Question 1

Which of the following best describes the concept of 'completeness' in consumer preferences?

Accepted Answer

Consumers can compare and rank all possible market baskets.

Question 2

Suppose a consumer's indifference curves for two goods intersect. What does this imply?

Accepted Answer

The consumer's preferences violate the theory of consumer behavior.

Question 3

If a consumer's marginal rate of substitution (MRS) between food and clothing is 2, and the price of food is $$1 while the price of clothing is 2$$, is the consumer maximizing satisfaction?

Accepted Answer

Yes, because $$MRS = \frac{P_F}{P_C}.$$

Question 4

Given the utility function $$U(X,Y) = XY$$, prices $$P_X = 2$$, $$P_Y = 5$$, and income $$I = 100$$, what is the optimal bundle $$(X^*, Y^*)$$?

Accepted Answer

$$(X^*, Y^*) = (25, 10)$$

Question 5

Which of the following statements about the budget line is correct?

Accepted Answer

The slope of the budget line is $$-\frac{P_F}{P_C}.$$

Question 6

If a consumer faces a corner solution, what does this mean?

Accepted Answer

The consumer consumes only one of the two goods.

Question 7

Which of the following is true about perfect complements?

Accepted Answer

Their indifference curves are shaped as right angles.

Question 8

A consumer's utility function is $$U(F, C) = F 	imes C. If $$the consumer spends all income on food, what is the marginal utility of clothing?

Accepted Answer

Zero, because $$C = 0$$ and $$MU_C = F.$$

Question 9

Which of the following best describes the equal marginal principle?

Accepted Answer

Utility is maximized when the marginal utility per dollar spent is equal across all goods.

Question 10

If the price of food falls (with income unchanged), what happens to the budget line?

Accepted Answer

It rotates outward from the food axis.

Question 11

Which of the following is a property of indifference curves for 'bads'?

Accepted Answer

Less is preferred to more.

Question 12

What does the Laspeyres price index tend to do compared to the ideal cost-of-living index?

Accepted Answer

Overstate the increase in the cost of living.

Question 13

Which formula represents the budget constraint for two goods, food ($$F) $$and clothing ($$C$$), with prices $$P_F$$ and $$P_C$$ and income $$I$$?

Accepted Answer

$$P_F F + P_C C = I$$

Question 14

If a consumer chooses market basket A over B, and A is more expensive than B, what can be inferred?

Accepted Answer

The consumer prefers A to B (revealed preference).

Question 15

Which of the following best describes diminishing marginal utility?

Accepted Answer

As more of a good is consumed, each additional unit adds less to total utility.

Question 16

Which equation expresses the marginal rate of substitution (MRS) in terms of marginal utilities for food ($$F) $$and clothing ($$C$$)?

Accepted Answer

$$MRS = \frac{MU_F}{MU_C}$$

Question 17

A consumer's indifference curve is convex to the origin. What does this imply about their preferences?

Accepted Answer

The consumer has a diminishing marginal rate of substitution.

Question 18

Which of the following is true about chain-weighted price indexes?

Accepted Answer

They account for changes in quantities of goods and services.

Question 19

If a consumer's utility function is $$U(F, C) = F 	imes C$$, and the consumer chooses $$F = 20$$ and $$C = 10$$, what is their utility?

Accepted Answer

$$U = 200$$

Question 20

Which of the following is NOT an assumption about consumer preferences?

Accepted Answer

Consumers always choose the cheapest market basket.

Consumer Behavior: Preferences, Constraints, and Choice

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