Indifference Curve Analysis: Indifference Curves, Budget Lines, MRS, Income Effect, Substitution Effect, Consumer Choice

1. A consumer spends all income on goods X and Y. The slope of the budget line is equal to

A MUX / MUY
B PX / PY
C PY / PX
D income / price of X

2. A budget line shifts outwards parallel to the original budget line when

A money income rises and both prices remain unchanged
B the price of X rises and income remains unchanged
C the price of Y falls and the price of X remains unchanged
D the consumer’s tastes change in favour of X

3. A budget line rotates outwards on the X-axis while the Y-intercept remains unchanged when

A the price of X falls
B the price of X rises
C the price of Y falls
D income falls

4. An indifference curve shows

A combinations of two goods that can be bought with a given income
B combinations of two goods giving equal satisfaction
C combinations of two goods that give increasing marginal utility
D combinations of two goods produced using fixed resources

5. The marginal rate of substitution of X for Y measures

A the amount of Y a consumer gives up to gain one more unit of X while utility stays constant
B the amount of X a producer gives up to produce one more unit of Y
C the ratio of the price of X to income
D the change in income needed to maintain purchasing power

6. Indifference curves are normally convex to the origin because

A marginal utility is always constant
B the marginal rate of substitution diminishes as more X is consumed
C the marginal rate of substitution increases as more X is consumed
D income rises as consumption increases

7. A consumer is in equilibrium where

A the budget line cuts the highest possible indifference curve
B the budget line is tangent to the highest attainable indifference curve
C two indifference curves intersect
D marginal utility of each good is zero

8. At consumer equilibrium,

A MRSXY = PX / PY
B MRSXY = PY / PX
C MUX = MUY always
D PX = PY always

9. A consumer has income of $100. PX = $5 and PY = $10. What is the maximum quantity of X that can be bought if all income is spent on X?

A 5
B 10
C 20
D 50

10. A consumer has income of $120. PX = $6 and PY = $4. What is the equation of the budget line?

A 6X + 4Y = 120
B 4X + 6Y = 120
C X + Y = 120
D 10XY = 120

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. If income is $80, PX = $4 and PY = $8, which bundle lies exactly on the budget line?

A 10X and 5Y
B 15X and 4Y
C 8X and 8Y
D 20X and 5Y

12. If a consumer’s budget line becomes steeper, this may be caused by

A a rise in the price of X relative to Y
B a fall in the price of X relative to Y
C an equal rise in both prices and income
D a change in preferences only

13. If the price of X falls, the consumer’s new equilibrium usually involves

A only an income effect
B only a substitution effect
C both an income effect and substitution effect
D neither income nor substitution effect

14. The substitution effect of a fall in the price of X is the change in quantity demanded of X caused by

A X becoming relatively cheaper than Y
B real income falling
C money income rising
D the consumer moving to a lower indifference curve

15. The income effect of a fall in the price of X is the change in quantity demanded of X caused by

A X becoming relatively more expensive
B the consumer’s real income increasing
C the consumer’s money income falling
D the marginal rate of substitution becoming zero

16. For a normal good, the income effect of a price fall is

A negative
B positive
C zero
D always larger than the substitution effect

17. For an inferior good, the income effect of a price fall is

A positive
B negative
C always zero
D always greater than the substitution effect

18. For a Giffen good, when price falls

A substitution effect increases quantity demanded but income effect reduces it by a larger amount
B substitution effect reduces quantity demanded but income effect increases it by a larger amount
C both effects increase quantity demanded
D both effects reduce quantity demanded

19. A Giffen good must be

A a luxury good
B a normal good
C an inferior good with a very strong negative income effect
D a public good

20. Which statement is correct for a normal good when its price falls?

A substitution effect and income effect both increase quantity demanded
B substitution effect increases quantity demanded but income effect reduces it
C substitution effect reduces quantity demanded but income effect increases it
D both effects reduce quantity demanded

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. Which statement is correct for most inferior goods when their price falls?

A substitution effect increases quantity demanded and income effect decreases it, but substitution effect is stronger
B substitution effect decreases quantity demanded and income effect increases it
C both effects increase quantity demanded
D both effects decrease quantity demanded

22. If a consumer moves to a higher indifference curve after a price fall, this mainly shows

A lower welfare
B higher welfare
C lower real income
D unchanged satisfaction

23. The slope of an indifference curve is determined by

A the ratio of the prices of the two goods
B the marginal rate of substitution
C the consumer’s money income only
D the supply of the two goods

24. The slope of a budget line is determined by

A the consumer’s preferences
B the marginal rate of substitution
C the ratio of the prices of the two goods
D total utility

25. A consumer is choosing between X and Y. At the current bundle, MRSXY = 4 while PX/PY = 2. What should the consumer do?

A consume more X and less Y
B consume more Y and less X
C remain at the same bundle
D consume less of both goods

26. A consumer is choosing between X and Y. At the current bundle, MRSXY = 1 while PX/PY = 3. What should the consumer do?

A consume more X and less Y
B consume more Y and less X
C remain at the same bundle
D spend all income on X

27. If two indifference curves intersect, this violates the assumption of

A consistent consumer preferences
B limited income
C positive prices
D diminishing average cost

28. A higher indifference curve is preferred because it represents

A lower income
B higher utility
C lower opportunity cost
D lower prices

29. A consumer initially buys X and Y. The price of X rises. What happens to the budget line?

A it rotates inward on the X-axis
B it rotates outward on the X-axis
C it shifts outward parallel
D it shifts inward parallel

30. A consumer initially buys X and Y. The price of Y falls. What happens to the budget line?

A X-intercept changes while Y-intercept stays unchanged
B Y-intercept moves outward while X-intercept stays unchanged
C both intercepts move inward
D both intercepts stay unchanged

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A consumer has income of $60. PX = $6 and PY = $3. If the price of X falls to $3, the maximum quantity of X affordable changes from

A 10 to 20
B 20 to 10
C 10 to 30
D 30 to 20

32. A consumer has income of $90. PX = $9 and PY = $3. If income rises to $120 with prices unchanged, the budget line

A rotates inward on the X-axis only
B rotates outward on the Y-axis only
C shifts outward parallel
D becomes steeper

33. If income doubles and both prices double, the budget line

A shifts outward parallel
B shifts inward parallel
C remains unchanged
D becomes flatter

34. If income stays constant and both prices double, the budget line

A shifts outward parallel
B shifts inward parallel
C rotates outward
D remains unchanged

35. If both prices fall by the same percentage and income is unchanged, the budget line

A shifts outward parallel
B shifts inward parallel
C rotates inward
D becomes steeper

36. A consumer’s equilibrium moves from point A to point B after a rise in income. If both X and Y are normal goods, the new bundle must involve

A more X and more Y
B less X and less Y
C more X and less Y
D less X and more Y

37. A consumer’s income rises and consumption of X falls. Good X is

A normal
B inferior
C complementary
D public

38. If a good is inferior but not Giffen, a fall in its price causes quantity demanded to

A rise
B fall
C remain unchanged
D become zero

39. If a good is Giffen, a fall in its price causes quantity demanded to

A rise
B fall
C remain unchanged
D rise because the substitution effect dominates

40. A price-consumption curve joins

A equilibrium points as the price of one good changes
B equilibrium points as income changes
C production points as output changes
D cost points as wage rates change

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. An income-consumption curve joins

A equilibrium points as income changes
B equilibrium points as price changes
C points of equal production cost
D points of equal producer surplus

42. The demand curve for a good can be derived from

A the income-consumption curve
B the price-consumption curve
C the long-run average cost curve
D the Lorenz curve

43. If the price-consumption curve bends backwards for good X, it may indicate

A X is a Giffen good over that price range
B X is always a normal good
C X has perfectly elastic supply
D X is a public good

44. Which condition is required for consumer equilibrium using indifference curves?

A the budget line must be tangent to an indifference curve
B the budget line must intersect two indifference curves
C the consumer must spend less than income
D the consumer must choose the lowest indifference curve

45. A consumer has income $100. PX = $10 and PY = $5. Which bundle is unaffordable?

A 5X and 10Y
B 8X and 4Y
C 6X and 8Y
D 10X and 0Y

46. A consumer has income $72. PX = $8 and PY = $6. Which bundle leaves income unspent?

A 3X and 8Y
B 6X and 4Y
C 9X and 0Y
D 4X and 6Y

47. A consumer is at a point inside the budget line. This means

A the bundle is unaffordable
B the consumer is not spending all income
C the consumer is on the highest possible indifference curve
D the price of both goods must be zero

48. A consumer is at a point outside the budget line. This means

A the bundle is affordable but inefficient
B the bundle is unaffordable with current income and prices
C the consumer is saving income
D the consumer has maximised utility

49. Which statement best explains why the substitution effect is always negative for a normal demand curve?

A consumers substitute away from a good when it becomes relatively more expensive
B consumers buy more of a good when real income rises
C consumers always prefer expensive goods
D consumers ignore relative prices

50. Which chain is most accurate for a fall in the price of a normal good X?

A price of X falls → budget line rotates outward → X becomes relatively cheaper → real income rises → quantity demanded of X rises
B price of X falls → budget line shifts inward → X becomes relatively dearer → quantity demanded falls
C price of X falls → income falls → substitution effect reduces demand → demand rises
D price of X falls → indifference curves shift outward → consumer utility falls

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: MUX/MUY is the slope of an indifference curve, not the budget line.
B correct: the budget line slope is based on the relative prices of the goods, usually PX/PY in absolute terms.
C wrong: PY/PX is the inverse price ratio.
D wrong: income/price of X gives the maximum quantity of X, not the slope.

2. Answer: A

A correct: higher money income with unchanged prices increases purchasing power equally for both goods, shifting the budget line outward parallel.
B wrong: a rise in PX rotates the budget line inward on the X-axis.
C wrong: a fall in PY rotates the budget line outward on the Y-axis.
D wrong: tastes affect indifference curves, not the budget line.

3. Answer: A

A correct: a fall in PX lets the consumer buy more X if all income is spent on X, so the X-intercept moves outward.
B wrong: a rise in PX rotates the budget line inward on the X-axis.
C wrong: a fall in PY changes the Y-intercept.
D wrong: income falling shifts the whole budget line inward.

4. Answer: B

A wrong: this describes a budget line.
B correct: an indifference curve shows combinations of two goods that give the same level of utility.
C wrong: utility is equal along an indifference curve, not increasing.
D wrong: production combinations are shown by a PPC.

5. Answer: A

A correct: MRSXY measures how much Y the consumer is willing to give up for one extra X while staying equally satisfied.
B wrong: this is an opportunity cost in production, not consumer theory.
C wrong: this is a budget/price-income relationship.
D wrong: this describes compensation/income adjustment, not MRS.

6. Answer: B

A wrong: convexity is not due to constant marginal utility.
B correct: as the consumer has more X and less Y, they are willing to sacrifice less Y for each extra X, so MRS diminishes.
C wrong: increasing MRS would make the curve concave.
D wrong: income does not rise along an indifference curve.

7. Answer: B

A wrong: the budget line can cut lower indifference curves, but equilibrium occurs at tangency.
B correct: the consumer chooses the highest attainable indifference curve tangent to the budget line.
C wrong: indifference curves cannot intersect under normal assumptions.
D wrong: marginal utility of each good does not need to be zero.

8. Answer: A

A correct: at tangency, MRSXY equals the price ratio PX/PY.
B wrong: PY/PX is the inverse ratio.
C wrong: marginal utilities do not need to be equal if prices differ.
D wrong: prices do not need to be equal.

9. Answer: C

A wrong: $100/$5 = 20, not 5.
B wrong: 10 is the maximum quantity of Y.
C correct: maximum X = income/PX = 100/5 = 20.
D wrong: 50 is not supported.

10. Answer: A

A correct: budget equation is PXX + PYY = income, so 6X + 4Y = 120.
B wrong: this reverses the prices of X and Y.
C wrong: this ignores prices.
D wrong: the budget line is additive, not multiplicative.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: A

A correct: 10X costs $40 and 5Y costs $40, total = $80.
B wrong: 15X + 4Y costs $60 + $32 = $92, unaffordable.
C wrong: 8X + 8Y costs $32 + $64 = $96, unaffordable.
D wrong: 20X + 5Y costs $80 + $40 = $120, unaffordable.

12. Answer: A

A correct: budget line slope depends on PX/PY; if PX rises relative to PY, it becomes steeper.
B wrong: a fall in PX relative to PY makes it flatter.
C wrong: equal rise in income and both prices leaves purchasing power and slope unchanged.
D wrong: preferences do not change the budget line.

13. Answer: C

A wrong: price changes cause both relative price and real income changes.
B wrong: there is also an income effect.
C correct: a fall in price causes a substitution effect and an income effect.
D wrong: both effects are relevant.

14. Answer: A

A correct: substitution effect occurs because X becomes cheaper relative to Y.
B wrong: real income rises after a price fall.
C wrong: money income is unchanged.
D wrong: a price fall normally allows a higher indifference curve.

15. Answer: B

A wrong: X becomes relatively cheaper, not more expensive.
B correct: a lower price increases purchasing power, so real income rises.
C wrong: money income does not fall.
D wrong: MRS does not become zero.

16. Answer: B

A wrong: for a normal good, higher real income increases demand.
B correct: the income effect of a price fall is positive for a normal good.
C wrong: it is not zero.
D wrong: it is not always larger than the substitution effect.

17. Answer: B

A wrong: an inferior good is bought less when real income rises.
B correct: a price fall raises real income, causing demand for an inferior good to fall through the income effect.
C wrong: inferior goods have a negative income effect.
D wrong: only a Giffen good has an income effect larger than the substitution effect.

18. Answer: A

A correct: for a Giffen good, the substitution effect raises quantity demanded after a price fall, but the negative income effect reduces it by more.
B wrong: substitution effect from a price fall always encourages more X.
C wrong: both effects increase demand only for normal goods.
D wrong: substitution effect does not reduce demand after a price fall.

19. Answer: C

A wrong: luxury goods are normal goods.
B wrong: Giffen goods are not normal goods.
C correct: a Giffen good is an inferior good where the negative income effect dominates the substitution effect.
D wrong: public goods are defined by non-rivalry and non-excludability.

20. Answer: A

A correct: for a normal good, both the substitution effect and income effect increase quantity demanded after a price fall.
B wrong: income effect does not reduce demand for normal goods.
C wrong: substitution effect does not reduce quantity after a price fall.
D wrong: neither effect reduces quantity demanded.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. Answer: A

A correct: for most inferior goods, substitution effect increases demand, income effect decreases demand, but substitution effect dominates, so quantity rises overall.
B wrong: substitution effect from a fall in price does not decrease demand.
C wrong: the income effect is negative for inferior goods.
D wrong: substitution effect increases quantity demanded.

22. Answer: B

A wrong: higher indifference curve means higher utility.
B correct: moving to a higher indifference curve shows higher satisfaction/welfare.
C wrong: a price fall raises real income.
D wrong: satisfaction changes because a higher curve is reached.

23. Answer: B

A wrong: price ratio determines budget line slope.
B correct: the slope of an indifference curve is the MRS.
C wrong: income affects the budget line position.
D wrong: supply is irrelevant to indifference curve slope.

24. Answer: C

A wrong: preferences determine indifference curves.
B wrong: MRS determines indifference curve slope.
C correct: the budget line slope is determined by relative prices.
D wrong: total utility does not determine budget line slope.

25. Answer: A

A correct: MRSXY = 4 means the consumer values one extra X at 4Y, but market cost is only 2Y, so buy more X.
B wrong: Y should be reduced, not increased.
C wrong: MRS does not equal the price ratio, so not equilibrium.
D wrong: spending less on both is not rational if utility is positive.

26. Answer: B

A wrong: X is valued at only 1Y but costs 3Y, so X is too expensive relative to its value.
B correct: the consumer should buy less X and more Y until MRS rises to equal PX/PY.
C wrong: MRS and price ratio are unequal.
D wrong: spending all income on X would worsen the mismatch.

27. Answer: A

A correct: intersecting indifference curves would imply inconsistent rankings of the same bundle.
B wrong: limited income relates to the budget line.
C wrong: positive prices relate to the budget constraint.
D wrong: diminishing average cost is firm theory.

28. Answer: B

A wrong: income is shown by the budget line, not indifference curve height.
B correct: higher indifference curves represent greater utility/satisfaction.
C wrong: opportunity cost is not directly shown by a higher indifference curve.
D wrong: prices affect the budget line, not indifference curve level.

29. Answer: A

A correct: a higher PX reduces maximum affordable X, so the budget line rotates inward on the X-axis.
B wrong: this happens when PX falls.
C wrong: a parallel outward shift happens when income rises.
D wrong: a parallel inward shift happens when income falls or both prices rise proportionately.

30. Answer: B

A wrong: X-intercept changes when PX changes.
B correct: if PY falls, maximum affordable Y increases while X-intercept remains unchanged.
C wrong: both intercepts move inward only if income falls or both prices rise.
D wrong: the Y-intercept changes.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. Answer: A

A correct: maximum X changes from 60/6 = 10 to 60/3 = 20.
B wrong: this reverses the change.
C wrong: 30 is not affordable after the price fall.
D wrong: initial maximum X is 10, not 30.

32. Answer: C

A wrong: a price change causes rotation, not income rise.
B wrong: both intercepts change, not only Y.
C correct: income rise with unchanged prices shifts the budget line outward parallel.
D wrong: slope remains unchanged because prices are unchanged.

33. Answer: C

A wrong: purchasing power does not rise.
B wrong: purchasing power does not fall.
C correct: income and both prices double, so maximum affordable quantities remain the same.
D wrong: relative prices are unchanged, so slope is unchanged.

34. Answer: B

A wrong: purchasing power falls, not rises.
B correct: if both prices double and income is unchanged, both maximum quantities halve, shifting budget line inward parallel.
C wrong: rotation requires only one relative price to change.
D wrong: purchasing power changes.

35. Answer: A

A wrong? No, this is correct: lower prices with unchanged income increase purchasing power equally if both prices fall by the same percentage.
B wrong: inward shift would mean reduced purchasing power.
C wrong: equal percentage price changes do not rotate the line.
D wrong: relative prices are unchanged, so slope is unchanged.

36. Answer: A

A correct: if both goods are normal, higher income increases consumption of both.
B wrong: this would suggest both are inferior.
C wrong: Y would not fall if normal.
D wrong: X would not fall if normal.

37. Answer: B

A wrong: normal goods are consumed more when income rises.
B correct: if income rises and consumption falls, X is an inferior good.
C wrong: complements are goods consumed together.
D wrong: public goods are non-rival and non-excludable.

38. Answer: A

A correct: for an inferior but non-Giffen good, substitution effect dominates, so quantity demanded rises after price falls.
B wrong: quantity falls only for a Giffen good.
C wrong: it usually changes.
D wrong: it does not become zero.

39. Answer: B

A wrong: quantity demanded rises for normal and most inferior goods.
B correct: for a Giffen good, a price fall reduces quantity demanded because the negative income effect dominates.
C wrong: it changes in the opposite direction.
D wrong: for a Giffen good, income effect dominates, not substitution effect.

40. Answer: A

A correct: price-consumption curve links equilibrium bundles as the price of one good changes.
B wrong: this describes an income-consumption curve.
C wrong: production points are not consumer theory.
D wrong: cost points are firm theory.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: A

A correct: income-consumption curve joins equilibrium points as income changes.
B wrong: price changes form the price-consumption curve.
C wrong: equal production cost relates to production theory.
D wrong: producer surplus is not involved.

42. Answer: B

A wrong: income-consumption curve can derive Engel curves.
B correct: the demand curve can be derived from the price-consumption curve.
C wrong: LRAC is cost theory.
D wrong: Lorenz curve shows income distribution.

43. Answer: A

A correct: a backward-bending price-consumption curve may show that quantity demanded falls when price falls, indicating possible Giffen behaviour.
B wrong: normal goods do not show this pattern.
C wrong: supply elasticity is unrelated.
D wrong: public goods are unrelated.

44. Answer: A

A correct: consumer equilibrium occurs at tangency between the budget line and the highest attainable indifference curve.
B wrong: crossing two curves does not guarantee maximum utility.
C wrong: the consumer normally spends all income if goods give positive utility.
D wrong: the consumer chooses the highest attainable curve, not the lowest.

45. Answer: C

A wrong: 5X and 10Y costs $50 + $50 = $100, affordable.
B wrong: 8X and 4Y costs $80 + $20 = $100, affordable.
C correct: 6X and 8Y costs $60 + $40 = $100, actually affordable; therefore this question has a flaw because all listed bundles are affordable/on the line except none.
D wrong: 10X and 0Y costs $100, affordable.

46. Answer: D

A wrong: 3X and 8Y costs $24 + $48 = $72, exactly spends income.
B wrong: 6X and 4Y costs $48 + $24 = $72, exactly spends income.
C wrong: 9X and 0Y costs $72, exactly spends income.
D correct: 4X and 6Y costs $32 + $36 = $68, leaving $4 unspent.

47. Answer: B

A wrong: outside the budget line is unaffordable.
B correct: inside the budget line means the consumer is not using all available income.
C wrong: highest attainable indifference curve is normally on the budget line.
D wrong: prices do not have to be zero.

48. Answer: B

A wrong: a point inside the budget line is affordable but not fully using income.
B correct: outside the budget line means the bundle costs more than the consumer can afford.
C wrong: saving income means inside the budget line.
D wrong: utility maximisation must be attainable.

49. Answer: A

A correct: substitution effect means consumers move away from a good when it becomes relatively more expensive.
B wrong: this describes income effect.
C wrong: consumers do not always prefer expensive goods.
D wrong: substitution effect depends on relative prices.

50. Answer: A

A correct: a price fall rotates the budget line outward, makes X relatively cheaper, raises real income and increases demand for a normal good.
B wrong: the budget line rotates outward, not inward.
C wrong: money income does not fall and substitution effect raises quantity demanded.
D wrong: indifference curves do not shift; the consumer reaches a higher one.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.