Question 1

Which of the following best describes the law of diminishing marginal utility?

Accepted Answer

As a consumer consumes more of a good, the extra benefit from each additional unit consumed declines.

Question 2

Suppose a consumer spends all their income on two goods, A and B. The price of A is $$4, the price of B is 2. $$The marginal utility of the last unit of A consumed is 12 utils, and for B it is 6 utils. Is the consumer maximizing utility?

Accepted Answer

No, because the marginal utility per dollar spent on A is higher than on B.

Question 3

If the marginal utility of the 5th digital app downloaded is zero, what does this imply about total utility at that point?

Accepted Answer

Total utility is at its maximum.

Question 4

A consumer has $$20 to spend on two goods: X (4 $$each) and Y ($2 each). The marginal utility of the last unit of X purchased is 16 utils, and for Y it is 8 utils. What should the consumer do to maximize utility?

Accepted Answer

The consumer is maximizing utility because the marginal utility per dollar is equal for both goods.

Question 5

Which of the following equations represents the rule for consumer optimum when choosing between two goods, A and B?

Accepted Answer

$$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$

Question 6

If the price of digital apps falls from $$6 to 4$$, holding income and the price of other goods constant, what is the likely effect on the consumer's optimum?

Accepted Answer

The consumer will buy more digital apps due to both the substitution and real-income effects.

Question 7

Which of the following best describes the substitution effect?

Accepted Answer

The tendency to substitute cheaper goods for more expensive ones when relative prices change.

Question 8

A consumer is indifferent between two bundles of goods, X and Y. What does this imply about the total utility derived from each bundle?

Accepted Answer

Total utility from X equals total utility from Y.

Question 9

Which property is NOT a characteristic of indifference curves?

Accepted Answer

Indifference curves can cross each other.

Question 10

If a consumer's budget constraint shifts outward, what does this indicate?

Accepted Answer

The consumer's purchasing power has increased.

Question 11

The diamond-water paradox illustrates that:

Accepted Answer

The price of a good is determined by its marginal utility, not its total utility.

Question 12

Which of the following is an example of the real-income effect?

Accepted Answer

A consumer buys more of all goods when their income increases.

Question 13

Suppose a consumer is choosing between two goods, A and B. If $$\frac{MU_A}{P_A} \u003e \frac{MU_B}{P_B}$$, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good A and less of good B.

Question 14

Which of the following statements about behavioral economics is correct?

Accepted Answer

Behavioral economics suggests that bounded rationality may prevent consumers from reaching the true optimum.

Question 15

If a consumer's indifference curve is a straight line, what does this imply about the two goods?

Accepted Answer

The goods are perfect substitutes.

Question 16

A consumer spends all their income on two goods. If the price of one good decreases, what happens to the budget line?

Accepted Answer

It rotates outward from the axis of the other good.

Question 17

Which of the following best describes the marginal rate of substitution (MRS)?

Accepted Answer

The rate at which a consumer is willing to give up one good for another while maintaining the same level of satisfaction.

Question 18

If a consumer derives negative marginal utility from consuming an additional unit of a good, what should they do?

Accepted Answer

Stop consuming the good, even if it is free.

Question 19

Which of the following is NOT a step in attaining consumer optimum?

Accepted Answer

Maximizing marginal utility for only one good.

Question 20

If a consumer's preferences are represented by convex indifference curves, what does this imply about their willingness to substitute between two goods?

Accepted Answer

The consumer's willingness to substitute decreases as they consume more of one good.

Consumer Choice and Utility Theory: Microeconomics Study Guide

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