Question 1

Suppose a consumer derives the following total utility from consuming digital apps per week: 0 apps = 0 utils, 1 app = 10 utils, 2 apps = 16 utils, 3 apps = 19 utils, 4 apps = 20 utils, 5 apps = 20 utils, 6 apps = 18 utils. What is the marginal utility of the 4th app?

Accepted Answer

$$1$$

Question 2

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

Accepted Answer

As more of a good is consumed, the additional satisfaction from each extra unit decreases.

Question 3

A consumer spends all their income on two goods, A and B. The marginal utility of the last unit of A is 20 utils, and its price is $$4. The marginal utility of the last unit of B is 30 utils, and its price is 6. Is $$the consumer maximizing utility, and if not, what should they do?

Accepted Answer

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

Question 4

If the price of digital apps falls from $$5 to 4$$, what two effects will influence the consumer's new optimum choice?

Accepted Answer

Substitution effect and income effect

Question 5

Which equation represents the rule for consumer optimum when allocating income between two goods, A and B?

Accepted Answer

$$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$

Question 6

A consumer is indifferent between two bundles of goods, X and Y. What does this imply about the total utility derived from each bundle?

Accepted Answer

Total utility from X equals total utility from Y.

Question 7

If a consumer's budget constraint shifts outward, what does this indicate?

Accepted Answer

The consumer's purchasing power has increased.

Question 8

Which of the following statements about indifference curves is correct?

Accepted Answer

Higher indifference curves represent higher levels of satisfaction.

Question 9

The marginal rate of substitution (MRS) between two goods is defined as:

Accepted Answer

The amount of one good a consumer is willing to give up to obtain one more unit of another good, keeping utility constant.

Question 10

Why are diamonds more expensive than water, even though water is essential for life?

Accepted Answer

Because the marginal utility of diamonds is higher than that of water.

Question 11

If a consumer continues to consume a good even after its marginal utility becomes negative, what happens to total utility?

Accepted Answer

Total utility decreases.

Question 12

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

Accepted Answer

A consumer buys more apples when the price of apples falls, holding income constant.

Question 13

Suppose a consumer's income is $$50, the price of good X is 5$$, and the price of good Y is $10. What is the equation for the consumer's budget constraint?

Accepted Answer

$$5X + 10Y = 50$$

Question 14

Which of the following best describes bounded rationality in consumer choice?

Accepted Answer

Consumers make satisfactory rather than optimal choices due to limited information and cognitive constraints.

Question 15

If the marginal utility per dollar spent on good A is greater than that on good B, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good A and less of good B.

Question 16

A consumer is at a point where their budget line is tangent to an indifference curve. What does this point represent?

Accepted Answer

A consumer optimum, where utility is maximized given the budget constraint.

Question 17

If the price of one good decreases while income and the price of another good remain constant, what happens to the budget line?

Accepted Answer

It rotates outward from the axis of the good whose price changed.

Question 18

Which of the following is NOT a property of indifference curves?

Accepted Answer

They can cross each other.

Question 19

A consumer spends all their income on two goods. If the marginal utility per dollar spent on both goods is equal, what can be said about the consumer's allocation?

Accepted Answer

The consumer is at the consumer optimum.

Question 20

Which of the following real-world examples best illustrates the concept of consumer optimum?

Accepted Answer

A person allocates their budget so that the marginal utility per dollar spent on each item is equal, even if one item is a $2,000 pair of jeans.

Consumer Choice and Utility Theory: Microeconomics Study Notes

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