Question 1

Consider a downward-sloping demand curve. When the price of a normal good decreases, the income and substitution effects
A) work in the same direction to increase quantity demanded.
B) work in the same direction to decrease quantity demanded.
C) work in opposite directions and quantity demanded increases.
D) work in opposite directions and quantity demanded decreases.

Accepted Answer

When the price of a normal good decreases, both the income effect (an increase in real income, assuming constant nominal income) and substitution effect (encouraging consumers to switch from substitute goods to the cheaper good) work in the same direction to increase the quantity demanded, as shown by the law of demand.

Question 2

If marginal utility of apples is diminishing and is a positive amount, consuming one more apple will cause
A) total utility to decrease.
B) a consumer to get no satisfaction from consuming apples.
C) a consumer's total utility to increase.
D) a consumer to go beyond her optimal consumption of apples.

Accepted Answer

If marginal utility of apples is diminishing and is a positive amount, it means that each additional apple consumed is still providing additional satisfaction, but at a decreasing rate. Therefore, consuming one more apple will increase a consumer's total utility. Choice A is incorrect because total utility will not decrease as additional satisfaction is still being gained from consuming the apple. Choice B is incorrect because the marginal utility may be decreasing but it is still positive, indicating that the consumer is getting some satisfaction from consuming the apples. Choice D is incorrect because the diminishing marginal utility implies that the consumer is already approaching their optimal consumption level, so consuming one more apple will not necessarily cause them to go beyond it.

Question 3

The amount of income a consumer has to spend on goods and services is known as
A) purchasing power.
B) effective demand.
C) a budget constraint.
D) wealth.

Accepted Answer

The answer of The amount of income a consumer has...

Question 4

Total utility is maximised in the consumption of two goods by
A) equating the marginal utility for each good consumed.
B) equating the marginal utility per dollar for each good consumed.
C) equating the total utility of each good divided by its price.
D) maximising expenditure on each good.

Accepted Answer

Maximising total utility requires balancing the marginal utilities of each good consumed. However, since the two goods have different prices, simply equating their marginal utilities will not lead to efficient consumption. Instead, we want to consume the combination of the two goods that gives us the most satisfaction per dollar spent. This means equating the marginal utility per dollar for each good consumed, which will maximise total utility while taking into account the relative prices of each good.

Question 5

-Refer to Table 6-2. Holding prices constant, when Keira's income changed from $18 to $23, her utility maximising bundle changed. Based on your answers to her optimal choices at the two income levels, what type of goods are soup and sandwiches?
A) Soup is an inferior good and sandwiches are a normal good.
B) Soup is a normal good and sandwiches are an inferior good.
C) Both soup and sandwiches are normal goods.
D) Both soup and sandwiches are inferior goods.

Accepted Answer

Both soup and sandwiches are normal goods as their quantity demanded increases when Keira's income increases. This is evident from the fact that the optimal bundle for soup and sandwiches changes in the same direction as the income change, indicating that they are both normal goods.

Question 6

The word 'util' has been used by economists in the past as an objective measure of utility. Today economists believe that
A) utility cannot be measured objectively.
B) utility can be measured objectively because people can use prices of different goods to measure utility.
C) all of the important conclusions of the economic model of consumer behaviour depend on utility being measured objectively.
D) the util truly is an objective, rather than a subjective, measure of utility.

Accepted Answer

Today economists believe that utility is a subjective concept and cannot be measured objectively. This is because utility depends on individual preferences and cannot be compared across individuals. Prices of different goods may provide some indication of individual preferences, but they do not provide an objective measure of utility. Therefore, choice A is the best answer. Option B is incorrect because using prices of different goods as a measure of utility is not an objective measure, but rather a subjective one. Option C is incorrect because the economic model of consumer behavior does not necessarily assume that utility can be measured objectively. Option D is incorrect because the concept of utility is inherently subjective and cannot be made objective.

Question 7

-Refer to Table 6-2. Holding prices constant, when Keira's income changed from $18 to $23, what happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich purchased?
A) Her total utility increases, but the marginal utilities of the last cup of soup and the last sandwich consumed decrease.
B) Her total utility, the marginal utility of the last cup of soup consumed and the marginal utility of the last sandwich consumed all increase.
C) Her total utility decreases, but the marginal utilities of the last cup of soup and the last sandwich consumed increase.
D) Her total utility and the marginal utility of the last cup of soup consumed increase, but marginal utility of the last sandwich consumed decreases.

Accepted Answer

As income increases, consumers can purchase more goods, which increases their total utility. However, due to the law of diminishing marginal utility, each additional unit of a good consumed provides less additional satisfaction than the previous unit, leading to a decrease in the marginal utilities of the last units consumed.

Question 8

-Refer to Table 6-2. What is Keira's marginal utility per dollar spent on the third cup of soup?
A) 72 units of utility
B) 36 units of utility
C) 12 units of utility
D) 6 units of utility

Accepted Answer

The answer of 
-Refer to Table 6-2. What is Keira's...

Question 9

The additional utility that George receives from consuming one more slice of pizza is called
A) average utility.
B) marginal utility.
C) total utility.
D) diminishing utility.

Accepted Answer

Marginal utility is the additional satisfaction or utility that a consumer derives from consuming an extra unit of a good or service. In this case, the additional satisfaction George receives from consuming one more slice of pizza is an example of marginal utility.

Question 10

-Refer to Table 6-2. If Keira maximises her utility, how many units of each good should she buy?
A) 1 cup of soup and 5 sandwiches
B) 3 cups of soup and 4 sandwiches
C) 6 cups of soup and 2 sandwiches
D) 4 cups of soup and 3.5 sandwiches

Accepted Answer

Keira maximizes her utility by choosing the combination of goods where the marginal utility per dollar spent is equal for both goods. Option B provides the optimal combination based on this principle.

Question 11

The economic model of consumer behaviour predicts that
A) consumers will try to earn as much income as they can over their lifetimes.
B) consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy.
C) consumers will try to accumulate as many goods and services as they can before they die.
D) consumers will divide their time between consumption and leisure activities in order to maximise social welfare.

Accepted Answer

The economic model of consumer behaviour assumes that consumers have a limited budget and will choose the combination of goods and services that gives them the highest possible level of satisfaction. This is known as utility maximization, and it means that consumers will allocate their spending in a way that maximizes the satisfaction they get from the goods and services they purchase. Therefore, choice B - consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy - is the most accurate prediction of consumer behaviour.

Question 12

-Refer to Table 6-2. Suppose Keira's income increases from $18 to $23 but prices have not changed. What is her utility maximising bundle now?
A) 6 cups of soup and 5 sandwiches
B) 4 cups of soup and 5 sandwiches
C) 5 cups of soup and 4 sandwiches
D) 5 cups of soup and 5 sandwiches

Accepted Answer

The answer of 
-Refer to Table 6-2. Suppose Keira's income...

Question 13

An economist observes two consumers in a supermarket. One of the consumers buys a case of Coca-Cola and the other buys a case of Pepsi-Cola. Both colas sell for the same price and the ages and incomes of the consumers are also the same. Based on this information, how would the economist explain the consumers' choices?
A) One of the consumers made the wrong choice, but it is impossible to say which one.
B) Both consumers should have considered buying other colas that had lower prices.
C) Both consumers should have purchased less than a case because they would be able to buy more later.
D) Apparently, the consumers had different tastes.

Accepted Answer

The consumers' choices can be explained by their different tastes, as one chose Coca-Cola and the other chose Pepsi-Cola. It is not possible to determine if either choice was "wrong" or if they should have considered buying other colas with lower prices or purchased less than a case.

Question 14

If the marginal utility Ida Mae receives from eating chicken wings is negative, then
A) her total utility from eating chicken wings has fallen.
B) her total utility from eating chicken wings is negative as well.
C) Ida Mae definitely does not like chicken wings.
D) her total utility has risen, but by less from the last chicken wing than from the next to last chicken wing.

Accepted Answer

A negative marginal utility implies that the additional satisfaction or utility gained from consuming another unit of the good (in this case, chicken wings) is decreasing. Therefore, the total utility that Ida Mae derives from consuming chicken wings has fallen, since the negative marginal utility adds less to the total utility than the positive marginal utility from earlier units consumed. This does not necessarily mean that Ida Mae dislikes chicken wings altogether.

Question 15

Adhira buys chocolates and almonds. She has 3 bars of chocolates and 4 bags of almonds. The marginal utility of the third chocolate bar is 18 units of utility and the marginal utility from the fourth bag of almonds is also 18. Is Adhira maximising her utility?
A) Yes, the marginal utility from the last unit of each good is equal.
B) No, she must buy 1 more chocolate bar to equate her quantities of the two goods.
C) No, she must buy cut back to 3 bags of almonds to equate her quantities of the two goods.
D) Without information on her income and the prices of the two goods, we cannot answer the question.

Accepted Answer

The answer of Adhira buys chocolates and almonds. She has...

Question 16

Marginal utility is
A) the change in total utility divided by the price of the last unit of a good or service consumed.
B) the change in total utility a person receives from consuming an additional unit of a good or service.
C) the utility from consuming a given quantity of a good or service.
D) the decrease in total utility from consuming more and more units of a good or service.

Accepted Answer

Marginal utility is the change in total utility that a person receives from consuming an additional unit of a good or service. It is important to note that marginal utility can decrease as consumption of a good or service increases, leading to a concept known as the law of diminishing marginal utility. Choice A is incorrect because the price of the last unit doesn't determine the marginal utility. Choice C is incorrect because it refers to total utility, not marginal utility. Choice D is also incorrect because it describes the concept of diminishing marginal utility, but it is not a definition of marginal utility itself.

Question 17

Suppose the marginal utilities for the first three cans of coke are 100, 80 and 60, respectively. The total utility received from consuming 2 cans is
A) 20.
B) 80.
C) 90.
D) 180.

Accepted Answer

To find the total utility received from consuming 2 cans, we need to add the marginal utilities of the first two cans.

MU of the first can = 100
MU of the second can = 80

Total utility = 100 + 80 = 180

Therefore, the best choice is D.

Question 18

A budget constraint
A) represents the bundles of consumption that make a consumer equally happy.
B) refers to the limited amount of income available to consumers to spend on goods and services.
C) reflects the desire by consumers to increase their income.
D) shows the prices that a consumer chooses to pay for products he consumes.

Accepted Answer

A budget constraint represents the limit of income that a consumer has available to spend on goods and services. It is a line that shows the combinations of two goods that a consumer can afford given their income and the prices of the two goods. Choice A is incorrect because a budget constraint does not represent the bundles of consumption that make a consumer equally happy, but rather the combinations of goods that a consumer can afford given their income and prices. Choice C is incorrect because a budget constraint is not determined by the desire of consumers to increase their income, but rather by the amount of income they have available. Choice D is incorrect because a budget constraint shows the maximum amount a consumer can pay for a good, given their income and the price of the other goods.

Question 19

In making decisions about what to consume, a person's goal is to
A) allocate her limited income among all the products she wishes to buy so that she receives the highest total utility.
B) buy low-priced goods rather than high-priced goods.
C) maximise her marginal utility from the goods and services she wishes to buy using her limited income.
D) consume as many necessities as possible and then, if there is money left over, buy luxuries.

Accepted Answer

The answer of In making decisions about what to consume,...

Question 20

The satisfaction a person receives from consuming goods and services is called
A) contentment.
B) psychic income.
C) wealth.
D) utility.

Accepted Answer

The satisfaction a person receives from consuming goods and services is called utility. The other options are not specifically related to the satisfaction individuals receive from consumption.

Quiz 6: Concumer Choice and Behavioural Economics

Consider a downward-sloping demand curve. When the price of a normal good decreases, the income and substitution effects

If marginal utility of apples is diminishing and is a positive amount, consuming one more apple will cause

The amount of income a consumer has to spend on goods and services is known as

Total utility is maximised in the consumption of two goods by

-Refer to Table 6-2. Holding prices constant, when Keira's income changed from $18 to $23, her utility maximising bundle changed. Based on your answers to her optimal choices at the two income levels, what type of goods are soup and sandwiches?

The word 'util' has been used by economists in the past as an objective measure of utility. Today economists believe that

-Refer to Table 6-2. Holding prices constant, when Keira's income changed from $18 to $23, what happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich purchased?

-Refer to Table 6-2. What is Keira's marginal utility per dollar spent on the third cup of soup?

The additional utility that George receives from consuming one more slice of pizza is called

-Refer to Table 6-2. If Keira maximises her utility, how many units of each good should she buy?

The economic model of consumer behaviour predicts that

-Refer to Table 6-2. Suppose Keira's income increases from $18 to $23 but prices have not changed. What is her utility maximising bundle now?

If the marginal utility Ida Mae receives from eating chicken wings is negative, then

Adhira buys chocolates and almonds. She has 3 bars of chocolates and 4 bags of almonds. The marginal utility of the third chocolate bar is 18 units of utility and the marginal utility from the fourth bag of almonds is also 18. Is Adhira maximising her utility?

Marginal utility is

Suppose the marginal utilities for the first three cans of coke are 100, 80 and 60, respectively. The total utility received from consuming 2 cans is

A budget constraint

In making decisions about what to consume, a person's goal is to

The satisfaction a person receives from consuming goods and services is called