and L C G, J and L only D G, H, J and L

29. The indifference curve diagram shows the effect of an increase in income on the consumption of
good X and good Y.B
Which types of good X and good Y are indicated by the change in consumption from E to F?

30. The diagrams show a consumer’s indifference curves (IC) and budget lines (BL) for an inferior
good and a normal good. Which diagram shows the effect of a cut in income tax on the
consumer’s choice?
 31. The diagram below shows a customer’s budget line for two goods, X and Y.

Assuming the price of X does not change, the slope of the budget line will become steeper when:

A the consumer’s income falls.

B the consumer’s income rises.

C the price of Y falls.

D the price of Y rises.

 32. To analyse a consumer’s preferences, an indifference curve represents possible combinations of
goods X and Y. The diagram shows a consumer’s indifference curve for good X and good Y.

What can be concluded from the diagram?

A Point E is the most desirable combination.

B Point F is less desirable than point G. C

Point G is the least desirable combination.

D Points E, F and G are equally desirable combinations.

33. On a diagram the slope of a consumer’s budget line becomes steeper. What can definitely be
concluded from this?
A The consumer’s income has fallen.
B The consumer’s income has risen.
C The price has decreased for the product on the horizontal axis.
D The price has increased for the product on the horizontal axis.

34. The diagram shows two indifference curves and two budget lines for goods X and Y.
The consumer’s initial position is at point F. The consumer’s preferred final position becomes point H.
What does the movement from F to G represent?

A the income effect of a price fall for X

B the price effect of a price change for X

C the substitution effect of a price fall for X

D the substitution effect of a price rise for X

35. The diagram shows a consumer’s indifference curves and a budget line for electronic goods and
food. If income and prices remain the same, at which point on the diagram will the consumer
maximise satisfaction?

36. The diagrams show different budget lines and consumer equilibrium choices. The consumer is in
equilibrium at Q1XQ1Y. Which diagram shows the effect of a successful advertising campaign of
good Y?
 37. The curve JK in the diagram is a consumer’s initial budget line.

Which combination could cause the budget line to shift to GH?

 38. The diagram shows a consumer’s indifference curves (IC) for goods F and G together with the
consumer’s budget lines.

What could explain the movement from X to Z on the diagram?

A a fall in the price of G when G is an inferior good

B a fall in the price of G when F is a Giffen good

C a fall in the price of G when G is a normal good

D a fall in the price of G when G is a Giffen good

39. The diagram shows the indifference curves (IC) for a consumer for goods X and Y together with
the consumer’s budget lines (BL).

If the budget line shifts from BL1 to BL2, how does this affect the consumer’s preferences for goods X
and Y when prices remain the same?
A He continues to buy the same amounts of X and Y.

B He prefers to buy fewer of X and fewer of Y.

C He prefers to buy fewer of X and more of Y.

D He prefers to buy more of X and fewer of Y.

40. The price of brand X is $2 and the price of brand Y is $1. The consumer has $20 income to spend
on these brands. Which combinations of the two brands would be points on the same budget
line for this consumer?

41. The diagram shows attainable indifference curves, I1 and I2, for good X and good Y. Which point
represents the highest level of satisfaction currently attainable?

42. The table shows the substitution effect and income effect for a Giffen good and an inferior good
as the price of the good changes. Which combination is correct?
 43. A consumer demands two goods, X and Y. The indifference curve diagram shows the effect of a
change in the price of one of these goods on the consumer’s equilibrium.

Which demand curve is consistent with the diagram?

 44. The diagram shows budget lines for normal goods X and Y.

What could cause a budget line to shift from PQ to PR?

45. A consumer spends all of their income on two goods, Y and X, and is at position E. The price of X
falls and the price of Y remains constant. The graph shows indifference curves and budget lines
which are used to determine the price, income and substitution effects that are related to this
price change.

Which distance gives the income effect of this price change?

A X1X2 B X1X4 C X2X4 D X5X6

46. The diagram shows attainable indifference curves, I1 and I2, for good X and good Y. Which point
represents the highest level of satisfaction currently attainable?

47. The table shows the substitution effect and income effect for a Giffen good and an inferior good
as the price of the good changes. Which combination is correct?

48. A consumer demands two goods, X and Y. The indifference curve diagram shows the effect of a
change in the price of one of these goods on the consumer’s equilibrium.
49. In the indifference curve diagram point M is the consumer’s initial equilibrium, JK and JL are
budget lines and MN is the substitution effect of a fall in the price of good X. If good X is a Giffen
good, which point will be the consumer’s new equilibrium point after the fall in the price of
good X?
50. Selina has an income of $100 and buys food and drink. The price of a unit of food is $2 while the
price of a unit of drink is $1. Which combination of spending would suggest that Selina wants to
save some of her income?