Question 1

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

Accepted Answer

As a consumer consumes more units of a good, the marginal utility from each additional unit decreases.

Question 2

A consumer maximizes utility when:

Accepted Answer

The marginal utility per dollar spent is equal for all goods.

Question 3

Suppose the price of good X falls. Which effect describes the consumer buying more of X because it is now relatively cheaper compared to other goods?

Accepted Answer

Substitution effect

Question 4

If a good is a Giffen good, which of the following must be true?

Accepted Answer

It is an inferior good and the income effect outweighs the substitution effect.

Question 5

Which formula represents the utility-maximizing condition for two goods, X and Y?

Accepted Answer

$$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$$

Question 6

What does the area under the demand curve and above the market price represent?

Accepted Answer

Consumer surplus

Question 7

Why does water, which is essential to life, have a lower price than diamonds, which are not essential?

Accepted Answer

Because water is more abundant, so its marginal utility and price are lower.

Question 8

If the price of a normal good decreases, what happens to the quantity demanded due to the income effect?

Accepted Answer

It increases because the consumer's real income has increased.

Question 9

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves are bowed inward due to diminishing marginal utility.

Question 10

A consumer's budget line will shift outward if:

Accepted Answer

The consumer's income increases.

Question 11

Which of the following best describes the marginal rate of substitution (MRS)?

Accepted Answer

The amount of one good a consumer is willing to give up to get one more unit of another good, keeping utility constant.

Question 12

If a consumer is at a point where $$\frac{MU_X}{P_X} \u003e \frac{MU_Y}{P_Y}$$, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good X and less of good Y.

Question 13

Which of the following is NOT a characteristic of a Giffen good?

Accepted Answer

The substitution effect outweighs the income effect.

Question 14

Which of the following would cause a movement along a consumer's demand curve for a good?

Accepted Answer

A change in the price of the good.

Question 15

Behavioural economics suggests that:

Accepted Answer

Consumers may be influenced by how choices are presented to them.

Question 16

If the market price of milk is $$1.00 per litre and Moira is willing to pay 2.00 $$for her third litre, what is her consumer surplus for that unit?

Accepted Answer

$1.00

Question 17

Which of the following best explains why the demand curve for a normal good is downward sloping?

Accepted Answer

Because of the combined effects of the income and substitution effects.

Question 18

If a consumer's indifference curve is tangent to the budget line, what does this point represent?

Accepted Answer

The consumer's utility-maximizing combination of goods.

Question 19

Which of the following is an example of the substitution effect?

Accepted Answer

A consumer buys more chicken when the price of beef rises.

Consumer Behaviour and Utility Maximization: Microeconomics Study Notes

Study Guide - Practice Questions