Question 1

Which of the following best explains why the demand curve is downward sloping according to the law of diminishing marginal utility?

Accepted Answer

As consumers purchase more of a good, the marginal utility of each additional unit decreases, so consumers are only willing to buy more at lower prices.

Question 2

Suppose a consumer is maximizing utility by purchasing two goods, A and B. If the marginal utility per dollar spent on A is greater than that on B, what should the consumer do?

Accepted Answer

Buy more of good A and less of good B until the marginal utility per dollar is equalized.

Question 3

Which formula represents the utility maximization rule for two goods, A and B?

Accepted Answer

$$ \frac{MUA}{PA} = \frac{MUB}{PB} $$

Question 4

If the price of good A falls while the price of good B remains constant, what happens to the marginal utility per dollar spent on A ($$ \frac{MUA}{PA} ) $$and how should the consumer respond?

Accepted Answer

$$ \frac{MUA}{PA} $$ increases; the consumer should buy more of A until the ratios are equalized.

Question 5

Which of the following best describes consumer surplus?

Accepted Answer

The amount an individual is willing to pay above the market price.

Question 6

A cost-saving innovation shifts the supply curve for a good to the right, lowering the market price from $$ P_1$  to$$ $$ P_2$ . $$What is the effect on consumer surplus?

Accepted Answer

Consumer surplus increases because consumers receive more value above the new, lower price.

Question 7

Which of the following statements about the diamond–water paradox is correct?

Accepted Answer

Water is less expensive than diamonds because its marginal utility at the quantity consumed is lower, despite its higher total value.

Question 8

If a consumer’s marginal utility from the last dollar spent on good A is less than that from good B, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good B and less of good A.

Question 9

Which of the following is NOT a property of indifference curves?

Accepted Answer

They intersect each other.

Question 10

Suppose a consumer faces the following marginal utilities and prices: $$ MUA = 20 $$, $$ PA = 4 $$; $$ MUB = 15 $$, $$ PB = 3 . Is $$the consumer maximizing utility, and if not, what should they do?

Accepted Answer

No, because $$ \frac{MUA}{PA} \u003e \frac{MUB}{PB} $$; buy more of A and less of B.

Question 11

Which of the following best describes the substitution effect when the price of a good falls?

Accepted Answer

Consumers buy more of the good because it is now relatively cheaper compared to substitutes.

Question 12

If the income effect of a price decrease for a good is so negative that the consumer buys less of the good as its price falls, what type of good is this?

Accepted Answer

Giffen good

Question 13

Which equation shows the relationship between marginal utilities and prices when a consumer is maximizing utility between goods A and B?

Accepted Answer

$$ \frac{MUA}{MUB} = \frac{PA}{PB} $$

Question 14

A consumer’s total utility from consuming 3 units of a good is 60 utils, and from 4 units is 70 utils. What is the marginal utility of the 4th unit?

Accepted Answer

10 utils

Question 15

Which of the following best describes the difference between 'use value' and 'exchange value' as discussed in the diamond–water paradox?

Accepted Answer

'Use value' is the total benefit from consuming a good, while 'exchange value' is the market price determined by marginal utility and scarcity.

Question 16

If the area under the demand curve up to the quantity purchased represents total value, what does the area between the demand curve and the market price represent?

Accepted Answer

Consumer surplus

Question 17

Which of the following is a correct statement about the law of demand?

Accepted Answer

A decrease in price causes an increase in quantity demanded due to the income and substitution effects.

Question 18

If a government policy lowers the cost of providing a good, which of the following best measures the benefit to consumers?

Accepted Answer

The increase in consumer surplus.

Question 19

Which of the following is NOT a reason for the downward slope of the demand curve?

Accepted Answer

Increasing marginal utility

Question 20

A consumer is choosing between goods X and Y. If $$ \frac{MUX}{PX} \u003c \frac{MUY}{PY} $$, what should the consumer do to maximize utility?

Accepted Answer

Buy more of Y and less of X.

Consumer Behaviour: Utility, Demand, and Value in Microeconomics

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