Question 1

The idea that people will substitute cheaper commodities for more expensive commodities is called

Accepted Answer

A)  the marginal effect. 
B)  the real-income effect. 
C)  the substitution effect. 
D)  the utility effect. 
A)  the marginal effect. 
B)  the real-income effect. 
C)  the substitution effect. 
D)  the utility effect.

Question 2

Why is water much cheaper than diamonds even though water is essential to human lives while diamonds are NOT?

Accepted Answer

This is called the diamond-water paradox

Question 3

Suppose the price of pizza falls to $1 per slice. Assuming that Tom's preferences continue to be those shown in the above table, and assuming that MU/P = 3 is still the point at which his consumer optimum is reached, how many slices will Tom now buy?

Accepted Answer

A)  1 slice 
B)  2 slices 
C)  3 slices 
D)  4 slices 
A)  1 slice 
B)  2 slices 
C)  3 slices 
D)  4 slices

Question 4

The consumer optimum is found by using

Accepted Answer

A)  marginal utility. 
B)  total utility. 
C)  total utility minus marginal utility. 
D)  total utils. 
A)  marginal utility. 
B)  total utility. 
C)  total utility minus marginal utility. 
D)  total utils.

Question 5

Diminishing marginal utility means that as more of a good is consumed

Accepted Answer

A)  the rate at which total utility increases starts to diminish. 
B)  the rate at which total utility increases stays the same. 
C)  the rate at which total utility increases starts to increase. 
D)  there is no impact on the rate of change of total utility. 
A)  the rate at which total utility increases starts to diminish. 
B)  the rate at which total utility increases stays the same. 
C)  the rate at which total utility increases starts to increase. 
D)  there is no impact on the rate of change of total utility.

Question 6

A consumer will achieve the highest level of utility possible when she consumes

Accepted Answer

A)  at the point at which the highest indifference curve is tangent to the budget constraint. 
B)  at the point at which the indifference curve crosses the budget constraint. 
C)  at a point to the left of the budget constraint. 
D)  just below the point where the indifference curve crosses the budget constraint. 
A)  at the point at which the highest indifference curve is tangent to the budget constraint. 
B)  at the point at which the indifference curve crosses the budget constraint. 
C)  at a point to the left of the budget constraint. 
D)  just below the point where the indifference curve crosses the budget constraint.

Question 7

-In the above figure, point C is

Accepted Answer

A)  preferred to points G, A, and B. 
B)  preferred to points A and B. 
C)  less preferred than point G. 
D)  less preferred than point H. 
A)  preferred to points G, A, and B. 
B)  preferred to points A and B. 
C)  less preferred than point G. 
D)  less preferred than point H.

Question 8

When the price of DVDs falls relative to movie and restaurant prices, and consumers buy more of the DVDs, economists call this

Accepted Answer

A)  indifference. 
B)  satisfaction. 
C)  marginalization. 
D)  substitution. 
A)  indifference. 
B)  satisfaction. 
C)  marginalization. 
D)  substitution.

Question 9

The diamond-water paradox is an example that shows that

Accepted Answer

A)  necessities like water should have a higher price. 
B)  marginal utility rather than total utility determines what people are willing to pay for a good. 
C)  there are exceptions to the law of diminishing marginal utility. 
D)  marginal utility can initially increase and then decrease. 
A)  necessities like water should have a higher price. 
B)  marginal utility rather than total utility determines what people are willing to pay for a good. 
C)  there are exceptions to the law of diminishing marginal utility. 
D)  marginal utility can initially increase and then decrease.

Question 10

If total utility is increasing, then marginal utility is

Accepted Answer

A)  negative. 
B)  positive. 
C)  zero. 
D)  decreasing. 
A)  negative. 
B)  positive. 
C)  zero. 
D)  decreasing.

Question 11

A student enters a McDonald's fast-food restaurant. He orders the first Big Mac. He consumes it within 3 minutes. He then orders a second Big Mac and consumes it in 10 minutes. He eats only half of the third one in 18 minutes and throws away the rest. The store manager offers him the fourth for free. The student says: "No thanks." For the student described above, we can say that

Accepted Answer

A)  diminishing marginal utility set in only after he had consumed the second Big Mac. 
B)  diminishing marginal utility began as soon as he had eaten the first Big Mac. 
C)  diminishing marginal utility did not occur, he simply wanted to quit eating. 
D)  the law of diminishing marginal utility only applies to durable goods. 
A)  diminishing marginal utility set in only after he had consumed the second Big Mac. 
B)  diminishing marginal utility began as soon as he had eaten the first Big Mac. 
C)  diminishing marginal utility did not occur, he simply wanted to quit eating. 
D)  the law of diminishing marginal utility only applies to durable goods.

Question 12

The slope of the budget line is

Accepted Answer

A)  zero since prices of the goods and income are assumed to be constant. 
B)  negative since to purchase more of one good means that some of the other good must be given up. 
C)  negative because of the marginal rate of substitution. 
D)  positive since prices and income are positive. 
A)  zero since prices of the goods and income are assumed to be constant. 
B)  negative since to purchase more of one good means that some of the other good must be given up. 
C)  negative because of the marginal rate of substitution. 
D)  positive since prices and income are positive.

Question 13

-In the above table, how much total utility does Carl get from consuming 4 beers?

Accepted Answer

A)  10 utils 
B)  45 utils 
C)  125 utils 
D)  115 utils 
A)  10 utils 
B)  45 utils 
C)  125 utils 
D)  115 utils

Question 14

Increases in total utility from the consumption of a good decrease as more is consumed. This statement is

Accepted Answer

A)  the law of diminishing marginal utility. 
B)  the law of average utility. 
C)  the consumer optimum. 
D)  not consistent with the assumption of rational behavior. 
A)  the law of diminishing marginal utility. 
B)  the law of average utility. 
C)  the consumer optimum. 
D)  not consistent with the assumption of rational behavior.

Question 15

When Sally increases the consumption of pizza and decrease the consumption of soda, her marginal utility of

Accepted Answer

A)  pizza falls and the marginal utility of soda will increase. 
B)  both pizza and soda will decrease. 
C)  pizza increases and the marginal utility of soda will fall. 
D)  both pizza and soda will increase. 
A)  pizza falls and the marginal utility of soda will increase. 
B)  both pizza and soda will decrease. 
C)  pizza increases and the marginal utility of soda will fall. 
D)  both pizza and soda will increase.

Question 16

-Use the above table. Adam has 3 apples and 3 oranges. Eve has 2 apples and 2 oranges. Eve asks Adam to give her an apple in exchange for an orange. Should Eve go through with this exchange?

Accepted Answer

A)  Yes. This way she will have 3 apples, which will give her more total satisfaction. 
B)  Yes. She is indifferent between consuming apples and oranges. 
C)  No. She gives up more satisfaction than she gets. 
D)  No. Adam likes apples more than oranges. 
A)  Yes. This way she will have 3 apples, which will give her more total satisfaction. 
B)  Yes. She is indifferent between consuming apples and oranges. 
C)  No. She gives up more satisfaction than she gets. 
D)  No. Adam likes apples more than oranges.

Question 17

If the marginal utility of each good is constant as consumption increases, the indifference curves are

Accepted Answer

A)  horizontal. 
B)  vertical. 
C)  straight lines. 
D)  positively sloped. 
A)  horizontal. 
B)  vertical. 
C)  straight lines. 
D)  positively sloped.

Question 18

One piece of evidence that possibly supports the bounded-rationality assumption of behavioral economics is that experiments appear to have shown that

Accepted Answer

A)  people make different decisions in calm situations than in situations in which emotions come into play. 
B)  people make the same decisions in calm situations than in situations in which emotions come into play. 
C)  total utility is maximized when marginal utility is equal to zero. 
D)  total utility is declining when marginal utility is negative. 
A)  people make different decisions in calm situations than in situations in which emotions come into play. 
B)  people make the same decisions in calm situations than in situations in which emotions come into play. 
C)  total utility is maximized when marginal utility is equal to zero. 
D)  total utility is declining when marginal utility is negative.

Question 19

The quantity of good M is measured along the vertical axis, and the quantity of good N is measured along the horizontal axis. If the prices of both goods M and N declines by 50% each, then the budget line

Accepted Answer

A)  shifts inward to the left by 50%. 
B)  shifts outward to the right by 50%. 
C)  shifts outward to the right by 100%. 
D)  rotates clockwise by 180 degrees. 
A)  shifts inward to the left by 50%. 
B)  shifts outward to the right by 50%. 
C)  shifts outward to the right by 100%. 
D)  rotates clockwise by 180 degrees.

Question 20

If the price of a product increases, then

Accepted Answer

A)  the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, decreases. 
B)  the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, increases. 
C)  the budget line shifts outward and the optimal quantity demanded, which corresponds to the higher price, decreases. 
D)  the budget line shifts inward and the optimal quantity demanded, which corresponds to the higher price, increases. 
A)  the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, decreases. 
B)  the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, increases. 
C)  the budget line shifts outward and the optimal quantity demanded, which corresponds to the higher price, decreases. 
D)  the budget line shifts inward and the optimal quantity demanded, which corresponds to the higher price, increases.

Exam 20: Consumer Choice

The idea that people will substitute cheaper commodities for more expensive commodities is called

Why is water much cheaper than diamonds even though water is essential to human lives while diamonds are NOT?

Suppose the price of pizza falls to $1 per slice. Assuming that Tom's preferences continue to be those shown in the above table, and assuming that MU/P = 3 is still the point at which his consumer optimum is reached, how many slices will Tom now buy?

The consumer optimum is found by using

Diminishing marginal utility means that as more of a good is consumed

A consumer will achieve the highest level of utility possible when she consumes

-In the above figure, point C is

When the price of DVDs falls relative to movie and restaurant prices, and consumers buy more of the DVDs, economists call this

The diamond-water paradox is an example that shows that

If total utility is increasing, then marginal utility is

The slope of the budget line is

-In the above table, how much total utility does Carl get from consuming 4 beers?

Increases in total utility from the consumption of a good decrease as more is consumed. This statement is

When Sally increases the consumption of pizza and decrease the consumption of soda, her marginal utility of

-Use the above table. Adam has 3 apples and 3 oranges. Eve has 2 apples and 2 oranges. Eve asks Adam to give her an apple in exchange for an orange. Should Eve go through with this exchange?

If the marginal utility of each good is constant as consumption increases, the indifference curves are

One piece of evidence that possibly supports the bounded-rationality assumption of behavioral economics is that experiments appear to have shown that

The quantity of good M is measured along the vertical axis, and the quantity of good N is measured along the horizontal axis. If the prices of both goods M and N declines by 50% each, then the budget line

If the price of a product increases, then

The Nature of Economics

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