Question 1

Which of the following best describes the concept of a budget line in consumer theory?

Accepted Answer

It shows all combinations of goods that a consumer can afford given their income and the prices of goods.

Question 2

Lisa has $$40 to spend each month. The price of a movie is 8 $$and the price of a case of pop is $$4. What is the equation for Lisa's budget line if x$ is the number of movies and y$ is the number of cases of pop?

Accepted Answer

$$8x + 4y = 40$$

Question 3

If Lisa spends all her income on pop, how many cases can she buy?

Accepted Answer

10

Question 4

Which statement best describes the principle of diminishing marginal utility?

Accepted Answer

As the quantity consumed of a good increases, the marginal utility from it decreases.

Question 5

Suppose Lisa's marginal utility from movies is 30 and the price of a movie is $$8. Her marginal utility from pop is 20 and the price of pop is 4. $$Which good should Lisa buy more of to maximize her utility?

Accepted Answer

Pop, because $$\frac{MU_P}{P_P} = \frac{20}{4} = 5 is $$greater than $$\frac{MU_M}{P_M} = \frac{30}{8} = 3.75$$

Question 6

What is the utility-maximizing rule for consumers?

Accepted Answer

Spend all available income and equalize the marginal utility per dollar for all goods.

Question 7

If the marginal utility per dollar spent on movies is less than the marginal utility per dollar spent on pop, what should the consumer do to maximize utility?

Accepted Answer

Buy more pop and less movies.

Question 8

Total utility from a good is maximized when:

Accepted Answer

Marginal utility is zero.

Question 9

If Lisa's total utility from 2 movies is 90 and from 6 cases of pop is 225, what is her total utility from this combination?

Accepted Answer

315

Question 10

Suppose the price of pop increases from $$4 to 8 $$per case, with Lisa's income and the price of movies unchanged. What happens to Lisa's budget line?

Accepted Answer

It rotates inward, reducing the maximum amount of pop she can buy.

Question 11

If the marginal utility from consuming the third case of pop is 15 and the price is $4, what is the marginal utility per dollar for this unit?

Accepted Answer

$$\frac{15}{4} = 3.75$$

Question 12

Which of the following is NOT a requirement for consumer equilibrium?

Accepted Answer

Marginal utility is maximized for each good.

Question 13

If a consumer is at a point where $$\frac{MU_M}{P_M} \u003e \frac{MU_P}{P_P}$$, what should they do?

Accepted Answer

Buy more movies and less pop.

Question 14

Which of the following best explains why the paradox of value exists?

Accepted Answer

Because marginal utility per dollar can be higher for less expensive goods.

Question 15

A consumer has $$20 to spend. Good X costs 5 $$and Good Y costs $2. If the marginal utility of X is 25 and of Y is 8, which good should the consumer buy more of?

Accepted Answer

Good X, because $$\frac{25}{5} = 5 is $$greater than $$\frac{8}{2} = 4$$

Question 16

If total utility is increasing but marginal utility is decreasing, what does this imply?

Accepted Answer

Each additional unit adds less to total utility than the previous unit.

Question 17

Suppose Lisa's marginal utility from the last dollar spent on movies is equal to the marginal utility from the last dollar spent on pop. What does this indicate?

Accepted Answer

Lisa is in consumer equilibrium.

Question 18

If a consumer spends all their income on two goods and the marginal utility per dollar is not equalized, what is the result?

Accepted Answer

The consumer can increase total utility by reallocating spending.

Question 19

Which of the following is true about total utility and marginal utility?

Accepted Answer

Total utility increases as long as marginal utility is positive.

Question 20

A consumer faces the following marginal utilities and prices: $$MU_A = 20$$, $$P_A = 4$$; $$MU_B = 15$$, $$P_B = 3. $$Which good should the consumer buy more of?

Accepted Answer

Either good, because the marginal utility per dollar is equal.

Utility and Demand: Consumer Choice and Utility Maximization

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