Consumer Demand Theory: Utility and Indifference Curve Approaches

The next two questions refer to the following table.

Number of Apples Consumed Total Utility

0 0

1 9

2 19

3 28

4 36

5 43

6 40

Marginal utility increases for the *a. First two apples b. First three apples c. First four apples d. First five apples The consumer begins to encounter diminishing marginal utility when she consumes the a. First apple b. Second apple *c. Third apple d. Fourth apple Glenn Hall is maximizing his satisfaction by consuming two goods, A and B. If the marginal utility of A is half that of B, what is the price of A if the price of B is $2? a. $0.50 *b. $1.00 c. $2.00 d. $3.00 An indifference curve is a curve that shows the various combinations of two goods that: a. Have identical prices b. have differing prices c. Provide a consumer equal marginal utilities *d. Provide a consumer equal total utilities In indifference curve analysis, the consumer will be in equilibrium (maximizes total utility) at the point where the a. Indifference curve intersects the budget line *b. Indifference curve is tangent to the budget line

c. Indifference curve lies below the budget line d. Indifference curve lies above the budget line If the indifference curve appears “L” shaped, the two products in question are a. Perfect substitutes *b. Perfect complements c. Independent goods d. “bads” If an indifference curve is a downward sloping straight line, the two products in question are *a. Perfect substitutes b. Perfect complements c. Independent goods d. “bads” The next two refer to the following diagram. Assume the price of good B has declined.

The substitution effect is denoted by: a. oa b. ab *c. bc d. ac The income effect is denoted by: a. Oa *b. ab c. bc d. ac

At all points along a budget line, a consumer: a. Has equal utility. b. Is buying the same quantity of each good. c. Is spending all his or her money. *d. Is spending a constant amount of money. Answer the next 3 questions from the following diagram:

Goods A and B represented by the indifference curves in the diagram are: a. Prefect substitutes *b. Imperfect substitutes c. Perfect complements d. Not identified by the degree of substitution If the consumer’s budget is $100, the price of A is $10, and the price of B is $20, the consumer will maximize satisfaction for this budget by purchasing that mix of goods represented by point: *a. a b. b c. c d. d Assuming the same prices of A and B as in the previous question and an $80 budget, the consumer would maximize utility by purchasing that mix of goods represented by point: a. a *b. b c. c d. d

A parallel shift in the budget line out or away from the origin could be the result of: a. An increase in the price of both goods b. A decrease in the price of one good, while the price of the other good remained constant c. A decrease in the consumer’s money income *d. An increase in the consumer’s money income assuming that the prices of both goods remain

constant. When total utility increases at a decreasing rate, marginal utility is: a. Negative and increasing b. Negative and declining c. Zero *d. Positive and declining At the saturation point for commodity X, the MU× is: a. Positive b. Negative *c. Zero d. Any of the above If the MU of the last unit of X consumed is twice the MU of the last unit of Y consumed, the consumer is in equilibrium only if: *a. The price of X is twice the price of Y b. The price of X is equal to the price of Y c. The price of X is one half the price of Y d. Any of the above is possible If the MU×/MUy for individual A is greater than the MU×/MUy for individual B, it is possible for individual A to gain by giving up: a. X in exchange for more Y from individual B *b. Y in exchange for more X from individual B c. Either X or Y d. We cannot say without additional information When the price of a normal good falls (ceteris paribus), more of it is purchased because of: a. The substitution effect b. The income effect c. Either the substitution or the income effect *d. Both the substitution and the income effects If an indifference curve were horizontal (assume X is measured along the horizontal axis Y along the vertical axis), this would mean that the consumer is saturated with: *a. Commodity X b. Commodity Y c. Both commodity X and commodity Y d. Neither commodity X nor commodity Y If the consumer is below his budget line, the consumer: *a. Is not spending all of his income

b. Is spending all of his income c. May or may not be spending all of his income d. Is in equilibrium At equilibrium, the slope of the indifference curve is: *a. Equal to the slope of the budget line b. Greater than the slope of the budget line c. Smaller than the slope of the budget line d. Either equal, larger or smaller than the slope of the budget line If the MRS×y for individual A exceeds the MRS×y for individual B, it is possible for individual A to gain by giving up: a. X in exchange for more Y *b. Y in exchange for more X c. Either X or Y d. We cannot say without additional information A basic limitation of the classical utility theory was its assumption that: a. The consumer is nonrational b. The consumer does not face a budget constraint c. Marginal utility necessarily decreases at all consumption levels *d. Utility is cardinally measurable Suppose that the MRS×y has an absolute value of two, and (P×/Py) has an absolute value of four. One can say that the consumer: a. Has maximized his satisfaction—reached consumer equilibrium *b. Should exchange X for more Y to reach equilibrium c. Should exchange Y for more X to reach equilibrium d. Has reached zero satisfaction

Given the above L-shaped indifference curve, one can say that:

a. Products X and Y are perfect substitutes b. Products X and Y are nonrelated goods *c. As one moves from point A to B, MUy = 0 d. As one moves from point A to C, MRS×y = positive When the total utility curve reaches its maximum level, marginal utility is: a. Rising b. Positive *c. Zero d. Negative According to the theory of consumer behavior, a consumer will always attempt to: *a. Get on the highest attainable indifference curve b. Remain on the same indifference curve when price changes c. Remain on the same indifference curve when income changes d. Move to a lower indifference curve when price or income changes Suppose a consumer purchases a combination of commodities X and Y such that MU×/P× equals 20 utils per dollar, and MUy/Py equals 10 utils per dollar. According to classical utility theory, in order to achieve consumer equilibrium the consumer should purchase: *a. Less of Y and more of X b. More of Y and less of X c. More of both Y and X d. Less of both Y and X Should a consumer move upward along an indifference curve, his total utility: a. First increases and then decreases b. First decreases and then increases *c. Remains constant d. Increases When P₁ rises or falls, consumer X will respond by changing his demand for Q₁. The part of this change that is referred to as the substitution effect represents consumer X’s response to: a. The change in his money income. *b. The change in relative goods prices. c. The change in his real income. d. An induced change in his preferences. When P₁ falls, the substitution effect is certain to lead consumer X to: a. Increase his demand for both Q₂ and Q₁. *b. Increase his demand for q₁ but decrease his demand for Q₂. c. Decrease his demand for both Q₁ and Q₂. d. Do the opposite of what the income effect leads him to do. Brown’s (Q₁, Q₂) –budget line depends on all of the following except: a. The amount he budgets for purchasing Q₁ and Q₂. b. The price of a Q₁. *c. His preferences with respect to Q₁ and Q₂.

d. The price of Q₂. The consumer’s budget line would shift upward, but remain parallel to his initial budget line if: a. The price of Q₁ fell. b. The price of Q₁ fell by 5% and the price of Q₂ fell by 10% *c. The prices of Q₁ and Q₂ both fell by 10%. d. The amount he had budgeted to spend on P₁ and P₂ were decreased by 10% If a consumer respects his budget constraint (i.e., spends the amount he planned to on consumption), he can purchase a commodity bundle: a. Above his budget line *b. On his budget line c. Below his budget line d. On or below his budget line. Which of the following statements best describe the income effect? a. An increase in demand resulting from an increase in money incomes of consumer. b. An increase in demand caused by a decrease in the price of the product. *c. An increase in quantity demanded resulting from an increase in purchasing power of a given

income stemming from a decrease in the price of the product. d. An increase in quantity demanded resulting from a decline in the relative price of the product. Decreasing the price of a good represented on the horizontal axis of an indifference curve-budget line diagram: *a. Makes the budget line less steep and increases the quantity purchased. b. Makes the budget line less steep and decrease the quantity purchased. c. Makes the budget line steeper and increases the quantity purchased. d. Makes the budget line steeper and decreases the quantity purchased. In deciding between a high quality of an expensive item and one that is low quality but inexpensive, the consumer should choose the one that: a. Is least costly b. Is of highest quality c. Yields the highest marginal utility d. Yields the highest marginal utility per dollar According to the following figures, a consumer would: MU Price Good A . . . . 100 $ 5 Good B . . . . 150 $ 10 a. Gain 50 utils by spending one more dollar on B and one less dollar on A. b. Gain 20 utils by spending one more dollar on A and one less dollar on B. c. Gain 10 utils by spending one more dollar on b and one less on A. *d. Gain 5 utils by spending one more dollar on A and one less dollar on B.

Consumers are indifferent between different: a. Budget lines b. Points on a budget line c. Indifferences curves *d. Points along an indifference curve The degree of substitution that exists between two goods is reflected by the: *a. Curvature of the indifference curve. b. Slope of the budget line. c. The position of the budget line d. Number of indifference curves that exist between the two goods. Two goods in which the amount of one good necessary to compensate for loss of the other remains constant at various combinations of the two goods are known as: a. Perfect complements. c. Imperfect substitutes *b. Perfect substitutes d. Imperfect complements At all points along a budget line, a consumer: a. Has equal utility b. Is buying the same quantity of each good. c. Is spending all his or her money. *d. Is spending a constant amount of money. A parallel shift in the price line out or away from the origin could be the result of: a. An increase in the price of both goods. b. A decrease in the price of one good, while the price of the other good remained constant. c. A decrease in the consumer’s money income. *d. An increase in the consumer’s money income. e. An increase in the consumer’s money income combined with a decrease in the price of one

good, while the price of the other good remained constant. Along a given budget line: *a. The prices of both goods and money income are constant. b. The prices of both goods vary, but money income is constant c. The prices of both goods are constant, but money income varies. d. Consumers are receiving the same level of satisfaction e. Consumers are indifferent between different levels of money income The marginal rate of substitution of good X for good Y measures: a. The additional amount of X a consumer wants if he has more Y. *b. The amount of Y he is willing to give up to get an additional unity of X. c. The amount of X a consumer can buy if he buys a certain amount of Y. d. The ration of the amount of Y to the amount of X that the consumer is buying. e. The combination of X and Y that the consumer will give up if his income falls. At every point on an indifferent curve: a. The price of each good is the same.

b. Money income is the same. *c. The level of satisfaction is the same. d. All of the above. e. None of the above. If good X and good Y are both normal goods, and a consumer’s money income increases while the prices of both goods and his tastes remain the same: a. Less of both X and Y will be demanded. b. More of X and less of Y will be demanded. c. Less of X and more of Y will be demanded. *d. More of both X and Y will be demanded. A major difference between indifference curves and utility curves is that: a. In deriving demand curves from indifference curves, you can derive two demand curves at once. b. In deriving demand curves from indifference curves, you do not have to have any knowledge

about the prices of goods, whereas when you use utility curves you do. c. Indifference curves do not presuppose any knowledge of consumer preferences, whereas utility

curves do. *d. Indifference curves do not assume that you can measure utility in cardinal terms, whereas utility

curves do. The reason the substitutions effects work to encourage a consumer to buy more of a product when its price decreases is: a. The real income of the consumer has been increased b. The real income of the consumer has been decreased *c. The product is now relatively less expensive than it was d. Other products are now relatively less expensive than they were Which of the following best expresses the law of diminishing marginal utility? a. The more a person consumes of a product, the smaller becomes the utility which he receives

from its consumption *b. The more a person consumes of a product, the smaller becomes the utility which he receives as

a result of consuming an additional unity of the product c. The less a person consumes a product, the smaller becomes the utility which he receives from

its consumption d. The less a person consumes of a product, the smaller becomes the utility which he receives as a

result of consuming an additional unity of the product Which of the following is not an essential assumption of the marginal-utility theory of consumer behavior? *a. The consumer has a small income b. The consumer is ration c. The goods and services are not free d. Goods and services yield decreasing amounts of marginal utility as the consumer buys more of

them.

Assume a consumer has the marginal utility schedules for goods X and Y given below, that the prices of X and Y are $1 and $2, respectively, and that the income of consumer is $9. When the consumer is maximizing the total utility he receives, he will buy a. 7X and 1Y *b. 5X and 2Y c. 3X and 3Y d. 1X and 4Y When the consumer in the previous question above, purchases the combination of X and Y that maximizes his total utility, his utility is: a. 36 b. 45 *c. 48 d. 52 Suppose that the prices of A and B are $3 and $2, respectively, that the consumer is spending his entire income and buying 4 units of A and 6 units of B and that the marginal utility of both the 4th unit of A and the 6th unit of B is 6. It can be concluded that: a. The consumer is in equilibrium b. The consumer should buy more of A and less of B *c. The consumer should buy less of A and more of B d. The consumer should buy less of both A and B Starting from position A of consumer equilibrium in the adjacent diagram, assume a reduction in the price of X from P₂ to P₁. Answer the next “three” questions on the basis of this information.

The “total effect” of the price change equals the movement from: a. Q₁ to Q₃ *b. Q₁ to Q₂ c. Q₂ to Q₃ d. Q₂ to Q₁

The substitution effect of the price change equals the movement from: *a. Q₁ to Q₃ b. Q₁ to Q₂ c. Q₂ to Q₃ d. Q₂ to Q₁ The income effect of the price change equals the movement from: a. Q₁ to Q₃ *b. Q₃ to Q₂ c. Q₂ to Q₁ d. Q₂ to Q₃ In the upper part of the figure below, the line AB₀ is a consumer’s “budget line.” The E₀ is his equilibrium point thereon. The curved line is an indifference curve for this consumer, and it is tangent to the budget line at this E₀ point. (The two other curved lines are also indifference curves). The price of good X is $4.

The price of good Y must be: a. $1 b. $2 c. $3 *d. $4 e. $5 f. Impossible to tell from diagram The consumer’s income or budget must be: a. $50 *b. $20 c. $10 e. $2 f. Impossible to tell The “budget” on consumption-possibility line shifts from position AB₀ to position AB₁. Such a shift could only be caused by: *a. a fall in the price of x b. a rise in the price of x c. A rise in the price of y d. A fall in the price of y e. An increase of income

Answer the following 2 questions of the basis of the following indifference curve/budget line figure. Assume that the price of X is $20 and the price of Y is $40.

If indifference curve II represents the highest level of utility the consumer can achieve, what is the consumer’s income? a. $480 b. $600 c. $800 *d. $1200 How many units of X will the consumer choose if point B is the utility-maximizing choice? a. 28 b. 30 *c. 32 d. 60 The following question refers to the indifference curve/budget line figure below. Assume that the price of Y is $10 and the consumer has $600 of income.

If the price of X is $5, what combination of X and Y will a utility-maximizing consumer choose? *a. 80X, 20Y b. 120X, 620Y c. 120X, 250Y d. 200X, 620Y