Question 1

Which of the following best describes the concept of a budget constraint?

Accepted Answer

The set of all possible combinations of goods and services a household can purchase given its income and the prices of goods.

Question 2

In a perfectly competitive market, which of the following is TRUE?

Accepted Answer

There are many firms, each producing virtually identical products, and no firm can control prices.

Question 3

Suppose a household faces the following budget constraint: $$P_X X + P_Y Y = I. If $$the price of good X decreases, what happens to the opportunity set?

Accepted Answer

The opportunity set expands because more combinations of X and Y are affordable.

Question 4

Which equation represents the utility-maximizing rule for two goods, X and Y?

Accepted Answer

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

Question 5

A consumer is deciding between buying apples and oranges. If the marginal utility per dollar spent on apples is greater than that for oranges, what should the consumer do to maximize utility?

Accepted Answer

Buy more apples and fewer oranges.

Question 6

The law of diminishing marginal utility states that:

Accepted Answer

Marginal utility decreases as more units of a good are consumed.

Question 7

If the price of a normal good falls, which effects will increase the quantity demanded?

Accepted Answer

Both the income and substitution effects.

Question 8

Which of the following best explains the diamond/water paradox?

Accepted Answer

Diamonds have high value in exchange but low value in use, while water has high value in use but low value in exchange.

Question 9

A household’s labor supply decision is most directly affected by:

Accepted Answer

The market wage rate and the opportunity cost of leisure.

Question 10

If the wage rate increases and the substitution effect outweighs the income effect, what happens to the labor supply curve?

Accepted Answer

It slopes upward.

Question 11

Which of the following is NOT a determinant of household demand?

Accepted Answer

The skills possessed by household members.

Question 12

The marginal rate of substitution (MRS) between goods X and Y is defined as:

Accepted Answer

The rate at which a household is willing to substitute Y for X.

Question 13

Which of the following statements about indifference curves is correct?

Accepted Answer

Higher indifference curves represent higher levels of total utility.

Question 14

If a consumer’s budget constraint is tangent to an indifference curve, what does this imply?

Accepted Answer

The consumer is maximizing utility given their budget constraint.

Question 15

Which formula represents the slope of the budget constraint for goods X and Y?

Accepted Answer

$$-\frac{P_X}{P_Y}$$

Question 16

In the context of the financial capital market, what is the effect of an increase in interest rates on household saving behavior?

Accepted Answer

Saving tends to increase because the substitution effect is larger.

Question 17

Which real-world scenario best illustrates the substitution effect?

Accepted Answer

A consumer switches from hotels to Airbnb when hotel prices rise.

Question 18

If a household’s real income increases, what happens to its opportunity set?

Accepted Answer

The opportunity set expands.

Question 19

Which of the following is a key assumption underlying indifference curve analysis?

Accepted Answer

Goods yield positive marginal utility and 'more is better'.

Question 20

A consumer’s demand curve for good X can be derived by:

Accepted Answer

Plotting the prices of X against the quantities of X chosen at each price, holding income and the price of Y constant.

Household Behavior and Consumer Choice: Principles of Microeconomics Study Guide

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