1CONSUMER CHOICE

TRUE-FALSE QUESTIONS
1. .Marginalutilityismeasuredbythemaximumamountofmoneyaconsumeriswilling
topayforonemoreunitofacommodity. 2. Totalutilityalwaysdecreaseswhenadditionalamountsofacommodityare consumed. 3. Marginalutilitycanfallevenastotalutilityfromtheconsumptionofagoodisrising. 4. Totalutilityincreasesifonemoreunitofaproductispurchasedandmarginalutility ispositive. 5. Thelawofdiminishingmarginalutilityholdsthatatsomepointconsumptionof additionalunitsofacommodityaddslesstototalutility. 6. Thelawofdiminishingmarginalutilitystatesthattotalutilitywillincreaseata decreasingrateasadditionalunitsofacommodityareacquired. 7. Asarule,asaconsumeracquiresmoreandmoreofagood,themarginalutility declines. 8. Ifthemarginalnetutilityofbeerisapositivenumber,theconsumershouldbuymore beerinordertomaximizeutility. 9. Ifthemarginalnetutilityofbeerisnegative,theconsumershouldbuymorebeerin ordertoincreasethetotalutility. 10. Thelawofdiminishingmarginalutilityisconsistentwiththeconsumerbehaviorthat producesanegativelyslopeddemandcurve. 11. Consumersurplusisthedifferencebetweentheworthofacommoditytothe consumerandthepricetheconsumerpaysforthecommodity. 12. Consumersurplusiswhatoneconsumeriswillingtopayforacommodityoverwhat anotherconsumeriswillingtopayforthesamecommodity. 13. Pointsalongabudgetlinerepresentthemaximumcombinationsoftwocommodities thataconsumercanafford. 14. Theslopeofthebudgetlineisdeterminedonlybythepricesofthecommodities purchased. 15. Achangeinthepriceofonegoodresultsinarotationofthebudgetline,sothatitis steeperorflatter. 16. Adecreaseinthepriceofonegoodresultsinaparallelshiftinthebudgetline. 17. 18. 19. Thebudgetlinerepresentsaconsumerspreferencesforacommodity. Achangeinthepriceofagoodwillshifttheindifferencecurves. Anypointonthelowestindifferencecurveispreferabletoapointonahigherindifference curve.

121

Chapter 4/Consumer Choice: Individual and Market Demand y 122 20. Allpointsonanindifferencecurverepresentcombinationsoftwogoodsthatareequally desirabletotheconsumer. 21. Anincreaseinincomeshiftsindifferencecurvesoutward. 22. Themarginalrateofsubstitutionrepresentsthemaximumamountofonecommodity aconsumeriswillingtogiveupinexchangeforonemoreunitofanothercommodity. 23. Theslopeofthebudgetlineistheamountofonecommoditythataconsumermust giveupinordertoobtainanadditionalunitoftheothercommodity. 24. Achangeinconsumerpreferenceswillshiftthebudgetline. 25. Aconsumerwillconsumethecombinationofgoodsatthepointoftangencybetween thebudgetlineandtheindifferencecurve. 26. Aconsumerwillconsumethecombinationofgoodsatthecrossingpointofabudget lineandindifferencecurve. 27. Anincreaseinaconsumersincomewillalwaysincreasethedemandforagood. 28. Bychangingtheamountofincomeaconsumerhastospend,achangeinthepriceof onegoodmayaffectthequantitydemandedofanothergood.

Multiplechoicequestions
1.Whenthepriceofacommodityrises,wecanexpect a. marginalutilityofthelastunitpurchasedwillrise. b. marginalutilityofthelastunitpurchasedwillfall. c. marginalutilityofthelastunitpurchasedwillbeunaffected. d. purchasestorisebecauseoftheincreasedmarginalutility. 2.Whenthepriceofacommodityfalls,wecanexpect a. totalutilitywillfall. b. marginalutilityofthelastunitpurchasedwillfall. c. marginalutilityofthelastunitpurchasedwillrise. d. purchaseswillfallbecauseofachangeinmarginalutility. . 3.Thetheoryofconsumerchoiceisbasedonthehypothesisthateachconsumerwantsto a. maximizehertotalutility. b. maximizehermarginalutility. c. minimizetherateatwhichhermarginalutilitydiminishes. d. minimizethepercentageofherconsumptiondivertedtoinferiorgoods.

4.Aconsumerpossessesfivepoundsofbananasandvaluestheirtotalutilityat$2.14.If oneadditionalpoundisacquiredandmarginalutilityis11cents,totalutilitywill a. riseto$2.25. b. fallto$2.03. c. staythesame. d. fallto$2.11.

Chapter 4/Consumer Choice: Individual and Market Demand y 123 5.Totalutility a. diminishesasthequantityconsumedofagoodincreases. b. increasesaslongasmoregoodsareacquired. c. increasesaslongasmarginalutilityincreases. d. increasesaslongasmarginalutilityispositive. e. diminishesasconsumptionofsomegoodrises. 6.Formostgoodsandmostpeople,marginalutilityprobably a. continuestoincreaseaslargerquantitiesarepurchased. b. plummetsafterthefirstfewunitsbutsoonbeginstorise. c. declinesasconsumptionincreases. d. isnegativeafterthefirstunitofagoodispurchased. e. ispositiveandrisingformostgoods. 7.Thelawofdiminishingmarginalutilityexplainswhy a. mostindividualdemandcurvesarestraightlines. b. theconsumersoptimalpurchaseisatthetangencyofanindifferencecurveandthe budgetline. c. mostindividualdemandcurvesslopedownward. d. marginalutilityfallswhentotalutilityfalls. . 8.Iftotalutilitydeclinesasanadditionalunitofacommodityispurchased, a. marginalutilitymustberising. b. marginalutilityisnegative. c. marginalutilityispositivebutfalling. d. itspricemusthaverisen. e. marginalutilityiszero.

. 9.

Theconsumermaximizeshistotalutility(measuredinmoneyterms)when,athis chosenquantityofeverygoodhebuys,marginalutility a. equalszero. b. dividedbypriceequalszero. c. equalsprice. d. equalstotalutility. Marginalutilityhasanegativeslope.Thisisbecauseofthe a. optimalpurchaserule. b. lawofincreasingcosts. c. lawofdiminishingmarginalutility. d. marginalrateofsubstitution. .11. Anincreaseinafamilysincomewillcauseitsbudgetlineto a. becomesteeper. b. becomeflatter(lesssteep). c. moveclosertotheorigin. d. moveawayfromtheorigin. e. becomemoreconvextowardtheorigin. 10.

Chapter 4/Consumer Choice: Individual and Market Demand y 124 12. Abudgetlineisastraightlinedesignedtoshow a. howincomeisrelatedtohoursworked. b. allcombinationsoftwogoodsthatcanbepurchasedwithagivenincome. c. thewayahomemakershoulddividemoneyamongseveralcommodities. d. thatifmoremoneyisspentononegood,thebreadwinnermustworkalltheharderto maintainasatisfactorylevelofliving. e. preferencesforgoodsandservices. Theslopeofanindifferencecurveiscalledthe a. blissgradient. b. happinessslope. c. averagetransformationrate. d. marginalrateofsubstitution.

13.

FIGURE 4-8

InFigure48,budgetlineBcomparedtoAclearlyshowsthatthe a. priceofwineincreased. b. priceofbeerdecreased. c. priceofbeerincreased. d. consumersmoneyincomeincreased. 14. 15. Ifthepricesofbothgoodsincreaseby10percent,thebudgetline a. shiftstotherightinparallelfashion. b. shiftstotheleftinparallelfashion. c. isunaffectedsinceonlyrelativepricechangesmatter. d. pivotsontheaxisofthemoreexpensivegood.

Chapter 4/Consumer Choice: Individual and Market Demand y 125 16. Whichofthefollowingischaracteristicofindifferencecurves? a. Theyarenegativelysloped. b. Theyneverintersect. c. Theyareconvextowardtheorigin. d. Alloftheabovearecorrect.

FIGURE 4-10

17.

InFigure410,theconsumersmarginalrateofsubstitutionathisoptimumchoiceofX andYis a. 1. b. 16. c. 8. d. 8.

Chapter 4/Consumer Choice: Individual and Market Demand y 126

FIGURE 4-14

18.

InFigure414,thelineABis a. anindifferencecurve. b. abudgetline. c. amarginalutilitycurve. d. ademandcurve.

19.

InFigure414,theconsumercanaffordanycombinationofXandYrepresentedbya point a. onlineABonly. b. onorbelowlineAB. c. onorabovelineAB. d. anywhereonthegraph. 20. InFigure414,theconsumerisbetteroff a. atAthanatE. b. atBthanatD. c. atanypointonU2thanatanypointonU1. d. Alloftheabovearecorrect. InFigure414,theslopeofthebudgetline(droppingallminussigns)equals a. priceofgoodX/priceofgoodY. b. priceofgoodY/priceofgoodX. c. theminimumnumberofunitsofgoodYtheconsumerwouldhavetoreceivetomake himwillingtogiveuponeunitofgoodX. d. theminimumnumberofunitsofgoodXtheconsumerwouldhavetoreceivetomake himwillingtogiveuponeunitofgoodY.

21.

Chapter 4/Consumer Choice: Individual and Market Demand y 127 22. AccordingtoFigure414,ifthepriceofgoodXfalls,aconsumermakingheroptimal decisionwillmovefromapointon a. U1toapointonU3. b. U2toapointonU3. c. U1toapointonU3. d. U2toapointonU1. 23. Whenthepriceofagoodchangesbutthepriceoftheonlyothergoodboughtbya consumerstaysconstant,his a. budgetlineshifts. b. indifferencecurvesshift. c. budgetlinechangesslope. d. indifferencecurveschangeslope.

FIGURE 4-15

Chapter 4/Consumer Choice: Individual and Market Demand y 128 24. Theslopeofaconsumersindifferencecurvebetweentwocommoditiesrepresents a. hermarginalrateofsubstitutionbetweenthecommodities. b. therelativepricesofthegoods. c. hermarginalrevenuefromsellingthecommodities. d. hermarginalrevenueproductfromconsumingthecommodities.

FIGURE 4-16

25.

HalinitiallyconsumesthecombinationmarkedasAinFigure416.Afterhisincome increases,HalconsumescombinationB.WecanconcludethatHalviews a. XasaninferiorgoodandYasanoninferiorgood. b. XasanoninferiorgoodandYasaninferiorgood. c. bothXandYasnoninferiorgoods. d. bothXandYasinferiorgoods.

Chapter 4/Consumer Choice: Individual and Market Demand y 129

FIGURE 4-17

26.

Figure417showsAdamspurchasesofbananasandappleswhenapplescost$5each andbananas$4each.TheinformationimpliesthatAdamsincome a. mustbe$9. b. mustbe$20. c. mustbe$40. d. Adamsincomecannotbedeterminedwithoutfurtherinformation. InFigure417,adecreaseinthepriceofappleswill a. shiftAdamsbudgetconstraintout. b. makeAdamsbudgetconstraintsteeper. c. shiftAdamsindifferencecurvesout. d. makeAdamsbudgetconstraintflatter. Vickiconsumesmeatloafandpizza.Tokeepherutilityconstant,youmustgiveher moreofonegoodifyoutakesomeoftheotheraway.Thisinformationimpliesthat a. Vickismarginalrateofsubstitutionmustbeconstantalongherindifferencecurve. b. Vickisindifferencecurvemusthaveanegativeslope. c. thepricesVickimustpayformeatloafandpizzaarealwaysthesame. d. Vickismarginalutilityfromeachgoodmustbeconstantalongherindifferencecurve.

27.

28.

Chapter 4/Consumer Choice: Individual and Market Demand y 130

FIGURE 4-19

29.

InFigure419,pointDfortheconsumer a. willbechosenbecausetotalutilityislargertherethanatpointC. b. wouldnotbechosenbecauseitislessdesirablethanpointC. c. isunattainable,giventheconsumersbudget. d. hastotalutilityequaltopointC.