Question 1

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)is buying bread and cheese in utility-maximizing amounts.
B)should buy more bread and less cheese in order to maximize her utility.
C)should buy more cheese and less bread in order to maximize her utility.
D)is spending too much money on bread and cheese.
E)should buy more bread and more cheese in order to maximize her utility.

Accepted Answer

To determine if Laurie is buying bread and cheese in utility-maximizing amounts, we need to compare the marginal utility per dollar of bread and cheese.

The marginal utility per dollar of bread is 60/3 = 20. 
The marginal utility per dollar of cheese is 30/2 = 15.

Since the marginal utility per dollar of bread is higher than the marginal utility per dollar of cheese, Laurie should buy more bread and less cheese in order to maximize her utility.

Therefore, the correct answer is B.

Question 2

Suppose the price of potatoes falls and we observe a decrease in an individualʹs purchases of potatoes.Which of the following can we infer?
A)The income effect is negative and outweighs the substitution effect.
B)The income effect is negative and reinforces the substitution effect.
C)The income effect just offsets the substitution effect.
D)The income effect is positive and exceeds the substitution effect.
E)The substitution effect outweighs the income effect.

Accepted Answer

When the price of potatoes falls, the normal response due to the substitution effect is to buy more potatoes because they are cheaper relative to other goods. However, if an individual buys fewer potatoes, it indicates that the income effect (where the individual feels richer due to the price drop and decides to buy less of the now "inferior" good, potatoes, in favor of more "superior" goods) is negative and strong enough to outweigh the substitution effect.

Question 3

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

Accepted Answer

The income effect refers to the change in quantity demanded due to a change in purchasing power as a result of a price change. If the income effect is negative and larger in absolute terms than the substitution effect, it means that the consumer is worse off as a result of the price change and will consume less of the good. This implies that the demand curve is upward sloping, as higher prices result in lower quantities demanded.

Question 4

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

Accepted Answer

When the price of good A falls and the consumption of good B rises, it implies that consumers are using the extra income (from the savings on good A) to buy more of good B, indicating that B is a normal good because its consumption increases with income.

Question 5

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

Accepted Answer

The substitution effect refers to the change in quantity demanded that occurs due to a change in relative prices while real income is held constant. This means that consumers will generally shift their purchasing towards the cheaper good as the relative prices change, assuming that their real income (or purchasing power) remains the same. This is different from the income effect, which looks at the change in quantity demanded due to a change in real income, while relative prices are held constant.

Question 6

The market demand curve is derived from
A)the vertical summation of individual demand curves.
B)the average quantity demanded of all individuals in the economy.
C)a weighted average of the quantity demanded of all individuals in the economy at each price.
D)the horizontal summation of individual demand curves.
E)market data provided by Statistics Canada.

Accepted Answer

The market demand curve is derived from the horizontal summation of individual demand curves. This means that the quantities demanded by all individuals in the market at each price level are added together to form the market demand curve.

Question 7

If John consumes only two goods,A and B,and he is maximizing his utility subject to his budget constraint,
A)MUA/MUB is at a maximum.
B)MUA/MUB equals the ratio of the total utility of A to the total utility of B.
C)MUA/MUB equals 1.
D)MUA/MUB equals zero.
E)MUA/MUB equals the ratio of the price of A to the price of B.

Accepted Answer

When a consumer is maximizing utility subject to a budget constraint, the ratio of marginal utilities of the two goods will be equal to the ratio of their prices (MUA/MUB = PA/PB) in order to obtain the highest level of utility without exceeding the budget constraint. Therefore, the best choice is E.

Question 8

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

Accepted Answer

The substitution effect of a price change refers to the change in consumption resulting from a change in the relative price of goods, holding the consumer's utility level constant. When the price of a good increases, the good becomes relatively more expensive compared to other goods, leading consumers to buy less of it and substitute it with cheaper alternatives. This is why the correct choice is that the substitution effect will result in the consumer buying less of a good at a higher price.

Question 9

Bjorn is a student with a monthly budget of $500,which he allocates between transportation services and ʺall other goods.ʺ Suppose the price of transportation is $5 per unit,and the price of ʺall other goodsʺ 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 ʺall other goodsʺ if he is maximizing his utility?
A)5
B)20
C)25
D)200
E)240

Accepted Answer

To maximize utility, the consumer should allocate their budget in such a way that the marginal utility per dollar spent on each good is equal. This means that the marginal utility from the last dollar spent on transportation should equal the marginal utility from the last dollar spent on all other goods. Given the price of transportation is $5 per unit and its marginal utility is 60, the marginal utility per dollar spent on transportation is 60/5 = 12. To maximize utility, the marginal utility per dollar spent on all other goods should also be 12. Since the price of all other goods is $20 per unit, the marginal utility from all other goods should be 12 * 20 = 240.

Question 10

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

Accepted Answer

If consumers have maximized their utility, then the ratios of their marginal utility to price for each good will be equal. This is because consumers will allocate their budget in such a way that the additional utility obtained from the last dollar spent on each good is the same across all goods. Therefore, each consumer will have the same ratios of marginal utility to price for each good, which is also known as the marginal rate of substitution (MRS).

Question 11

A demand curve for a normal good is downward sloping due to
A)the income effect.
B)the substitution effect.
C)the combination of income and substitution effects.
D)neither the substitution effect nor the income effect.
E)the Giffen effect.

Accepted Answer

The downward slope of the demand curve for a normal good is due to the combination of income and substitution effects. As the price of the good decreases, it becomes relatively cheaper compared to other goods (substitution effect), which leads consumers to purchase more of it. At the same time, the decrease in price increases the consumer's purchasing power (income effect), allowing them to buy more of all goods, including the normal good. These two effects work together to cause an increase in quantity demanded as the price decreases, resulting in a downward sloping demand curve.

Question 12

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

Accepted Answer

Marginal utility analysis suggests that as the price of good X (PX) falls, consumers will buy more of it until the marginal utility per dollar spent on X (MUX/PX) equals the marginal utility per dollar spent on all other products (MU/P). This behavior explains why the demand curve for good X slopes downward.

Question 13

Christine is allocating her household expenditure between cleaning services and gardening services in order to maximize the householdʹs 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)reduce the marginal utility per dollar spent on cleaning service.
C)reduce the marginal utility of a unit of cleaning service.
D)increase the marginal utility per dollar spent on cleaning service.
E)have no effect on the marginal utility per dollar spent on cleaning service.

Accepted Answer

An increase in the price of cleaning service, while holding everything else constant (ceteris paribus), reduces the marginal utility per dollar spent on cleaning service because you get less utility for each dollar spent on cleaning services compared to before the price increase.

Question 14

Bjorn is a student with a monthly budget of $500,which he allocates between transportation services and ʺall other goods.ʺ Suppose the price of transportation is $5 per unit,and the price of ʺall other goodsʺ is $20 per unit.The marginal utility he currently receives from his consumption of transportation services is 60.How many units of ʺall other goodsʺ is he consuming if he is maximizing his utility?
A)25
B)60
C)200
D)240
E)There is not enough information to determine.

Accepted Answer

To determine the number of units of "all other goods" Bjorn is consuming, we need to know the marginal utility of "all other goods." Without this information, we cannot apply the principle of utility maximization, which requires equating the marginal utility per dollar spent across all goods.

Question 15

The Smith family is allocating its monthly household expenditure between only two goods,food and clothing.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 currently 200.What is the familyʹs marginal utility from its consumption of food if it is maximizing its utility?
A)200
B)150
C)75
D)16
E)12

Accepted Answer

To maximize utility, the ratio of the marginal utility to the price of each good should be equal. Given the marginal utility of clothing is 200 and its price is $16, the ratio is 200/16. For food, with a price of $12, to have the same ratio, its marginal utility must be (200/16)*12 = 150.

Question 16

Consider the income and substitution effects of price changes.For a product with an income elasticity greater than one,a price increase will cause the consumerʹs real income to
A)rise and the quantity purchased to fall.
B)fall and the quantity purchased to fall.
C)rise and the quantity purchased to rise.
D)fall and the quantity purchased to rise.
E)remain constant.

Accepted Answer

For a product with an income elasticity greater than one, a price increase will cause the consumer's real income to fall since they are spending more on the same quantity of the good. This will lead to a decrease in the quantity purchased due to the income effect. The substitution effect also works in the same direction, leading to a further decrease in the quantity purchased. Therefore, both income and substitution effects work together to reduce the quantity purchased in this case.

Question 17

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

Accepted Answer

The opportunity cost of a good is the value of the next best alternative that must be forgone in order to produce or consume that good. In this case, the opportunity cost of good X in terms of good Y is the amount of good Y that must be given up in order to produce or consume one more unit of good X. This is reflected by the ratio of the price of X to the price of Y, as it indicates how many units of Y must be forgone in order to obtain one unit of X. Therefore, the correct answer is choice C.

Question 18

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 currently 25.What is the familyʹs marginal utility from its consumption of clothing if it is maximizing its utility?
A)5
B)10
C)12.5
D)25
E)50

Accepted Answer

The answer of The Smith family is allocating its monthly...

Question 19

John is allocating his household expenditure between groceries and housing in order to maximize total utility.For the quantities of groceries and housing he has chosen,an increase in the price of housing will,ceteris paribus,
A)increase the marginal utility of a unit of housing.
B)increase the marginal utility per dollar spent on housing.
C)reduce the marginal utility of a unit of housing.
D)reduce the marginal utility per dollar spent on housing.
E)have no effect on the marginal utility per dollar spent on housing.

Accepted Answer

An increase in the price of housing, with all else being equal, reduces the marginal utility per dollar spent on housing because you get less utility for each dollar spent on housing compared to before the price increase.

Question 20

The demand curve for a good with an income elasticity of less than one
A)must be downward sloping.
B)must be upward sloping.
C)will be upward sloping only if the substitution effect outweighs the income effect.
D)will be upward sloping only if the income effect outweighs the substitution effect.
E)indicates a normal good.

Accepted Answer

The answer of The demand curve for a good with...

Quiz 6: Consumer Behaviour

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

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

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

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

The substitution effect is

The market demand curve is derived from

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

The substitution effect of a price change

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 demand curve for a normal good is downward sloping due to

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

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

Consider the income and substitution effects of price changes.For a product with an income elasticity greater than one,a price increase will cause the consumerʹs real income to

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

John is allocating his household expenditure between groceries and housing in order to maximize total utility.For the quantities of groceries and housing he has chosen,an increase in the price of housing will,ceteris paribus,

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