Question 1

According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:

Accepted Answer

According to the law of diminishing marginal utility, as a consumer consumes more units of a good, the satisfaction or utility gained from each additional unit decreases. Thus, consumers are willing to pay less for each additional unit beyond a certain point. This leads to a downward slope in the demand curve.

Question 2

The substitution effect of a price change is described by which of the following statements?

Accepted Answer

The substitution effect refers to the change in consumption patterns resulting from a change in the relative prices of goods. When the price of a good falls, consumers are incentivized to substitute this lower priced good for relatively higher priced goods, resulting in an increase in the quantity demanded of the lower priced good. Therefore, Option B accurately describes the substitution effect. Option A describes the income effect, and Option D describes the effect of a change in income on the quantity of a good purchased. Option C is incomplete and does not fully describe the substitution effect.

Question 3

Market demand is found by:

Accepted Answer

Market demand is the sum of all individual quantities demanded at each price level. Therefore, the correct way to find market demand is by adding individual quantities demanded at each price.

Question 4

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:

Accepted Answer

The substitution effect refers to the idea that if the price of a good decreases, buyers will substitute it for other goods that are now relatively more expensive. This means they will purchase more of the now relatively less expensive good (in this case, the good that experienced a price decrease). Therefore, option C is the correct answer.

Question 5

The change in a consumer's consumption of a good in response to an income-compensated price change is called the:

Accepted Answer

The substitution effect occurs when a consumer changes their consumption of goods in response to a change in the relative prices of those goods, holding real income (purchasing power) constant. This is distinguished from the income effect, which is the change in consumption resulting from a change in the consumer's real income.

Question 6

When there is a difference between the MU_x/P_x and the MU_y/P_y, we expect that a consumer will:

Accepted Answer

When there is a difference between the two goods, the consumer is likely to make changes to the quantity of the goods in their purchase basket in order to achieve a preferred outcome. Therefore, option D is the best choice.

Question 7

A change in the ability to purchase a good because its price has increased is most closely related to the:

Accepted Answer

The change in the ability to purchase a good due to an increase in its price is known as the income effect. As the price of the good increases, the consumer's purchasing power decreases, and they are unable to afford the same quantity of the good as before. This effect is related to the consumer's income because it determines their ability to purchase goods and services. The other choices, output effect, nominal effect, and substitution effect, are not directly related to changes in price and income.

Question 8

If the price of apples falls and the price of oranges remains constant:

Accepted Answer

All statements are correct. A) The relative price of apples decreases compared to oranges. B) Consumers experience an increase in purchasing power or a form of income effect due to the price drop. C) The principle of marginal utility per dollar spent implies that apples become a more attractive purchase compared to oranges when their price falls, assuming other factors remain constant (ceteris paribus).

Question 9

According to the utility model of consumer demand, the demand curve is downward sloping because of the law of:

Accepted Answer

The law of diminishing marginal utility states that as a person consumes more of a good or service, the additional utility or satisfaction they receive from each additional unit will eventually decrease. This leads to a downward sloping demand curve, as consumers are willing to pay less for each additional unit as they already have some satisfaction from previous units consumed. Therefore, choice A is the correct answer.

Question 10

The income effect refers to:

Accepted Answer

The income effect describes how a change in the price of a good or service leads to a change in the quantity demanded, effectively altering the consumer's purchasing power as if their income had changed, without an actual change in nominal income.

Question 11

Following an income-compensated price change, you decide to decrease the quantity of ice cream purchased each month when the price increases and purchase more frozen yogurt instead.This is an indication of the:

Accepted Answer

This situation describes the substitution effect, where the consumer substitutes one good for another when the price of one increases while keeping their total utility constant. The income effect, on the other hand, describes the change in quantity demanded of a good due to the change in purchasing power resulting from a change in price. The utility effect and consumption effect are not recognized economic terms.

Question 12

According to the income effect, a decrease in the price of a product leads to an increase in the quantity demanded because buyers:

Accepted Answer

A decrease in the price of a product increases the purchasing power of buyers, leading to an implicit increase in income. This leads buyers to purchase more of the product, resulting in an increase in the quantity demanded. Therefore, choice B is the best answer.

Question 13

Utility maximization _______ the law of demand.

Accepted Answer

Utility maximization underlies the law of demand. The law of demand states that as prices increase, quantity demanded decreases and as prices decrease, quantity demanded increases. This is based on the assumption that consumers are rational and seek to maximize their utility (satisfaction) with their purchases. As prices increase, consumers will seek to substitute to lower-priced alternatives or forego the purchase altogether in order to maximize their utility. Therefore, the law of demand is based on the concept of utility maximization.

Question 14

The increase in quantity demanded due to a price reduction is a result of the _______ and the ________.

Accepted Answer

The increase in quantity demanded due to a price reduction is a result of the substitution effect and the income effect. The substitution effect occurs because the new lower price makes the good relatively less expensive compared to other goods, which encourages consumers to substitute the newly cheaper good for other goods. The income effect occurs because the lower price increases the purchasing power of consumers' income, which allows them to buy more of the good.

Question 15

Market demand curves are found by:

Accepted Answer

Market demand curves are found by determining the quantities demanded by all buyers at each price. This involves adding up the individual demand curves of all buyers in the market.

Question 16

The substitution effect always involves a change in consumption in the _______ direction of the ________ change.

Accepted Answer

The substitution effect occurs when the price of a good changes, leading consumers to substitute a relatively cheaper good for a relatively expensive one. Therefore, the change in consumption is in the opposite direction of the price change. For example, if the price of good A increases and the price of good B stays the same, consumers will likely consume less of good A and more of good B, as good B is now relatively cheaper.

Question 17

You decide to decrease the quantity of ice cream purchased each month when the price increases in part because the higher price causes an implicit reduction in your income.This is an indication of the:

Accepted Answer

The scenario described is an example of the income effect, where the change in price of ice cream indirectly affects the purchasing power and thus the demand for the product. When the price increases, the implicit reduction in income makes consumers less able to afford the same amount of ice cream as before, causing them to decrease the quantity purchased. The other options (B) utility effect, (C) consumption effect, and (D) substitution effect are not applicable in this scenario.

Question 18

Following an income-compensated price change, you decide to increase the quantity of pizza purchased each month when the price decreases and therefore purchase fewer hamburgers.This is an indication of the:

Accepted Answer

This scenario describes the concept of substitution effect, where the change in relative prices of two goods (pizza and hamburgers) leads to a change in the quantity demanded of one good (pizza) as consumers switch to the now relatively cheaper good. The income effect, on the other hand, refers to the change in quantity demanded resulting from a change in income, and is not applicable in this scenario. The output effect and marginal effect are not relevant in this context.

Question 19

If the price of a good falls and the consumer decides to buy more of the good solely because it is relatively less expensive, this describes the:

Accepted Answer

This describes the substitution effect, where the consumer switches their consumption to the now relatively cheaper option. The income effect refers to the change in purchasing power due to a change in price, and it may lead to an increase or decrease in consumption depending on the good being considered. Consumer surplus refers to the difference between the price a consumer is willing to pay and the price they actually pay, and it may or may not change with a change in price. The marginal maximizing rule refers to the optimization principle that a rational decision-maker will choose to consume at the point where the marginal benefit equals the marginal cost.

Question 20

An imaginary adjustment of a consumer's income at the same instant a price changes, so the consumer has just enough to buy the same goods and services at the new price is:

Accepted Answer

This scenario is known as an income-compensated price change, where the consumer's income is adjusted to reflect the price change so that they can still afford the same goods and services as before. The substitution effect refers to the change in the quantity demanded of a good due to a change in its relative price compared to other goods, while the income effect refers to the change in quantity demanded due to a change in income level. A price-compensated utility change is not a commonly used term in economics.

Quiz 7: Aggregate Demand and Aggregate Supply

According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:

The substitution effect of a price change is described by which of the following statements?

Market demand is found by:

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:

The change in a consumer's consumption of a good in response to an income-compensated price change is called the:

When there is a difference between the MU_x/P_x and the MU_y/P_y, we expect that a consumer will:

A change in the ability to purchase a good because its price has increased is most closely related to the:

If the price of apples falls and the price of oranges remains constant:

According to the utility model of consumer demand, the demand curve is downward sloping because of the law of:

The income effect refers to:

Following an income-compensated price change, you decide to decrease the quantity of ice cream purchased each month when the price increases and purchase more frozen yogurt instead.This is an indication of the:

According to the income effect, a decrease in the price of a product leads to an increase in the quantity demanded because buyers:

Utility maximization _______ the law of demand.

The increase in quantity demanded due to a price reduction is a result of the _ and the __.

Market demand curves are found by:

The substitution effect always involves a change in consumption in the _ direction of the __ change.

You decide to decrease the quantity of ice cream purchased each month when the price increases in part because the higher price causes an implicit reduction in your income.This is an indication of the:

Following an income-compensated price change, you decide to increase the quantity of pizza purchased each month when the price decreases and therefore purchase fewer hamburgers.This is an indication of the:

If the price of a good falls and the consumer decides to buy more of the good solely because it is relatively less expensive, this describes the:

An imaginary adjustment of a consumer's income at the same instant a price changes, so the consumer has just enough to buy the same goods and services at the new price is:

Quiz 7: Aggregate Demand and Aggregate Supply

According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:

The substitution effect of a price change is described by which of the following statements?

Market demand is found by:

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:

The change in a consumer's consumption of a good in response to an income-compensated price change is called the:

When there is a difference between the MUx/Px and the MUy/Py, we expect that a consumer will:

A change in the ability to purchase a good because its price has increased is most closely related to the:

If the price of apples falls and the price of oranges remains constant:

According to the utility model of consumer demand, the demand curve is downward sloping because of the law of:

The income effect refers to:

Following an income-compensated price change, you decide to decrease the quantity of ice cream purchased each month when the price increases and purchase more frozen yogurt instead.This is an indication of the:

According to the income effect, a decrease in the price of a product leads to an increase in the quantity demanded because buyers:

Utility maximization _______ the law of demand.

The increase in quantity demanded due to a price reduction is a result of the _______ and the ________.

Market demand curves are found by:

The substitution effect always involves a change in consumption in the _______ direction of the ________ change.

You decide to decrease the quantity of ice cream purchased each month when the price increases in part because the higher price causes an implicit reduction in your income.This is an indication of the:

Following an income-compensated price change, you decide to increase the quantity of pizza purchased each month when the price decreases and therefore purchase fewer hamburgers.This is an indication of the:

If the price of a good falls and the consumer decides to buy more of the good solely because it is relatively less expensive, this describes the:

An imaginary adjustment of a consumer's income at the same instant a price changes, so the consumer has just enough to buy the same goods and services at the new price is:

When there is a difference between the MU_x/P_x and the MU_y/P_y, we expect that a consumer will:

The increase in quantity demanded due to a price reduction is a result of the _ and the __.

The substitution effect always involves a change in consumption in the _ direction of the __ change.