Question 1

Which of the following best describes the main idea of rational consumer theory?

Accepted Answer

Consumers make intentional choices limited by their budget constraints.

Question 2

According to Samuelson (1938), what does a consumer's choice reveal?

Accepted Answer

Their preference.

Question 3

Anna has $$100 to spend per week. Milk costs 5 $$per litre and salad costs $10 per portion. Which equation represents her budget line?

Accepted Answer

$$5Q_M + 10Q_S$$ = $$100$$

Question 4

If Anna spends all her money on salad, how many portions can she buy?

Accepted Answer

10

Question 5

What happens to Anna’s budget line if her income increases from $$100 to 120$$, with prices unchanged?

Accepted Answer

The budget line shifts parallel outward.

Question 6

If the price of milk rises from $$5 to 10 $$per litre, what happens to Anna’s budget line?

Accepted Answer

It rotates inward around the salad intercept.

Question 7

Which of the following equations expresses Anna’s budget line in terms of salad portions per week ($$Q_S$$)?

Accepted Answer

$$Q_S = \frac{Y}{P_S} - \frac{P_M}{P_S}Q_M$$

Question 8

What does the slope of the budget line represent?

Accepted Answer

The negative of the relative price of the goods.

Question 9

Which of the following best defines an indifference curve?

Accepted Answer

A curve showing all combinations of goods that the consumer considers equally as good.

Question 10

If Anna is indifferent between (8 litres of milk, 6 salads) and (4 litres of milk, 12 salads), what is her marginal rate of substitution (MRS) between milk and salad in this range?

Accepted Answer

2

Question 11

What does a diminishing marginal rate of substitution imply about a consumer’s preferences?

Accepted Answer

The consumer values variety and is willing to give up less of one good for more of another as they have more of it.

Question 12

Which of the following pairs of goods is most likely to have indifference curves that are L-shaped?

Accepted Answer

Left shoes and right shoes

Question 13

At the optimal consumption bundle, which condition must hold?

Accepted Answer

$$MRS = \frac{P_M}{P_S}$$

Question 14

Suppose Anna’s income increases, and both milk and salad are normal goods. What happens to her demand for these goods?

Accepted Answer

Her demand for both goods increases.

Question 15

If the price of milk increases, what is the expected effect on the quantity of milk Anna demands, ceteris paribus?

Accepted Answer

It decreases.

Question 16

Which of the following is an example of perfect substitutes?

Accepted Answer

Different brands of bottled water

Question 17

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

Accepted Answer

They are perfect substitutes.

Question 18

A consumer chooses a bundle where the marginal rate of substitution is less than the relative price ratio. What should the consumer do to increase utility?

Accepted Answer

Buy more of the good on the vertical axis.

Question 19

Which of the following best describes the effect of a parallel shift of the budget line?

Accepted Answer

A change in the consumer’s income.

Question 20

Suppose Anna’s optimal bundle is 10 litres of milk and 5 portions of salad. If the price of salad increases, what is likely to happen to her optimal bundle?

Accepted Answer

She will consume less salad and possibly more milk.

Consumer Theory: Preferences, Budget Constraints, and Optimal Choice

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