Question 1

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

Accepted Answer

As more of a good is consumed, the extra benefit from each additional unit declines.

Question 2

Suppose a consumer is deciding how to allocate their income between two goods, A and B. If the marginal utility per dollar spent on A is $$\frac{MU_A}{P_A}$$ and on B is $$\frac{MU_B}{P_B}$$, what condition must be met for the consumer to be at their optimum?

Accepted Answer

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

Question 3

A consumer has a fixed income and faces the following prices: digital apps cost $$5 each and wireless earbuds cost 10 $$each. If the marginal utility of the last app purchased is 20 utils and the marginal utility of the last earbud purchased is 40 utils, which statement is true?

Accepted Answer

The consumer is at their optimum because the marginal utility per dollar spent is equal for both goods.

Question 4

If the price of digital apps falls from $$5 to 4$$, holding income and the price of other goods constant, what happens to the consumer's budget line?

Accepted Answer

The budget line rotates outward, allowing the consumer to buy more apps.

Question 5

Which effect explains why a consumer might buy more of a good when its price falls, even if their income does not change?

Accepted Answer

Substitution effect

Question 6

A consumer's purchasing power increases when:

Accepted Answer

The price of a good they buy decreases, holding income constant.

Question 7

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves are convex to the origin and slope downward.

Question 8

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 while keeping total satisfaction constant.

Question 9

Graphically, the consumer optimum is found at:

Accepted Answer

The tangency point between the highest indifference curve and the budget constraint.

Question 10

If a consumer derives zero marginal utility from consuming an additional unit of a good, what does this imply?

Accepted Answer

Total utility remains unchanged.

Question 11

Which of the following best explains the diamond-water paradox?

Accepted Answer

Diamonds have a higher marginal utility than water, even though water has a higher total utility.

Question 12

Bounded rationality may prevent a consumer from reaching a true optimum because:

Accepted Answer

Consumers may not act rationally or may be limited by cognitive constraints.

Question 13

If a consumer is indifferent between two combinations of goods, this means:

Accepted Answer

Both combinations yield the same total utility.

Question 14

Suppose a consumer's budget constraint is given by $$P_A \cdot Q_A + P_B \cdot Q_B = I. If $$the price of good A decreases, what happens to the budget line?

Accepted Answer

It rotates outward, allowing more of good A to be purchased.

Question 15

Which of the following is NOT a reason why a consumer might choose not to purchase a new vehicle with advanced digital features?

Accepted Answer

Marginal utility increases as more features are added.

Question 16

A consumer is considering buying a $100 plain white cotton T-shirt. According to consumer optimum theory, this purchase is rational if:

Accepted Answer

The marginal utility per dollar spent on the T-shirt equals that of other goods.

Question 17

Behavioral economics challenges traditional consumer choice theory by arguing that:

Accepted Answer

Consumers may not behave rationally, so utility-based models may not accurately predict choices.

Question 18

If a consumer's income is $$I$$, the price of good A is $$P_A$$, and the price of good B is $$P_B$$, which equation represents the budget constraint?

Accepted Answer

$$P_A \cdot Q_A + P_B \cdot Q_B = I$$

Question 19

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

Accepted Answer

The demand curve slopes downward because a decrease in price allows consumers to buy more.

Consumer Choice and Utility Theory: Microeconomics Study Notes

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