Macroeconomics Principles and Policy 11th Edition by William J. Baumol - Test Bank

Macroeconomics Principles and Policy 11th Edition by William J. Baumol – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Consumer Choice: Individual and Market Demand

 

TRUE/FALSE

 

1.    Because the consumer’s budget is limited, purchase decisions among available goods must of necessity be interdependent.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy      TOP:    Scarcity and Demand

 

2.    The number of Compact Discs purchased by a consumer depends on the price of the discs as well as the prices of all other goods purchased.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand                TOP:    Scarcity and Demand

 

3.    Utility is the pleasure, satisfaction, or enjoyment derived from consumption.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

4.    Marginal utility is measured by the maximum amount of money a consumer is willing to pay for one more unit of a commodity.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

5.    Total utility always decreases when additional amounts of a commodity are consumed.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

6.    Total utility can be objectively measured in numbers that indicate usefulness or benefit to the consumer.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

7.    Marginal utility can fall even as total utility from the consumption of a good is rising.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

8.    Total utility increases if one more unit of a product is purchased and marginal utility is positive.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

9.    The law of diminishing marginal utility holds that at some point consumption of additional units of a commodity adds less to total utility.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

10. The law of diminishing marginal utility states that total utility will increase at a decreasing rate as additional units of a commodity are acquired.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

11. As a rule, the more of a commodity a consumer acquires, the smaller will be her total utility from that good.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

12. Total utility decreases when diminishing marginal utility is present.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

13. As a rule, as a consumer acquires more and more of a good, the marginal utility declines.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

14. An optimal purchase is one that maximizes total utility.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

15. Consumers should purchase quantities of a good to the point where MU > P.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

16. Consumers should purchase a good up to the point where MU = P.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

17. Given a typical demand curve and a decline in price, the consumer who wishes to maximize total utility must increase the quantity purchased of a good to arrive at an optimal MU = P point.

 

ANS:    T                PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

18. If the marginal net utility of beer is a positive number, the consumer should buy more beer in order to maximize utility.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

19. If the marginal net utility of beer is negative, the consumer should buy more beer in order to increase the total utility.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

20. The law of diminishing marginal utility is consistent with the consumer behavior that produces a negatively sloped demand curve.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

21. The law of diminishing marginal utility guarantees that demand curves will have positive slopes.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

22. The real cost of a decision is the opportunity cost measured in the commodities forgone.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

23. All decisions involve opportunity cost.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

24. Consumer surplus is the difference between the worth of a commodity to the consumer and the price the consumer pays for the commodity.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

25. Consumer surplus is what one consumer is willing to pay for a commodity over what another consumer is willing to pay for the same commodity.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

26. Voluntary exchange requires that there must be mutual gain.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

27. A consumer cannot gain consumer’s surplus if she purchases more than one unit of a good.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

 

28. The resolution of Adam Smith’s diamond-water puzzle is based on the distinction between marginal and total utility.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

29. Since price tends to equal marginal utility, the price of water is low and the price of diamonds is high.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

30. Since price tends to equal total utility, the price of water is low and the price of diamonds is high.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

31. Scarcity raises both price and marginal utility but generally reduces total utility.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Scarcity, tradeoffs, and opportunity cost

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

32. Quantity demanded is not only affected by price but by variables such as income and the prices of other goods.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Elasticity    TOP:  Consumer Choice as a Trade-Off: Opportunity Cost

 

33. An inferior good is one that consumers buy in smaller quantities when incomes rise.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

34. If income rises, most consumers will increase the quantity demanded of an inferior good.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Aggregate demand and aggregate supply

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

35. All inferior goods have upward-sloping demand curves.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

 

36. The market demand curve represents the total quantity demanded at each price.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

37. The market demand curve is the horizontal summation of all individual demand curves.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

38. The law of demand ensures that a demand curve has a positive slope.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

39. The law of demand holds that as prices of goods decrease, people are willing to buy more.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

40. Even if all individual demand curves are downwardly sloped, the market demand curve may slope upward.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

41. If a good has “snob appeal,” consumers may purchases less when the price falls.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

42. Rolls Royce may actually sell fewer cars at lower prices due to the “snob effect.”

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

43. Points along a budget line represent the maximum combinations of two commodities that a consumer can afford.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

44. The slope of the budget line is determined only by the prices of the commodities purchased.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

 

45. An increase in income produces a parallel, outward shift in the budget line.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

46. A change in the price of one good results in a rotation of the budget line, so that it is steeper or flatter.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

47. A decrease in the price of one good results in a parallel shift in the budget line.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

48. The budget line represents a consumer’s preferences for a commodity.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

49. Indifference curves show all combinations of commodities that are equally desirable to the consumer.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

50. A change in the price of a good will shift the indifference curves.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

51. Any point on the lowest indifference curve is preferable to a point on a higher indifference curve.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

52. If point A on an indifference curve lies higher (measured vertically) than point B on the same curve, Point A automatically represents higher total utility than point B.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

 

53. The budget line and the indifference curve are geometric devices used to provide a closer look at consumer choice.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

54. All points on an indifference curve represent combinations of two goods that are equally desirable to the consumer.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

55. An increase in income shifts indifference curves outward.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

56. The marginal rate of substitution represents the maximum amount of one commodity a consumer is willing to give up in exchange for one more unit of another commodity.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

57. The slope of an indifference curve represents the maximum amount of one commodity that a consumer is willing to give up in exchange for one more unit of another commodity.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

58. The slope of the budget line is the amount of one commodity that a consumer must give up in order to obtain an additional unit of the other commodity.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

59. The demand curve can be derived from indifference curves by varying the price of the commodity in question.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

60. A change in consumer preferences will shift the budget line.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

61. A consumer will go to a point on the highest attainable indifference curve.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

62. A consumer will consume the combination of goods at the point of tangency between the budget line and the indifference curve.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

63. A consumer will consume the combination of goods at the crossing point of a budget line and indifference curve.

 

ANS:    F                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

64. An increase in a consumer’s income will always increase the demand for a good.

 

ANS:    F                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

65. A change in the price of one good, such as staples, may affect the quantity demanded of another good, such as rubber bands.

 

ANS:    T                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

66. By changing the amount of income a consumer has to spend, a change in the price of one good may affect the quantity demanded of another good.

 

ANS:    T                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

MULTIPLE CHOICE

 

1.    Scarcity

a.	necessitates choice among consumer goods.
b.	of income renders purchase decisions interdependent.
c.	affects all consumer decisions.
d.	may involve forgoing the pleasure of one good in order to enjoy another.
e.	All of the above answer are correct.

 

 

ANS:    E                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Scarcity, tradeoffs, and opportunity cost                 TOP:    Scarcity and Demand

 

 

2.    Which of the following factors is always present in consumer decision making?

a.	taxes
b.	high prices
c.	scarcity
d.	changing consumer tastes
e.	cost-of-living adjustments to income

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Scarcity, tradeoffs, and opportunity cost                 TOP:    Scarcity and Demand

 

3.    Total utility can be thought of as the

a.	total satisfaction derived from a bundle of goods.
b.	minimum amount of money a consumer is willing to spend on a bundle of goods.
c.	additional satisfaction a consumer receives from the marginal unit of a good.
d.	willingness to pay for the marginal unit of a good.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

4.    Lana spent $5 to see a movie. We know

a.	the movie was worth 500 utils.
b.	Lana’s total utility from movies was $5.
c.	the movie was worth at least $5 worth of other goods.
d.	the movie increased marginal utility.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

5.    Modern economists measure how much utility Fred gets from a hot dog by

a.	asking Fred how many utils he gets from its consumption.
b.	examining the price of the hamburger Fred chose not to buy.
c.	asking Fred how much of some other good he would give up to get the hot dog. The “other good” can be any good except money.
d.	asking Fred how much of some other good he would give up to get the hot dog. The “other good” can be any good, including money.

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

6.    When the price of a commodity rises, we can expect

a.	marginal utility of the last unit purchased will rise.
b.	marginal utility of the last unit purchased will fall.
c.	marginal utility of the last unit purchased will be unaffected.
d.	purchases to rise because of the increased marginal utility.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

7.    When the price of a commodity falls, we can expect

a.	total utility will fall.
b.	marginal utility of the last unit purchased will fall.
c.	marginal utility of the last unit purchased will rise.
d.	purchases will fall because of a change in marginal utility.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

8.    If a commodity is inexpensive and its total utility great,

a.	it is an inferior good.
b.	it is plentiful.
c.	its marginal utility is high.
d.	the ratio of price to marginal utility is very high.

 

 

ANS:    B                PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

9.    High price and low total utility indicate

a.	low marginal utility.
b.	large quantities are sold.
c.	high marginal utility.
d.	a high price/marginal utility ratio.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

10. Economists consider instances of increasing marginal utility to be

a.	normal.
b.	impossible.
c.	unusual, as in the case of addictions.
d.	irrational.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

Figure 5-1

 

 

11. Americans choose cola over other flavors 70 percent of the time. Analysts say this is because cola’s flavor is more robust and durable. Orange soda, for example, suffers from flavor fatigue faster than cola. Also, because cola contains caffeine, people may be addicted to the stimulant. Which panel in Figure 5-1 best illustrates these facts?

a.	1
b.	2
c.	3

 

 

ANS:    A               PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Utility: A Tool to Analyze Purchase Decisions

 

 

12. A bottle of wine costs $8 and a quiche, $5. At Robert’s present levels of consumption, he spends all his income and receives marginal utility of $10 from the last bottle of wine and marginal utility of $4 from the last quiche. To maximize his total utility, Robert should

a.	buy less wine and more quiche.
b.	buy more wine and less quiche.
c.	spend all of his money on wine.
d.	change his spending pattern until he buys 8/5ths as much wine as quiche.

 

 

ANS:    B                PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

Table 5-1

 

Number of milkshakes consumed	1	2	3
Total utility from milkshakes (in $)	$23	$28	$31
Number of sandwiches consumed	1	2	3
Total utility from sandwiches (in $)	$40	$43	$45

 

 

13. Table 5-1 gives information on George’s total utility from consuming milkshakes and sandwiches. If George’s income this week is $15, milkshakes are $3 each, and sandwiches $2, he will maximize his utility if he buys

a.	three milkshakes and two sandwiches.
b.	three milkshakes and three sandwiches.
c.	no milkshakes and as many sandwiches as possible.
d.	two milkshakes and three sandwiches.

 

 

ANS:    B                PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

14. The theory of consumer choice is based on the hypothesis that each consumer wants to

a.	maximize her total utility.
b.	maximize her marginal utility.
c.	minimize the rate at which her marginal utility diminishes.
d.	minimize the percentage of her consumption diverted to inferior goods.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

15. The marginal utility of a unit of good X

a.	is always greater than the total utility of X.
b.	is always less than the average utility of X.
c.	generally depends on how much X the consumer already has.
d.	is always equal to the price of X.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

16. The marginal utility of a unit of good Y to Jane is

a.	the additional utility that Jane gets from consuming one more unit of Y.
b.	defined in money terms as the minimum amount Jane is willing to pay for that additional unit of Y.
c.	defined in money terms as the maximum amount Jane is willing to pay for all the Y she buys except that additional unit.
d.	All of the above are correct.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

17. A consumer possesses five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will

a.	rise to $2.25.
b.	fall to $2.03.
c.	stay the same.
d.	fall to $2.11.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

18. Marginal utility is

a.	the difference in price between one store and another.
b.	the difference in value between “some” of a thing and “none” of a thing.
c.	the difference between any two successive total utility figures.
d.	acquired only with the first few units of a good or service.
e.	utility that is barely satisfactory.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

19. Total utility

a.	diminishes as the quantity consumed of a good increases.
b.	increases as long as more goods are acquired.
c.	increases as long as marginal utility increases.
d.	increases as long as marginal utility is positive.
e.	diminishes as consumption of some good rises.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

20. Total utility will be at its maximum when

a.	marginal utility is negative.
b.	marginal utility is positive.
c.	marginal utility is maximum.
d.	marginal utility is zero.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

21. For most goods and most people, marginal utility probably

a.	continues to increase as larger quantities are purchased.
b.	plummets after the first few units but soon begins to rise.
c.	declines as consumption increases.
d.	is negative after the first unit of a good is purchased.
e.	is positive and rising for most goods.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

22. Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her total utility is equal to

a.	$.50, the value of her last cup of coffee.
b.	$1.00, the value of her first cup of coffee.
c.	marginal utility.
d.	$2.25.
e.	$1.50.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

23. Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her marginal utility is equal to

a.	$.50, the value of her last cup of coffee.
b.	$1.00, the value of her first cup of coffee.
c.	marginal utility.
d.	$2.25.
e.	$1.50.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

24. Jason considers a crystal bowl, a silver dish, and a pewter figurine, each priced $45 at the local gift shop. He chooses the silver dish because, according to economic theory

a.	his marginal utility per dollar is greatest.
b.	his total utility is minimized.
c.	his marginal utility is equal to his total utility.
d.	silver costs more per ounce than pewter.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

25. The law of diminishing marginal utility explains why

a.	most individual demand curves are straight lines.
b.	the consumer’s optimal purchase is at the tangency of an indifference curve and the budget line.
c.	most individual demand curves slope downward.
d.	marginal utility falls when total utility falls.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

Table 5-2

 

Number of coconuts	0	1	2	3	4
Robinson’s marginal utility	C	$2.00	$1.88	$1.60	$1.30

 

 

 

26. According to Table 5-2, Robinson’s total utility from having two coconuts is ____.

a.	$1.87
b.	$1.66
c.	$3.88
d.	This is not determinable from the information in the table.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

27. If total utility declines as an additional unit of a commodity is purchased,

a.	marginal utility must be rising.
b.	marginal utility is negative.
c.	marginal utility is positive but falling.
d.	its price must have risen.
e.	marginal utility is zero.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

Table 5-1B

 

Number of coconuts	0	1	2	3	4
Robinson’s marginal utility	C	$2.00	$1.88	$1.60	$1.30

 

TOP: Utility: A Tool to Analyze Purchase Decisions

 

28. If a graph of Robinson’s marginal utility were constructed from Table 5-1B, it would

a.	illustrate the “law” of diminishing marginal utility.
b.	be a negatively sloped curve.
c.	illustrate a typical consumer’s satisfaction derived from consumption of consecutive units of a good.
d.	All of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Utility: A Tool to Analyze Purchase Decisions

 

29. If the marginal utility to Juan of sleeping an extra hour (from 8 a.m. to 9 a.m.) is negative,

a.	Juan is better off getting up at 8 a.m.
b.	Juan is better off getting up at 9 a.m.
c.	Juan’s total utility from sleeping must be negative.
d.	Juan’s average utility from every hour he sleeps must be negative.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

30. The host at a party offers Justin a sixth beer. Justin says, “No thanks, man. The marginal utility of that fifth beer was, like, 20 cents, but the marginal utility of the sixth would be minus 10 cents.” From his comments, we deduce that Justin

a.	is an alcoholic.
b.	may think that a sixth beer would make him sick.
c.	is irrational.
d.	wrongly estimates the marginal utility of the fifth beer.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

31. The host at a party offers Justin a sixth beer. Justin says, “No thanks, man. The marginal utility of that fifth beer was, like, 20 cents, but the marginal utility of the sixth would be minus 10 cents.” If Justin consumes the sixth beer, his total utility will

a.	rise by 10 cents.
b.	reach a plateau and remain constant.
c.	fall by 10 cents.
d.	fall below his marginal utility.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

32. The consumer maximizes his total utility (measured in money terms) when, at his chosen quantity of every good he buys, marginal utility

a.	equals zero.
b.	divided by price equals zero.
c.	equals price.
d.	equals total utility.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

33. Tom is buying a quantity of wheat at which the marginal utility (in dollars) exceeds price. He should

a.	reduce wheat consumption, thus raising P to the level at which MU = P.
b.	reduce wheat consumption, thus raising MU to the level at which MU = P.
c.	increase wheat consumption, thus raising P to the level at which MU = P.
d.	increase wheat consumption, thus lowering MU to the level at which MU = P.

 

 

ANS:    D               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

34. Net utility is

a.	equal to total utility from the quantity acquired of a good minus the utility lost by having to pay for it.
b.	equal to the sum of the marginal utilities.
c.	equal to an optimal number easily calculated by the consumer.
d.	always greater than total utility.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

35. The optimal purchase rule is stated as

a.	TU = MU.
b.	MU = P.
c.	TU = P.
d.	MU = 0.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

36. As a general rule, consumers have

a.	limited income.
b.	unlimited desires for goods.
c.	many choices of goods facing them.
d.	All of the above are correct.
e.	None of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

37. Marginal utility has a negative slope. This is because of the

a.	optimal purchase rule.
b.	law of increasing costs.
c.	law of diminishing marginal utility.
d.	marginal rate of substitution.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

38. An individual’s demand curve for a good is ____ her marginal utility curve for the good.

a.	based on
b.	the mirror image around the vertical axis of
c.	twice as steep as
d.	half as steep as

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand                TOP:    Utility: A Tool to Analyze Purchase Decisions

 

39. Which of the following statements is correct?

a.	The “law” of diminishing marginal utility implies that demand curves slope upward and to the right.
b.	If the price of a good falls, the utility-maximizing consumer will assure that marginal utility rises.
c.	If the price of a good falls, the consumer will purchase more of the good in order to maximize total utility.
d.	MU and demand have different underlying consumer behavior assumptions.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand                TOP:    Utility: A Tool to Analyze Purchase Decisions

 

40. Which of the following scenarios could be an example of increasing marginal utility?

a.	A father buying three game CDs for his son.
b.	A shopkeeper selling the tenth unit of hamburger.
c.	A philatelist buying an additional stamp for collection.
d.	A consumer buying an additional unit of apple.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice    TOP:    Utility: A Tool to Analyze Purchase Decisions

 

 

41. Consumer’s surplus is a measure of how much

a.	less than his income a consumer spends on goods.
b.	more utility a consumer receives from his purchases than he has to pay for them.
c.	a consumer’s marginal utility differs from his total utility.
d.	a change in price induces a consumer to substitute other goods.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

42. Consumer’s surplus

a.	is the gap between total willingness to pay and the total market value of a good.
b.	guarantees that the market value of a good in money is equal to the total economic value of the good.
c.	is always negative because of diminishing marginal utility.
d.	is the total area under a consumer’s demand curve.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

43. Consumer’s surplus can be written as

a.	total expenditure – total utility.
b.	total utility – total expenditure.
c.	marginal utility – marginal expenditure.
d.	marginal expenditure – marginal utility.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

Table 5-4

 

Price in $	Quantity Demanded
80	1
70	2
60	3
50	4
40	5
30	6
20	7
10	8

 

 

44. Table 5-4 shows the demand schedule for concert tickets for a particular consumer. What will be this consumer’s surplus if the price of tickets is $50?

a.	$ 200
b.	$ 60
c.	$ 260
d.	$ 210

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs | Scarcity, tradeoffs, and opportunity cost

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

 

45. Gwen’s decision to buy a new television instead of a bicycle for the same price

a.	means that opportunity cost is zero since both cost the same amount.
b.	would not have involved trade-off and opportunity cost if Gwen had decided to put the money in a bank CD instead.
c.	would not imply a trade-off because of scarcity if Gwen were a multimillionaire.
d.	means that the opportunity cost to Gwen is the bicycle that she has given up.

 

 

ANS:    D               PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Scarcity, tradeoffs, and opportunity cost

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

Figure 5-2

 

 

46. In Figure 5-2, consumer surplus is measured by the area

a.	ABC.
b.	OBCD.
c.	OACD.
d.	DCE.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

47. Adam Smith’s diamond-water puzzle

a.	can be resolved by distinguishing between marginal and total utility.
b.	occurs because diamonds have no utility.
c.	occurs because scarcity increases total utility.
d.	will likely never be resolved with existing economic tools.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

48. Resolving Adam Smith’s diamond-water puzzle involves

a.	realizing that price is not directly related to total utility.
b.	knowing that at optimal purchase, price will tend to equal marginal utility.
c.	knowing that, as increasing quantities of a good are consumed, marginal utility diminishes and, conversely, consuming a small quantity of a good produces high marginal utility.
d.	All of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

 

49. Suppose that Joan, the only consumer of pork, has a downward-sloping demand curve for pork and faces an upward-sloping supply curve. If her demand curve shifts out because she develops a craving for pork, then at the new equilibrium (everything else equal),

a.	the price of pork relative to other goods will be higher than before.
b.	Joan’s marginal utility from every unit of pork she eats will be higher than before.
c.	Joan’s real income will be lower than before.
d.	All of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

50. An inferior good is one

a.	produced by American industries.
b.	whose quantity demanded falls when the purchaser’s income rises.
c.	ordinarily bought by college students from college-town merchants.
d.	suitable for a garage sale.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

51. For a(n) ____, if incomes rise and prices do not change, quantity demanded will increase.

a.	normal good
b.	inferior good
c.	Giffen good
d.	substitute good

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

52. A normal good is a good whose quantity demanded

a.	rises when its price falls.
b.	falls when the price of a related good falls.
c.	falls when the consumer’s total utility rises.
d.	rises when the consumer’s real income increases.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

53. An inferior good is a good whose quantity demanded

a.	rises when its price falls.
b.	falls when the price of a related good falls.
c.	falls when the consumer’s total utility rises.
d.	rises when the consumer’s real income falls.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

 

54. When the price of one product falls,

a.	consumers’ real income will increase.
b.	consumers will buy less of that product.
c.	consumers will not change their buying patterns.
d.	consumers’ real income will decrease.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

55. The Wall Street Journal reports that “hard times aid poultry companies as people eat cheaper fowl.” In the language of economists, this means

a.	chicken is an inferior good.
b.	chicken has a negative substitution effect.
c.	chicken has a positive substitution effect.
d.	people’s tastes change during recessions.
e.	chicken has a positive income effect.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     Consumer Choice as a Trade-Off: Opportunity Cost

 

56. Market demand curves are found by

a.	vertically summing individual demand curves.
b.	horizontally summing individual demand curves.
c.	summing individual demand curves in a parallel fashion.
d.	adding the slopes of individual demand curves.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

Figure 5-3

 

 

 

57. Assume the market consists of three consumers with the demand curves in Figure 5-3. At a price of 1, the total market demand is

a.	40.
b.	80.
c.	140.
d.	150.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     From Individual Demand Curves to Market Demand Curves

 

58. In Figure 5-3, a decline in price from 3 to 1 will increase market quantity demanded by

a.	30.
b.	40.
c.	50.
d.	60.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     From Individual Demand Curves to Market Demand Curves

 

59. Market demand curves may slope downward even when individual demand curves do not because

a.	the law of demand requires that this is true.
b.	lower prices may bring more purchasers into the market.
c.	merchants try to sell more at lower prices.
d.	people believe expensive goods are better goods.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

60. The market demand curve

a.	and the individual demand curve are synonymous.
b.	is calculated by multiplying the number of consumers by the individual demand curve.
c.	shows how the total quantity demanded of some good changes as price changes, other things held constant.
d.	can be calculated even if individual demand curves are unknown.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

61. In Poland’s new free market, Felix Siemienas is making a fortune in cold cuts. Prices are much higher than formerly. Siemienas says, “Yes, my prices are high. If nobody buys, I bring my prices down. That is the market rule.” This “rule” best describes

a.	the law of diminishing returns.
b.	opportunity cost.
c.	the law of increasing costs.
d.	the law of demand.

 

 

ANS:    D               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

 

62. A well-known women’s college whose tuition lagged below similar schools found recruiting difficult and enrollment falling. A substantial tuition increase was effected, and dormitories were soon full again. This can be explained by

a.	the law of demand.
b.	the fact that education at the school was an inferior good.
c.	the fact that people sometimes base perceptions of quality on price (snob effect).
d.	elastic demand.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

63. The law of demand states that as the price

a.	increases, total quantity demanded will increase.
b.	decreases, total quantity demanded will decrease.
c.	increases, total quantity demanded will decrease.
d.	increases, total quantity demanded will stay the same.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

64. According to the “law” of demand, we would expect

a.	the demand curve to be negatively sloped.
b.	the demand curve to be positively sloped.
c.	the total quantity demanded by the market to move in the same direction as price.
d.	marginal utility to increase as quantity demanded increases.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Supply and demand

TOP:     From Individual Demand Curves to Market Demand Curves

 

65. An increase in a family’s income will cause its budget line to

a.	become steeper.
b.	become flatter (less steep).
c.	move closer to the origin.
d.	move away from the origin.
e.	become more convex toward the origin.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

66. A budget line is a straight line designed to show

a.	how income is related to hours worked.
b.	all combinations of two goods that can be purchased with a given income.
c.	the way a homemaker should divide money among several commodities.
d.	that if more money is spent on one good, the breadwinner must work all the harder to maintain a satisfactory level of living.
e.	preferences for goods and services.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

 

Figure 5-4

 

 

67. In Figure 5-4, the rightward shift in budget lines from the one containing point A to the one containing point B

a.	resulted from equal price reductions in beer and wine.
b.	resulted from an increase in the consumer’s income.
c.	could have been caused by income or price changes.
d.	All of the answers above are correct possibilities.
e.	None of the above is correct.

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

68. The budget line facing a household includes information on

a.	prices of two goods and household income.
b.	household income and the price of money.
c.	the price of one good and household income.
d.	the price of two goods but no information on household income.
e.	preferences of goods at various prices.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Marginal costs & benefits

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

69. What would happen to the budget line if income as well as prices of both goods increase by the same percentage?

a.	A rightward parallel shift in the budget line.
b.	A leftward parallel shift in the budget line.
c.	A rightward shift in the budget line.
d.	No shift in the budget line.

 

 

ANS:    D               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Reading and interpreting graphs | Utility and consumer choice

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

 

Figure 5-5

 

 

70. Figure 5-5 shows a consumer budget line for records and compact discs. The price of records is $7. The price of a compact disc is

a.	$7.
b.	$14.
c.	$5.
d.	$10.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

71. Figure 5-5 shows a consumer budget line for records and compact discs. The household allocates a budget to records and compact discs. If the price of a record is $7, how much income is allocated to discs and records?

a.	$5
b.	$50
c.	$70
d.	$10

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

72. In Figure 5-5, if the household is spending enough of its budget to purchase 3 records and the price of a record is $7, the remainder of the budget available for compact discs is

a.	$10.
b.	$4.
c.	$50.
d.	$49.

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

 

Figure 5-6

 

 

73. A shift in the budget line in Figure 5-6 from AB to AC indicates

a.	the price of wine coolers has risen.
b.	income has increased.
c.	the price of beer has fallen.
d.	the price of wine coolers has fallen.
e.	All of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Elasticity    TOP:  Appendix: Geometry of Available Choices: The Budget Line

 

74. In Figure 5-6, a shift in the budget line from AC to AB indicates

a.	the price of wine coolers has risen.
b.	income has increased.
c.	the price of beer has fallen.
d.	the price of wine coolers has fallen.
e.	All of the above are correct.

 

 

ANS:    A               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Elasticity    TOP:  Appendix: Geometry of Available Choices: The Budget Line

 

75. Which of the following observations is not true of a budget line?

a.	It indicates what choices are available to the consumer.
b.	It is a curve of constant expenditure.
c.	Its slope reports the market terms on which the consumer can trade one good for another.
d.	It helps examine the consumer’s preferences.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Aggregate demand and aggregate supply

TOP:     Appendix: Geometry of Available Choices: The Budget Line

 

 

76. An indifference curve is a line showing

a.	combinations of goods that can be produced if all resources are fully employed.
b.	all combinations of two commodities that are equally desirable to the consumer.
c.	all combinations of goods over which the consumer has no choice.
d.	how decisions are made in a nonmarket economy.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Aggregate demand and aggregate supply

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

Figure 5-8

 

 

77. In Figure 5-8, the consumer is indifferent between the combinations of beer and wine coolers indicated by points

a.	A, C.
b.	B, D.
c.	C, B.
d.	A, B.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Supply and demand

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

78. Which of the following is characteristic of indifference curves?

a.	They are negatively sloped.
b.	They never intersect.
c.	They are convex toward the origin.
d.	All of the above are correct.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

 

Figure 5-9

 

 

79. In Figure 5-9, the consumer’s marginal rate of substitution at his optimum choice of X and Y is

a.	-1.
b.	16.
c.	8.
d.	-8.

 

 

ANS:    A               PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: What the Consumer Prefers: Properties of the Indifference Curve

 

80. The optimal combination of goods for a consumer to purchase is shown by

a.	any intersection of the indifference curve and the budget line.
b.	the point where the budget line touches the vertical axis.
c.	a point of tangency between the budget line and the indifference curve.
d.	the point at which the indifference curve parallels the horizontal axis.
e.	the intersection of two indifference curves.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

81. If indifference curves and budget lines are used to analyze consumer choice, an inferior good will

a.	escape detection when income rises.
b.	be easily identified because the quantity purchased will fall as income rises.
c.	be easily identified because the quantity purchased will rise as income rises.
d.	be easily identified because it will change the slope of the budget line.
e.	escape detection because this model does not show that relationship.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Elasticity    TOP:  Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

Figure 5-10

 

 

82. In the indifference curve pictured in Figure 5-10, which of the following is clearly true?

a.	B is preferred to D.
b.	B is preferred to C.
c.	A is preferred to B.
d.	C is preferred to D.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-11

 

 

 

83. In Figure 5-11, a consumer is initially at point A. There is a price change and she moves to B. It follows that

a.	the demand for beer follows the law of demand.
b.	the demand for beer does not follow the law of demand.
c.	wine is an inferior good.
d.	the consumer is confused.

 

 

ANS:    B                PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-12

 

 

84. In Figure 5-12, the move in the consumer equilibrium from A to B shows that

a.	beer is an inferior good, but wine is a normal good.
b.	wine is an inferior good, but beer is a normal good.
c.	both beer and wine are normal goods.
d.	both beer and wine are inferior goods.

 

 

ANS:    C                PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

85. For a consumer to maximize utility, he will choose the

a.	point where the slope of the budget line equals the slope of the indifference curve.
b.	any point where the budget line and indifference curve intersect.
c.	point where he gets the most of the good he prefers most.
d.	point where the marginal rate of substitution is greatest.
e.	the point where marginal utility is zero for both goods

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

Figure 5-13

 

 

86. In Figure 5-13, the line AB is

a.	an indifference curve.
b.	a budget line.
c.	a marginal utility curve.
d.	a demand curve.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

87. In Figure 5-13, the consumer can afford any combination of X and Y represented by a point

a.	on line AB only.
b.	on or below line AB.
c.	on or above line AB.
d.	anywhere on the graph.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

88. In Figure 5-13, the consumer is better off

a.	at A than at E.
b.	at B than at D.
c.	at any point on U2 than at any point on U1.
d.	All of the above are correct.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

89. In Figure 5-13, the slope of the budget line (dropping all minus signs) equals

a.	price of good X/price of good Y.
b.	price of good Y/price of good X.
c.	the minimum number of units of good Y the consumer would have to receive to make him willing to give up one unit of good X.
d.	the minimum number of units of good X the consumer would have to receive to make him willing to give up one unit of good Y.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

90. According to Figure 5-13, if the price of good X falls, a consumer making her optimal decision will move from a point on

a.	U1 to a point on U3.
b.	U2 to a point on U3.
c.	U1 to a point on U3.
d.	U2 to a point on U1.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

91. If the slope of an indifference curve between two goods decreases as we move from left to right (dropping all minus signs), we infer that the consumer

a.	is less willing to trade away a good when he has a lot of it.
b.	is more willing to trade away a good when he has a lot of it.
c.	always tries to keep the percentage of his budget spent on each good constant.
d.	views one of the goods as inferior.

 

 

ANS:    B                PTS:   1                DIF:     Difficult     NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

92. When the price of a good changes but the price of the only other good bought by a consumer stays constant, his

a.	budget line shifts.
b.	indifference curves shift.
c.	budget line changes slope.
d.	indifference curves change slope.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

Figure 5-14

 

 

93. Martha initially buys the combination of pens and pencils shown as A in Figure 5-14. After the prices of both goods change, she buys combination B. It must be true that

a.	Martha prefers A to B.
b.	Martha prefers B to A.
c.	Martha is indifferent between A and B.
d.	Martha’s preferences between A and B cannot be determined from the information given.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

94. The slope of a consumer’s indifference curve between two commodities represents

a.	her marginal rate of substitution between the commodities.
b.	the relative prices of the goods.
c.	her marginal revenue from selling the commodities.
d.	her marginal revenue product from consuming the commodities.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

Figure 5-15

 

 

95. Hal initially consumes the combination marked as A in Figure 5-15. After his income increases, Hal consumes combination B. We can conclude that Hal views

a.	X as an inferior good and Y as a noninferior good.
b.	X as a noninferior good and Y as an inferior good.
c.	both X and Y as noninferior goods.
d.	both X and Y as inferior goods.

 

 

ANS:    A               PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-16

 

 

96. Figure 5-16 shows Adam’s purchases of bananas and apples when apples cost $5 each and bananas $4 each. The information implies that Adam’s income

a.	must be $9.
b.	must be $20.
c.	must be $40.
d.	Adam’s income cannot be determined without further information.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

97. In Figure 5-16, Adam is

a.	better off at C than at D and able to afford either C or D.
b.	better off at D than at C but only able to afford C.
c.	equally well off at C and D and able to afford either C or D.
d.	equally well off at C and D but only able to afford C.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

98. In Figure 5-16, a decrease in the price of apples will

a.	shift Adam’s budget constraint out.
b.	make Adam’s budget constraint steeper.
c.	shift Adam’s indifference curves out.
d.	make Adam’s budget constraint flatter.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

99. Vicki consumes meatloaf and pizza. To keep her utility constant, you must give her more of one good if you take some of the other away. This information implies that

a.	Vicki’s marginal rate of substitution must be constant along her indifference curve.
b.	Vicki’s indifference curve must have a negative slope.
c.	the prices Vicki must pay for meatloaf and pizza are always the same.
d.	Vicki’s marginal utility from each good must be constant along her indifference curve.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-17

 

 

 

100. In Figure 5-17, which of the marked points would an economist use to help him construct a single demand curve for X?

a.	A and B
b.	C and D
c.	A and C
d.	A and D

 

 

ANS:    D               PTS:   1                DIF:     Difficult     NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

101. Which of the following statements about Figure 5-17 must be correct?

a.	The consumer pays a higher dollar price per unit for good Y at A than at D.
b.	The consumer pays the same dollar price per unit for good Y at A and at B.
c.	The consumer pays a higher dollar price per unit for good X at D than at A.
d.	The consumer pays a higher dollar price per unit for good X at A than at C.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

102. In Figure 5-17, the consumer would prefer

a.	D to C.
b.	B to D.
c.	C to B or A.
d.	D to A but not B.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-18

 

 

 

103. In Figure 5-18, point D for the consumer

a.	will be chosen because total utility is larger there than at point C.
b.	would not be chosen because it is less desirable than point C.
c.	is unattainable, given the consumer’s budget.
d.	has total utility equal to point C.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

Figure 5-19

 

 

104. In Figure 5-19, the consumer experiences at point C

a.	greater total utility than at point D.
b.	greater total utility than at point E.
c.	less total utility than at point D.
d.	total utility equal to that experienced at point D.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

105. The slope of an indifference curve is called the

a.	bliss gradient.
b.	happiness slope.
c.	average transformation rate.
d.	marginal rate of substitution.

 

 

ANS:    D               PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

Figure 5-7

 

 

106. In Figure 5-7, budget line B compared to A clearly shows that the

a.	price of wine increased.
b.	price of beer decreased.
c.	price of beer increased.
d.	consumers’ money income increased.

 

 

ANS:    B                PTS:   1                DIF:     Moderate   NAT:   Reflective

LOC:    Reading and interpreting graphs

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

107. The slope of an indifference curve at all points reflects

a.	the terms by which the consumer can trade off goods in the market.
b.	the relative prices of the two goods.
c.	the willingness of the consumer to trade one good for another.
d.	consumer income relative to the price of a good.
e.	the relative price ratio of the two goods.

 

 

ANS:    C                PTS:   1                DIF:     Moderate   NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

108. If the prices of both goods increase by 10 percent, the budget line

a.	shifts to the right in parallel fashion.
b.	shifts to the left in parallel fashion.
c.	is unaffected since only relative price changes matter.
d.	pivots on the axis of the more expensive good.

 

 

ANS:    B                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Utility and consumer choice

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

109. The slope of the budget line

a.	always equals 1.
b.	equals income divided by price.
c.	equals the ratio of the prices.
d.	decreases as we move from left to right.

 

 

ANS:    C                PTS:   1                DIF:     Easy           NAT:   Analytic

LOC:    Monetary and fiscal policy

TOP:     Appendix: The Slopes of Indifference Curves and Budget Lines

 

 

ESSAY

 

1.    Why is gold very expensive, even though it is not essential to life, while water, which is essential to life, is inexpensive?

 

ANS:

Because there is a lower supply of gold it has a higher marginal utility, and hence the willingness to pay for the marginal unit is very high for most consumers. Water is relatively abundant, and hence its marginal utility is rather low, meaning that the willingness to pay for the marginal unit is low for most consumers.

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Utility and consumer choice

 

2.    In Figure 5-2 from the text, if the price of pizzas is $8:

a.	how many pizzas will the consumer purchase?
b.	what is the payment for the optimal number of pizzas?
c.	how much consumer surplus will the consumer receive?

 

 

ANS:

a.	The consumer will purchase 5 pizzas at a price of $8.
b.	The payment for 8 pizzas will be $40 ($8 per pizza multiplied by 5 pizzas).
c.	The consumer surplus will be $10 (actual payment of $40 subtracted from total utility of $50).

 

 

PTS:     1                DIF:   Easy           NAT:   Reflective  LOC:    Utility and consumer choice

 

3.    Define the following terms. Give a complete and precise definition in one sentence.

a.	total utility
b.	marginal utility
c.	consumer’s surplus
d.	“law” of demand

 

 

ANS:

a.	Total utility of a good is the satisfaction the consumer receives from consuming a given quantity of the commodity. Measured in money terms, it is the maximum amount a consumer is willing to give in exchange for the good.
b.	Marginal utility of a good is the satisfaction the consumer receives from the marginal unit consumed. Measured in money terms, it is the maximum amount of money the consumer is willing to pay for one more unit of the commodity.
c.	Consumer’s surplus is the difference between the amount that the quantity of commodity X purchased is worth to the consumer and the amount that the market requires the consumer to pay for that quantity of X.
d.	The “law” of demand is the principle that a lower price generally is associated with an increased quantity demanded of a commodity.

 

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Utility and consumer choice

 

 

4.    How do you calculate consumer’s surplus? What happens to consumer’s surplus when the price of a commodity rises?

 

ANS:

Consumer’s surplus = Total utility (in money terms) − Total expenditure

 

Amount of consumer’s surplus will decrease when price rises because part of the consumer surplus will be taken away by the supplier in the form of a high price.

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Utility and consumer choice

 

5.    Plot the demand for caviar given the following information on quantity consumed and total utility; then explain why caviar sells for such a high price.

 

Quantity	Total Utility	(in ounces)	(in dollars)
1	50
2	75
3	88
4	95
5	99

 

 

ANS:

Figure 5-20

 

 

To plot demand, find marginal utility for each ounce of caviar and plot quantity and MU (see Figure
5-19). At Q = 1, plot $50, at Q = 2, plot 25, . . . , at Q = 5, plot 4.

 

Since there is only a small supply, the price can be as high as $50 an ounce (if S intersects D at one ounce). A larger supply would drop P to $25 (if S intersects D at Q = 2), etc.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Supply and demand

 

 

6.    Use the law of diminishing marginal utility to explain why Domino’s and Pizza Hut allow the purchase of a second pizza for only $4 when one pays full price (around $10) for the first pizza. Why not simply charge $7 a pizza instead?

 

ANS:

The second pizza gives less marginal utility than the first. The companies are trying to charge a high price for the first pizza, which gives high marginal utility, and get customers to buy that second pizza, with relatively low marginal utility, by charging a price that reflects the lower MU. At $7 apiece, the companies might lose selling the second pizza and be worse off than selling two pizzas at an average price of $7.

 

PTS:     1                DIF:   Moderate   NAT:   Reflective  LOC:    Utility and consumer choice

 

7.    You have five hours left to study for two exams tomorrow. The relationship between hours of study and test scores is as follows:

 

Economics		Sociology
Hours	Score	Hours	Score
1	50	1	75
2	65	2	85
3	75	3	90
4	80	4	93
5	85	5	5

 

Use the rule for determining optimal purchases to allocate your time, where each point is one “util” of utility.

 

ANS:

Time is money in this example, so you want the most marginal utility per hour spent. The first hour goes to sociology, which yields MU = 75; hour 2 goes to economics for MU = 50. Hour 3 goes to economics, where MU = 15, and hours 4 and 5 are split between economics and sociology, each worth MU = 10. Three hours of additional study for economics yields a 75, and two hours toward sociology yields an 85.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Utility and consumer choice

 

8.    If I use 1,000 gallons of water a month at a price of $.01 a gallon, is my consumer surplus likely to be large or small? Explain.

 

ANS:

The 1,000th gallon will yield no consumer surplus, since MU = P is the decision rule for optimal purchases. But since MU declines, all gallons before 1,000 will yield CS. The first gallons will have particularly high CS, since if I had to forgo any drinking water, water for showers, and water to keep my plants alive, I would lose a lot of utility. In sum, CS is likely to be large.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Supply and demand

 

 

9.    Draw individual demands for caviar for Al, Barbara, Chuck, and Denise where Al’s demand is relatively inelastic, Barbara’s is elastic, Chuck’s is upward sloping, and Denise refuses to eat caviar at any price. Then draw the corresponding market demand.

 

ANS:

Figure 5-21

 

 

(See Figure 5-21). Al’s demand is steep with respect to price, while Barbara’s is relatively flat. Chuck’s D slopes up with respect to price, while Denise consumes zero at all prices. Market demand

is a horizontal summation of individual demands at quantities purchased by A, B, and C (D is zero). Market D will slope down unless Chuck has such a strong opposite relationship to offset the downward demands of both Al and Barbara.

 

PTS:     1                DIF:   Easy           NAT:   Reflective  LOC:    Supply and demand

 

10. Bob values the utility of a single scoop of Baskin-Robbins ice cream at $1.50. A double scoop gives total utility of $2.25, while a triple scoop yields $2.60. Baskin-Robbins charges $1.35 for a single, $1.95 for a double, and $2.35 for a triple. How many scoops will Bob buy?

 

ANS:

Bob will buy a double. The first scoop has marginal utility of $1.50, which exceeds the price of $1.35. The second scoop has MU of 75 cents, exceeding the marginal price of 60 cents. The third scoop adds MU of 35 cents, which falls below the marginal 40 cents addition to price.

 

PTS:     1                DIF:   Difficult     NAT:   Analytic     LOC:    Utility and consumer choice

 

 

11. Alice has $10 to spend on wine and cheese. If wine is $2.50 a glass and cheese $2, draw the corresponding budget line. Then draw three indifference curves, one showing the amount of wine and cheese Alice would choose, one showing less preferred combinations of wine and cheese, and the last showing preferred but unaffordable combinations.

 

ANS:

See Figure 5-22, below.

 

Figure 5-22

 

 

PTS:     1                DIF:   Easy           NAT:   Reflective

LOC:    Reading and interpreting graphs

 

12. Draw the point of consumer equilibrium from an indifference map and budget line. Explain why this is the point of optimization. Be sure your diagram is fully and correctly labeled.

 

ANS:

The diagram should look like Figure 5-10 in the text, with for example, point T as the equilibrium. Point T, the tangency between an indifference curve and the budget line, maximizes utility on the limited budget. Any other point on the budget line is on a lower indifference curve (and provides less utility); any other point on the same indifference curve is more expensive and unattainable for the same amount of money.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Equilibrium

 

 

 

13. Suppose the price of butter falls because milk price supports are removed. Will people’s tastes shift away from margarine and toward butter?

 

ANS:

No. This change in relative prices will result in a change in consumption but will not affect preferences. The indifference map, which measures tastes, does not change when prices of goods change.

 

PTS:     1                DIF:   Moderate   NAT:   Reflective  LOC:    Supply and demand

 

 

14. What is marginal analysis?

 

ANS:

Marginal analysis is a method for calculating optimal choices—the choices that best promote the decision maker’s objective. It works by testing whether, and by how much, a small change in a decision will move things toward or away from the goal. It helps consumers determine their optimal purchase decisions.

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Marginal costs & benefits

 

15. If marginal net utility is positive, the consumer must be buying too small a quantity to maximize total net utility. Why?

 

ANS:

Because marginal utility exceeds price, the consumer can increase total net utility further by buying (at least) one more unit of the product. In other words, since marginal net utility (which is marginal utility minus price) tells us how much the purchase of an additional unit raises or lowers total net utility, a positive marginal net utility means that total net utility is still going uphill.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Marginal costs & benefits

 

16. Why is it that the consumer can maximize total net utility only if the purchase quantity brings marginal utility as close as possible to equality with price?

 

ANS:

The decision to purchase a quantity of a good that leaves marginal utility greater than price cannot maximize total net utility, because buying an additional unit would add more to total utility than it would increase cost. Similarly, it cannot be optimal for the consumer to buy a  quantity of a good that leaves marginal utility less than price, because then a reduction in the quantity purchased would save more money than it would sacrifice in utility. Consequently, the consumer can maximize total net utility only if the purchase quantity brings marginal utility as close as possible to equality with price.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Marginal costs & benefits

 

17. What is the relationship between marginal utility and an individual demand curve?

 

ANS:

The marginal utility reveals how much of an item a consumer will purchase at various prices and is implicitly an individual demand curve. Because marginal utility falls as consumption increases, a lower price is necessary to generate increased unit purchases of an item.

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Utility and consumer choice

 

18. The authors state that mutual gains must exist from trade. Explain their reasoning.

 

ANS:

The authors note that trade is voluntary and will not occur unless there are (expected) gains. The gain is not in the form of greater overall amounts of goods but in utility as trade increases. Each party gives up something for which marginal utility is low to gain something for which marginal utility is high. Therefore, each has an increase in total utility. More simply, if there were no expectation of mutual gains, why would voluntary exchange occur?

 

PTS:     1                DIF:   Moderate   NAT:   Analytic

LOC:    Gains from trade, specialization and trade

 

 

19. Use consumer indifference curves and budget lines to show the optimal consumption curves for a normal good and for an inferior good. (Use two graphs.) Be sure your graphs are completely and correctly labeled.

 

ANS:

The graphs should look like Figure 5-11 in the text for the normal good and Figure 5-12 for the inferior good.

 

PTS:     1                DIF:   Difficult     NAT:   Analytic     LOC:    Supply and demand

 

20. Use consumer indifference curves and budget lines to illustrate the effects of an increase in income for a normal good and an inferior good (use two graphs). Be sure your diagrams are fully and correctly labeled.

 

ANS:

The graphs should look like Figure 5-11 in the text for the normal good and Figure 5-12 for the inferior good. The graph for the inferior good should clearly show the consumption for one of the goods declining.

 

PTS:     1                DIF:   Difficult     NAT:   Analytic     LOC:    Monetary and fiscal policy

 

TABLE 5-3

 

Ice Cream Cones	Total Utility
1	50
2	80
3	95
4	95

 

 

21. Using Table 5-3, graph the marginal utility curve.

 

ANS:

 

PTS:     1                DIF:   Easy           NAT:   Reflective  LOC:    Utility and consumer choice

 

 

Figure 5-24

 

 

22. Given the demand curve in Figure 5-24 (above), explain how consumer’s surplus is calculated.

 

ANS:

The area under the demand curve above market price is the consumer’s surplus, equal in dollar terms to $36. It represents additional value above market cost for which the consumer does not have to pay.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Supply and demand

 

23. If you go to a bar tonight and have three beers before going home to study economics, will you likely receive some consumer surplus? Explain why or why not.

 

ANS:

The law of diminishing marginal utility indicates that as more and more of a commodity is consumed, the marginal utility declines. The optimal purchase rule states that a rational consumer will keep buying a commodity until the MU falls until it is equal to the price of the good. These two rules together suggest that you will buy beers until the MU of the last one is equal to the price. Hence the MU of the first two beers were higher than the price, and the difference between the MU and the price of each beer is the consumer surplus.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Supply and demand

 

 

 

24. What are the properties of indifference curves?

 

ANS:

a.	Every point on an indifference curve farther from the origin than another indifference curve is preferable to points on the curve closer to the origin.
b.	Indifference curves never intersect.
c.	Indifference curves are negatively sloped.
d.	Indifference curves are generally “bowed in” (convex) toward the origin.

 

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Supply and demand

 

 

25. Are there ever exceptions to the law of demand?

 

ANS:

When consumers associate quality with high price (name-brand preferences, for example), the result is an upward-sloping demand curve. Similarly, “snob appeal,” buying because the good is priced higher than other goods in the same general category, produces a market demand curve that slopes upward.

 

PTS:     1                DIF:   Moderate   NAT:   Analytic     LOC:    Supply and demand

 

26. What is a budget line? What does its slope indicate?

 

ANS:

The budget line for a household graphically represents all possible combinations of two commodities that it can purchase, given the prices of the commodities and some fixed amount of money at its disposal. Its slope is the amount of one commodity that the market requires an individual to give up to obtain one additional unit of another commodity without any change in the amount of money spent.

 

PTS:     1                DIF:   Easy           NAT:   Analytic

LOC:    Scarcity, tradeoffs, and opportunity cost

 

27. What is the marginal rate of substitution, and what role does it play in determining the consumer’s optimum choice?

 

ANS:

The MRS is the slope of the indifference curve and represents the maximum amount of one commodity the consumer is willing to give up in exchange for one more unit of another commodity. The optimum choice of goods occurs where the budget line is tangent to the highest attainable indifference curve. At that point the MRS equals the slope of the budget line. In other words, the consumer’s willingness to trade one good for another just equals the market cost of the trade-off.

 

PTS:     1                DIF:   Easy           NAT:   Analytic     LOC:    Utility and consumer choice