Question 1

Which of the following is an assumption of perfect competition in the market system?

Accepted Answer

Households and firms have perfect knowledge of prices and qualities.

Question 2

In a perfectly competitive market, what does it mean for products to be homogeneous?

Accepted Answer

Products are identical and indistinguishable from one another.

Question 3

Which equation represents the budget constraint for a household choosing between two goods, X and Y?

Accepted Answer

$$P_X X + P_Y Y = I$$

Question 4

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

Accepted Answer

The opportunity set expands.

Question 5

According to the law of diminishing marginal utility, what happens as a consumer consumes more units of a good?

Accepted Answer

Marginal utility decreases with each additional unit.

Question 6

A consumer allocates their budget between two goods, X and Y, to maximize utility. Which condition must be satisfied?

Accepted Answer

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

Question 7

If the price of good X decreases, what is the effect on the household's budget constraint?

Accepted Answer

The budget constraint swivels outward, increasing the opportunity set.

Question 8

Which of the following best describes the income effect of a price decrease for a normal good?

Accepted Answer

The consumer feels richer and buys more of the good.

Question 9

What is the substitution effect when the price of good X falls?

Accepted Answer

Consumers buy more of good X and less of substitutes.

Question 10

In the context of labor supply, what does the wage rate represent for a household?

Accepted Answer

The price of leisure.

Question 11

If the substitution effect of a wage increase outweighs the income effect, what happens to the labor supply curve?

Accepted Answer

It slopes upward.

Question 12

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

Accepted Answer

The skills possessed by the household.

Question 13

What does an indifference curve represent?

Accepted Answer

Combinations of goods that yield the same total utility.

Question 14

At the consumer's utility-maximizing equilibrium, what is true about the slopes of the indifference curve and the budget constraint?

Accepted Answer

The slopes are equal.

Question 15

Which formula expresses the marginal rate of substitution (MRS) between goods X and Y?

Accepted Answer

$$MRS = \frac{MU_X}{MU_Y}$$

Question 16

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

Accepted Answer

Buy more of X and less of Y.

Question 17

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

Accepted Answer

Goods with high value in use may have low value in exchange, and vice versa.

Question 18

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

Accepted Answer

Saving tends to increase.

Question 19

Which of the following is a property of indifference curves?

Accepted Answer

They represent combinations of goods with equal utility.

Question 20

How can a demand curve be derived from indifference curves and budget constraints?

Accepted Answer

By plotting the prices of X against the quantities of X chosen at utility-maximizing points.

Principles of Microeconomics: The Market System and Household/Firm Choices

Study Guide - Practice Questions