Preview Extract
CHAPTER 6—CONSUMER CHOICE
MULTIPLE CHOICE
1) The budget line is useful for illustrating the notion of opportunity cost.
a. True
b. False
Answer: A
2) The ratio of the prices of two goods multiplied by -1 is equal to the slope of the budget
line.
a. True
b. False
Answer: A
3) A consumer's budget line shows
a. the utility that an individual would receive from consuming various combinations of two
goods
b. the combinations of two goods that an individual is able to purchase, given prices and
income
c. how income is influenced by prices of goods
d. how changes in income affect utility
e. the relationship between prices and income
Answer: B
4) Budget constraints exist for consumers because
a. their utility from consuming goods eventually reaches a maximum level
b. even with unlimited incomes, they have to pay for each good they consume
c. they have to pay for goods and they have limited incomes
d. prices and income are inversely related
e. demand curves for goods generally slope downward
Answer: C
5) The intercept of a budget line measures the
a. amount of a good that a consumer will purchase
b. maximum amount of a good that a consumer could purchase, given his consumption of
some other good
c. maximum amount of a good that could be consumed at given prices and income
d. minimum amount of a good that could be consumed at given prices and income
e. minimum consumption of a good consistent with utility maximization
Answer: C
6) A family on a trip budgets $800 for sit-down restaurant meals and fast food. If the price of
a fast food meal for the family is $20, how many such meals can the family buy if they do not
eat at restaurants?
a. 8
b. 15
c. 20
d. 40
e. 160
Answer: D
7) A family on a trip budgets $800 for sit-down restaurant meals and fast food. The family
can buy 16 restaurant meals if they don't buy any fast food. What is the price of a restaurant
meal for the family?
a. $5
b. $16
c. $20
d. $50
e. it is impossible to tell from the information given
Answer: D
8) A family on a trip budgets $800 for restaurant meals and fast food. The family can buy 16
restaurant meals if they don't buy any fast food. What is the price of a fast-food meal for the
family?
a. $5
b. $16
c. $20
d. $50
e. it is impossible to tell from the information given
Answer: E
9) A family on a trip budgets $800 for restaurant meals and fast food. The price of a fast-food
meal is $20 and the family can afford 16 restaurant meals if they don't buy any fast food.
How many fast-food meals would the family gain if they gave up one restaurant meal?
a. 1
b. 0.4
c. 2
d. 2.5
e. 5
Answer: D
10) If food is measured on the horizontal axis of a budget line diagram, and clothing is
measured on the vertical axis, the slope of the budget line
a. may be positive if the price of clothing is high enough
b. may be positive if the price of food is high enough
c. may be positive if income is large enough
d. equals the maximum consumption of food divided by the maximum consumption of
clothing times -1
e. equals the maximum consumption of clothing divided by the maximum consumption of
food times -1
Answer: E
11) If a consumer's budget line between meat and potatoes has a vertical axis intercept at 100
pounds of meat and a horizontal axis intercept at 100 pounds of potatoes
a. demand must be inelastic
b. the consumer's budget must equal $100
c. both meat and potatoes must be priced at $1 per pound
d. the price of a pound of meat must equal the price of a pound of potatoes
e. the opportunity cost of meat in terms of potatoes cannot be determined
Answer: D
12) If the price of bread were zero, a budget line between bread (on the vertical axis) and
cheese (on the horizontal axis) would
a. not exist
b. be vertical
c. coincide with the vertical axis
d. be horizontal
e. coincide with the horizontal axis
Answer: B
Figure 6-1
Income = $ 100
Price per Ticket = $20
Price per Compact Disk $ 10
13) Joe spends all of his money on concert tickets and compact disks. Figure 6-1 shows his
budget constraint when his income is $100. The price of a ticket is $20, while the price of a
compact disk is $10. If Joe currently buys 3 tickets and would like to purchase a fourth, his
opportunity cost would be
a. 1 compact disk
b. $20
c. $10
d. 2 compact disks
e. 4 compact disks
Answer: D
14) Joe spends all of his money on concert tickets and compact disks. Figure 6-1 shows his
budget constraint when his income is $100. The price of a ticket is $20, while the price of a
compact disk is $10. What is the opportunity cost of a compact disk?
a. 1/2 ticket
b. $20
c. $10
d. 1 ticket
e. 2 tickets
Answer: A
15) The slope of the budget line
a. is always -1
b. represents the opportunity cost of consuming one more unit of the good measured on the
horizontal axis
c. increases as more of one good is consumed
d. decreases as more of one good is consumed
e. is negative because of the law of demand
Answer: B
16) The ratio of the price of the good on the horizontal axis divided by the price of the good
on the vertical axis multiplied by -1
a. is the slope of the demand curve
b. measures the price elasticity of demand for a particular good
c. defines real income for the consumer
d. is the slope of the budget line
e. is the slope of the indifference curve
Answer: D
17) Suppose that Trey spends all of his income on vacation trips and textbooks. If the price of
a trip is $200 and the price of a textbook is $50, then the slope of his budget line (assuming
vacation trips are measured on the vertical axis) would be
a. -4
b. 4
c. 0.25
d. -1.75
e. -0.25
Answer: E
18) If income doubles and the prices of all goods remain the same, the budget line will shift
outward by 50 percent along each axis.
a. True
b. False
Answer: B
19) If income decreases, there will be a parallel inward shift of the budget line.
a. True
b. False
Answer: A
20) If income decreases, the budget constraint will shift in but the slope will remain the same.
a. True
b. False
Answer: A
21) An increase in the price of the good measured on the vertical axis of a budget line
diagram will
a. cause a parallel outward shift of the budget line
b. leave the budget line unchanged
c. cause a parallel inward shift of the budget line
d. make the budget line flatter
e. make the budget line steeper
Answer: D
22) An increase in the price of the good measured on the horizontal axis of a budget line
diagram will
a. make the budget line flatter
b. make the budget line steeper
c. leave the budget line unchanged
d. cause a parallel inward shift of the budget line
e. cause a parallel outward shift of the budget line
Answer: B
23) Which panel in Figure 6-2 shows the effect of a decrease in the price of apples, other
things constant?
a. panel a
b. panel b
c. panel c
d. panel d
e. panel e
Answer: B
24) Which panel in Figure 6-2 shows the effect of an increase in income, other things
constant?
a. panel a
b. panel b
c. panel c
d. panel d
e. panel e
Answer: E
25) Which panel in Figure 6-2 shows the effect of an increase in the price of oranges, other
things constant?
a. panel a
b. panel b
c. panel c
d. panel d
e. panel e
Answer: C
26) Which panel in Figure 6-2 shows the combined effects of an increase in the price of
oranges and a decrease in the price of apples?
a. panel a
b. panel b
c. panel c
d. panel d
e. none of these
Answer: E
27) If income and the prices of both goods all double, the budget line will
a. become flatter
b. become steeper
c. remain unchanged
d. experience a parallel outward shift
e. experience a parallel inward shift
Answer: C
28) If the price of good X (measured on the horizontal axis of a budget line diagram)
increases at the same time that the price of good Y (measured on the vertical axis) decreases,
the budget line
a. will become flatter
b. will become steeper
c. could become either steeper or flatter, depending on the sizes of the price changes
d. will rotate about its original point of intersection with the horizontal axis
e. will shift outward, but not in a parallel fashion
Answer: B
29) If the price of good X (measured on the horizontal axis of a budget line diagram)
increases at the same time that the price of good Y (measured on the vertical axis) increases,
the budget line
a. will necessarily become steeper
b. will necessarily become flatter
c. will remain unchanged
d. will shift outward in a parallel fashion
e. could become either steeper or flatter, depending on the sizes of the price changes
Answer: E
30) If food is measured on the horizontal axis of budget line diagram, and clothing is
measured on the vertical axis, an increase in
a. the price of clothing will make the budget line steeper
b. income will make the budget line steeper
c. income will make the budget line flatter
d. the price of food will make the budget line steeper
e. the price of food will make the budget line flatter
Answer: D
31) If food is measured on the horizontal axis of a budget line diagram, and clothing is
measured on the vertical axis, an increase in
a. the price of food will decrease the slope (e.g., -9 instead of -6) of the budget line
b. the price of food will increase the slope of the budget line
c. income will decrease the slope of the budget line
d. income will increase the slope of the budget line
e. the price of clothing will decrease the slope of the budget line
Answer: A
32) Imagine a budget line depicting a consumer's possible allocation of a given income
between fruit and vegetables. If the consumer's income increases at the same time the price of
vegetables rises, the budget line's intercept with the
a. fruit axis will be unaffected
b. fruit axis will move toward the origin
c. vegetable axis will be unaffected
d. fruit axis will move toward the origin
e. vegetable axis might remain unchanged, move toward the origin, or move away from the
origin
Answer: E
33) Roger spends all of his money on racquetballs and food. What would happen to Roger's
budget line if his income increased by 10 percent, holding prices constant?
a. It would shift inward.
b. It would rotate about the axis for food.
c. It would rotate about the axis for racquetballs.
d. Nothing would happen to the budget line, because the relative prices for food and
racquetballs have not changed.
e. It would shift outward.
Answer: E
34) Joe spends all of his money on concert tickets and compact disks. Figure 6-3 shows his
budget constraint when his income is $200. The price of a ticket is $40, while the price of a
compact disk is $20. What would happen to Joe's budget line if his income increased to $300
and the prices of concert tickets and compact disks each increased by 50 percent?
a. There would be no change in the budget line.
b. His budget line would shift upward by 50 percent.
c. His budget line would shift downward by 50 percent.
d. He could purchase 50 percent more compact disks and the same number of tickets as
before.
e. He could purchase 50 percent more tickets and the same number of compact disks as
before.
Answer: A
35) Which of the following could change a consumer's budget line?
a. a change in utility
b. an increase in the availability of substitute goods
c. additional responsibilities taken on by the consumer
d. a change in the price of one or more goods
e. a reduction in the level of technical inefficiency in the market
Answer: D
36) Suppose that a consumer's original budget line was AB in Figure 6-4, but it has now
changed to line AC. Which of the following must have occurred?
a. The price of good X must have risen.
b. The price of good Y must have risen.
c. The price of good Y must have fallen.
d. The price of good X must have fallen.
e. The consumer's income must have risen.
Answer: D
37) Suppose that a consumer's original budget line was AC in Figure 6-4, but it has now
changed to line AB. Which of the following must have occurred?
a. The price of good X must have risen.
b. The price of good Y must have risen.
c. The price of good Y must have fallen.
d. The price of good X must have fallen.
e. The consumer's income must have risen.
Answer: A
38) Suppose that a consumer used to be at point R on budget line AA' in Figure 6-5, and is
now at point S on line BB'. Which of the following is true if the consumer enjoys both goods?
a. The utility level at point S is higher than at point R.
b. Good X is an inferior good.
c. The consumer's income fell.
d. The price of X rose.
e. The utility level at point S is lower than at point R.
Answer: A
39) Suppose that a consumer used to be at point S on budget line BB' in Figure 6-5, and is
now at point R on line AA'. Which of the following is true?
a. The price of X rose.
b. The price of X fell.
c. The consumer's income fell.
d. The utility level at point R is higher than at point S.
e. The substitution effect is positive.
Answer: C
40) Economists usually assume that all consumers have the same tastes and preferences.
a. True
b. False
Answer: B
41) Economists usually assume
a. that Americans' preferences are systematically different from Europeans
b. that there are some features common to the preferences of a wide variety of people
c. that everyone has the same preferences
d. that everyone has the same preferences that they (the economists) do
e. that individuals prefer to purchases goods rather than services
Answer: B
42) According to the assumption of consumer rationality, a consumer who prefers one head
of broccoli to one head of cauliflower, one head of cauliflower to one package of brussel
sprouts, and one
a. package of brussel sprouts to one head of cabbage, must prefer a head of cabbage to a head
of cauliflower
b. package of brussel sprouts to one head of cabbage, must prefer a head of broccoli to any
other vegetable
c. package of brussel sprouts to one head of cabbage, must prefer a package of brussel sprouts
to a head of cauliflower
d. package of brussel sprouts to one head of cabbage, must prefer a head of cauliflower to a
head of cabbage
e. head of cabbage to one package of brussel sprouts, must prefer the package of brussel
sprouts to a head of broccoli
Answer: D
43) A rational consumer who prefers one apple to two oranges, and two oranges to one
orange,
a. must prefer two oranges to one apple
b. must prefer one apple to one orange
c. must prefer two oranges to two apples
d. must be indifferent between two oranges and two apples
e. might prefer one orange to one apple
Answer: B
44) The feature of preferences that "more is better"
a. is a logical consequence of transitivity
b. is shared by most people, most of the time.
c. implies that 5 apples will always be preferred to 4 oranges
d. implies that 5 apples will always be preferred to 5 oranges
e. means that, when dining, people always try to eat as much as they possibly can
Answer: B
45) Marginal utility is the extra utility a consumer derives from consuming an extra unit of a
good.
a. True
b. False
Answer: A
46) The principle of diminishing marginal utility implies that total utility falls as consumption
rises above a certain level.
a. True
b. False
Answer: B
47) If marginal utility from consuming an extra unit of a good is positive, then the consumer's
total utility must increase as more of the good is consumed.
a. True
b. False
Answer: A
48) The change in total utility arising from a one-unit increase in consumption of a good is
referred to as
a. average utility
b. the principle of diminishing marginal utility
c. real income
d. marginal utility
e. price
Answer: D
49) Marginal utility
a. increases as more of a good is consumed
b. increases as the total utility of consuming a good increases
c. is the same as the utility of consuming a good
d. is the same as the utility of consuming an additional unit of a good
e. is the same for all units of a good, but varies from one consumer to another
Answer: D
50) The law of diminishing marginal utility
a. is valid only after basic necessities (such as food and shelter) have been obtained
b. says that marginal utility decreases as more of a good is consumed
c. implies that spending on a good will decrease as more of that good is consumed
d. says that marginal utility decreases as income increases
e. implies that spending on a good decreases as income increases
Answer: B
51) As Reba consumes four slices of pizza, her total utility rises from 0 to 18, to 24, to 28,
and to 30, respectively. What is her marginal utility of the fourth slice of pizza?
a. 28
b. 24
c. 2
d. 7
e. 8
Answer: C
52) As Reba consumes four slices of pizza, her total utility rises from 0 to 18, to 24, to 28,
and to 30, respectively. What is her marginal utility of the first slice of pizza?
a. 18
b. 24
c. 2
d. 7
e. 8
Answer: A
53) Figure 6-6 shows the total utility that Jerry receives from consuming different numbers of
apples per week. What is his marginal utility from the fourth apple ?
a. 20
b. 6
c. 34
d. 14
e. 10
Answer: B
54) Figure 6-6 shows the total utility that Jerry would receive from consuming different
numbers of apples per week. What is Jerry's marginal utility from consuming the second
apple after he already consumed the first one?
a. 0
b. 17
c. 20
d. 14
e. 34
Answer: D
55) Figure 6-6 shows the total utility that Jerry would receive from consuming several
different quantities of apples per week. What can be said about Jerry's utility schedule for
apples?
a. It conforms to the law of supply.
b. Marginal utility rises as consumption rises.
c. Average utility rises as consumption rises.
d. It conforms to the law of diminishing marginal utility.
e. The marginal and total utility lines cross at four apples.
Answer: D
56) Which of the following most clearly illustrates the law of diminishing marginal utility?
a. The total satisfaction from consuming a good falls as more of the good is consumed.
b. Marginal utility falls as total utility falls.
c. The quantity of a good demanded falls as its price rises.
d. The additional satisfaction from consuming a good falls as more of the good is consumed.
e. There is a direct relationship between the price of a good and its total utility.
Answer: D
57) If Bill asks for a second helping of pancakes, then his
a. second helping must be free
b. marginal utility of the second helping must be negative
c. price per helping is too low
d. marginal utility of the second helping must be positive
e. marginal utility of the second helping must be less than the marginal utility of the first
helping
Answer: D
58) If diminishing marginal utility holds, and a person consumes less of a good, then all else
being equal
a. the price of the good will rise
b. total utility will rise
c. marginal utility will rise
d. expenditure on the good will increase
e. marginal utility will decline
Answer: C
59) Consuming goods until the ratio of marginal utilities of the goods is equal to the ratio of
their prices is consistent with maximizing total utility.
a. True
b. False
Answer: A
60) Consuming to the point where the marginal utility of each good is equal to the price of
that good is consistent with utility maximization.
a. True
b. False
Answer: B
61) The combination of two goods at which total utility is maximized must lie somewhere on
the consumer's budget line.
a. True
b. False
Answer: A
62) If MUx/Px is less than MUy/Py, then the consumer should consume more of X and less
of Y.
a. True
b. False
Answer: B
63) If Sally maximizes her total utility by allocating time between two different activities, she
will select the combination at which the marginal utility per hour spent is the same in both
activities.
a. True
b. False
Answer: A
64) If all consumers satisfy economists' assumptions regarding utility, then
a. they will each choose a consumption bundle that is inside the budget line
b. everyone will choose the same consumption bundle
c. everyone will have the same budget line
d. all consumers will react in the same way to a price change
e. each person will choose a consumption bundle on his or her budget line
Answer: E
65) A utility-maximizing consumer will choose a collection of goods
a. represented by a point below her budget line
b. represented by a point above her budget line
c. for which the marginal utility from each good is the same
d. for which the marginal utility divided by the price is the same or each good
e. for which the total utility from each good is the same
Answer: D
66) Beginning at the vertical axis intercept, as a consumer moves down the budget line, she
will find that
a. the marginal utility per dollar spent on the vertical axis good decreases
b. the marginal utility per dollar spent on the vertical axis good increases
c. the marginal utility per dollar spent on the horizontal axis good increases
d. the marginal utilities per dollar spent on both goods increase
e. the marginal utilities per dollar spent on both goods remain constant along that particular
budget line
Answer: B
67) Beginning at the horizontal axis intercept, as a consumer moves upward along the budget
line, he will find that
a. the marginal utility per dollar spent on the vertical axis good increases
b. the marginal utility per dollar spent on the horizontal axis good increases
c. the marginal utility per dollar spent on the horizontal axis good decreases
d. the marginal utilities per dollar spent on both goods increase
e. the marginal utilities per dollar spent on both goods remain constant along that particular
budget line
Answer: B
68) The marginal utility per dollar spent on a good represents the
a. satisfaction received for each dollar spent on the last unit consumed
b. total satisfaction received from consuming a certain number of units of that good
c. dollar value of average utility
d. change in price due to a one-unit increase in total utility
e. price paid for the last unit of utility
Answer: A
69) A utility-maximizing consumer will
a. consume at a point on her budget line
b. consume each good until its marginal utility is zero
c. adjust her consumption pattern so that the marginal utilities of all goods are equal
d. consume more of a good only if its price rises
e. stop consuming any good whose price rises
Answer: A
70) Suzy spends all of her income on potato chips and textbooks. To maximize her total
utility, she should
a. allocate her income so that the marginal utilities of potato chips and textbooks are equal
b. allocate her income so that the marginal utilities per dollar spent on potato chips and
textbooks are equal
c. change her eating habits
d. choose a consumption point that is inside her budget constraint
e. allocate her income so that the total utilities of potato chips and textbooks are equal
Answer: B
71) Among all the combinations of goods attainable by a consumer facing a budget
constraint, the one that maximizes total utility is the one that
a. maximizes marginal utility per dollar spent on each good
b. maximizes marginal utility per pound, or other physical quantity, of each good
c. equates the marginal utilities per dollar spent on each good
d. equates the marginal utilities per pound, or other physical quantity, of each good
e. drives the marginal utility of each good to zero
Answer: C
72) If bread costs $1 per pound and meat costs $4 per pound, a consumer whose marginal
utility of meat equals 80 utils per pound is maximizing utility only if the marginal utility per
pound of bread equals
a. 4 utils
b. 5 utils
c. 10 utils
d. 20 utils
e. 80 utils
Answer: D
73) Ignoring all other goods, if Yong's marginal utility per pound of bread is 10 utils and per
pound of cheese is 30 utils, his
a. total utility would be maximized if the price per pound of cheese is triple the price per
pound of bread
b. total utility could be increased by buying more bread and less cheese
c. total utility could be increased by buying more cheese and less bread
d. total utility would be maximized if the price per pound of cheese is one-third the price per
pound of bread
e. marginal utility would be maximized if the price per pound of cheese is one-third the price
per pound of bread
Answer: A
74) Suppose that the price of a pizza is $10 and that the price of a blouse is $30. At her
present level of consumption, Magda's ratio of marginal utility of pizza to marginal utility of
blouses is 1/4. To maximize total utility, she should
a. buy more pizzas and fewer blouses
b. buy fewer pizzas and more blouses
c. continue to buy the same quantities of pizza and blouses
d. spend more time consuming pizza
e. spend more time buying blouses
Answer: A
75) Suppose that the price of a pizza is $10 and that the price of a blouse is $30. At her
present level of consumption, Magda's ratio of marginal utility of pizza to marginal utility of
blouses is 1/2. To maximize total utility, she should
a. buy more pizzas and fewer blouses
b. buy fewer pizzas and more blouses
c. continue to buy the same quantities of pizza and blouses
d. spend more time consuming pizza
e. spend more time buying blouses
Answer: B
76) Lin is maximizing total utility while consuming food and clothing. Her marginal utilities
of food and clothing are 50 utils and 25 utils, respectively. If clothing is priced at $10 per
unit, the price of a unit of food
a. must be rising
b. must be falling
c. must equal $10 as well
d. must equal $20
e. cannot be determined without additional information.
Answer: D
77) Stanley receives the following marginal utilities from the first four car washes that he
buys each year, respectively: 20, 15, 10, and 5. If each car wash sells for $10, then the
marginal utility per dollar spent on the third car wash is
a. 10
b. 4.5
c. 1
d. 45
e. 5
Answer: C
78) Jeffrey spends all of his income on warm-up suits and running shoes, and the price of a
warm-up suit is four times the price per pair of shoes. Then, in order to maximize total utility,
Jeffrey should
a. buy four times as many warm-up suits as pairs of running shoes
b. buy four times as many pairs of running shoes as warm-up suits
c. divide his income equally between warm-up suits and running shoes
d. buy both items until the marginal utility of a warm-up suit is four times the marginal utility
of a pair of running shoes
e. buy both items until the marginal utility of a pair of running shoes is four times the
marginal utility of a warm-up suit
Answer: D
79) For dessert, Mac has the choice between cheesecake and apple pie. The cheesecake has a
marginal utility of 50 and a price of $5, and the apple pie has a marginal utility of 30 and a
price of $3. Therefore, Mac should buy
a. the cheesecake since the marginal utility is greater
b. the apple pie because its price is lower
c. two servings of apple pie and no cheesecake
d. four servings of cheesecake
e. either the apple pie or the cheesecake, it makes no difference
Answer: E
80) Figure 6-7 shows the marginal utilities Kate receives from buying hamburgers and frozen
pizzas, assuming she buys only these two goods. Each hamburger sells for $5 and each pizza
sells for $4. What is her marginal utility per dollar spent on the fourth hamburger?
a. 15
b. 4
c. 3
d. 20
e. 12
Answer: C
81) Figure 6-7 shows the marginal utilities Kate receives from buying hamburgers and frozen
pizzas, assuming she buys only these two goods. Each hamburger sells for $5 and each pizza
sells for $4. What is her marginal utility per dollar spent on the second pizza?
a. 16
b. 6
c. 3
d. 20
e. 4
Answer: E
82) Figure 6-7 shows the marginal utilities Kate receives from buying hamburgers and frozen
pizzas, assuming she buys only these two goods. Each hamburger sells for $5 and each pizza
sells for $4. If Kate has $27 to spend how many hamburgers and frozen pizzas should she
buy?
a. 1 hamburger and 5-1/2 pizzas
b. 2 hamburgers and 1-1/4 pizzas
c. 3 hamburgers and 3 pizzas
d. 4 hamburgers and 1-3/4 pizzas
e. 5 hamburgers and 1/2 pizza
Answer: C
83) If a consumer allocates her income between two goods, x and y, then she will be in
equilibrium when
a. MUx/Px = MUy/Py and she is below her budget constraint
b. MUx = MUy and she has spent all of her income
c. MUx/MUy > Px/Py and all of her income is spent
d. MUx/Px = MUy/Py and all of her income is spent
e. MUx = MUy and she is below her budget constraint
Answer: D
84) If a person could increase total utility by purchasing more candy and fewer apples, then
the
a. total utility from candy must exceed the total utility from apples
b. marginal utility of candy must exceed the marginal utility of apples
c. marginal utility per dollar spent on candy must exceed the marginal utility per dollar spent
on apples
d. total utility per dollar spent on candy must exceed the total utility per dollar spent on
apples
e. marginal utility per dollar spent on candy must be less than the marginal utility per dollar
spent on apples
Answer: C
85) Suppose that Janis is maximizing her total utility from chairs and tables. If the marginal
utility of the last table she purchased is 200 utils, and the prices of chairs and tables are $50
and $100, respectively, then the marginal utility of the last chair she purchased
a. is 100 utils
b. is 400 utils
c. is 200 utils
d. is 50 utils
e. cannot be determined without more information
Answer: A
86) Alice has spent all of her income on ten different goods, and knows that the marginal
utilities per dollar spent on the ten goods are equal. Which of the following statements is
correct?
a. She could possibly increase her total utility by redistributing her income among the ten
items.
b. She has violated the assumption of rationality.
c. The law of diminishing marginal utility does not apply to her.
d. Any reallocation of income among the ten items will reduce her total utility.
e. She must be at a point inside of her budget line.
Answer: D
87) Steve buys Pepsi at $.60 per can and orange juice at $1.20 per can. In consumer
equilibrium,
a. orange juice would yield a higher marginal utility per dollar spent than Pepsi would
b. he will consume twice as much Pepsi as orange juice
c. he will consume more orange juice than Pepsi
d. total utility from orange juice is twice that from Pepsi
e. his last can of orange juice would generate a higher marginal utility than his last can of
Pepsi
Answer: E
88) If MUx/Px exceeds MUy/Py, then the consumer should
a. consume more of good X and less of good Y
b. consume less of good X and more of good Y
c. consume less of both goods X and Y
d. not change the consumption levels of X and Y
e. consume more of good Z
Answer: A
89) Suppose you have spent your entire budget and the marginal utilities per dollar spent on
all the goods you buy are equal. Which of the following is true?
a. You are not being rational.
b. There is a way to increase your utility by reallocating your purchases.
c. You will reduce your utility if you allocate your income in any other way.
d. You are minimizing your total utility.
e. You have chosen a consumption bundle that lies below your budget line.
Answer: C
90) The law of diminishing marginal utility applies to goods with negative income
elasticities; it does not always apply for goods with positive income elasticities.
a. True
b. False
Answer: B
91) The Jones family is going to Disney World and has set a budget of $2000 for food and
souvenirs. If Mr. Jones finds a $50 bill on the ground during their trip and uses it to purchase
additional souvenirs, then
a. souvenirs are a normal good
b. food is an inferior good
c. the budget line has shifted to the left
d. the slope of the budget line has changed
e. souvenirs are a luxury good
Answer: A
92) The Jones family is going to Disney World and has set a budget of $2000 for visiting the
theme park and hotel accommodations. Their original plan was to spend three days at the
park and two nights in the hotel. Mrs. Jones unexpectedly listens to a timeshare sales pitch
and she is paid $400 for enduring the ordeal. The family decides to spend an extra day at the
park and two extra nights in the hotel. For the Jones family, we can be certain that
a. hotels nights are an inferior good
b. their budget line has shifted to the left
c. theme parks days are an inferior good
d. hotel nights are a normal good
e. their budget line has changed its slope
Answer: D
93) The income effect measures how
a. the quantity of a good supplied changes in response to a change in income
b. the quantity of a good demanded changes in response to a change in the price of a good,
with income constant
c. far the budget line shifts due to a change in income
d. the quantity of a good demanded changes in response to a change in purchasing power
e. income changes when prices change, holding quantities demanded constant
Answer: D
94) The income effect of a lower price for good A
a. invariably leads a consumer to buy more of good A, because the combination of unchanged
money income and lower price raises that consumer's real income or purchasing power
b. invariably leads a consumer to buy less of good A because the combination of unchanged
money income and lower price encourages that consumer to buy more of other goods
c. may lead to a larger, smaller, or even an unchanged quantity of good A demanded; it all
depends on the nature of the good itself
d. creates a change in the good's relative price and, therefore, causes the consumer to
substitute good A in place of other goods
e. causes a parallel outward shift of the budget line, enabling the consumer to buy more of all
goods than before
Answer: C
95) As the price of a computer falls, overall
a. the marginal utility of computers rises
b. the total utility of computers falls
c. the total utility per dollar spent on computers falls
d. individuals would purchase fewer computers in equilibrium
e. individuals would purchase more computers in equilibrium
Answer: E
96) Suppose there are only two goods, food and clothing, with food measured on the vertical
axis. If the price of clothing changes, holding all else constant,
a. the budget line undergoes a parallel shift to the right
b. the budget line undergoes a parallel shift to the left
c. a new point of utility maximization will be reached
d. the budget line becomes flatter
e. the slope of the budget line remains constant
Answer: C
97) A change in the price of one good leads to all of the following, except one. Which is the
exception?
a. a change in the slope of the budget line
b. a new point of consumer utility maximization
c. a change in the trade-off between the two goods
d. a change in the marginal utility of each unit of the good
e. a change in the marginal utility per dollar spent on the good
Answer: D
98) A decrease in the price of a good or service
a. causes the budget line to rotate inward
b. causes a parallel outward shift of the budget line
c. means that less of the good can be purchased with a given income
d. causes the budget line to rotate outward
e. causes a parallel inward shift of the budget line
Answer: D
99) An increase in the price of a loaf of bread will
a. cause the budget constraint to rotate outward
b. reduce the minimum number of loaves any individual consumer can purchase
c. increase the minimum number of loaves any individual consumer can purchase
d. increase the maximum number of loaves any individual consumer can purchase
e. reduce the maximum number of loaves any individual consumer can purchase
Answer: E
100) A consumer's demand curve
a. shows the quantity of a good or service that individual will demand at each different price
b. shows the quantity of a good or service that individual will demand at different levels of
income
c. is derived by equating the income and substitution effects
d. slopes downward because the income effect offsets the substitution effect
e. will be vertical if the income effect outweighs the substitution effect
Answer: A
101) A consumer's demand curve for apples
a. is derived by varying the price of apples and determining the quantities of apples at which
the marginal utility per dollar spent on apples equals the marginal utility per dollar spent on
other goods
b. is derived by determining how many apples will be purchased at different levels of income
c. is derived by varying the prices of other goods and determining the quantities of apples at
which the marginal utilities per dollar spent on all goods are equal
d. slopes downward whenever the income and substitution effects cancel out
e. will be vertical if the substitution effect outweighs the income effect
Answer: A
102) An individual's demand curve for a good is derived by
a. varying the income level and observing the resulting total utility derived from both goods
b. varying the price of one good and observing the resulting quantities demanded of the other
good
c. varying the prices of both goods and observing the changes in quantities demanded of both
goods
d. shifting the budget line to the left and calculating the loss in total utility
e. varying the price of one good and observing the resulting quantities demanded of that good
Answer: E
103) The net change in quantity demanded of a good following a price change
a. is equivalent to the substitution effect
b. is equivalent to the income effect
c. must decrease as marginal utility rises
d. is negative only when the income effect is negative
e. reflects both the substitution and income effects
Answer: E
104) Higher education is a normal good. If its price falls,
a. the quantity of higher education demanded will fall
b. the substitution and income effects work in opposite directions
c. the income effect is negative
d. higher education will satisfy to the law of demand
e. real purchasing power will fall
Answer: D
105) The substitution effect will never induce a consumer to buy more of a good when its
price increases.
a. True
b. False
Answer: A
106) The substitution effect measures how
a. the quantity demanded of one good is influenced by a change in income, with prices
constant
b. the quantity demanded of one good is influenced by a change the price of another good
c. marginal utility per dollar spent is affected by income changes
d. an increase in the price of a good is effectively the same as a reduction in income
e. the quantity demanded of one good is influenced by a change in the price of that good, with
income constant
Answer: E
107) The substitution effect of a(n)
a. price increase works to reduce the quantity of the good demanded
b. price increase works to increase the quantity of the good demanded
c. price decrease works to reduce the quantity of the good demanded
d. income increase works to reduce the quantity of the good demanded
e. income decrease works to reduce the quantity of the good demanded
Answer: A
108) If the price of a haircut increases,
a. haircuts become more expensive relative to other goods and services
b. haircuts become less expensive relative to having a friend cut your hair
c. people will have their hair cut more often
d. haircuts become less expensive relative to other goods and services
e. the budget constraint will shift outward
Answer: A
109) If the price of paint increases, the substitution effect will cause
a. people to paint their homes more often
b. people to use more paint than they did before
c. the quantity of paint demanded to increase
d. the quantity of paint supplied to decrease
e. people to use less paint
Answer: E
110) If the price of a hamburgers increases, the substitution effect works to
a. decrease the quantity of hamburgers supplied
b. increase the number of hamburger buns demanded
c. decrease the quantity of hamburgers demanded
d. increase the number of hamburger buns supplied
e. increase the quantity of hamburgers demanded
Answer: C
111) The income effect
a. of a price increase works to increase the quantity of the good demanded
b. of a price increase works to decrease the quantity of the good demanded
c. of a price decrease works to increase the quantity of the good demanded
d. of a price decrease works to decrease the quantity of the good demanded
e. of a price decrease could work to increase or decrease the quantity of the good demanded
Answer: E
112) Steak is a normal good. If the price of steak increases,
a. the income effect on the demand for steak will reinforce the substitution effect
b. the income effect on the supply of steak will, to some extent, offset the substitution effect
c. the budget line will rotate outward
d. consumers' purchasing power will increase
e. the budget line will shift outward
Answer: A
113) An inferior good is one that
a. people consume if their income falls
b. people consume more of if their income falls
c. people never consume
d. people consume if their income rises
e. people consume more of if their income rises
Answer: B
114) Housing is a normal good. That means
a. that most people prefer to purchase their housing rather than rent it
b. that most people tend to purchase more housing if its price falls.
c. that people tend to purchase more housing if their income increases
d. that most people live in houses
e. the people tend to purchase more housing if its price rises
Answer: C
115) For a normal good, such as steak,
a. quantity demanded increases as its price falls.
b. the income and substitution effects work in opposite directions
c. the income effect is negative
d. the income effect reinforces the substitution effect
e. the supply curve is vertical
Answer: D
116) For an inferior good, the income effect
a. is zero
b. at least partially offsets the substitution effect
c. operates to increase the quantity demanded
d. helps explain why the demand curve slopes upward
e. does not exist
Answer: B
117) Steak is a normal good. A decrease in the price of steak
a. causes the budget line to rotate inward
b. makes the supply of steak more elastic
c. decreases consumers' purchasing power
d. makes consumers poorer
e. increases consumers' purchasing power
Answer: E
118) For a normal good, the substitution and income effects of a price decrease work in the
same direction to increase the quantity demanded of that good.
a. True
b. False
Answer: A
119) If the price of an inferior good increases, the substitution effect encourages the
consumer to purchase less of it while the income effect encourages him to purchase more of
it.
a. True
b. False
Answer: A
120) Inferior goods typically obey the law of demand because the substitution effect tends to
dominate the income effect.
a. True
b. False
Answer: A
121) The substitution effect of a decrease in the price of an inferior good encourages the
consumer to purchase more of the good while the income effect encourages the consumer to
purchase less of it.
a. True
b. False
Answer: A
122) A decrease in the price of a good enhances the consumer's purchasing power. The
income effect applies to both normal and inferior goods by encouraging the consumer to
purchase more.
a. True
b. False
Answer: B
123) Biscuits are an inferior good for Aster, then if their price falls, she
a. will definitely buy more biscuits
b. will definitely buy fewer biscuits
c. may buy more biscuits
d. will buy fewer biscuits if the substitution effect is larger than the income effect
e. will buy more biscuits if the substitution effect is larger than the income effect
Answer: E
124) For an inferior good, a rise in price causes
a. negative income and substitution effects
b. positive income and substitution effects
c. a negative income effect and a positive substitution effect
d. a positive income effect and a negative substitution effect
e. a positive income effect, but no substitution effect
Answer: D
125) If the substitution effect of a lowered price is partly or fully offset by the income effect,
we know that the good in question is a(n)
a. complementary good
b. inferior good
c. luxury good
d. normal good
e. substitute good
Answer: B
126) Normal goods always obey the law of demand because, as the price of such a good rises,
the
a. fall in quantity demanded due to the substitution effect is offset by a rise in quantity
demanded due to the income effect
b. fall in quantity demanded due to the substitution effect is reinforced by a fall in quantity
demanded due to the income effect
c. substitution effect will lead to an inward shift of the demand curve
d. substitution effect will lead to an increase in quantity demanded
e. rise in quantity demanded due to the substitution effect is offset by a fall in quantity
demanded due to the income effect
Answer: B
127) If macaroni and cheese is an inferior good, then
a. the income effect and the substitution effect work in opposite directions
b. as the budget line shifts to the right, consumers demand more macaroni and cheese
c. when the price of macaroni and cheese rises, the quantity demanded also rises
d. the quantity demanded rises as purchasing power rises
e. individuals will not consume macaroni and cheese
Answer: A
128) For a normal good, the
a. income effect is greater than 1.0
b. income effect is negative
c. substitution effect is zero
d. income effect and the substitution effect work in the same direction
e. demand curve is horizontal
Answer: D
129) The market demand curve for a good is found by
a. adding up the quantities demanded by all consumers at different prices of that good
b. adding up the quantities demanded by all consumers at different incomes
c. adding up the maximum price each consumer is willing to pay for each possible quantity of
the good
d. varying consumers' total income and determining what prices they are willing to pay
e. vertically summing the individual consumers' demand curves
Answer: A
130) The market demand curve for a particular good
a. may be horizontal even if the individual consumers' demand curves are downward sloping
b. will always shift to the right as the price of the good decreases
c. is even more likely to be downward sloping than an individual consumer's demand curve
d. will always shift to the right if consumers' incomes increase
e. must be flatter than the flattest of the individual consumer demand curves
Answer: C
131) The market demand curve for a particular good
a. will shift to the right if more consumers enter the market
b. could shift to the left if more consumers enter the market
c. will be upward sloping if the good is an inferior good
d. will always shift to the right if consumers' incomes increase
e. could shift downward if more consumers enter the market
Answer: A
132) Suppose there are three buyers in the market for bottled water. At a price of $2 per
bottle, Jerry demands 23 bottles, Elaine demands 14 bottles, and Kramer demands 7 bottles.
One point on, the market demand curve for bottled water is
a. price = $2 and quantity = 23 bottles
b. price = $88 and quantity = 44 bottles
c. price = $88 dollars and quantity = 14 bottles
d. price = $2 and quantity = 44 bottles
e. impossible to determine from the information given
Answer: D
133) The market demand curve is
a. any individual consumer's demand curve multiplied by the number of consumers in the
market
b. a relationship between total income and total quantity demanded
c. the horizontal sum of the individual demand curves of all consumers in the market
d. the vertical sum of the individual demand curves of all consumers in the market
e. the sum of the prices paid at each quantity demanded
Answer: C
134) Behavioral economics
a. helps explain why economic decision makers maximize either utility or profit
b. assumes that people behave "as if" they are maximizing something.
c. is a subfield of economics, but one that is rejected by most economists
d. explains why irrational behavior is better than typically "rational" behavior.
e. points out that some human behavior is not consistent with any type of maximization
Answer: E
135) People sometimes try to limit the options they have available. This
a. is consistent with rational economic behavior.
b. can be explained by behavioral economic analysis
c. explains why demand curves are sometimes vertical
d. violates the assumption of transitive preferences
e. occurs when income and substitution effects cancel out.
Answer: B
136) Procrastination, addiction, and honesty
a. may be explained by preferences that are not transitive
b. violate the economist's assumption that "more is better"
c. help to explain why the substitution effect is more powerful than the income effect
d. are often inconsistent with narrowly defined rationality
e. are inferior economic "goods".
Answer: D
137) The theory of consumer demand
a. can be used to explain how an individual allocates time between two competing uses
b. is valid only for choices among various physical goods
c. is valid only for goods and services purchased for cash
d. is valid only if consumers are perfectly rational
e. can explain the demand for normal goods, but not the demand for inferior goods
Answer: A
138) Behavioral economics
a. is a subfield of psychology that has partially replaced traditional economic analysis
b. is a subfield of economics that explains how people behavior
c. is a subfield of economics that incorporates insights from psychology and sociology
d. provides support for the traditional economic theory of rational utility maximization
e. predicts that demand curves slope upward
Answer: C
139) In allocating time between studying French and studying economics,
a. exam points are inferior goods
b. we can think of students "buying" exam points with hours spent studying
c. we can think of students "buying" exam points with money
d. the demand curve for exam points is upward sloping
e. we can think of students "buying" study time for cash
Answer: B
140) In allocating time between competing uses,
a. an individual will try to maximize marginal utility per hour spent on one activity
b. time is considered a free good
c. an individual will try to equate marginal utilities per hour spent on each activity
d. time can be purchased for cash
e. an individual will try to equate the marginal utilities derived from each activity
Answer: C
141) Steve is planning to divide his study time between English and calculus. It will take him
two hours of study for each extra point in calculus and one hour of study to raise his English
score by one point. He should allocate his time so that
a. the marginal utility of an hour spent studying calculus is twice the marginal utility of an
hour spent studying English
b. the marginal utility of an hour spent studying English is twice the marginal utility of an
hour spent studying calculus
c. the marginal utility per hour spent studying calculus equals the marginal utility per hour
spent on English
d. he spends twice as much time on calculus as on English
e. he spends twice as much time on English as on calculus
Answer: C
142) A technological change that enables a student to learn more French in the same amount
of study time
a. causes the budget line to rotate inward
b. causes an outward, parallel shift of the budget line
c. shifts the "demand curve" inward
d. is equivalent to a increase in the "price" of an hour spent studying French
e. makes the student better off
Answer: E
143) Hamburger is an inferior good. If the price of hamburger increases,
a. the income effect on the demand for hamburger will reinforce the substitution effect
b. the income effect on the supply of hamburger will reinforce the substitution effect
c. the budget line will rotate outward
d. the budget line will shift outwards
e. the income effect on the demand for hamburger will offset, to some degree, the substitution
effect
Answer: E
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
