Question 1

Which of the following best describes the consumer's problem in microeconomics?

Accepted Answer

To maximize a utility function subject to a limited income or budget.

Question 2

Suppose a consumer has a utility function $$U(x_1$, x_2$) = x_1$ + x_2$. What type of preferences does this utility function represent?

Accepted Answer

Perfect substitutes

Question 3

If a consumer's indifference curves are convex to the origin, what does this imply about their preferences?

Accepted Answer

The consumer prefers balanced bundles and has diminishing marginal rate of substitution.

Question 4

Given the utility function $$U(x_1$, x_2$) = x_1$ + 2x_2$$, what is the marginal utility of good 2?

Accepted Answer

$$MU_2 = 2$

Question 5

For the utility function $$U(x_1$, x_2$) = x_1$ + 2x_2$$, what is the marginal rate of substitution (MRS) of $$x_1$$ for $$x_2$$?

Accepted Answer

$$MRS = 1/2$$

Question 6

Which of the following statements about ordinal utility is correct?

Accepted Answer

Ordinal utility only ranks bundles in order of preference, not the magnitude of satisfaction.

Question 7

Suppose a consumer faces the budget constraint $$p_1x_1 + p_2x_2 = m. If $$the price of good 1 falls, what happens to the budget line?

Accepted Answer

It shifts outward and becomes flatter.

Question 8

Which of the following utility functions represents quasilinear preferences?

Accepted Answer

$$U(x_1$, x_2$) = f(x_1$) + x_2$

Question 9

If a consumer's utility function is $$U(x_1$, x_2$) = 	ext{min}(x_1$, x_2$)$$, what type of goods are $$x_1$$ and $$x_2$$?

Accepted Answer

Perfect complements

Question 10

Consider a consumer with a fixed income $$m$$ and two normal goods. If the price of good 1 falls, what is the sign of the substitution effect and the income effect for good 1?

Accepted Answer

Both effects are positive.

Question 11

Suppose the utility function is $$U(x_1$, x_2$) = x_1$ x_2$. If the price of x_1$ decreases, which effect is likely to be larger for quasilinear utility: substitution or income effect?

Accepted Answer

Substitution effect is larger.

Question 12

If a consumer's indifference curves for two goods are straight lines, what does this imply about the goods?

Accepted Answer

They are perfect substitutes.

Question 13

Which equation represents the budget constraint for a consumer choosing quantities $$x_1$$ and $$x_2 of $$two goods with prices $$p_1$$ and $$p_2$$ and income $$m$$?

Accepted Answer

$$p_1x_1 + p_2x_2 = m$$

Question 14

A consumer's optimal choice occurs where:

Accepted Answer

The marginal rate of substitution equals the ratio of prices.

Question 15

If the price of good 2 increases and the demand for good 1 increases, what is the relationship between the two goods?

Accepted Answer

They are gross substitutes.

Question 16

Which of the following best describes the Slutsky substitution effect?

Accepted Answer

It isolates the effect of a price change by holding purchasing power constant.

Question 17

For an inferior good, what is the sign of the income effect when the price of the good falls?

Accepted Answer

Negative

Question 18

If a consumer's utility function is $$U(x_1$, x_2$) = x_1$ + 	ext{ln}(x_2$)$$, what is the marginal utility of $$x_2$$?

Accepted Answer

$$MU_2 = 1$$/$$x_2$$

Question 19

Which of the following is true about the Hicks substitution effect?

Accepted Answer

It holds utility constant.

Consumer Theory I: Utility, Preferences, and Choice

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