Question 1

Lisa has $40 to spend each month. The price of a movie is $8 and the price of a case of cola is $4. Which equation correctly represents Lisa's budget line if $Q_M$ is the number of movies and $Q_C$ is the number of cases of cola?

Accepted Answer

$8Q_M + 4Q_C = 40$

Question 2

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

Accepted Answer

As the quantity consumed of a good increases, the marginal utility from it decreases.

Question 3

Suppose Lisa's marginal utility from her last movie is 30 and the price of a movie is $8. Her marginal utility from her last case of cola is 20 and the price of cola is $4. According to the utility-maximizing rule, what should Lisa do?

Accepted Answer

Buy more movies and less cola.

Question 4

If Lisa is maximizing her utility, which of the following must be true?

Accepted Answer

$\frac{MU_M}{P_M} = \frac{MU_C}{P_C}$

Question 5

If the price of cola rises from $4 to $8 per case, what is the predicted effect on Lisa's consumption according to marginal utility theory?

Accepted Answer

She will buy less cola and more movies.

Question 6

Which of the following statements best explains the paradox of value (why water is cheaper than diamonds)?

Accepted Answer

Water has a high total utility but low marginal utility, while diamonds have a low total utility but high marginal utility.

Question 7

Lisa's marginal utility from the last movie is 40 and the price of a movie is $8. Her marginal utility from the last case of cola is 16 and the price of cola is $4. What is her marginal utility per dollar for each good?

Accepted Answer

Movies: $5$, Cola: $4$

Question 8

Which of the following is NOT an assumption of marginal utility theory?

Accepted Answer

Consumers have unlimited income.

Question 9

If Lisa's income increases from $40 to $56 per month, with prices unchanged, what is the predicted effect on her consumption of normal goods?

Accepted Answer

She will buy more of both movies and cola.

Question 10

Which of the following best describes the endowment effect as discussed in behavioral economics?

Accepted Answer

People value something more highly simply because they own it.

Question 11

Suppose Lisa is choosing between two goods, A and B. If $\frac{MU_A}{P_A} > \frac{MU_B}{P_B}$, what should she do to maximize her utility?

Accepted Answer

Buy more of good A and less of good B.

Question 12

Which of the following is an example of bounded rationality?

Accepted Answer

A consumer uses a rule of thumb instead of calculating the exact utility of each option.

Question 13

Which area of the brain is associated with rational economic decisions according to neuroeconomics?

Accepted Answer

Pre-frontal cortex

Question 14

If the supply of water is perfectly elastic, what does this imply about the consumer surplus from water?

Accepted Answer

Consumer surplus from water is large.

Question 15

Which of the following is NOT a prediction of marginal utility theory?

Accepted Answer

A rise in the price of a good increases the quantity demanded of that good.

Question 16

Which of the following best describes consumer equilibrium?

Accepted Answer

The situation in which all available income is allocated to maximize total utility, given prices.

Question 17

A consumer faces the following marginal utilities and prices: $MU_X = 24$, $P_X = 6$; $MU_Y = 18$, $P_Y = 3$. Is the consumer maximizing utility, and if not, what should they do?

Accepted Answer

No; buy more of good X and less of good Y.

Question 18

Which of the following is an example of bounded self-interest?

Accepted Answer

A person donates money to charity even though it does not benefit them directly.

Question 19

If a consumer's marginal utility per dollar for good A is less than for good B, what will happen if the consumer reallocates spending toward good B?

Accepted Answer

Total utility will increase.

Question 20

Which of the following statements about utility is correct?

Accepted Answer

Utility is an abstract concept with arbitrary units, similar to temperature.

chapter 8

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