Question 1

Which of the following best describes a consumer's budget line?

Accepted Answer

A line that shows all combinations of goods a consumer can afford given their income and the prices of goods.

Question 2

Lisa has $$40 to spend each month. If the price of a movie is 8 $$and the price of a case of cola is $4, which equation represents her budget constraint?

Accepted Answer

$$8M + 4C = 40$$

Question 3

What is the principle of diminishing marginal utility?

Accepted Answer

As the quantity consumed of a good increases, the marginal utility from it decreases.

Question 4

If Lisa's marginal utility from the last movie is 40 and the price of a movie is $8, what is her marginal utility per dollar for movies?

Accepted Answer

$$\frac{40}{8} = 5$$

Question 5

Which rule must a consumer follow to maximize total utility?

Accepted Answer

Spend all available income and equalize the marginal utility per dollar for all goods.

Question 6

Suppose the price of cola rises from $$4 to 8 $$per case. What is the likely effect on Lisa's consumption, according to marginal utility theory?

Accepted Answer

She will decrease her consumption of cola and increase her consumption of movies.

Question 7

If Lisa's marginal utility per dollar for movies is greater than for cola, what should she do to maximize her utility?

Accepted Answer

Buy more movies and less cola.

Question 8

Which of the following best explains the paradox of value (water vs. diamonds)?

Accepted Answer

Water has a high total utility but low marginal utility, while diamonds have a low total utility but high marginal utility.

Question 9

If Lisa's income increases from $$40 to 56$$, what is the expected effect on her consumption of normal goods?

Accepted Answer

She will buy more of both movies and cola.

Question 10

Which of the following is NOT an impediment to rational choice according to behavioral economics?

Accepted Answer

Perfect information

Question 11

What is the endowment effect?

Accepted Answer

The tendency for people to value something more highly simply because they own it.

Question 12

Which area of the brain is associated with rational economic decisions according to neuroeconomics?

Accepted Answer

Pre-frontal cortex

Question 13

If Lisa spends all her income and the marginal utility per dollar for movies equals that for cola, what is true?

Accepted Answer

She is in consumer equilibrium and maximizes her total utility.

Question 14

Which formula correctly expresses the marginal utility per dollar for cola?

Accepted Answer

$$\frac{MU_C}{P_C}$$

Question 15

A fall in the price of a movie will cause Lisa to:

Accepted Answer

Increase the quantity of movies demanded and decrease the demand for cola.

Question 16

Which of the following statements about utility is correct?

Accepted Answer

Utility is an abstract concept, similar to temperature, with arbitrary units of measurement.

Question 17

If Lisa's marginal utility from the last case of cola is 20 and the price of cola is $4, what is her marginal utility per dollar for cola?

Accepted Answer

$$\frac{20}{4} = 5$$

Question 18

Which of the following is an example of bounded willpower?

Accepted Answer

Choosing to eat dessert even though you know you will regret it later.

Question 19

What happens to the consumer surplus from water compared to diamonds, according to marginal utility theory?

Accepted Answer

Consumer surplus from water is large because its supply is perfectly elastic and price is low.

Utility and Demand: Consumption Choices and Utility Maximization

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