Question 1

Suppose a consumer derives the following marginal utility from consuming bottles of juice: the first bottle gives 30 utils, the second 20 utils, the third 15 utils, and so on, with marginal utility decreasing for each additional bottle. What economic principle does this illustrate?

Accepted Answer

The law of diminishing marginal utility

Question 2

A consumer spends all her income on two goods, X and Y. The price of X is $$4, the price of Y is 2. $$The marginal utility of the last unit of X consumed is 20 utils, and the marginal utility of the last unit of Y consumed is 10 utils. Is the consumer maximizing her utility?

Accepted Answer

Yes, because $$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$$

Question 3

If the price of good X falls, what happens to the consumer’s real income and what effect does this have on the quantity demanded of X if X is a normal good?

Accepted Answer

Real income increases and quantity demanded of X increases

Question 4

Which of the following best describes the substitution effect of a price decrease for a good?

Accepted Answer

The consumer buys more of the good because it is now relatively cheaper compared to other goods

Question 5

Suppose a consumer is maximizing utility by purchasing two goods, A and B. If the price of A rises, what will the consumer do to restore utility maximization?

Accepted Answer

Buy less of A and more of B

Question 6

Which of the following equations represents the utility-maximizing condition for two goods, X and Y?

Accepted Answer

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

Question 7

A Giffen good is characterized by which of the following?

Accepted Answer

A positively sloped demand curve because the income effect outweighs the substitution effect

Question 8

If a consumer is willing to pay $$6 for the first litre of milk, 3 $$for the second, and $$2 for the third, but the market price is 1 $$per litre, what is the consumer surplus for the first three litres?

Accepted Answer

$$(6-1) + (3-1) + (2-1) = 8$$

Question 9

Which of the following statements about the paradox of value is correct?

Accepted Answer

Water has a low price and high total value, while diamonds have a high price and low total value

Question 10

If the marginal utility per dollar spent on good X is greater than that for good Y, what should a rational consumer do?

Accepted Answer

Buy more of X and less of Y

Question 11

Which of the following best explains why the market demand curve is downward sloping?

Accepted Answer

Because the marginal utility of a good decreases as more is consumed, leading consumers to buy less at higher prices

Question 12

A decrease in the price of a normal good will have what effect on the consumer’s demand for that good?

Accepted Answer

Both the substitution and income effects will increase quantity demanded

Question 13

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

Accepted Answer

The good must be a normal good

Question 14

If a consumer’s demand curve for a product is derived from the utility-maximizing rule, what does each point on the demand curve represent?

Accepted Answer

The maximum price the consumer is willing to pay for each additional unit

Question 15

Which of the following best describes consumer surplus?

Accepted Answer

The difference between the total value consumers place on a good and the amount they actually pay

Question 16

If the price of a good falls and the good is inferior, what can be said about the income and substitution effects?

Accepted Answer

The substitution effect increases quantity demanded, but the income effect decreases it

Question 17

Which of the following is an example of a real-world policy nudge based on consumer behaviour research?

Accepted Answer

Automatically enrolling employees in a retirement savings plan with an opt-out option

Question 18

If a consumer’s marginal utility from the last dollar spent on juice is 10 and from the last dollar spent on burritos is 8, what should the consumer do to maximize utility?

Accepted Answer

Buy more juice and less burritos

Question 19

Which of the following best explains why diamonds have a high price but a low total value to consumers, while water has a low price but a high total value?

Accepted Answer

Diamonds are scarce and water is abundant, so the marginal value of diamonds is high and that of water is low

Consumer Behaviour: Utility, Demand, and Consumer Surplus

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