Question 1

Suppose a consumer is deciding how to allocate their $$30 budget between two goods: coffee and bagels. The price of coffee is 3 $$per cup, and the price of a bagel is $2. If the marginal utility of the last cup of coffee consumed is 12 utils and the marginal utility of the last bagel is 8 utils, which of the following statements is true about the consumer's allocation?

Accepted Answer

The consumer should buy more bagels and fewer cups of coffee to maximize utility.

Question 2

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

Accepted Answer

As more of a good is consumed, the additional satisfaction from each extra unit eventually decreases.

Question 3

A consumer is indifferent between consuming 3 units of good X and 2 units of good Y, or 2 units of good X and 4 units of good Y. What does this imply about the consumer's preferences?

Accepted Answer

The consumer receives the same total utility from both combinations.

Question 4

If the price of digital apps falls from $$5 to 3 $$while the consumer's income and the price of all other goods remain constant, what happens to the consumer's budget constraint?

Accepted Answer

The budget constraint rotates outward, allowing the consumer to buy more digital apps.

Question 5

Which of the following equations represents the rule for consumer optimum when choosing between two goods, A and B?

Accepted Answer

$$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$

Question 6

A consumer derives 20 utils from the first slice of pizza, 15 from the second, 10 from the third, and 5 from the fourth. What is the marginal utility of the third slice?

Accepted Answer

10 utils

Question 7

Which of the following best illustrates the substitution effect?

Accepted Answer

A consumer buys more apples and fewer oranges when the price of apples falls.

Question 8

If a consumer's marginal utility from the last dollar spent on jeans is less than the marginal utility from the last dollar spent on shoes, what should the consumer do to maximize utility?

Accepted Answer

Buy more shoes and fewer jeans.

Question 9

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves are convex to the origin, reflecting diminishing marginal rate of substitution.

Question 10

Suppose a consumer faces the following marginal utilities and prices: $$MU_A = 30$$, $$P_A = 5$$; $$MU_B = 18$$, $$P_B = 3. Is $$the consumer maximizing utility, and if not, what should they do?

Accepted Answer

No, the consumer should buy more of good B and less of good A.

Question 11

Which of the following best describes the real-income effect?

Accepted Answer

The change in purchasing power when the price of a good changes, holding income constant.

Question 12

A consumer is at a point where their budget line is tangent to an indifference curve. What does this point represent?

Accepted Answer

The consumer is at their consumer optimum, maximizing utility given their budget constraint.

Question 13

Which of the following is an example of bounded rationality affecting consumer choice?

Accepted Answer

A consumer is unable to compare all possible options due to limited information and cognitive capacity.

Question 14

If the marginal utility of water is lower than that of diamonds, but the total utility of water is much higher, what does this imply about their prices?

Accepted Answer

Diamonds will be more expensive than water because price is determined by marginal utility, not total utility.

Question 15

A consumer's indifference map shows several indifference curves. Which of the following is true?

Accepted Answer

A consumer prefers points on higher indifference curves to those on lower ones.

Question 16

Suppose a consumer's budget constraint is given by $$P_X X + P_Y Y = I. If $$the price of good X decreases, what happens to the budget line?

Accepted Answer

It rotates outward, allowing the consumer to buy more of good X for the same income.

Question 17

Which of the following best describes the marginal rate of substitution (MRS) between two goods X and Y?

Accepted Answer

The rate at which a consumer is willing to give up Y for one more unit of X, keeping utility constant.

Question 18

A consumer spends all their income on two goods, A and B. If $$\frac{MU_A}{P_A} \u003e \frac{MU_B}{P_B}$$, what should the consumer do to increase total utility?

Accepted Answer

Buy more of good A and less of good B.

Question 19

Which of the following is NOT an assumption made when deriving the demand curve from consumer choice theory?

Accepted Answer

The marginal utility of money increases as more is spent.

Consumer Choice and Utility Theory: Microeconomics Study Notes

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