Question 1

What is marginal utility and what is the law of diminishing marginal utility?

Accepted Answer

Marginal utility is the change in total

Question 2

Assume that Anne has $300 to spend on DVDs and CDs. Her optimal consumption of DVDs and CDs is illustrated by a tangency between a budget line and an indifference curve. Now assume that the price of CDs rises but the price of DVDs falls. How can you show that Anne is made better off by these price changes?

Accepted Answer

A)  Show that the price changes shift Anne's budget line outward; the budget line is tangent to a higher indifference curve. 
B)  Show that the price changes move Anne along her budget line to a higher indifference curve. 
C)  Show that Anne can afford to buy the optimal combination of DVDs and CDs at their original prices; then show that Anne can now reach a higher indifference curve. 
D)  Show that Anne can now afford to buy more DVDs, which give her greater utility than CDs. 
A)  Show that the price changes shift Anne's budget line outward; the budget line is tangent to a higher indifference curve. 
B)  Show that the price changes move Anne along her budget line to a higher indifference curve. 
C)  Show that Anne can afford to buy the optimal combination of DVDs and CDs at their original prices; then show that Anne can now reach a higher indifference curve. 
D)  Show that Anne can now afford to buy more DVDs, which give her greater utility than CDs.

Question 3

The iPod is a product without any significant network externalities.

Accepted Answer

A) True 
 B)False

Question 4

Terence has $50 per week to spend on Subway sandwiches and milkshakes. The price of a Subway sandwich is $5 and the price of a milkshake is $4. He buys 6 sandwiches and 5 milkshakes. The marginal utility of the 6th sandwich = 25 and the marginal utility of the 5th milkshake = 24. Which of the following is true?

Accepted Answer

A)  He is not maximizing his utility and should buy more milkshakes. 
B)  He is maximizing his utility. 
C)  He is not maximizing his utility and should buy more Subway sandwiches. 
D)  He is not maximizing his utility because he is not spending all of his income. 
A)  He is not maximizing his utility and should buy more milkshakes. 
B)  He is maximizing his utility. 
C)  He is not maximizing his utility and should buy more Subway sandwiches. 
D)  He is not maximizing his utility because he is not spending all of his income.

Question 5

What does the marginal rate of substitution measure?

Accepted Answer

A)  It measures the rate at which a consumer must give up one good to purchase another good. 
B)  It measures the rate at which a consumer will substitute one good for another when the price of one good changes. 
C)  It measures the change in utility from consuming one additional unit of a good. 
D)  It measures the rate at which a consumer is willing to trade off one product for another while keeping utility constant. 
A)  It measures the rate at which a consumer must give up one good to purchase another good. 
B)  It measures the rate at which a consumer will substitute one good for another when the price of one good changes. 
C)  It measures the change in utility from consuming one additional unit of a good. 
D)  It measures the rate at which a consumer is willing to trade off one product for another while keeping utility constant.

Question 6

Table 10-6
   Table 10-6 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1.
-Refer to Table 10-6. What is Jay's optimal consumption bundle?

Accepted Answer

A)  1 burger and 2 Pepsis 
B)  2 burgers and 3 Pepsis 
C)  3 burgers and 1 Pepsi 
D)  3 burgers and 2 Pepsis 
A)  1 burger and 2 Pepsis 
B)  2 burgers and 3 Pepsis 
C)  3 burgers and 1 Pepsi 
D)  3 burgers and 2 Pepsis

Question 7

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay. On the day of the performance of the play Adam refuses to sell the ticket for $150. How would behavioral economists explain Adam's refusal to sell his ticket?

Accepted Answer

A)  Adam's tastes had changed from the time he bought the ticket to the time of the performance of the play. 
B)  When Adam bought the ticket he was being unrealistic about his future behavior. 
C)  The endowment effect explains Adam's actions. People like Adam seem to value things that they have more than the things they do not have. 
D)  Adam's income probably increased between the time he bought the ticket and the day of the play's performance. 
A)  Adam's tastes had changed from the time he bought the ticket to the time of the performance of the play. 
B)  When Adam bought the ticket he was being unrealistic about his future behavior. 
C)  The endowment effect explains Adam's actions. People like Adam seem to value things that they have more than the things they do not have. 
D)  Adam's income probably increased between the time he bought the ticket and the day of the play's performance.

Question 8

Marginal utility is the

Accepted Answer

A)  total satisfaction received from consuming a given number of units of a product. 
B)  average satisfaction received from consuming a product. 
C)  extra satisfaction received from consuming one more unit of a product. 
D)  satisfaction achieved when a consumer has had enough of a product. 
A)  total satisfaction received from consuming a given number of units of a product. 
B)  average satisfaction received from consuming a product. 
C)  extra satisfaction received from consuming one more unit of a product. 
D)  satisfaction achieved when a consumer has had enough of a product.

Question 9

Which of the following is a common mistake consumers commit when they make decisions?

Accepted Answer

A)  They take into account nonmonetary opportunity costs but ignore monetary costs. 
B)  They are overly pessimistic about their future behavior. 
C)  They fail to ignore sunk costs. 
D)  They sometimes value fairness too much. 
A)  They take into account nonmonetary opportunity costs but ignore monetary costs. 
B)  They are overly pessimistic about their future behavior. 
C)  They fail to ignore sunk costs. 
D)  They sometimes value fairness too much.

Question 10

Marv Pilson has $50 worth of groceries in a shopping cart at his local Shop 'n Save. Assume that the marginal utility per dollar of the liter bottles of soft drink in Marv's cart equals 50. The marginal utility per dollar of the boxes of cereal in Marv's cart equals 20. Marv has only $50 to spend, but has not yet paid for his groceries. How can Marv increase his total utility without spending more than $50?

Accepted Answer

A)  Marv should substitute his favorite soft drink or the cereal in his cart for generic brands that have lower prices. 
B)  Marv should buy more boxes of cereal and fewer bottles of soft drink. 
C)  Marv should buy fewer boxes of cereal and more bottles of soft drink. 
D)  Marv should buy fewer boxes of cereal and fewer bottles of soft drink. He can then spend more on other items. 
A)  Marv should substitute his favorite soft drink or the cereal in his cart for generic brands that have lower prices. 
B)  Marv should buy more boxes of cereal and fewer bottles of soft drink. 
C)  Marv should buy fewer boxes of cereal and more bottles of soft drink. 
D)  Marv should buy fewer boxes of cereal and fewer bottles of soft drink. He can then spend more on other items.

Question 11

Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss. Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report. Many of my clients in this situation will hold the stock, hoping the price will later rise above $50. In most cases like this the price does not rise and may even fall. You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?

Accepted Answer

A)  People sometimes buy stocks because other people are buying them or they want to appear to be fashionable. 
B)  People sometimes make mistakes when they buy stocks because of the endowment effect. 
C)  People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices. 
D)  People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost. 
A)  People sometimes buy stocks because other people are buying them or they want to appear to be fashionable. 
B)  People sometimes make mistakes when they buy stocks because of the endowment effect. 
C)  People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices. 
D)  People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost.

Question 12

Figure 10-5  
-Refer to Figure 10-5. Suppose the price of pizza increases while the price of hamburger remains constant. Then, the consumer's

Accepted Answer

A)  indifference curve becomes more concave away from the origin. 
B)  indifference curve becomes straighter. 
C)  budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept remains the same. 
D)  budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept remains the same. 
A)  indifference curve becomes more concave away from the origin. 
B)  indifference curve becomes straighter. 
C)  budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept remains the same. 
D)  budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept remains the same.

Question 13

Table 10-4
  
-Refer to Table 10-4. For steak and cheese and grilled chicken sandwiches, the table contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled chicken sandwiches. Which of the following statements is true?

Accepted Answer

A)  If Mabel maximizes her utility she will buy three steak and cheese sandwiches and two grilled chicken sandwiches. 
B)  If Mabel was maximizing her utility when spending $14 and then received an additional $4, she would receive the most marginal utility per dollar if her next purchase was another grilled chicken sandwich. 
C)  Mabel will first buy two steak and cheese sandwiches; then with her remaining $6 she will buy three grilled chicken sandwiches. 
D)  To maximize her utility, Mabel will need a total of $36, the income needed to buy 6 steak and cheese sandwiches and 6 grilled chicken sandwiches. 
A)  If Mabel maximizes her utility she will buy three steak and cheese sandwiches and two grilled chicken sandwiches. 
B)  If Mabel was maximizing her utility when spending $14 and then received an additional $4, she would receive the most marginal utility per dollar if her next purchase was another grilled chicken sandwich. 
C)  Mabel will first buy two steak and cheese sandwiches; then with her remaining $6 she will buy three grilled chicken sandwiches. 
D)  To maximize her utility, Mabel will need a total of $36, the income needed to buy 6 steak and cheese sandwiches and 6 grilled chicken sandwiches.

Question 14

Figure 10-2   Figure 10-2 represents the demand for ice cream cones.
-Refer to Figure 10-2. Which of the following statements is true?

Accepted Answer

A)  Points a and b are the utility-maximizing quantities of ice-cream cones at two different prices of ice-cream. 
B)  Points a and b may not necessarily be the utility-maximizing quantities of ice-cream cones at two different prices because we have no information on the consumer's budget or the price of other goods. 
C)  Point a could be a utility-maximizing choice if the price is $3 but point b may not be because we have no information on the marginal utility per dollar when price changes. 
D)  Points a and b are derived independently of the utility-maximizing model. 
A)  Points a and b are the utility-maximizing quantities of ice-cream cones at two different prices of ice-cream. 
B)  Points a and b may not necessarily be the utility-maximizing quantities of ice-cream cones at two different prices because we have no information on the consumer's budget or the price of other goods. 
C)  Point a could be a utility-maximizing choice if the price is $3 but point b may not be because we have no information on the marginal utility per dollar when price changes. 
D)  Points a and b are derived independently of the utility-maximizing model.

Question 15

The absolute value of the slope of the budget constraint is equal to

Accepted Answer

A)  the marginal rate of substitution between the two goods in question. 
B)  the price of good on the vertical axis divided by the price of the good on the horizontal axis. 
C)  the price of good on the horizontal axis divided by the price of the good on the vertical axis. 
D)  quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis. 
A)  the marginal rate of substitution between the two goods in question. 
B)  the price of good on the vertical axis divided by the price of the good on the horizontal axis. 
C)  the price of good on the horizontal axis divided by the price of the good on the vertical axis. 
D)  quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis.

Question 16

Economists Gary Becker and Kevin Murphy are associated with which of the following?

Accepted Answer

A)  the discovery of the first example of a Giffen good 
B)  They have argued that social factors are not important in explaining the choices consumers make. 
C)  Consumers appear to receive utility from consuming goods they believe are popular. 
D)  They discovered that price changes have both income and substitution effects. 
A)  the discovery of the first example of a Giffen good 
B)  They have argued that social factors are not important in explaining the choices consumers make. 
C)  Consumers appear to receive utility from consuming goods they believe are popular. 
D)  They discovered that price changes have both income and substitution effects.

Question 17

Harvey Miller owns a baseball that was hit for a home run by Ted Williams. Harvey, a long-time Boston Red Sox fan, recently refused to sell his baseball for $75,000 even though he would not have paid someone more than $10,000 for the baseball if he did not already own it. Harvey explained his decision not to sell the baseball by noting that: "Ted Williams was my hero. This baseball has a great deal of sentimental value for me." Which of the following can explain Harvey's behavior?

Accepted Answer

A)  the difference between implicit and explicit costs 
B)  the scarcity of home run baseballs hit by Ted Williams 
C)  the endowment effect 
D)  how social influences can affect consumption choices 
A)  the difference between implicit and explicit costs 
B)  the scarcity of home run baseballs hit by Ted Williams 
C)  the endowment effect 
D)  how social influences can affect consumption choices

Question 18

What happens to the absolute value of marginal rate of substitution as you move down a convex (bowed toward the origin) indifference curve?

Accepted Answer

A)  increases 
B)  decreases 
C)  remains constant 
D)  could increase or decrease 
A)  increases 
B)  decreases 
C)  remains constant 
D)  could increase or decrease

Question 19

If a consumer receives 22 units of marginal utility for consuming the first can of soda, 20 units from consuming the second, and 15 from the third, the total utility of consuming the three units is

Accepted Answer

A)  57 utility units. 
B)  35 utility units. 
C)  15 utility units. 
D)  unknown, as more information is needed to determine the answer. 
A)  57 utility units. 
B)  35 utility units. 
C)  15 utility units. 
D)  unknown, as more information is needed to determine the answer.

Question 20

A change in the price of a good has two effects on the quantity consumed. What are these effects?

Accepted Answer

A)  the income effect and the substitution effect 
B)  the utility effect and the budget effect 
C)  the total utility effect and marginal utility effect 
D)  the consumption effect and expenditure effect 
A)  the income effect and the substitution effect 
B)  the utility effect and the budget effect 
C)  the total utility effect and marginal utility effect 
D)  the consumption effect and expenditure effect

Exam 10: Consumer Choice and Behavioral Economics

What is marginal utility and what is the law of diminishing marginal utility?

The iPod is a product without any significant network externalities.

What does the marginal rate of substitution measure?

Table 10-6 Table 10-6 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1. -Refer to Table 10-6. What is Jay's optimal consumption bundle?

Suppose Adam Einberg pays $100 for a ticket to a new Broadway play and $100 was the maximum price he was willing to pay. On the day of the performance of the play Adam refuses to sell the ticket for $150. How would behavioral economists explain Adam's refusal to sell his ticket?

Marginal utility is the

Which of the following is a common mistake consumers commit when they make decisions?

Figure 10-5 -Refer to Figure 10-5. Suppose the price of pizza increases while the price of hamburger remains constant. Then, the consumer's

Figure 10-2 Figure 10-2 represents the demand for ice cream cones. -Refer to Figure 10-2. Which of the following statements is true?

The absolute value of the slope of the budget constraint is equal to

Economists Gary Becker and Kevin Murphy are associated with which of the following?

What happens to the absolute value of marginal rate of substitution as you move down a convex (bowed toward the origin) indifference curve?

If a consumer receives 22 units of marginal utility for consuming the first can of soda, 20 units from consuming the second, and 15 from the third, the total utility of consuming the three units is

A change in the price of a good has two effects on the quantity consumed. What are these effects?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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