Deck 6: Consumer Behaviour

Question 1

If consumption of a good generates a marginal utility of zero, then consumption of an additionalunit would mean that total utility would

A) not change.
B) also be zero.
C) be negative.
D) be increasing.
E) be decreasing.

Answer 1

A

Question 2

Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls andthe consumption of apples increases, we can conclude that the increased consumption of apples isdue to

A) the income effect only.
B) both the income effect and the substitution effect.
C) the deflation effect.
D) neither the income effect nor the substitution effect.
E) the substitution effect only.

Answer 2

A

Question 3

The condition required for a consumer to be maximizing utility, for any pair of products, X and Y,is

A) MUX/PY = MUY/PX.
B) MUX = MUY.
C) PX = PY.
D) PX(MUX) = PY(MUY).
E) MUX/PX = MUY/PY.

Answer 3

E

Question 4

The substitution effect is

A) the change in quantity demanded that occurs when one good is substituted for another.
B) the change in the relative prices of two or more goods.
C) the change in quantity demanded that occurs as a result of a change in absolute prices, with real income held constant.
D) the change in quantity demanded that occurs as a result of a change in relative prices with real income held constant.
E) the change in quantity demanded that occurs as a result of a change in relative prices with money income held constant.

Question 5

In indifference curve analysis, a point to the left of the consumer's budget line

A) implies that the household is not spending all of its income on the goods in question.
B) implies the household is paying below-market prices for the goods in question.
C) implies the household is paying above-market prices for the goods in question.
D) shows a combination of goods that are beyond the income of the household.
E) indicates consumption spending beyond current income.

Question 6

Christine is allocating her household expenditure between cleaning services and gardening services in order to maximize the household's total utility. For the quantities of cleaning and gardening services she has chosen, an increase in the price of cleaning service will, ceteris paribus,

A) increase the marginal utility of a unit of cleaning service.
B) increase the marginal utility per dollar spent on cleaning service.
C) have no effect on the marginal utility per dollar spent on cleaning service.
D) reduce the marginal utility of a unit of cleaning service.
E) reduce the marginal utility per dollar spent on cleaning service.

Question 7

Since there is a relatively plentiful supply of water in Canada (this is not true in many parts of the world), the consumption of water in Canada

A) takes place at a relatively high marginal value.
B) takes place at a relatively low marginal value.
C) should be regulated by the government.
D) takes priority over all other goods.
E) should be unlimited at a price of $0.

Question 8

If the price of a normal good changes, the income effect of the price change will

A) produce a positively sloped demand curve.
B) reinforce the substitution effect.
C) always be to increase quantity demanded.
D) oppose the substitution effect.
E) always be larger than the substitution effect.

Question 9

If John consumes only two goods, A and B, and he is maximizing his utility subject to his budgetconstraint,

A) MUA/MUB equals the ratio of the price of A to the price of B.
B) MUA/MUB equals 1.
C) MUA/MUB equals the ratio of the total utility of A to the total utility of B.
D) MUA/MUB is at a maximum.
E) MUA/MUB equals zero.

Question 10

In indifference curve analysis, the consumer's utility-maximizing point is where

A) the consumer's marginal utility curve is tangent to the relevant budget line.
B) the indifference curve farthest from the origin intersects with the budget line that is farthest from the origin.
C) each indifference curve has the same slope as the relevant budget line.
D) the price-consumption line is tangent to the budget line.
E) one indifference curve is tangent to the relevant budget line.

Question 11

The real purchasing power of an individual will NOT be affected if

A) money income doubles and the prices of all goods and services are cut in half.
B) money income is cut in half and prices of all goods and services remain constant.
C) money income is cut in half and the prices of all goods and services fall by fifty percent.
D) money income doubles and the prices of all goods and services remain constant.
E) money income falls and the price of one good falls.

Question 12

The paradox in "the paradox of value" refers to the

A) confusion between supply curves and demand curves.
B) fact that goods with high total values command high prices.
C) fact that goods with low total values command low prices.
D) situation where a good with a low total value can command a high price, while a good with a high total value can command a low price.
E) situation where a good that is necessary to sustain life is "more valuable" than a decorative, luxury item.

Question 13

Choose the one alternative that best completes the statement or answers the question. FIGURE 6-8
Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumerhas $11 per week to spend on snacks, how many of each will he/she purchase?

A) 4 toffee bars and 7 bags of cashews.
B) 5 toffee bars and 5 bags of cashews.
C) 6 toffee bars and 5 bags of cashews.
D) 5 toffee bars and 6 bags of cashews.
E) 3 toffee bars and 8 bags of cashews.

Question 14

The substitution effect of a price change

A) outweighs the income effect for Giffen goods.
B) is equal to the income effect for normal goods.
C) is equal to the income effect for inferior goods.
D) will result in the consumer buying less of a good at a lower price.
E) will result in the consumer buying less of a good at a higher price.

Question 15

The income effect refers to the change in quantity demanded that occurs as a result of a change in

A) real income, with relative prices held constant.
B) preferences, with real income held constant.
C) marginal utility, with real income held constant.
D) money income, with relative prices held constant.
E) relative prices, with real income held constant.

Question 16

The idea that the utility a consumer derives from successive units of a good diminishes as totalconsumption of the good increases is known as

A) diminishing marginal utility.
B) the paradox of value.
C) the utility theory of demand.
D) diminishing total utility.
E) utility maximization.

Question 17

Choose the one alternative that best completes the statement or answers the question. FIGURE 6-8
Refer to Figure 6-8. In part (ii), the line joining points X, Y, and Z is known asshows how _.

A) an indifference map; the value of various combinations of two goods changes.
B) an income-consumption line; consumption changes with changing relative prices and constant income
C) a price-consumption line; consumption changes as relative prices change, with money income constant
D) an income-consumption line; consumption changes as income changes, with relative prices held constant
E) a price-consumption line; consumption changes as money income and relative prices change

Question 18

Utility

A) can be measured with the appropriate equipment.
B) is not real as we cannot measure it directly.
C) is very difficult to observe empirically.
D) is an objective measure of a good's value.
E) measures the common value of a good, independent of the individual.

Question 19

If the income effect is negative and larger in absolute terms than the substitution effect, then thedemand curve will be

A) vertical.
B) horizontal.
C) upward sloping.
D) downward sloping.
E) of indeterminate slope.

Question 20

A consumer maximizes his or her utility when expenditures are allocated such that

A) the utility received per dollar spent on the last unit of each good is equal.
B) the total number of dollars spent on each good is equal.
C) the utility received from the last unit of each good is equal.
D) the marginal utility is zero for each good consumed utility.
E) the total utility from each good is equal.

Question 21

The Smith family is allocating its monthly household expenditure between only two goods, foodandclothing. Suppose that the price of food is $12 per unit, and the price of clothing is $16 per unit and that the marginal utility that the family is receiving from its consumption of clothing is currently200. What is the family's marginal utility from its consumption of food if it is maximizing its utility?

A) 75
B) 16
C) 12
D) 150
E) 200

Question 22

If a consumer is faced with a choice of products A, B, C, ..., and has a given money income, theconsumer's utility will be maximized when

A) TUA = TUB = TUC = ...
B) MUA = PA; MUB = PB; MUC = PC; ...
C) MUA = MUB = MUC = ...
D) MUA/PA = MUB/PB = MUC/PC = ...
E) PA = PB = PC = ...

Question 23

Marginal utility analysis predicts a downward-sloping demand curve for good X because

A) utility-maximizing consumers equate marginal utility received for each product consumed.
B) all demand curves are downward sloping, regardless of the behaviour of consumers.
C) as PX falls, the ratio MUX/PX becomes smaller, causing the consumer to purchase more of good X.
D) as PX falls, the consumer increases purchases of X such that MUX/PX is equal to MU/P for all other products.
E) as PX rises, the consumer increases purchases of X such that MUX/PX is equal to MU/P for all other products.

Question 24

An indifference curve plotted for two different goods on the axes

A) shows the different combinations of two goods that the same income can purchase.
B) shows all combinations of the two goods that give the same level of utility.
C) changes its slope as the relative prices of the two goods change.
D) shifts when real income changes.
E) shows the combinations of the two goods that will just use up a consumer's income.

Question 25

Any consumption point that is on the budget line

A) indicates consumption spending beyond current income.
B) implies that the household is not spending all of its income on the goods in question.
C) implies the household is paying above-market prices for the goods in question.
D) implies the household is paying below-market prices for the goods in question.
E) implies that the household is spending all of its income on the goods in question.

Question 26

When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices forX and Y, and when the consumer is spending all available income, then

A) a higher indifference curve can be reached given the existing budget line.
B) all budget lines are tangent to all indifference curves.
C) the consumer is not maximizing his utility.
D) the budget line is tangent to the indifference curve at all quantities of X and Y.
E) the budget line is tangent to the indifference curve.

Question 27

The marginal rate of substitution

A) is equal to the price ratio on the budget line.
B) always has a positive algebraic value.
C) is constant as one moves along a particular indifference curve.
D) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total expenditure unchanged.
E) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total satisfaction unchanged.

Question 28

For your typical consumption levels of water and diamonds, the good with the higher marginal utility is ; the good with the higher total utility is ; and the good with the greatest consumer surplus is .

A) water; water; water
B) diamonds; water; water
C) water; water; diamonds
D) water; diamonds; water
E) diamonds; water; diamonds

Question 29

Given a particular market demand curve, consumer surplus is

A) greater the lower the price and the larger the output.
B) less the lower the price and the larger the output.
C) greater the lower the price and the smaller the output.
D) less the lower the price and the smaller the output.
E) greater the higher the price and the smaller the output.

Question 30

As a consumer moves along an indifference curve

A) his level of utility will vary as the combinations of goods varies.
B) the combination of goods and the consumer's income level will remain constant.
C) the combination of goods will vary but the level of utility remains constant.
D) the combination of goods will vary, but the level of money income remains constant.
E) the combination of goods he prefers will remain constant, but the level of satisfaction will vary.

Question 31

Suppose a consumer can purchase only two goods, beef and chicken. If the price of beef falls (with all other variables held constant), and the consumption of chicken increases, we can conclude that the increased consumption of chicken is due to

A) a change in the consumer's preference toward chicken.
B) the substitution effect only.
C) the income effect only.
D) neither the income effect nor the substitution effect.
E) both the income effect and the substitution effect.

Question 32

A demand curve for a normal good is downward sloping due to

A) the substitution effect.
B) the combination of income and substitution effects.
C) the income effect.
D) neither the substitution effect nor the income effect.
E) the Giffen effect.

Question 33

In economics, the term "utility" is defined as the

A) a service such as sewer and water or electricity.
B) usefulness of a theory to explain price determination.
C) system of basing the price of a good on its usefulness to society.
D) usefulness of a good.
E) total consumer satisfaction received from consumption of a good.

Question 34

Consumer surplus is

A) the same as total utility.
B) the marginal value that consumers place on their purchases.
C) the same as Karl Marx's notion of surplus value.
D) the total value that consumers place on their purchases.
E) the sum of the extra value placed on each unit of a commodity above the market price paid for each.

Question 35

Suppose a utility-maximizing person consumes only two goods, hamburgers and milkshakes.Suppose the price of milkshakes rises and all other variables remain constant. As a result, thisperson will certainly

A) reduce his/her consumption of both milkshakes and hamburgers.
B) not increase his consumption of both milkshakes and hamburgers.
C) purchase more milkshakes and fewer hamburgers.
D) increase his/her consumption of milkshakes.
E) consume more hamburgers and the same amount of milkshakes.

Question 36

Since there is a limited supply of diamonds in the world, the consumption of diamonds

A) takes place at relatively high marginal value.
B) takes place at relatively low marginal value.
C) takes priority over some other good.
D) is no less important than consumption of water.
E) should be regulated by the government.

Question 37

Suppose a consumer can purchase only two goods, pasta and cheese. Let the quantity of pasta bemeasured on the vertical axis and the quantity of cheese be measured on the horizontal axis. If theprice of pasta falls, with no change in the price of cheese or in the consumer's money income, then the budget line for the consumer will shift

A) outward parallel to the existing budget line.
B) away from the origin and become steeper.
C) away from the origin and become flatter.
D) toward the origin and become steeper.
E) toward the origin and become flatter.

Question 38

Economists use the term "marginal utility" to describe the

A) average utility of each unit of a good consumed.
B) change in total satisfaction caused by consumption of an additional unit of a good.
C) price paid for every unit consumed.
D) inverse of the measure of total utility.
E) total satisfaction received from consumption of a good.

Question 39

Assume an individual with a downward-sloping demand curve is paying a single price for eachunit of some commodity. He will get consumer surplus on

A) none of the units.
B) the first unit only.
C) all units bought with the possible exception of the last unit.
D) all of the units bought.
E) all units that were not bought at that particular price.

Question 40

A basic hypothesis of marginal utility theory is that the utility a consumer derives from successiveunits of a good diminishes as total consumption of the good increases. This hypothesis is known as

A) utility maximization.
B) the law of diminishing marginal utility.
C) the law of diminishing total utility.
D) the paradox of value.
E) the utility theory of demand.

Question 41

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Table 6-3.

A) $16
B) $310
C) $430
D) $108
E) $92

Question 42

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Table 6-3. If the price of a 9-hole round of golf is $9, then Andrew will playtimes per month.

A) 6
B) 2
C) 4
D) 5
E) 3

Question 43

Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer?

A) The income effect is negative and reinforces the substitution effect.
B) The income effect is positive and exceeds the substitution effect.
C) The income effect just offsets the substitution effect.
D) The substitution effect outweighs the income effect.
E) The income effect is negative and outweighs the substitution effect.

Question 44

Marginal utility theory is about

A) proving that demand curves are always downward sloping.
B) calculating consumer surplus.
C) the total satisfaction resulting from the consumption of some good by the consumer.
D) the consumer behaviour that underlies the theory of demand.
E) how producers allocate their scarce resources.

Question 45

For a product with an income elasticity greater than one, a price increase will cause the consumer's real income to

A) rise and the quantity purchased to fall.
B) fall and the quantity purchased to rise.
C) fall and the quantity purchased to fall.
D) remain constant.
E) rise and the quantity purchased to rise.

Question 46

Consider a consumer who divides his income between spending on good X and good Y. The opportunity cost of good X in terms of good Y is reflected by the

A) price of good X relative to the prices of all other goods.
B) ratio of the price of X to the price of Y.
C) absolute price of good X.
D) ratio of the price of Y to the price of X.
E) absolute price of good Y.

Question 47

Economists usually assume that consumers

A) are motivated to maximize their utility.
B) spend all of their current income.
C) are poor judges of what is best for them.
D) are motivated to maximize their profit.
E) usually save as much as possible of their income.

Question 48

The diagram below shows a set of budget lines facing a household. FIGURE 6-7
Refer to Figure 6-7. The movement of the budget line from ab to ac could be caused by

A) an increase in the price of food.
B) a decrease in the price of housing.
C) a decrease in the price of food.
D) an increase in money income.
E) an increase in the price of housing.

Question 49

Consumer surplus

A) is the total value that a consumer receives from the purchase of a particular good.
B) is the sum of the marginal values to the consumer.
C) is a measure of the gains that a consumer forgoes by buying this product rather than another.
D) is the difference between what the consumer is willing to pay for all the units consumed and what he or she actually paid.
E) is the consumption of a commodity above and beyond the amount required by the consumer.

Question 50

If money income is reduced by half, and the prices of all goods consumed by the household are reduced by half, the household's budget line will

A) become steeper.
B) become flatter.
C) shift outward.
D) shift inward.
E) not change.

Question 51

At a garage sale, Dominique purchases a sewing machine for $30 when she was willing to pay $55.If the sewing machine costs $200 new, Dominique's consumer surplus would be _ .

A) $0
B) $25
C) $120
D) $145
E) $170

Question 52

The demand curve for a good with an income elasticity of less than one

A) will be upward sloping only if the substitution effect outweighs the income effect.
B) must be upward sloping.
C) must be downward sloping.
D) indicates a normal good.
E) will be upward sloping only if the income effect outweighs the substitution effect.

Question 53

Consider the pizza market, with a downward-sloping demand curve and an upward-sloping supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is

A) negative.
B) zero.
C) unknown.
D) positive.
E) non-negative.

Question 54

The diagram below shows a set of budget lines facing a household. FIGURE 6-7
Refer to Figure 6-7. The movement of the budget line from ab to ef could be caused by

A) a decrease in money income.
B) an equal percentage increase in the price of both food and housing.
C) an equal percentage decrease in the price of both food and housing.
D) a decrease in the price of either food or housing.
E) an increase in the price of either food or housing.

Question 55

Assume a person reveals the following demand conditions. At a price of $10, quantity demanded is zero; and at a price of $1, quantity demanded is 10 units.

A) The consumer surplus will be the area under the entire demand curve.
B) Demand decreases as the price decreases.
C) The lower the price the smaller the consumer surplus.
D) The consumer surplus will be zero at a price of $10.
E) The consumer surplus is zero at a price of $1.

Question 56

An equal proportional increase in money income and all money prices will

A) rotate the budget line inward from the vertical axis.
B) shift the budget line to the left parallel to the original budget line.
C) shift the budget line to the right parallel to the original budget line.
D) rotate the budget line inward from the horizontal axis.
E) leave the position of the budget line unchanged.

Question 57

The diagram below shows a set of budget lines facing a household. FIGURE 6-7
Refer to Figure 6-6.

A) under the demand curve to the left of Q0, but above P0.
B) under the demand curve to the left of Q0.
C) under the entire demand curve.
D) above the market price.
E) below P0 and to the left of Q0.

Question 58

A parallel shift in the consumer's budget line always indicates a change in

A) at least one money price.
B) both prices.
C) money income.
D) tastes.
E) real income.

Question 59

Suppose Arun consumes only 2 goods -- books and CDs -- and has a set of downward sloping indifference curves. As Arun moves from one point to another on a particular indifference curve,

A) the combination of books and CDs that Arun prefers will remain constant, but the level of satisfaction will vary.
B) the combination of books and CDs will vary, but the level of utility remains constant.
C) Arun is consuming the same combination of goods, but with varying levels of income.
D) Arun's level of satisfaction will vary as the combinations of books and CDs varies.
E) the combination of books and CDs and Arun's income level will remain constant.

Question 60

The "law" of diminishing marginal utility implies that the

A) marginal utility of a good diminishes over time.
B) first unit of a good consumed will contribute most to the consumer's satisfaction.
C) total utility is constant as more units are consumed.
D) last unit of a good consumed will contribute most to the consumer's satisfaction.
E) total utility is negative.

Question 61

The substitution effect is the change in quantity demanded that occurs

A) as a result of a change in absolute prices, with real income held constant.
B) as a result of a change in relative prices with money income held constant.
C) as a result of a change in relative prices, with real income held constant.
D) with a change in the relative prices of two or more goods.
E) when one good is substituted for another.

Question 62

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Table 6-3. If the price of a 9-hole round of golf is $19, then Andrew will playrounds per month.

A) 5
B) 4
C) 3
D) 6 or more
E) 2

Question 63

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week, his/her total utility will be

A) 7
B) 23
C) 31
D) 54
E) 57

Question 64

Given a typical downward-sloping demand curve in a market that has reached its equilibrium, the consumer surplus

A) is calculated as the product of market price and quantity consumed.
B) is measured by the area below the market price and under the demand curve.
C) is measured by the area above the market price and under the demand curve.
D) is measured by the area immediately above the demand curve.
E) cannot be measured given the information.

Question 65

If all consumers in an economy have maximized their utility, and they face a given set of market prices, then each consumer will have identical

A) total utilities for each good.
B) consumption of each good.
C) marginal utilities per unit of each good.
D) marginal utilities for each good.
E) ratios of marginal utility to price for each good.

Question 66

If consumption of a product delivers a positive marginal utility, then consumption of an additionalunit would mean

A) that total utility would not change.
B) that total utility would be decreasing.
C) that the consumer would no longer receive any satisfaction from any consumption of this good.
D) that total utility is also zero.
E) that total utility would be increasing.

Question 67

The marginal rate of substitution measures the tradeoff between the

A) substitution of money for goods.
B) different values that two consumers place on a good.
C) different indifference curves.
D) amount of one good the consumer is willing to give up in exchange for another along an indifference curve.
E) prices of two goods along a budget line.

Question 68

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Table 6-3. If the price of a 9-hole round of golf is $16, then Andrew's consumer surplus will be

A) $108.
B) $16.
C) $44.
D) $92.
E) $310.

Question 69

An individual's consumer surplus from some product can be eliminated entirely by:1. raising the price until very few units are bought.2. charging a price for each unit that is equal to the individual's marginal value for each unit.3. raising the price until zero units are purchased.

A) 1 only
B) 2 only
C) 3 only
D) 2 or 3
E) 1, 2, & 3.

Question 70

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. TABLE 6-3
Refer to Figure 6-1. If this figure represents the utility obtained from consuming units of a good, how many units would this consumer consume if the good were free?

A) 1
B) 2
C) 3
D) 4
E) at least 5

Question 71

At a garage sale, Ken purchases a used bicycle for $8 when he was willing to pay $25. If the bicycle costs $75 new, Ken's consumer surplus is _.

A) $0
B) $17
C) $33
D) $50
E) $67

Question 72

Indifference theory is based on the assumption that

A) the consumer is able to quantify the difference in total utility received from two different consumption bundles.
B) the consumer receives the same utility and is therefore indifferent between any two consumption bundles.
C) the consumer has equated the marginal utilities of all products, and is therefore indifferent between consumption bundles.
D) consumers can always say which of two consumption bundles they prefer without having to say by how much they prefer it.
E) consumers are not able to rank consumption bundles in order of preference.

Question 73

If total utility is increasing as more units are consumed, then marginal utility must be

A) increasing.
B) positive.
C) increasing at an increasing rate.
D) decreasing at an increasing rate.
E) negative.

Question 74

The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose that the price of food is $5 per unit, and the price of clothing is $10 per unit and that the marginal utility that the family is receiving from its consumption of food is currently25. What is the family's marginal utility from its consumption of clothing if it is maximizing its utility?

A) 25
B) 50
C) 10
D) 12.5
E) 5

Question 75

Assume the quantity of good X is measured on the horizontal axis and the quantity of good Y on the vertical axis. Initial prices are PX = $5 and PY = $10. The consumer's income is $100. If PY increases to $20, then

A) the budget line will rotate to the left across the horizontal axis, slope remaining constant.
B) the entire budget line shifts to the left with its slope changing from 1/2 to 1/4 (in absolute values).
C) the entire budget line will shift to the right.
D) the budget line will rotate to the right down the horizontal axis with the slope changing from 1/4 to 1/2 (in absolute values).
E) the budget line will rotate to the left down the vertical axis with the slope changing from 1/2 to 1/4 (in absolute values).

Question 76

Suppose there are only two goods, A and B, and that consumer income is constant. If the price of good A falls and the consumption of good B rises, we can conclude that

A) B is a normal good.
B) B is an inferior good.
C) A is an inferior good.
D) both A and B are normal goods.
E) A is a normal good.

Question 77

Given a particular consumer's indifference map, the further the indifference curve is from theorigin

A) the higher the level of satisfaction.
B) the lower the marginal rate of substitution.
C) the more goods are included.
D) the higher the marginal rate of substitution.
E) the lower the level of satisfaction.