Question 1

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

Accepted Answer

The additional satisfaction from consuming each extra unit of a product decreases as total consumption increases.

Question 2

A consumer is deciding how to allocate their budget between two goods, X and Y. The utility-maximizing condition is given by which equation?

Accepted Answer

$$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$$

Question 3

Suppose the price of juice increases. According to the theory of consumer behaviour, what will happen to the quantity of juice demanded?

Accepted Answer

It will decrease because the consumer will buy less juice to restore the utility-maximizing condition.

Question 4

Which of the following statements about the substitution effect is correct?

Accepted Answer

It refers to the change in quantity demanded due to a change in the product's relative price, holding real income constant.

Question 5

If a product is a normal good and its price falls, what is the combined effect of the income and substitution effects?

Accepted Answer

Both effects lead to an increase in quantity demanded.

Question 6

Which of the following is NOT a necessary condition for a good to be classified as a Giffen good?

Accepted Answer

The good must be a normal good.

Question 7

Consumer surplus is best described as:

Accepted Answer

The difference between the total value consumers place on all units consumed and the payment they actually make.

Question 8

Which of the following explains the paradox of value, where water has a low price and diamonds have a high price?

Accepted Answer

Water has a low marginal value but a high total value, while diamonds have a high marginal value but a low total value.

Question 9

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

Accepted Answer

Buy more of good A and less of good B.

Question 10

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

Accepted Answer

A consumer buys more organic food when their salary increases.

Question 11

If the area under the demand curve and above the price line represents consumer surplus, what does the area under the demand curve alone represent?

Accepted Answer

The total value consumers place on all units consumed.

Question 12

Which of the following scenarios best illustrates the concept of framing in consumer behaviour?

Accepted Answer

A consumer is influenced to buy a product because it is advertised as 'limited time offer' rather than 'regular price'.

Question 13

If a consumer’s real income increases, what is the expected effect on the quantity demanded of a normal good?

Accepted Answer

It will increase.

Question 14

Which of the following is true about conspicuous consumption goods?

Accepted Answer

Market demand for these goods is unlikely to be positively sloped because lower-income consumers offset snob behaviour.

Question 15

A consumer is considering buying more of a product. According to the theory of diminishing marginal utility, what happens to the marginal utility as the consumer increases consumption?

Accepted Answer

Marginal utility decreases.

Question 16

Suppose the price of a normal good falls significantly and the good represents a large portion of a household's budget. Which effect is likely to be larger: the income effect or the substitution effect?

Accepted Answer

The income effect, because the change in real income is substantial.

Question 17

Which equation represents the relative price of two products, X and Y, in terms of utility maximization?

Accepted Answer

$$\frac{MU_X}{MU_Y} = \frac{P_X}{P_Y}$$

Question 18

If a consumer is willing to pay a maximum of $$10 for a product but the market price is 6$$, what is the consumer surplus for one unit?

Accepted Answer

$$4$$

Question 19

Which of the following best explains why the market demand curve for a normal good is negatively sloped?

Accepted Answer

Because both the income and substitution effects lead to an increase in quantity demanded when price falls.

Chapter 6: Consumer Behaviour – Microeconomics Study Notes

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