Q: Given the demand function $$Q = 15 - P$$, what is the consumer surplus when the price is $$P = 2$$?

$$CS = \frac{1}{2} \times (15 - 2) \times 13 = 84.5$$

Question 1

Which of the following best describes the Law of Diminishing Marginal Utility?

Accepted Answer

As the quantity consumed of a commodity increases per unit of time, the utility derived from each successive unit decreases, consumption of all other commodities remaining constant.

Question 2

Suppose a consumer’s utility function is $$U(x, y) = x^2$ y. If$$ $$MU_x$$ and $$MU_y$$ are the marginal utilities of $$x$$ and $$y$$ respectively, what is the Marginal Rate of Substitution ($$MRS_{x,y}) at$$ $$x = 2$$ and $$y = 8$$?

Accepted Answer

$$MRS_{x,y} = \frac{MU_x}{MU_y} = \frac{2xy}{x^2$} = \frac{2 	imes 2 	imes 8}{2^2$} = 8$$

Question 3

Which of the following is NOT an assumption of the Cardinal Utility Theory?

Accepted Answer

Utility is ranked only in order, not measured.

Question 4

A consumer faces the budget constraint $$P_x X + P_y Y = M. If $$the price of $$X$$ doubles, what happens to the intercept of the budget line on the $$X-$$axis?

Accepted Answer

It halves.

Question 5

Which property is NOT true for indifference curves?

Accepted Answer

Indifference curves are concave to the origin.

Question 6

If a consumer’s income increases, what happens to the budget line?

Accepted Answer

It shifts outward, parallel to the original line.

Question 7

Given the demand function $$Q = 15 - P$$, what is the consumer surplus when the price is $$P = 2$$?

Accepted Answer

$$CS = \frac{1}{2} 	imes (15 - 2) 	imes 13 = 84.5$$

Question 8

Which of the following best describes the income effect?

Accepted Answer

The change in quantity demanded due to a change in purchasing power associated with a change in price.

Question 9

If the cross-price elasticity of demand between goods $$A$$ and $$B is $$positive, what does this imply?

Accepted Answer

Goods $$A$$ and $$B$$ are substitutes.

Question 10

A consumer’s utility function is $$U(x, y) = xy. If$$ $$P_x = 2$$, $$P_y = 5$$, and $$M = 51$$, what is the utility-maximizing bundle $$(x^*, y^*)$$?

Accepted Answer

$$(x^*, y^*) = (10.2, 6.2)$$

Question 11

Which of the following is a critique of the cardinal utility approach?

Accepted Answer

It assumes utility can be measured objectively.

Question 12

If the price elasticity of demand for a product is $$-0.5$$, what does this imply about the product?

Accepted Answer

Demand is inelastic.

Question 13

Which formula is used to calculate the arc elasticity of demand between two points?

Accepted Answer

$$\frac{(Q_2$ - Q_1$)}{(Q_2$ + Q_1$)} \div \frac{(P_2$ - P_1$)}{(P_2$ + P_1$)}$$

Question 14

If a good has a negative income elasticity of demand, it is classified as:

Accepted Answer

An inferior good

Question 15

Which of the following will make the demand for a product more elastic?

Accepted Answer

Greater number and closeness of substitutes

Question 16

A consumer’s equilibrium under the ordinal utility approach occurs when:

Accepted Answer

$$MRS_{x,y} = \frac{P_x}{P_y}$$

Question 17

If the government imposes a lump sum tax on a consumer, how does the budget line change?

Accepted Answer

The budget line shifts inward, parallel to the original line.

Question 18

Which of the following is true about perfect complements?

Accepted Answer

Their indifference curves are L-shaped.

Question 19

If the price of good $$X$$ falls, which effect describes the change in quantity demanded due to the good becoming relatively cheaper compared to other goods?

Accepted Answer

Substitution effect

Question 20

The market demand curve is derived by:

Accepted Answer

Horizontally summing individual demand curves.

Microeconomics I: Theory of Consumer Behavior and Demand – Study Notes

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