Question 1

A person's consumption possibilities include all points on the budget line as well as all points below the budget line.

Accepted Answer

The budget line represents the maximum combinations of goods a person can afford, while points below it represent combinations that cost less than the budget, thus all are possible consumption choices.

Question 2

The assumption that a rational consumer seeks to maximize his or her utility implies that utility is measurable according to some objective scale.

Accepted Answer

Utility is a subjective concept and cannot be measured on an objective scale; it varies from individual to individual based on their preferences and satisfaction levels.

Question 3

The optimal consumption bundle is the combination of goods that lies above the budget constraint.

Accepted Answer

The optimal consumption bundle is the combination of goods that maximizes a consumer's utility subject to their budget constraint, typically lying on the budget constraint, not above it.

Question 4

The income effects of a change in price are most important for goods that:
A) take up a substantial share of a consumer's spending.
B) are very inexpensive.
C) are imported.
D) are normal.

Accepted Answer

The income effect is based on the idea that a change in the price of a good will affect the purchasing power of consumers. If a good takes up a substantial share of a consumer's spending, a change in its price will have a significant impact on the consumer's budget, leading to a change in their purchasing behavior. Therefore, goods that take up a substantial share of a consumer's spending are most affected by income effects.

Question 5

When the price of an inferior good falls, the substitution effect contributes to _____ in the quantity demanded, and the income effect _____ the substitution effect.
A) a decrease; reinforces
B) an increase; reinforces
C) an increase; opposes
D) a decrease; opposes

Accepted Answer

The substitution effect always leads to an increase in quantity demanded when the price falls. For inferior goods, the income effect works in the opposite direction, reducing the quantity demanded as income effectively increases.

Question 6

If Joe drinks iced tea while he is mowing his yard, he will probably derive a lower marginal utility from the sixth glass of tea than from the first glass.

Accepted Answer

The law of diminishing marginal utility states that as a person consumes more of a good, the additional satisfaction from each additional unit decreases.

Question 7

If the price of laundry detergent equals the price of dishwashing powder, then a utility-maximizing consumer will always buy equal amounts of laundry detergent and dishwashing powder.

Accepted Answer

The statement does not take into account the preferences and needs of the individual consumer. Depending on their specific needs and preferences, a consumer may choose to buy more of one product than the other, even if they are priced equally. Utility maximization is based on the concept of maximizing satisfaction or happiness, and this can vary from person to person.

Question 8

At Frankie's Buy-the-Slice Pizza, Brian eats eight slices of pizza, explaining that at only $2 per slice, the utility-maximizing decision is to eat until your marginal utility per dollar is zero. Brian's explanation is correct.

Accepted Answer

Brian's explanation is incorrect because utility maximization occurs when the marginal utility per dollar spent is equal across all goods, not when it is zero.

Question 9

Mikaela is buying a new motorcycle. She has narrowed her choices to a BMW Classic Montauk or a Honda Valkyrie Rune. She likes the Honda exactly twice as much, but it costs about 40% more. If both bikes are in her budget, she should buy the Honda.

Accepted Answer

Given that Mikaela likes the Honda twice as much and it is within her budget despite being 40% more expensive, it makes sense for her to choose the Honda for greater satisfaction.

Question 10

Assume that as the price of cauliflower falls, the income effect causes consumers to buy fewer heads of cauliflower. We can conclude that cauliflower is:
A) an inferior good.
B) nasty tasting.
C) a normal good.
D) expensive.

Accepted Answer

When the price of an inferior good (such as cauliflower) decreases, the income effect causes consumers to buy less of it because they have more purchasing power and may switch to other products. This indicates that cauliflower is an inferior good.

Question 11

Mary, an avid gardener, plans to spend 8 hours working in her garden. It takes her 45 minutes to prune a bush and 30 minutes to fertilize a tree. If she prunes eight bushes, she will still have enough time to fertilize six trees.

Accepted Answer

The answer of Mary, an avid gardener, plans to spend...

Question 12

Which of the following statements is FALSE?
A) The income effect of normal goods counters the substitution effect, so the demand curve slopes upward.
B) The income effect and the substitution effect reinforce each other when the price of a normal good changes.
C) The income effect represents the decrease in quantity demanded caused by the implicit change in income due to a fall in the price of an inferior good but not of a normal good.
D) The substitution effect reflects the change in quantity demanded solely because of a change in the relative price of a good.

Accepted Answer

The income effect of normal goods does not counter the substitution effect; instead, both effects typically work in the same direction, leading to a downward-sloping demand curve for normal goods.

Question 13

Professor Makrung spends his entire weekly income of $700 on economics books (E) and coffee (C). The price of an economics book (P_E) is $50 and the price of a cup of coffee (P_C) is $2. If the professor buys 10 economics books and 50 cups of coffee per week, he finds that MU_E = 75 and MU_C = 3. This implies that a consumption bundle consisting of 10 economics books and 50 cups of coffee per week maximizes the professor's utility.

Accepted Answer

Given the prices and quantities of economics books and coffee, along with their marginal utilities, we can calculate the marginal utility per dollar for each good (MU/P). For economics books, MU/P = 75/50 = 1.5. For coffee, MU/P = 3/2 = 1.5. Although the marginal utility per dollar spent on each good is equal, which is a condition for utility maximization, the statement doesn't provide enough information to conclusively say this bundle maximizes the professor's utility without knowing his utility function or if other combinations might yield higher total utility.

Question 14

The marginal utility of a good is used to describe any good (such as a mushroom brush or a shrimp deveiner) that has only limited usefulness.

Accepted Answer

The marginal utility of a good refers to the additional satisfaction or usefulness that a consumer gains from acquiring or consuming more of that good. It is not limited to goods with limited usefulness, but rather applies to all goods and services.

Question 15

The income effect refers to a change in:
A) income because of a change in business investment.
B) money or nominal income because of a change in wages.
C) the quantity demanded of a good because of an implicit change in the buyer's income caused by a change in the price of a good or service.
D) the quantity demanded of a good because of a change in the buyer's money income.

Accepted Answer

The income effect describes how a change in the price of a good affects the quantity demanded due to the change in the consumer's real income or purchasing power.

Question 16

If the marginal utility of hot dogs exceeds the marginal utility of french fries, then the consumer should always increase the consumption of hot dogs and decrease the consumption of french fries.

Accepted Answer

The decision to consume more hot dogs or fewer french fries should also consider the price of each item and the consumer's budget constraint, not just the marginal utility.

Question 17

Which of the following statements is FALSE?
A) A Giffen good must be an inferior good.
B) A Giffen good must be such that the income effect and the substitution effect move in opposite directions, and the income effect outweighs the substitution effect.
C) A Giffen good must be such that the substitution effect outweighs the income effect for an inferior good.
D) A Giffen good must have an upward-sloping demand curve.

Accepted Answer

A Giffen good is characterized by the income effect outweighing the substitution effect, not the other way around, which is why the demand curve slopes upward.

Question 18

The income effect of a price change is the effect on consumption changes as a result of a change in:
A) income when all prices change in the same proportion.
B) purchasing power caused by a change in the price of the good.
C) income caused by a change in the price of labor.
D) income sufficient to offset the effect of a price change.

Accepted Answer

The income effect occurs when a change in price of a good affects the consumer's purchasing power, which in turn affects their consumption of the good. As the price of a good increases, the consumer's purchasing power decreases, leading to a decrease in consumption. Conversely, as the price of a good decreases, the consumer's purchasing power increases, leading to an increase in consumption. Therefore, the income effect is the effect on consumption changes as a result of a change in purchasing power caused by a change in the price of the good.

Question 19

At Frankie's Buy-the-Slice Pizza, Bill eats three slices of pizza and then realizes that he enjoyed the second slice more than the third. Even though the price per slice is just $1, the utility-maximizing decision is to quit eating now, since Bill has reached diminishing marginal utility.

Accepted Answer

The answer of At Frankie's Buy-the-Slice Pizza, Bill eats three...

Question 20

Gehrig's utility from the consumption of mangoes is measured by the level of satisfaction he gets from only the first mango he buys and eats.

Accepted Answer

The statement is not specific enough to determine Gehrig's utility function for mangoes. It is possible that his utility increases with the number of mangoes consumed or that he derives similar levels of satisfaction from multiple mangoes.

Quiz 10: The Rational Consumer

A person's consumption possibilities include all points on the budget line as well as all points below the budget line.

The assumption that a rational consumer seeks to maximize his or her utility implies that utility is measurable according to some objective scale.

The optimal consumption bundle is the combination of goods that lies above the budget constraint.

The income effects of a change in price are most important for goods that:

When the price of an inferior good falls, the substitution effect contributes to _ in the quantity demanded, and the income effect _ the substitution effect.