Question 1

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

Accepted Answer

The substitution effect is the change in quantity demanded that occurs as a result of a change in relative prices with real income held constant. This means that as the price of one good increases relative to another, consumers will substitute the more expensive good with the less expensive one. The change in quantity demanded due to this substitution is known as the substitution effect.

Question 2

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

Accepted Answer

Indifference theory assumes that consumers are able to rank consumption bundles in order of preference, but do not necessarily have to quantify the difference in utility between them. Therefore, choice A is the best answer.

Question 3

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

Accepted Answer

Ken's maximum willingness to pay was $25, but he only had to pay $8, giving him a consumer surplus of $17 ($25-$8).

Question 4

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.

Accepted Answer

When all consumers have maximized their utility and face a given set of market prices, they will allocate their spending according to the ratios of marginal utility to price for each good. This ensures that consumers get the most satisfaction possible given their budget constraint. As a result, the ratios of marginal utility to price will be identical for all consumers in the economy. Therefore, the correct choice is E.

Question 5

If consumption of an extra unit of some good generates a marginal utility of zero,then consumption of that additional unit would mean that total utility would
A)be negative.
B)also be zero.
C)be increasing.
D)be decreasing.
E)not change.

Accepted Answer

When marginal utility is zero, consuming an additional unit does not change the total utility, meaning it remains constant.

Question 6

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 above the market price and under the demand curve.
C)is measured by the area below 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.

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the market price. In a typical downward-sloping demand curve in equilibrium, the consumer surplus is measured by the area above the market price and under the demand curve. This represents the difference between what consumers are willing to pay (as shown by the demand curve) and what they actually pay (the market price).

Question 7

Suppose a consumer can purchase only two goods,pasta and cheese.Let the quantity of pasta be measured on the vertical axis and the quantity of cheese be measured on the horizontal axis.If the price 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 rotate
A)outward parallel to the existing budget line.
B)toward the origin and become steeper.
C)away from the origin and become steeper.
D)away from the origin and become flatter.
E)toward the origin and become flatter.

Accepted Answer

When the price of pasta falls, the consumer can now purchase more pasta for the same amount of money. Therefore, the budget line rotates outward, allowing the consumer to purchase more of both goods. However, since the price of cheese has not changed, the budget line will still touch the horizontal axis at the same quantity of cheese. This means that the budget line will become steeper as the consumer can now purchase more pasta for each unit of cheese they give up. Thus, the correct answer is C- away from the origin and become steeper.

Question 8

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)Arun is consuming the same combination of goods,but with varying levels of income.
B)the combination of books and CDs will vary,but the level of utility remains constant.
C)the combination of books and CDs that Arun prefers will remain constant,but the level of satisfaction will vary.
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.

Accepted Answer

An indifference curve shows all the combinations of two goods that give a consumer the same level of satisfaction. As Arun moves from one point to another on a particular indifference curve, the combination of books and CDs will vary, but the level of utility remains constant.

Question 9

Laurie spends all of her money buying bread and cheese.The marginal utility she receives from the last loaf of bread is 60 and from the last block of cheese is 30.The price of bread is $3 and the price of cheese is $2.Laurie
A)should buy more cheese and less bread in order to maximize her utility.
B)should buy more bread and more cheese in order to maximize her utility.
C)should buy more bread and less cheese in order to maximize her utility.
D)is buying bread and cheese in utility- maximizing amounts.
E)is spending too much money on bread and cheese.

Accepted Answer

To maximize utility, Laurie should allocate her budget in a way that the marginal utility per dollar spent is the same for each good. Currently, MU/price for bread is 20 (60/3) and for cheese it is 15 (30/2). Therefore, Laurie should consume more bread and less cheese.

Question 10

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

Accepted Answer

When the utility received per dollar spent on the last unit of each good is equal, the consumer is spending their money in the most efficient way possible, maximizing their overall utility. This is because they are getting the same amount of satisfaction from the last dollar spent on each good.

Question 11

When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y,and when the consumer is spending all available income,then
A)the consumer is not maximizing his utility.
B)the budget line is tangent to the indifference curve at all quantities of X and Y.
C)a higher indifference curve can be reached given the existing budget line.
D)all budget lines are tangent to all indifference curves.
E)the budget line is tangent to an indifference curve.

Accepted Answer

When the consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y, then the budget line is tangent to an indifference curve at the point of optimal consumption. This is known as consumer equilibrium and represents the most preferred combination of X and Y that the consumer can afford. Therefore, the correct choice is E - the budget line is tangent to an indifference curve.

Question 12

Bjorn is a student with a monthly budget of $500,which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit,and the price of "all other goods" is $20 per unit.The marginal utility he currently receives from his consumption of transportation services is 60.What is his marginal utility from the consumption of "all other goods" if he is maximizing his utility?
A)200
B)240
C)5
D)20
E)25

Accepted Answer

The marginal utility of the last dollar spent on transportation is equal to the marginal utility of the last dollar spent on all other goods. So, 5 * marginal utility of transportation = 20 * marginal utility of all other goods. Since the marginal utility of transportation is 60, the marginal utility of all other goods is 60 * 5 / 20 = 150.

Question 13

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

Accepted Answer

The paradox of value refers to the situation where a good with a low total value (such as water) can command a high price, while a good with a high total value (such as diamonds) can command a low price. This is paradoxical because one would expect goods with higher total values to command higher prices.

Question 14

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

Accepted Answer

The answer of Suppose a consumer can purchase only two...

Question 15

If the income effect of a price change is negative and larger in absolute terms than the substitution effect,then the demand curve will be
A)of indeterminate slope.
B)downward sloping.
C)horizontal.
D)vertical.
E)upward sloping.

Accepted Answer

If the negative income effect is larger than the substitution effect, the overall effect is that the quantity demanded increases as the price increases, leading to an upward sloping demand curve.

Question 16

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 or 2,but not 3.

Accepted Answer

The answer of An individual's consumer surplus from some product...

Question 17

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

Accepted Answer

In economics, utility refers to the total satisfaction or happiness that consumers derive from consuming a particular good or service. It is not related to the usefulness of a theory or a service, nor does it dictate the pricing of a good based on its usefulness to society.

Question 18

Given a particular consumer's indifference map,the further the indifference curve is from the origin
A)the higher the marginal rate of substitution.
B)the higher the level of satisfaction.
C)the more goods are included.
D)the lower the marginal rate of substitution.
E)the lower the level of satisfaction.

Accepted Answer

The further the indifference curve is from the origin, the higher the level of satisfaction as it indicates that the consumer prefers more of both goods. This means that the consumer is better off at a higher level of utility, which corresponds to a higher level of satisfaction. The marginal rate of substitution (MRS) may or may not be higher depending on the shape and slope of the indifference curve.

Question 19

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

Accepted Answer

Dominique's consumer surplus is the difference between what she was willing to pay ($55) and what she actually paid ($30), which is $25.

Question 20

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

Accepted Answer

The substitution effect refers to the change in quantity demanded due to a change in relative prices, while keeping real income constant.

Quiz 6: Consumer Behaviour

The substitution effect is

Indifference theory is based on the assumption that

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

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

If consumption of an extra unit of some good generates a marginal utility of zero,then consumption of that additional unit would mean that total utility would

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

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,

Laurie spends all of her money buying bread and cheese.The marginal utility she receives from the last loaf of bread is 60 and from the last block of cheese is 30.The price of bread is $3 and the price of cheese is $2.Laurie

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

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

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

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

If the income effect of a price change is negative and larger in absolute terms than the substitution effect,then the demand curve will be

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.

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

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

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

Consider the income and substitution effects of price changes.The substitution effect is the change in quantity demanded that occurs