Question 1

Suppose a consumer is deciding how to allocate their budget between 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, and the marginal utility of the last unit of Y consumed is 10. According to the utility-maximizing rule, what should the consumer do?

Accepted Answer

Buy more of good Y and less of good X.

Question 2

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

Accepted Answer

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

Question 3

If the marginal utility per dollar spent on juice is greater than the marginal utility per dollar spent on burritos, what should a rational consumer do to maximize total utility?

Accepted Answer

Buy more juice and less burritos.

Question 4

Which equation represents the utility-maximizing condition for two goods, X and Y?

Accepted Answer

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

Question 5

A decrease in the price of a normal good will have which of the following effects?

Accepted Answer

Both the substitution and income effects will increase the quantity demanded.

Question 6

Which of the following statements about Giffen goods is correct?

Accepted Answer

They are inferior goods with a positively sloped demand curve due to a strong income effect.

Question 7

What is consumer surplus?

Accepted Answer

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

Question 8

If the area under the demand curve and above the price line for a given quantity is $$A$$, what does $$A$$ represent?

Accepted Answer

Consumer surplus.

Question 9

Which of the following best explains the paradox of value (water-diamond paradox)?

Accepted Answer

Water has a low price due to its high supply, and diamonds have a high price due to their scarcity, even though water's total value is higher.

Question 10

Suppose the price of good X falls. Which of the following statements is true regarding the substitution and income effects for a normal good?

Accepted Answer

Both the substitution and income effects increase the quantity demanded.

Question 11

A consumer faces the following marginal utilities and prices: $$MU_A = 30$$, $$P_A = 5$$; $$MU_B = 18$$, $$P_B = 3. Is $$the consumer maximizing utility, and if not, what should they do?

Accepted Answer

No, they should buy more of good B and less of good A.

Question 12

Which of the following is NOT an assumption of the standard theory of consumer behaviour?

Accepted Answer

Consumers always respond to framing effects in their choices.

Question 13

If a good is a Giffen good, what must be true about its income and substitution effects?

Accepted Answer

The income effect is negative and larger than the substitution effect.

Question 14

Which of the following best describes real income?

Accepted Answer

Income expressed in terms of the purchasing power of money income.

Question 15

A consumer is observed to buy more of a good when its price falls, even though their income has not changed. This behaviour is best explained by:

Accepted Answer

The substitution effect.

Question 16

Which of the following is an example of a policy 'nudge' as discussed in behavioural economics?

Accepted Answer

Automatically enrolling employees in a retirement savings plan but allowing them to opt out.

Question 17

If the marginal utility of the last dollar spent on apples is less than the marginal utility of the last dollar spent on oranges, what should the consumer do?

Accepted Answer

Buy more oranges and less apples.

Question 18

Which of the following statements about conspicuous consumption goods is correct?

Accepted Answer

They are consumed for their 'snob appeal', but the market demand curve is still likely negatively sloped.

Question 19

Suppose a consumer's demand curve for a product is relatively flat. What does this imply about the marginal utility of the product as consumption increases?

Accepted Answer

Marginal utility decreases slowly as consumption increases.

Question 20

If a consumer purchases water and diamonds, which of the following statements is true according to the resolution of the paradox of value?

Accepted Answer

Water has a low price and low marginal value, but high total value.

Consumer Behaviour: Utility, Demand, and Surplus (Microeconomics Chapter 6 Study Notes)

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