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Cameroon GCE A-Level Economics study materials
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Cameroon GCE A-Level Economics practice questions

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Question 1Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A country can use its limited supply of skilled labour either to build roads or to staff hospitals. What does the study of economics call this situation where a choice must be made between competing uses?

  1. Inflation of prices
  2. Equilibrium of demand
  3. Scarcity of resources Correct answer.
  4. Specialisation of labour

Explanation

Scarcity means that resources are limited relative to the wants they could satisfy, so not every desired use can be met at once. Because skilled labour is finite, using it for roads rules out using the same workers in hospitals, forcing a choice. This limited availability of productive inputs is the core economic problem.

Question 2Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A student with a fixed monthly allowance of 20,000 FCFA decides to buy a textbook instead of a concert ticket. What does the concert ticket represent in this decision?

  1. The money cost of the textbook
  2. The marginal utility of the textbook
  3. The opportunity cost of the textbook Correct answer.
  4. The scarcity price of the textbook

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. By choosing the textbook, the student gives up the concert ticket, so the ticket is the sacrificed alternative. The money paid is the accounting cost, not the opportunity cost itself.

Question 3Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

Which statement best describes a production possibility frontier for an economy producing two goods?

  1. It shows the maximum combinations of two goods obtainable when all resources are fully and efficiently used Correct answer.
  2. It shows the total money cost of producing every possible output level
  3. It shows the quantity of one good consumers are willing to buy at each price
  4. It shows the distribution of income between the two groups of producers

Explanation

A production possibility frontier is a curve showing the maximum output combinations of two goods achievable with given resources and technology. Points on the curve represent full and efficient use of resources. It is a supply-side boundary, not a demand or cost curve.

Question 4Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

An economy is operating at a point inside its production possibility frontier. What does this position indicate?

  1. The frontier has shifted outwards
  2. The economy has achieved full employment
  3. The economy is producing beyond its capacity
  4. Resources are unemployed or used inefficiently Correct answer.

Explanation

Any point inside the frontier means the economy could produce more of at least one good without sacrificing the other, so resources are idle or poorly used. Points on the curve show full and efficient use. Points beyond the curve are currently unattainable.

Question 5Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

Which of the following is best classified as a free good rather than an economic good?

  1. Fresh air in an open countryside Correct answer.
  2. Airtime purchased from a mobile network
  3. A bag of cement sold in a hardware store
  4. A taxi journey across town

Explanation

A free good is available in unlimited quantity relative to demand, so it commands no price and involves no opportunity cost in use. Fresh air in the open countryside fits this because taking it does not reduce what others can have. Economic goods are scarce relative to wants and must be produced or paid for.

Question 6Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A firm owns a machine that can be used to produce either shirts or trousers. Shifting production towards trousers requires giving up increasing numbers of shirts. What does this pattern illustrate?

  1. Increasing opportunity cost Correct answer.
  2. Constant opportunity cost
  3. Decreasing opportunity cost
  4. Zero opportunity cost

Explanation

When successive units of one good cost ever more of the other to produce, the production possibility frontier is bowed outwards and opportunity cost is increasing. This arises because resources are not equally suited to both uses. As more resources move into trousers, they become less productive there.

Question 7Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A new technology raises the productivity of all workers in an economy producing rice and timber. How is this shown on the production possibility frontier?

  1. A movement along the existing frontier towards timber
  2. An inward shift of the entire frontier
  3. A movement from a point inside the frontier to a point on it
  4. An outward shift of the entire frontier Correct answer.

Explanation

Improved technology increases what can be produced from the same resources, raising maximum output for both goods. This shifts the whole production possibility frontier outwards. Moving onto the curve only reflects removing unemployment, not a change in productive capacity.

Question 8Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A government decides to build a new hydroelectric dam using funds that could otherwise have financed a network of rural clinics. Which statement correctly identifies the opportunity cost of the dam?

  1. The rural clinics that were not built Correct answer.
  2. The money spent on constructing the dam
  3. The electricity generated by the dam
  4. The total tax revenue collected by government

Explanation

Opportunity cost is the next best alternative forgone, which here is the clinics that could have been funded instead. The construction money is the financial cost, and the electricity is the benefit gained. Opportunity cost is measured by the sacrificed option, not by the spending itself.

Question 9Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

The production possibility frontier of a country is a straight downward-sloping line. What does the straight-line shape imply about the resources used to produce the two goods?

  1. The country can produce unlimited quantities of both goods
  2. Resources are completely immobile between the two goods
  3. The country faces increasing opportunity cost as output changes
  4. Resources are perfectly adaptable between the two goods at a constant rate Correct answer.

Explanation

A straight-line frontier means each extra unit of one good always costs the same amount of the other, so opportunity cost is constant. This happens when resources are equally productive in both uses and can be transferred without loss. A bowed curve, by contrast, reflects resources of differing suitability.

Question 10Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A point lying outside an economy's current production possibility frontier represents which of the following?

  1. A wasteful use of existing resources
  2. An efficient use of existing resources
  3. An output combination currently unattainable with available resources Correct answer.
  4. A combination achievable only through full employment

Explanation

Points beyond the frontier require more output than current resources and technology can deliver, so they are unattainable for now. They may become attainable after growth shifts the frontier outwards. Points on the curve show efficiency, and points inside show waste or unemployment.

Question 11Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A country chooses to devote more resources to capital goods and fewer to consumer goods today. What is the most likely long-run effect on its production possibility frontier?

  1. The frontier will become a straight line because resources are reallocated
  2. The frontier will shift outwards because productive capacity grows Correct answer.
  3. The frontier will shift inwards because consumers have fewer goods
  4. The frontier will remain unchanged because total output is fixed

Explanation

Capital goods such as machinery and factories add to future productive capacity, so sacrificing current consumption can push the frontier outwards over time. This is the growth trade-off between present and future consumption. Consumer goods satisfy wants now but do not add capacity.

Question 12Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A farmer must decide how to use a plot of land that can grow either maize or groundnuts. Which concept is directly illustrated when the farmer chooses maize?

  1. The basic economic problem of choice under scarcity Correct answer.
  2. The principle of comparative advantage between nations
  3. The circular flow of income
  4. The law of demand

Explanation

The farmer faces limited land and must choose between competing uses, which is the essence of the economic problem of scarcity and choice. Choosing maize means forgoing groundnuts, creating an opportunity cost. The other concepts concern markets, national income flows or trade between countries.

Question 13Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

An economy's production possibility frontier shifts outwards evenly for both goods. Which combination of changes could best explain this?

  1. A fall in consumer demand for both goods
  2. An increase in the labour force combined with better machinery Correct answer.
  3. A reallocation of workers from one industry to the other
  4. A rise in unemployment combined with falling investment

Explanation

Outward shifts of the frontier come from increases in the quantity or quality of factors of production. More workers and improved machinery both raise productive capacity, shifting the whole frontier outwards. Reallocation moves the economy along the curve rather than shifting it.

Question 14Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

Two economies, X and Y, each produce only cocoa and timber. Economy X gives up 2 tonnes of cocoa to produce each extra tonne of timber, while economy Y gives up 5 tonnes of cocoa for each extra tonne of timber. Which statement is correct?

  1. Economy Y has a lower opportunity cost of timber than economy X
  2. Economy X has a lower opportunity cost of timber than economy Y Correct answer.
  3. Economy X faces increasing opportunity cost while Y faces constant cost
  4. Both economies face identical opportunity costs of timber

Explanation

Opportunity cost of timber is measured by the cocoa sacrificed per extra tonne of timber. Economy X sacrifices only 2 tonnes against Y's 5 tonnes, so X has the lower opportunity cost. This lower cost is the basis for X specialising in timber.

Question 15Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A government moves the economy from a point inside its production possibility frontier to a point on the frontier without any change in resources or technology. What has occurred?

  1. The opportunity cost of production has fallen to zero
  2. The frontier has shifted to the right
  3. Economic growth has taken place
  4. Unemployment has been reduced and efficiency improved Correct answer.

Explanation

Moving from inside to on the frontier means idle resources are brought into use and production becomes efficient, raising output without new resources. This is not growth, because the frontier itself has not moved. Opportunity cost remains positive along the curve.

Question 16Basic economic concepts, scarcity, opportunity cost and production possibility frontiers

A country can produce either 100 units of food or 50 units of clothing with its resources, and its frontier is a straight line. What is the opportunity cost of producing one additional unit of clothing?

  1. 50 units of food
  2. 0.5 units of food
  3. 1 unit of food
  4. 2 units of food Correct answer.

Explanation

With a straight-line frontier, the opportunity cost of clothing equals food output divided by clothing output, that is 100 divided by 50, giving 2 units of food per unit of clothing. Each extra unit of clothing therefore costs 2 units of food. The reciprocal, 0.5, would be the cost of food in terms of clothing.

Question 17Demand, supply, elasticity and market equilibrium

In the theory of demand, what does the law of demand state about the relationship between price and quantity demanded, other things being equal?

  1. Quantity demanded is fixed regardless of price.
  2. Quantity demanded depends only on consumer income.
  3. Price and quantity demanded move in opposite directions. Correct answer.
  4. Price and quantity demanded move in the same direction.

Explanation

The law of demand asserts an inverse relationship: as the price of a good rises, the quantity demanded falls, and as price falls, quantity demanded rises, all other factors held constant. This inverse relationship produces the downward-sloping demand curve. It holds for normal goods and reflects both the substitution and income effects of a price change.

Question 18Demand, supply, elasticity and market equilibrium

A movement along a given demand curve for rice is caused by which of the following?

  1. A change in the price of rice Correct answer.
  2. A rise in consumers' incomes
  3. A change in tastes for rice
  4. An increase in the population

Explanation

A change in the good's own price causes a movement along the existing demand curve, changing quantity demanded while the curve stays fixed. The other options shift the whole curve because they alter demand at every price. Distinguishing own-price changes from other determinants is central to demand analysis.

Question 19Demand, supply, elasticity and market equilibrium

A fall in the price of a substitute good such as margarine will most likely do what to the demand for butter?

  1. Cause a movement down along the butter demand curve
  2. Shift the demand curve for butter to the left Correct answer.
  3. Leave the butter demand curve unchanged
  4. Shift the demand curve for butter to the right

Explanation

When a substitute becomes cheaper, consumers switch toward it and away from the good in question, so demand for butter falls at every price. This is a leftward shift of the demand curve, not a movement along it. The own price of butter has not changed, so no movement along the curve occurs.

Question 20Demand, supply, elasticity and market equilibrium

Which of the following best describes a normal good?

  1. A good that is consumed only by low-income households
  2. A good whose demand falls when its price falls
  3. A good whose demand rises when consumer income rises Correct answer.
  4. A good whose demand rises when its price rises

Explanation

For a normal good, income and demand move together: an increase in income raises demand at every price. Most goods are normal goods. Inferior goods behave oppositely, with demand falling as income rises.

Question 21Demand, supply, elasticity and market equilibrium

The price elasticity of demand is calculated as which of the following?

  1. Percentage change in price divided by percentage change in quantity demanded
  2. Change in quantity demanded divided by change in price
  3. Percentage change in quantity demanded divided by percentage change in price Correct answer.
  4. Change in price divided by change in quantity demanded

Explanation

Price elasticity of demand measures responsiveness of quantity demanded to price and is defined as the percentage change in quantity demanded divided by the percentage change in price. Using percentages makes the measure unit-free. The reciprocal ratio would instead describe the slope of the demand curve.

Question 22Demand, supply, elasticity and market equilibrium

If a 10% increase in the price of a good causes quantity demanded to fall by 25%, the price elasticity of demand is which of the following?

  1. 0.25
  2. 0.4
  3. 10
  4. 2.5 Correct answer.

Explanation

Elasticity equals the percentage change in quantity demanded divided by the percentage change in price, so 25% divided by 10% gives 2.5 in absolute value. Since the value exceeds 1, demand is elastic. The negative sign is conventionally ignored when reporting magnitude.

Question 23Demand, supply, elasticity and market equilibrium

A movement along a given supply curve for cocoa is caused by which of the following?

  1. An improvement in cocoa farming technology
  2. A fall in the cost of fertiliser
  3. A change in the price of cocoa Correct answer.
  4. A rise in the wages of cocoa farm workers

Explanation

A change in the good's own price causes a movement along the supply curve, altering quantity supplied while the curve stays fixed. Cost and technology changes shift the supply curve because they alter supply at every price. This distinction mirrors the demand-side treatment of own price versus other determinants.

Question 24Demand, supply, elasticity and market equilibrium

At a price above the equilibrium price in a competitive market, which situation arises?

  1. Quantity demanded exceeds quantity supplied, creating a shortage
  2. Quantity supplied equals quantity demanded at a lower price
  3. Quantity supplied exceeds quantity demanded, creating a surplus Correct answer.
  4. Demand increases until the surplus disappears

Explanation

When the price is above equilibrium, suppliers offer more than consumers will buy, so quantity supplied exceeds quantity demanded and a surplus emerges. Downward pressure on price then pushes the market back toward equilibrium. A shortage instead arises below equilibrium.

Question 25Demand, supply, elasticity and market equilibrium

A market for maize is in equilibrium. A drought sharply reduces the harvest while demand is unchanged. What is the predicted effect?

  1. Equilibrium price falls and equilibrium quantity rises
  2. Equilibrium price falls and equilibrium quantity falls
  3. Equilibrium price rises and equilibrium quantity rises
  4. Equilibrium price rises and equilibrium quantity falls Correct answer.

Explanation

A poor harvest reduces supply, shifting the supply curve to the left. With demand unchanged, the new intersection occurs at a higher price and a lower quantity. This is the standard supply-shock outcome for an agricultural market.

Question 26Demand, supply, elasticity and market equilibrium

Which of the following goods is most likely to have an inelastic price elasticity of demand?

  1. Household salt, a small share of the budget with few substitutes Correct answer.
  2. Fresh mangoes, a luxury fruit with many alternatives
  3. A particular brand of bottled water among many brands
  4. Air travel for holidaymakers with flexible plans

Explanation

Demand tends to be inelastic when the good takes a small share of the budget, has few close substitutes, and is a necessity. Household salt fits all these conditions. Goods with many substitutes or flexible consumption tend to have elastic demand.

Question 27Demand, supply, elasticity and market equilibrium

A firm faces inelastic demand for its product. If it raises the price, what happens to total revenue?

  1. Total revenue first rises then falls to zero
  2. Total revenue stays exactly the same
  3. Total revenue rises Correct answer.
  4. Total revenue falls

Explanation

When demand is inelastic, the percentage fall in quantity demanded is smaller than the percentage rise in price, so total revenue increases. This is the revenue test for elasticity. Firms with inelastic demand can raise price and gain revenue.

Question 28Demand, supply, elasticity and market equilibrium

The demand for a product is unit elastic. What happens to total revenue when its price is reduced?

  1. Total revenue remains unchanged Correct answer.
  2. Total revenue falls
  3. Total revenue becomes zero
  4. Total revenue rises

Explanation

Under unit elastic demand, the percentage rise in quantity demanded exactly offsets the percentage fall in price, leaving total revenue constant. This marks the boundary between elastic and inelastic ranges on a demand curve. It is why revenue is maximised where elasticity equals one.

Question 29Demand, supply, elasticity and market equilibrium

A consumer's income rises by 20% and her demand for a good falls by 10%. The income elasticity of demand is which of the following?

  1. -2.0, indicating a luxury good
  2. -0.5, indicating an inferior good Correct answer.
  3. 2.0, indicating an inferior good
  4. 0.5, indicating a normal good

Explanation

Income elasticity equals the percentage change in quantity demanded divided by the percentage change in income, giving -10% divided by 20%, which is -0.5. A negative income elasticity identifies an inferior good, whose demand falls as income rises. Positive values indicate normal goods.

Question 30Demand, supply, elasticity and market equilibrium

The cross-price elasticity of demand between two goods is positive. What does this indicate?

  1. The goods are inferior goods
  2. The goods are complements
  3. The goods are substitutes Correct answer.
  4. The goods are unrelated

Explanation

A positive cross-price elasticity means that a rise in the price of one good increases demand for the other, which is the definition of substitutes. Complements show negative cross-price elasticity because a price rise for one reduces demand for the other. A value near zero suggests the goods are unrelated.

Question 31Demand, supply, elasticity and market equilibrium

Which of the following explains why the supply of agricultural products is often inelastic in the short run?

  1. Land and labour are freely available to farmers
  2. Farmers always respond instantly to price signals
  3. Output cannot easily be changed quickly because of the biological growing cycle Correct answer.
  4. Agricultural prices are fixed by the government

Explanation

Price elasticity of supply depends on how quickly producers can adjust output. In agriculture, planting and harvesting cycles mean output cannot respond rapidly to a price change, so short-run supply is inelastic. Over the long run, farmers can adjust land use and investment, making supply more elastic.

Question 32Demand, supply, elasticity and market equilibrium

A price ceiling set below the equilibrium price will most likely produce which outcome?

  1. An automatic rise in market price to clear the market
  2. No effect because the market clears at the ceiling
  3. A persistent shortage because quantity demanded exceeds quantity supplied Correct answer.
  4. A persistent surplus because quantity supplied exceeds quantity demanded

Explanation

A binding price ceiling below equilibrium prevents the price from rising to its market-clearing level. At the controlled price, quantity demanded exceeds quantity supplied, producing a shortage. Non-price rationing, queues, or black markets often follow.

Question 33Demand, supply, elasticity and market equilibrium

A minimum price (price floor) set above equilibrium in a labour market for unskilled workers is likely to cause which outcome?

  1. A shortage of labour, meaning unfilled vacancies
  2. A fall in the wage below the equilibrium level
  3. No change because the market still clears
  4. A surplus of labour, meaning unemployment Correct answer.

Explanation

A binding minimum wage above equilibrium prevents wages from falling to clear the market. At the higher wage, more workers offer themselves than firms wish to hire, creating a surplus of labour, which appears as unemployment. This is the standard price-floor result.

Question 34Demand, supply, elasticity and market equilibrium

The supply curve of a firm is best interpreted as which of the following?

  1. The average fixed cost curve
  2. The total revenue curve
  3. The marginal revenue curve in perfect competition
  4. The marginal cost curve above the minimum average variable cost Correct answer.

Explanation

A competitive firm supplies where price equals marginal cost, provided price covers average variable cost. The portion of the marginal cost curve above minimum average variable cost is therefore the firm's supply curve. Below that shut-down point, the firm produces nothing.

Question 35Demand, supply, elasticity and market equilibrium

A consumer's demand curve is derived from which underlying concept in marginal utility analysis?

  1. The marginal utility of each successive unit falls as more is consumed Correct answer.
  2. The total utility of a good is always constant
  3. Marginal utility rises as consumption increases
  4. Consumers always prefer more expensive goods

Explanation

The law of diminishing marginal utility states that each additional unit consumed yields less extra satisfaction. Consumers buy additional units only at lower prices, which generates the downward-sloping demand curve. This links utility theory to the law of demand.

Question 36Demand, supply, elasticity and market equilibrium

Along a straight-line downward-sloping demand curve, how does price elasticity of demand change as price falls toward the quantity axis?

  1. It falls from elastic toward zero Correct answer.
  2. It stays constant at every point
  3. It rises from zero toward infinity
  4. It becomes negative and then positive

Explanation

On a linear demand curve, elasticity varies along the curve: it is elastic at high prices, unit elastic at the midpoint, and inelastic at low prices. As price falls toward the quantity axis, elasticity approaches zero. This is why slope and elasticity must not be confused.

Question 37Demand, supply, elasticity and market equilibrium

Both demand and supply for a good increase simultaneously by the same amount. What is the certain outcome?

  1. Both equilibrium price and quantity rise
  2. Both equilibrium price and quantity fall
  3. Equilibrium price rises while the quantity change is indeterminate
  4. Equilibrium quantity rises while the price change is indeterminate Correct answer.

Explanation

When both curves shift right, the new intersection lies at a higher quantity, but the price effect depends on the relative sizes of the shifts. If the shifts are equal, price may be unchanged; otherwise it could rise or fall. Only the quantity change is certain.

Question 38Demand, supply, elasticity and market equilibrium

A good has a price elasticity of supply of zero in the short run. What does this mean?

  1. Quantity supplied changes proportionately with price
  2. Quantity supplied does not change at all when the price changes Correct answer.
  3. Producers will supply any amount at the going price
  4. Supply is perfectly elastic at the current price

Explanation

A supply elasticity of zero means the supply curve is vertical: quantity supplied is fixed regardless of price in that period. This can occur when capacity is fully committed, as with seats in a stadium on match day. Perfectly elastic supply, by contrast, is a horizontal curve.

Question 39Demand, supply, elasticity and market equilibrium

In a market with a downward-sloping demand curve and an upward-sloping supply curve, a technological improvement shifts supply right. What happens to consumer surplus?

  1. Consumer surplus falls because less is traded
  2. Consumer surplus becomes zero at the new equilibrium
  3. Consumer surplus rises because consumers pay a lower price for a larger quantity Correct answer.
  4. Consumer surplus is unchanged because demand has not moved

Explanation

A rightward supply shift lowers the equilibrium price and raises the quantity traded. Consumer surplus, the area below the demand curve and above price, therefore expands. Producers may also gain if demand is elastic, but the consumer gain is unambiguous.

Question 40Demand, supply, elasticity and market equilibrium

A government imposes a specific tax on the producers of a good. The demand for the good is perfectly inelastic and the supply curve is upward sloping. Which statement correctly describes the incidence of the tax?

  1. Consumers bear the entire burden of the tax because quantity demanded does not change. Correct answer.
  2. The burden is shared equally between consumers and producers.
  3. Consumers bear none of the tax burden because producers are legally required to pay it.
  4. Producers bear the entire burden of the tax because supply is upward sloping.

Explanation

When demand is perfectly inelastic, the quantity demanded does not respond to price changes, so the market price rises by the full amount of the tax. Producers receive the same net price as before, meaning the entire tax burden falls on consumers. The slope of the supply curve does not affect this result when demand is perfectly inelastic.

Question 41Consumer theory, utility and indifference analysis

In consumer theory, total utility is said to be maximised when marginal utility is:

  1. zero Correct answer.
  2. at its maximum
  3. equal to total utility
  4. negative

Explanation

Total utility rises as long as marginal utility is positive and begins to fall once marginal utility turns negative. The turning point, where total utility peaks, is reached when the marginal utility of the last unit consumed is exactly zero. This is the saturation point of the commodity.

Question 42Consumer theory, utility and indifference analysis

A consumer spends her entire income on two goods, X and Y. The price of X is 500 francs and the price of Y is 1,000 francs. At her current bundle, the marginal utility of X is 20 utils and the marginal utility of Y is 30 utils. To increase utility while keeping expenditure constant, she should:

  1. keep the bundle unchanged
  2. buy more Y and less X
  3. buy more X and less Y Correct answer.
  4. buy more of both goods

Explanation

Utility per franc spent is 20/500 = 0.04 utils per franc on X and 30/1,000 = 0.03 utils per franc on Y. Since the marginal utility per franc is higher for X, shifting spending towards X raises total utility. The consumer is in equilibrium only when the ratios of marginal utility to price are equal.

Question 43Consumer theory, utility and indifference analysis

An indifference curve is convex to the origin because of:

  1. perfect substitutability between the goods
  2. diminishing marginal rate of substitution Correct answer.
  3. constant marginal utility of money
  4. increasing marginal rate of substitution

Explanation

As a consumer moves down an indifference curve and obtains more of one good, she is willing to give up less and less of the other good to gain an extra unit. This diminishing marginal rate of substitution makes the curve flatter to the right and therefore convex to the origin. Convexity is thus a direct expression of diminishing marginal utility.

Question 44Consumer theory, utility and indifference analysis

The marginal rate of substitution of good X for good Y (MRSxy) measures:

  1. the total utility obtained from X and Y
  2. the extra income needed to buy one more unit of X
  3. the amount of Y a consumer will give up for one extra unit of X while remaining equally satisfied Correct answer.
  4. the ratio of the prices of X and Y

Explanation

The MRSxy is the slope of an indifference curve and shows the rate at which a consumer trades Y for X without any change in total satisfaction. It is therefore the ratio of the marginal utilities of the two goods. At the optimum it equals the price ratio.

Question 45Consumer theory, utility and indifference analysis

A consumer's budget line shifts outward in a parallel manner. This is best explained by:

  1. a rise in the price of both goods
  2. a fall in the price of one good only
  3. a change in the consumer's tastes
  4. a rise in money income with prices constant Correct answer.

Explanation

The intercepts of the budget line are income divided by each price. If money income rises while both prices stay constant, both intercepts increase proportionately and the line shifts outward parallel to itself. A parallel shift therefore reflects a change in real income at unchanged relative prices.

Question 46Consumer theory, utility and indifference analysis

A consumer is in equilibrium at a point where the budget line is tangent to an indifference curve. Which condition must hold at that point?

  1. MRSxy equals zero
  2. MRSxy is greater than the price ratio Px/Py
  3. MRSxy is less than the price ratio Px/Py
  4. MRSxy equals the price ratio Px/Py Correct answer.

Explanation

At tangency the slope of the indifference curve equals the slope of the budget line. Since the slope of the indifference curve is the MRSxy and the slope of the budget line is Px/Py, equilibrium requires MRSxy = Px/Py. This is the indifference-curve version of the equi-marginal principle.

Question 47Consumer theory, utility and indifference analysis

Two goods, bread and garri, are perfect substitutes for a particular consumer. Her indifference curves between them will be:

  1. downward-sloping straight lines Correct answer.
  2. upward-sloping
  3. convex to the origin
  4. L-shaped

Explanation

When a consumer is always willing to exchange the two goods at a constant rate, the marginal rate of substitution does not change along the curve. The indifference curves are therefore straight lines with a constant negative slope. L-shaped curves, by contrast, describe perfect complements.

Question 48Consumer theory, utility and indifference analysis

A consumer's income is 12,000 francs. Good X costs 400 francs and good Y costs 600 francs. Which equation correctly represents her budget constraint, where Qx and Qy are quantities consumed?

  1. 600Qx + 400Qy = 12,000
  2. 400Qx + 600Qy = 12,000 Correct answer.
  3. 400Qx + 600Qy = 6,000
  4. 12,000Qx + 600Qy = 400

Explanation

Total expenditure on the two goods, price times quantity for each, must equal money income. Multiplying 400 by Qx and 600 by Qy and setting the sum to 12,000 gives the correct budget constraint. The intercepts would be 30 units of X and 20 units of Y.

Question 49Consumer theory, utility and indifference analysis

A rise in the price of good X, with money income and the price of Y unchanged, will cause the budget line to:

  1. shift outward parallel to itself
  2. rotate outward along the X-axis
  3. rotate inward along the X-axis Correct answer.
  4. shift inward parallel to itself

Explanation

The maximum quantity of X affordable is income divided by the price of X. A higher price of X reduces this intercept while the Y-intercept is unaffected, so the line pivots inward along the X-axis. Its slope becomes steeper, reflecting the higher relative price of X.

Question 50Consumer theory, utility and indifference analysis

The income-consumption curve for a normal good traces the locus of:

  1. utility-maximising bundles as money income changes with prices constant Correct answer.
  2. all bundles giving the same level of satisfaction
  3. utility-maximising bundles as one price changes with income constant
  4. all bundles that cost the same amount

Explanation

The income-consumption curve joins the tangency points between successive parallel budget lines and indifference curves as income varies. Because prices are held constant, it isolates the income effect. For an inferior good the curve bends back towards the good whose consumption falls as income rises.