Question 1

Which of the following best describes the concept of 'preferences' in consumer theory?

Accepted Answer

Preferences are the complete ordering of bundles of goods according to the consumer's satisfaction.

Question 2

Suppose a consumer's utility function is $$U(X, Y) = X$$^{0.5}$$Y^{0.5}. If $$the price of $$X is$$ $$P_X = 2$$, the price of $$Y is$$ $$P_Y = 4$$, and income $$I = 120$$, what is the optimal bundle $$(X^*, Y^*)$?

Accepted Answer

$$X^* = 30, Y^* = 15$$

Question 3

Which property is NOT required for a consumer's preferences to be considered 'well-behaved'?

Accepted Answer

Increasing marginal utility

Question 4

If a consumer's utility function is $$U(X, Y) = \min \{aX, bY\}$$, which of the following statements is true?

Accepted Answer

The consumer will consume $$X$$ and $$Y in $$fixed proportions.

Question 5

What does the marginal rate of substitution (MRS) represent?

Accepted Answer

The rate at which a consumer is willing to substitute one good for another while keeping utility constant.

Question 6

If the price of good $$X$$ falls, which of the following is true about the substitution effect (S.E.) and income effect (I.E.) for a normal good?

Accepted Answer

Both the substitution effect and income effect increase the quantity demanded of $$X.$$

Question 7

Which of the following utility functions represents perfect substitutes?

Accepted Answer

$$U(X, Y) = X + Y$$

Question 8

A consumer faces prices $$P_X = 3$$, $$P_Y = 6$$, and income $$I = 60. $$For perfect complements with $$U(X, Y) = \min \{X, Y\}$$, what is the optimal bundle?

Accepted Answer

$$X^* = 10, Y^* = 10$$

Question 9

Which of the following statements about indifference curves is FALSE?

Accepted Answer

Indifference curves for perfect complements are convex to the origin.

Question 10

If a consumer's utility function is $$U(X, Y) = X + 2Y$$, and $$P_X = 1$$, $$P_Y = 2$$, $$I = 10$$, what is the optimal consumption bundle?

Accepted Answer

$$X^* = 0, Y^* = 5$$

Question 11

Which of the following best describes the income effect?

Accepted Answer

The change in consumption resulting from a change in purchasing power, holding relative prices constant.

Question 12

Suppose a consumer's preferences are represented by $$U(X, Y) = X + Y. If$$ $$P_X = 2$$, $$P_Y = 1$$, and $$I = 10$$, what bundle will the consumer choose?

Accepted Answer

$$X^* = 0, Y^* = 10$$

Question 13

Which of the following is a property of Cobb-Douglas utility functions?

Accepted Answer

The optimal bundle always spends a constant share of income on each good.

Question 14

If a consumer's utility function is $$U(X, Y) = X + Y$$, what is the marginal rate of substitution (MRS) between $$X$$ and $$Y$$?

Accepted Answer

1

Question 15

Which of the following is true for a Giffen good?

Accepted Answer

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

Question 16

If a consumer's utility function is $$U(X, Y) = X$$^{0.3}$$Y^{0.7}$$, and the consumer's income doubles, what happens to the optimal quantities of $$X$$ and $$Y$?

Accepted Answer

Both $$X^*$$ and $$Y^*$$ double.

Question 17

Which of the following is NOT a characteristic of perfect complements?

Accepted Answer

The consumer's optimal bundle is always at a corner solution.

Question 18

If a consumer's preferences are strictly monotonic, which of the following must be true?

Accepted Answer

More of any good always increases utility.

Question 19

Which of the following best describes the substitution effect?

Accepted Answer

The change in consumption resulting from a change in relative prices, holding utility constant.

Consumer Theory and Utility Functions: Microeconomics Study Notes

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