Question 1

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

Accepted Answer

As a consumer consumes more units of a good, the marginal utility from each additional unit decreases.

Question 2

Suppose a consumer spends all their income on two goods, X and Y. The consumer maximizes utility when:

Accepted Answer

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

Question 3

If the price of good X increases, what happens to the consumer’s utility-maximizing condition?

Accepted Answer

The marginal utility per dollar spent on X will fall, so the consumer will buy less of X.

Question 4

Which of the following is an example of the substitution effect?

Accepted Answer

A consumer buys more oranges when the price of apples rises, holding real income constant.

Question 5

What is the income effect of a price decrease for a normal good?

Accepted Answer

The consumer buys more of the good because their real income has increased.

Question 6

Which of the following best describes a Giffen good?

Accepted Answer

An inferior good that takes a large proportion of household expenditure and has a positively sloped demand curve.

Question 7

Consumer surplus is defined as:

Accepted Answer

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

Question 8

If the market price for milk is $$1 per litre and Moira is willing to pay 5 $$for the first litre, what is her consumer surplus for that litre?

Accepted Answer

$4

Question 9

Why does water, which is essential to life, have a low price compared to diamonds, which are not essential?

Accepted Answer

Because water has a plentiful supply, leading to a low marginal value and price, while diamonds are scarce, leading to a high marginal value and price.

Question 10

Which of the following statements about the market demand curve is correct?

Accepted Answer

It is the horizontal sum of all individual demand curves.

Question 11

Suppose the price of a normal good falls. Which of the following is true?

Accepted Answer

Both the substitution effect and the income effect lead to an increase in quantity demanded.

Question 12

A consumer is currently maximizing utility by purchasing goods X and Y. If the price of X falls, what should the consumer do to restore utility maximization?

Accepted Answer

Buy more of X and less of Y.

Question 13

Which of the following is NOT a necessary condition for a Giffen good?

Accepted Answer

The substitution effect must outweigh the income effect.

Question 14

If a good is consumed for its 'snob appeal,' what does the theory predict about its market demand curve?

Accepted Answer

It will be negatively sloped, as lower-income consumers will still buy more at lower prices.

Question 15

If the marginal utility of the last dollar spent on tea is greater than that spent on milk, what should the consumer do?

Accepted Answer

Spend more on tea and less on milk.

Question 16

Which equation represents the consumer’s utility-maximizing rule for two goods, X and Y?

Accepted Answer

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

Question 17

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

Accepted Answer

Because the substitution effect and income effect both increase quantity demanded when price falls.

Question 18

If a consumer’s real income increases, what happens to the quantity demanded of an inferior good?

Accepted Answer

It decreases.

Question 19

Which area on a demand curve graphically represents consumer surplus?

Accepted Answer

The area under the demand curve and above the price line.

Question 20

A consumer faces the following marginal utilities and prices: $$MU_X = 20$$, $$P_X = 4$$, $$MU_Y = 30$$, $$P_Y = 10. Is $$the consumer maximizing utility, and what should they do?

Accepted Answer

No, the consumer should buy more of X and less of Y.

Consumer Behaviour: Utility, Demand, and Consumer Surplus

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