Question 1

Which of the following best describes the concept of 'utility' in microeconomics?

Accepted Answer

The satisfaction or happiness a consumer gains from consuming a good or service.

Question 2

Suppose a consumer is deciding how to allocate their budget between two goods, X and Y. The prices are $$P_X = 4$$ and $$P_Y = 2. $$The marginal utilities are $$MU_X = 12$$ and $$MU_Y = 6. $$According to the utility-maximizing rule, is the consumer currently maximizing their utility?

Accepted Answer

Yes, because $$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}.$$

Question 3

What does the law of diminishing marginal utility state?

Accepted Answer

As a consumer consumes more of a good, the marginal utility received from each additional unit decreases.

Question 4

A consumer is choosing between two bundles: Bundle A (3 units of X, 2 units of Y) and Bundle B (2 units of X, 3 units of Y). Both bundles lie on the same indifference curve. What does this imply?

Accepted Answer

The consumer is indifferent between Bundle A and Bundle B.

Question 5

If a consumer’s budget constraint is given by $$M = P_X X + P_Y Y$$, what happens to the budget line if the consumer’s income $$M$$ increases, holding prices constant?

Accepted Answer

The budget line shifts outward, parallel to the original line.

Question 6

Which of the following equations represents the consumer’s equilibrium condition for utility maximization?

Accepted Answer

$$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$$

Question 7

If the price of good X increases, which of the following effects will NOT occur?

Accepted Answer

The consumer will buy more of X due to the substitution effect.

Question 8

Consider two goods, X and Y, that are perfect complements. If the price of X increases, what is the expected substitution effect?

Accepted Answer

There is no substitution effect because the goods are not substitutable.

Question 9

A consumer’s marginal rate of substitution (MRS) between X and Y is given by $$MRS = \frac{MU_X}{MU_Y}. $$What does a high MRS indicate?

Accepted Answer

The consumer is willing to give up a lot of Y to get one more unit of X.

Question 10

If a consumer faces the following situation: $$\frac{MU_X}{P_X} \u003e \frac{MU_Y}{P_Y}$$, what should the consumer do to maximize utility?

Accepted Answer

Buy more of X and less of Y.

Question 11

Which of the following is an example of the income effect?

Accepted Answer

A consumer buys more of both X and Y after receiving a salary increase.

Question 12

Suppose X and Y are substitutes. If the price of X increases, what is the expected change in the consumption of Y?

Accepted Answer

Consumption of Y will increase.

Question 13

Which of the following statements about indifference curves is correct?

Accepted Answer

Each indifference curve represents a different level of utility.

Question 14

A consumer is observed to always buy goods X and Y in a fixed ratio, regardless of changes in income. What type of preferences does this consumer exhibit?

Accepted Answer

Perfect complements

Question 15

Which of the following is NOT an assumption of neo-classical economics?

Accepted Answer

Individuals always make systematic errors.

Question 16

Which behavioral bias describes the tendency to pay more attention to information that fits preconceived notions and ignore contradictory information?

Accepted Answer

Confirmation bias

Question 17

A consumer is choosing between two perfect substitutes, X and Y. If $$P_X \u003c P_Y$$, what will the consumer do?

Accepted Answer

Buy only X.

Question 18

Which of the following best describes the framing effect in behavioral economics?

Accepted Answer

A change in context can alter perception or behavior regarding an event.

Question 19

Suppose a consumer’s budget constraint is $$M = P_X X + P_Y Y. If$$ $$P_X$$ decreases and $$M$$ and $$P_Y$$ remain constant, what happens to the budget line?

Accepted Answer

The budget line rotates outward, allowing the consumer to buy more of X.

Unit 6: Consumer Choice – Utility, Preferences, and Behaviour in Microeconomics

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