Question 1

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 is given by the equation 4M + 4C = 80, where M is the quantity of marshmallows and C is the quantity of chocolate chips. Rearranging this equation, we get M = 20 - C. Substituting this into the consumer's utility function U = MC, we get U = (20 - C)C = 20C - C^2. To maximize utility, we take the derivative of this function with respect to C and set it equal to zero: dU/dC = 20 - 2C = 0. Solving for C, we get C = 10. Substituting this back into the budget constraint, we get M = 10 as well. Therefore, the consumer would purchase 10 marshmallows and 10 chocolate chips to maximize 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 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

At a price of $2.50 for marshmallows, the consumer is willing to give up 1 chocolate chip cookie for every 2 marshmallows, as that is the rate at which the indifference curve is tangent to the budget line. Given an income of $50, the budget line has a slope of $1/$2.50=-0.4. At a price of $2.50 for chocolate chip cookies, the intercept of the budget line on the vertical axis is $50/$2.50=20. Therefore, at a price of $2.50 for chocolate chip cookies, the quantity demanded would be $20/($2.50/$10)=8. Multiplying by the rate at which marshmallows are sacrificed for cookies, the quantity demanded of marshmallows would be 16. So, at a price of $2.50 for marshmallows, the demand for chocolate chip cookies would be for 8 cookies (Choice B).

Question 3

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 4

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 5

Figure 21-18 
-Refer to Figure 21-18. Bundle B represents a point where
A) MRSxy > Py/Px.
B) MRSxy = Px/Py.
C) MRSxy < Px/Py.
D) MRSxy > Px/Py.

Accepted Answer

Bundle B represents a point where the marginal rate of substitution (MRS) of good x for good y is greater than the price ratio of good x to good y (Px/Py), indicating that the consumer is willing to give up more of good y to obtain an additional unit of good x than the market requires.

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 are correct and play a role in the consumer's optimal consumption decision. The marginal rate of substitution (MRS) represents the amount of one good a consumer is willing to give up in order to obtain one more unit of another good while remaining indifferent. At the optimal consumption point, the MRS must equal the relative price ratio in order for the consumer to allocate their budget most efficiently. The slope of the indifference curve represents the consumer's willingness to trade off one good for another. The slope of the budget constraint represents the relative prices of the two goods. At the optimal consumption point, the two slopes must be equal. Finally, the ratio of the marginal utilities (MU) represents the additional satisfaction a consumer receives for each additional unit of a good consumed. At the optimal consumption point, the ratio of the MU of one good to the MU of the other good must equal the ratio of the prices. Therefore, all three options are correct and are necessary for the consumer to choose an optimal consumption point.

Question 7

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

Point B represents the bundle of Skittles and M&M's that maximizes the consumer's utility given their budget constraint. At point B, the consumer is spending $16 on Skittles (8 packs) and $4 on M&M's (2 packs), which adds up to their available income of $20. At this point, the consumer is also experiencing the highest level of utility compared to any other affordable bundle of Skittles and M&M's.

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. 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 9

Figure 21-18 
-Refer to Figure 21-18. Bundle C represents a point where
A) MRSxy > Py/Px.
B) MRSxy = Px/Py.
C) MRSxy < Px/Py.
D) MRSxy > Px/Py.

Accepted Answer

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

Question 10

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 the consumer is to maximize utility, or in other words, to get the most satisfaction possible from the goods and services they consume. While minimizing expenses is important for many consumers, it is not the only goal, as some consumers may prioritize other factors such as brand loyalty or sustainability. Similarly, while some consumers may choose to spend more income in the present rather than saving for the future, this is not a universal goal for all consumers. Therefore, choice A is the best answer as it encompasses the main goal of maximizing utility.

Question 11

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 of the choices listed are goals of a consumer. Consumers strive to maximize their satisfaction, which can be achieved by being on the highest indifference curve and maximizing their utility. Therefore, the best choice is D, as it encompasses all of the possible goals a consumer may have.

Question 12

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 marginal rate of substitution (MRS) is the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility. In the given figure, the slope of the indifference curve at the chosen point represents the MRS. At point B, the slope of the indifference curve is 1 (the absolute value of the slope is 1), which means that the consumer is willing to give up one Skittle to get one M&M. This implies that the MRS is 1, which is the correct answer. This is because both the prices are the same, so for every dollar spent, the consumer can buy one unit of either good. Therefore, the consumer will allocate the entire budget of $50 in buying either Skittles or M&M's or a combination of both, based on their preferences.

Question 13

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 14

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 achieves equality between the marginal rate of substitution (MRS) and the relative price ratio, as this represents the point at which they are allocating their budget in a way that maximizes their satisfaction. Option B is not necessarily true, as it is possible for the slope of the indifference curve to be less than the slope of the budget constraint and still represent an optimal consumption point. Option C is also not necessarily true, as the marginal utilities of different goods may not be equal even at an optimal consumption point.

Question 15

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 16

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 17

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 18

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 19

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, which means that the consumer is getting the highest possible level of satisfaction while still staying within their budget. Choosing a point along the highest indifference curve or lowest budget constraint may not necessarily be feasible or affordable for the consumer, and therefore may not be optimal.

Question 20

Figure 21-18 
-Refer to Figure 21-18. Bundle D represents a point where
A) MRSxy > Py/Px.
B) MRSxy = Px/Py.
C) MRSxy < Px/Py.
D) MRSxy < Py/Px.

Accepted Answer

Bundle D represents a point where the slope of the indifference curve is steeper than the slope of the budget line. This implies that MRSxy (the marginal rate of substitution of good x for good y) is less than Px/Py (the ratio of the prices of good x and good y). Therefore, C is the best choice.

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

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

A consumer chooses an optimal consumption point where the

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

The goal of the consumer is to

The goal of the consumer is to

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

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 consumer chooses an optimal consumption point where the

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

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

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