Question 1

When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs
A) along the highest indifference curve.
B) along the lowest budget constraint.
C) where the indifference curve is tangent to the budget constraint.
D) All of the above are correct.

Accepted Answer

The optimal choice point occurs where the indifference curve is tangent to the budget constraint, because at this point the consumer is maximizing their utility given their budget constraint. Points above or below this point would either be unaffordable or provide less utility.

Question 2

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer has an income of $100 and currently optimizes at bundle A. When the price of marshmallows decreases to $5, which bundle will the optimizing consumer choose?
A) A
B) B
C) C
D) D

Accepted Answer

When the price of marshmallows decreases to $5, the budget line shifts outward (to the right), becoming flatter. The new optimal bundle will be at the tangency point between the new budget line and the highest indifference curve. This point is bundle B, which has more marshmallows and fewer cookies than bundle A, but still lies on the same indifference curve as A. Therefore, the consumer will choose bundle B as the new optimal bundle.

Question 3

When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs
A) along the highest attainable indifference curve.
B) where the indifference curve is tangent to the budget constraint.
C) where the marginal utility per dollar spent is the same for both X and Y.
D) All of the above are correct.

Accepted Answer

The answer of When a consumer is purchasing the best...

Question 4

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $2. The consumer's optimal choice is point
A) A.
B) B.
C) C.
D) D.

Accepted Answer

To find the optimal choice, we need to locate the point where the budget line (dashed line) just touches the highest possible indifference curve (the one farthest to the top right). This point is B. At this point, the consumer is spending all their income, and the marginal utility per dollar spent on each good is equal (MU/ Price). At point A, the consumer is not spending all their income, and at points C and D, the budget line is not touching the highest indifference curve. Therefore, point B is the optimal choice for this consumer.

Question 5

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer will choose a consumption bundle where the marginal rate of substitution is
A) 2.
B) 2/3.
C) 1/2.
D) 1/3.

Accepted Answer

The consumer will choose the consumption bundle where the ratio of the marginal utility of Skittles to the marginal utility of M&M's equals the price ratio (MU S/MU M = P S/P M).

In this case, the marginal utility of Skittles is 5 and the marginal utility of M&M's is 10. So, MU S/MU M = 5/10 = 1/2.

The price ratio is 2/4 = 1/2.

So, the marginal rate of substitution is 1/2.

To maximize utility subject to the budget constraint, the consumer should choose a consumption bundle where the marginal rate of substitution equals the price ratio. This occurs at point W in the figure, where the consumer purchases 4 units of Skittles and 2 units of M&M's. This consumption bundle costs $16, which is within the consumer's budget, so it is the best choice.

Question 6

A consumer chooses an optimal consumption point where the
A) marginal rate of substitution equals the relative price ratio.
B) slope of the indifference curve equals the slope of the budget constraint.
C) ratio of the marginal utilities equals the ratio of the prices.
D) All of the above are correct.

Accepted Answer

All three options listed are correct and necessary for a consumer to choose an optimal consumption point. The marginal rate of substitution (MRS) represents the consumer's willingness to trade one good for another, while the relative price ratio represents the opportunity cost of doing so. When MRS equals the relative price ratio, the consumer is making the trade-off at the most efficient point. The slope of the indifference curve represents the consumer’s preference for one good compared to the other, while the slope of the budget constraint represents the relative price of the goods. When these slopes are equal, the consumer is maximizing satisfaction subject to their budget constraint. Finally, the ratio of the marginal utilities represents the relative satisfaction gained from consuming one good compared to the other, while the ratio of the prices represents the relative cost of the goods. When these ratios are equal, the consumer is maximizing overall satisfaction subject to their budget constraint. Therefore, all three options are necessary for a consumer to choose an optimal consumption point.

Question 7

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer has an income of $80. If the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer would choose to purchase
A) 9 marshmallows and 6 chocolate chips.
B) 10 marshmallows and 10 chocolate chips.
C) 5 marshmallows and 5 chocolate chips.
D) 3 marshmallows and 9 chocolate chips.

Accepted Answer

The consumer's budget constraint at $80 income, $4 price for marshmallows, and $4 price for chocolate chips is represented by the line AB in the graph. The highest indifference curve that the budget constraint touches is curve I3. The optimal bundle of marshmallows and chocolate chips is where the budget constraint line AB is tangent to indifference curve I3. This occurs at the point where the consumer purchases 10 marshmallows and 10 chocolate chips.

Question 8

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer has an income of $40, the price of a bag of marshmallows is $2, and the price of a bag of chocolate chips is $2. The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate chips?
A) A
B) B
C) C
D) D

Accepted Answer

The optimizing consumer will choose the bundle that maximizes their utility, subject to their budget constraint. In this case, bundle C provides the highest level of utility (13 utils) within the consumer's budget constraint, since it lies on the highest possible indifference curve that is still within the budget line. Bundles A and B are either on a lower indifference curve or outside of the budget constraint. Bundle D is on a higher indifference curve, but is not affordable with the given prices and income. Therefore, the best choice is bundle C.

Question 9

The goal of the consumer is to
A) maximize utility.
B) be on the highest indifference curve.
C) maximize satisfaction.
D) All of the above are the goals of the consumer.

Accepted Answer

All three options (maximizing utility, being on the highest indifference curve, and maximizing satisfaction) essentially mean the same thing - the consumer aims to obtain the best possible outcome from the goods or services they consume. Therefore, all of these options are accurate goals of the consumer.

Question 10

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B. According to the graph, which of the following would cause the consumer to move to point A?
A) a decrease in the price of Skittles
B) a decrease in the price of M&M's
C) an increase in the price of Skittles
D) an increase in the price of M&M's

Accepted Answer

The answer of Figure 21-19 
-Refer to Figure 21-19. Assume...

Question 11

Figure 21-18 
-Refer to Figure 21-18. Bundle D represents a point where

Accepted Answer

The answer of Figure 21-18 
-Refer to Figure 21-18. Bundle...

Question 12

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer's optimal choice is point
A) A.
B) B.
C) C.
D) D.

Accepted Answer

The answer of Figure 21-19 
-Refer to Figure 21-19. Assume...

Question 13

Figure 21-19 
-Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $50. The price of Skittles is $5 and the price of M&M's is $5. This consumer will choose a consumption bundle where the marginal rate of substitution is
A) 10.
B) 5.
C) 1.
D) 1/5.

Accepted Answer

The answer of Figure 21-19 
-Refer to Figure 21-19. Assume...

Question 14

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer has an income of $40. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips were $4?
A) P=$2, Q=3
B) P=$2, Q=9
C) P=$4, Q=3
D) P=$4, Q=9

Accepted Answer

The answer of Figure 21-20
The following graph illustrates a representative...

Question 15

Figure 21-18 
-Refer to Figure 21-18. Bundle B represents a point where

Accepted Answer

Bundle B represents a point where the marginal utility per dollar spent on coffee and on bagels is equal. Therefore, the consumer is maximizing their utility by consuming a combination of coffee and bagels at Bundle B. The best choice for the consumer is Bundle B.

Question 16

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer has an income of $40. If the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer would choose to purchase
A) 9 marshmallows and 6 chocolate chips.
B) 10 marshmallows and 10 chocolate chips.
C) 5 marshmallows and 5 chocolate chips.
D) 3 marshmallows and 9 chocolate chips.

Accepted Answer

At $4 per unit for marshmallows and chocolate chips, the budget constraint line intersects the indifference curve at point C, where the consumer purchases 5 marshmallows and 5 chocolate chips. This point maximizes the consumer's utility given their budget constraint.

Question 17

Figure 21-18 
-Refer to Figure 21-18. Bundle C represents a point where

Accepted Answer

Bundle C represents a point where marginal utility per dollar spent on both goods is equal. Therefore, the best choice would be a combination of goods that lie on the Budget Line AB, where the slope of the line represents the ratio of prices of the two goods. Bundle B is the only option that lies on AB and also on the highest indifference curve, indicating maximum utility.

Question 18

A consumer chooses an optimal consumption point where the
A) marginal rate of substitution equals the relative price ratio.
B) slope of the indifference curve exceeds the slope of the budget constraint.
C) ratios of all the marginal utilities are equal.
D) All of the above are correct.

Accepted Answer

The optimal consumption point is where the consumer maximizes their utility subject to their budget constraint. This occurs where the marginal rate of substitution (MRS) between two goods equals the relative price ratio (the ratio of the prices of the two goods). At this point, the consumer has allocated their spending in a way that gives them the most satisfaction. So, only choice A is correct.

Question 19

Figure 21-20
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies: 
-Refer to Figure 21-20. Assume that the consumer depicted the figure has an income of $50. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for chocolate chips if the price of marshmallows is $2.50?
A) P=$2.50, Q=6
B) P=$2.50, Q=10
C) P=$5.00, Q=3
D) P=$5.00, Q=5

Accepted Answer

According to the graph, at a price of $2.50 for marshmallows, the consumer would be willing to purchase 10 chocolate chip cookies. This combination (P=$2.50, Q=10) would be on her demand curve for chocolate chips. The other options listed either have a different price for marshmallows or a quantity of chocolate chips that is not on her demand curve at the given price for marshmallows.

Question 20

The goal of the consumer is to
A) maximize utility.
B) minimize expenses.
C) spend more income in the current time period than in the future.
D) All of the above are the goals of the consumer.

Accepted Answer

The primary goal of a consumer is to maximize utility (i.e. satisfaction) from the goods and services that they consume, given their budget constraint. While minimizing expenses and spending more income in the current time period than in the future may be important considerations for some consumers, these are not universal goals for all consumers. Therefore, choice (D) is not a correct answer.

Quiz 21: The Theory of Consumer Choice

When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs

When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs

Figure 21-19 -Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $2. The consumer's optimal choice is point

Figure 21-19 -Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer will choose a consumption bundle where the marginal rate of substitution is

A consumer chooses an optimal consumption point where the

The goal of the consumer is to

Figure 21-19 -Refer to Figure 21-19. Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B. According to the graph, which of the following would cause the consumer to move to point A?

Figure 21-19 -Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer's optimal choice is point

Figure 21-19 -Refer to Figure 21-19. Assume that the consumer depicted in the figure has an income of $50. The price of Skittles is $5 and the price of M&M's is $5. This consumer will choose a consumption bundle where the marginal rate of substitution is

A consumer chooses an optimal consumption point where the

The goal of the consumer is to