7.2 Indifference Curve and Budget Line

Question 1

Budget line

Answer 1

the combinations of two products obtainable with given income and prices

Question 2

Substitution effect

Answer 2

where following a price change, a consumer will substitute the cheaper product for the one that is now relatively more expensive

Question 3

Income effect

Answer 3

where following a price change, a consumer has higher real income and will purchase more of this product

Question 4

Indifference curve

Answer 4

this shows the different combinations of two goods that give a consumer equal satisfaction

Question 5

Marginal rate of substitution

Answer 5

the rate at which a consumer is willing to substitute one good for another

Question 6

Normal goods

Answer 6

the quantity demand for it rises when the real income rises.

Question 7

Inferior goods

Answer 7

the quantity demand for it falls when the real income rises.

Question 8

Giffen goods

Answer 8

Very inferior goods. The quantity demand for it rises when the price of it rises. It has larger income effect than substitution effect.