Managerial Economics Christopher Thomas 13e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5: THEORY OF CONSUMER BEHAVIOR

 

Multiple Choice

 

5-1       If Mary prefers bananas to plums and plums to peaches, but is indifferent between bananas and oranges, she

1. prefers oranges to peaches.
2. prefers plums to oranges.
3. is indifferent between oranges and plums.
4. is indifferent between oranges and peaches.

Answer: a

Difficulty: 01 Easy

Topic: Basic Assumptions of Consumer Theory

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-01

 

5-2       A typical indifference curve

1. shows all combinations of goods that give a consumer the same level of utility.
2. shows that as a consumer has more of a good, he is less willing to exchange it for one unit of another good.
3. shifts out if income increases.
4. both a and b
5. all of the above

Answer: a

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-3       The rate at which a consumer is ABLE to substitute one good for another is determined by

1. the indifference map.
2. the marginal rate of substitution.
3. the consumer’s income.
4. the budget line.

Answer: d

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

5-4       A utility function

1. shows the relation between prices and a consumer’s utility.
2. shows the relation between income and a consumer’s utility.
3. shows the relation between the amount of goods consumed and a consumer’s utility.
4. all of the above
5. none of the above

Answer: c

Difficulty: 01 Easy

Topic: Basic Assumptions of Consumer Theory

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-01

 

5-5       Along an indifference curve

1. the MRS is constant.
2. the ratio of the marginal utilities is constant.
3. the price ratio is constant.
4. all of the above
5. none of the above

Answer: e

Difficulty: 02 Medium

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-6      The slope of an indifference curve

1. shows the change in utility from an additional unit of the good.
2. shows the rate at which the consumer is able to substitute goods in the market.
3. is equal to the price ratio at all points.
4. is the rate at which the consumer is willing to exchange one good for another, utility held constant.
5. all of the above

Answer: d

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-7       Which of the following assumptions is(are) NOT made in consumer behavior theory?

1. Consumers can rank all bundles of goods.
2. Consumers can measure the utility they get from all bundles of goods.
3. Consumers have complete information.
4. both a and b
5. None of the above are assumptions made in consumer behavior theory.

Answer: b

Difficulty: 01 Easy

Topic: Basic Assumptions of Consumer Theory

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

5-8       Suppose that 2 units of X and 8 units of Y give a consumer the same satisfaction as 4 units of X and 2 units of Y. Then

1. the consumer is willing to give up 3 units of Y to obtain 1 more unit of
2. the consumer is willing to give up 1 unit of Y to obtain 3 more units of X.
3. the marginal rate of substitution of Y for X is 3.
4. both a and c
5. both b and c

Answer: d

Difficulty: 03 Hard

Topic: Indifference Curves

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-02

 

5-9       Alexandra consumes only caviar and champagne, but she does have a limited income of $400. Her current consumption choice is 5 ounces of caviar, at a price of $50 per ounce, and 6 bottles of champagne, at $25 each. The last ounce of caviar added 100 units to Alexandra’s total utility, while the last bottle of champagne added 75 units. If Alexandra chooses 4 ounces of caviar and 8 bottles of champagne instead her total utility will:

1. increase by 150 units
2. decrease by 150 units
3. increase by 100 units
4. decrease by 100 units
5. increase by 50 units

Answer: e

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-10     According to the following figure, what could have caused a consumer’s budget line to shift from ML to MN?

 

1. an increase in the price of X
2. a decrease in the price of X
3. an increase in the price of Y
4. a decrease in the price of Y
5. cannot determine without more information

Answer: b

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-11     According to the following figure, at point A,

 

1. the marginal rate of substitution of X for Y is greater than it is at point B.
2. the ratio of the price of X to the price of Y is greater than it is at point B.
3. the consumer’s utility is less than it is at point B.
4. both a and c
5. all of the above

Answer: e

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-12     Marginal utility is

1. the utility obtained from the consumption of all but the last unit of a good.
2. the relative value of two goods when a utility-maximizing decision has been made.
3. the change in utility that results from increasing the amount of a good consumed by one unit.
4. the change in the amount of a good consumed that increases total utility by one unit.

Answer: c

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

5-13     If the marginal rate of substitution of X for Y is 2, the price of X is $3, and the price of Y is $1, a utility-maximizing consumer should

1. be indifferent between 1X and 2Y.
2. prefer 3Y to 1X.
3. choose less X and more Y.
4. choose more X and less Y.

Answer: c

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-14     If a consumer is choosing the bundle of goods that maximizes utility subject to a budget constraint, then

1. the rate at which income affects the utility-maximizing choice is equal for all goods.
2. the rate at which the consumer is willing to substitute between goods is equal to the market rate of exchange.
3. the ratio of marginal utility to price is equal for all goods.
4. both b and c
5. all of the above

Answer: d

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-15     Ronald, who consumes only hamburgers and hot dogs, has a weekly income of $50. He is currently consuming 20 hamburgers, at a price of $2 each, and 10 hot dogs, at a price of $1 each. If the last hamburger and the last hot dog both added 50 units to Ronald’s total utility, he

1. is making the utility-maximizing choice.
2. should buy more hamburgers and fewer hot dogs.
3. should buy more hot dogs and fewer hamburgers.
4. obtains more additional utility per dollar from hot dogs than from hamburgers.
5. both c and d

Answer: e

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

The price of Y is $10.

 

5-16     According to the above figure, if the price of X is $5, what combination of X and Y will a utility-maximizing consumer choose?

1. 80X, 20Y
2. 120X, 620Y
3. 120X, 250Y
4. 200X, 620Y
5. none of the above

Answer: a

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-03

 

The price of Y is $10.

 

5-17     According to the above figure, the marginal rate of substitution of X for Y at point C is:

1. 5
2. 2
3. 0.5
4. 0.3
5. none of the above

Answer: e

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-03

 

The price of Y is $10.

 

5-18     According to the above figure, which of the following are points on the consumer’s demand curve for X?

1. $2, 300 units
2. $3, 120 units
3. $5, 120 units
4. both a and b
5. both c and d

Answer: b

Difficulty: 02 Medium

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

 

The consumer’s income is $800.

 

5-19     According to the above figure, what are the prices of goods X and Y?

1. = $10, = $8
2. = $8,  = $10
3. = $100,  = $80
4. = $20,  = $60
5. = $60,  = $20

Answer: b

Difficulty: 02 Medium

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

 

 

The consumer’s income is $800.

 

5-20     According to the above figure, what is the consumer’s marginal rate of substitution in equilibrium?

1. 1.5
2. 2
3. 2.5
4. 0.8
5. unable to tell from information given

Answer: d

Difficulty: 02 Medium

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

 

The consumer’s income is $800.

 

5-21     According to the above figure, why doesn’t the consumer choose the combination of 30X and 56Y at point A?

1. MRS is less than .
2. MRS is greater than .
3. is greater than .
4. is less than .

Answer: b

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-04

 

 

 

The consumer’s income is $800.

 

5-22     According to the above figure, why doesn’t the consumer choose the combination at point B?

1. The consumer is willing to give up more X for additional units of Y than the rate in the market.
2. The marginal utility of Y exceeds the marginal utility of X.
3. The marginal utility per dollar spent on Y exceeds the marginal utility per dollar spent on X.
4. both a and c
5. both b and c

Answer: d

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-23     An individual’s demand curve for X

1. shows how the utility-maximizing choice of X changes as the price of X
2. shows how the individual’s preferences change as the price of X
3. shows how the individual’s preferences change as the consumer income changes.
4. both a and b
5. both a and c

Answer: a

Difficulty: 01 Easy

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

 

 

5-24     Suppose a consumer who purchases only two goods is making a utility-maximizing choice and then the price of one of the goods decreases. What will happen?

1. The consumer’s purchasing power will increase.
2. The consumer’s total utility will increase.
3. The consumer’s money income will increase.
4. both a and b
5. all of the above

Answer: d

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-04

 

5-25     If Ferdinand prefers a Big Mac to a Whopper and a Whopper to a hotdog, but is indifferent between a Big Mac and a Quarter Pounder he must

1. prefer a Quarter Pounder to a hotdog.
2. prefer a Whopper to a Quarter Pounder.
3. be indifferent between a Quarter Pounder and a Whopper.
4. be indifferent between a Whopper and a hotdog.

Answer: a

Difficulty: 02 Medium

Topic: Basic Assumptions of Consumer Theory

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-01

 

5-26     Which of the following is NOT a characteristic of a typical indifference curve?

1. The curve shows all combinations of goods that give the consumer the same level of utility.
2. As a consumer has less of a good, he is less willing to exchange less of it for one more unit of another good.
3. The marginal rate of substitution is measured by the slope of the tangent to the curve.
4. The curve will shift out if income increases.

Answer: d

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-27     According to the Rolling Stones, “You can’t always get what you want.” Which does this mean in the context of utility maximization?

1. A bundle of goods between the budget line and the origin
2. Vertical indifference curves
3. A bundle of goods above the budget line
4. Horizontal indifference curves

Answer: c

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-28     The consumer chooses the bundle of goods that maximizes his utility and spends all his income. Which of the following statements is correct?

1. The marginal utilities of all goods are equal.
2. Expenditures on all goods are equal.
3. The addition to utility of the last unit of the good is equal across all goods.
4. The addition to utility of the last unit of the good per dollar spent on the good is equal across all goods.

Answer: d

Difficulty: 01 Easy

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-04

 

5-29     An indifference curve is drawn on a graph with good X on the horizontal axis and good Y on the vertical axis. One point on the curve is X = 5, Y = 5. Which of the following points CANNOT also be on the curve?

1. X = 6, Y = 6
2. X = 6, Y = 4
3. X = 9, Y = 4
4. X = 2, Y = 11

Answer: a

Difficulty: 01 Easy

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-30     Ms. Birnbaum is buying bottles of beer and bags of pretzels. The marginal utility of the last bottle of beer is 60 and the marginal utility of the last bag of pretzels is 30. The price of beer is $0.30 per bottle and the price of pretzels is $0.20 per bag. Ms. Birnbaum

1. is buying beer and pretzels in the utility-maximizing amounts.
2. should buy more beer and fewer pretzels.
3. should buy more pretzels and less beer.
4. is not spending all her income.

Answer: b

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-31     The rate at which a consumer is WILLING to substitute one good for another is measured by

1. the corner solution on the Y axis.
2. the slope of the budget line.
3. the consumer’s real income.
4. the slope of the tangent to the indifference curve.

Answer: d

Difficulty: 02 Medium

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-32     Based on the following graph, what is the price of Y?

 

The consumer’s income is $600.

 

1. $0.25
2. $4
3. $8
4. $6
5. none of the above

Answer: d

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-33     Based on the following graph, if the price of X is $7.50 per unit, how many units of X will a utility-maximizing consumer choose?

 

The consumer’s income is $600.

 

1. 25
2. 30
3. 35
4. 50
5. none of the above

Answer: c

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-34     Based on the following graph, at point C,

 

The consumer’s income is $600.

 

1. MRS is greater than 1.25.
2. MRS is less than 0.4.
3. MRS is greater than 2.
4. MRS is less than 2.5.

Answer: a

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-35     Based on the following graph, one point on the consumer’s demand curve for X is

 

The consumer’s income is $600.

 

10. 60 units at a price of $10.
11. 35 units at a price of $10.
12. 35 units at a price of $6.
13. 25 units at a price of $10.
14. 25 units at a price of $7.50.

Answer: d

Difficulty: 02 Medium

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-36     A market demand curve

1. is the horizontal summation of the demand curves of all consumers in the market.
2. is the sum of the prices consumers are willing to pay at each quantity.
3. shows that consumers demand more at higher prices.
4. both a and b
5. all of the above

Answer: a

Difficulty: 01 Easy

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-37     The ratio of the prices of two goods measures

1. the rate at which a consumer is willing to substitute one good for another in the market.
2. the rate at which a consumer is able to substitute one good for another in the market.
3. the marginal rate of substitution of X for Y.
4. both a and c
5. both b and c

Answer: b

Difficulty: 01 Easy

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

 

The price of X is $20 and the price of Y is $40.

5-38     Based on the above graph, if U₁ is the highest level of utility the consumer can achieve, what is the consumer’s income?

1. $ 480
2. $ 600
3. $ 800
4. $1,200
5. none of the above

Answer: c

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

The price of X is $20 and the price of Y is $40.

5-39     Based on the above graph, how many units of X will the consumer choose if point B is the utility-maximizing choice?

1. 28
2. 30
3. 32
4. 60
5. none of the above

Answer: c

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-04

 

The price of X is $20 and the price of Y is $40.

5-40     Based on the above graph, at point B,

1. if the consumer obtains one more unit of Y, ½ unit of X must be foregone in order to keep utility unchanged.
2. if the consumer obtains one more unit of X, two units of Y must be foregone in order to keep utility unchanged.
3. the marginal rate of substitution is ½.
4. both a and c
5. all of the above

Answer: c

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

The price of X is $20 and the price of Y is $40.

5-41     Based on the above graph, if income is $800, how many units of Y will the consumer choose?

1. 6
2. 7
3. 8
4. 9
5. 10

Answer: c

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-42     In the following graph the consumer’s income is $1,200. What is Y₁?

1. 30
2. 80
3. 110
4. 120
5. none of the above

Answer: d

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-04

 

5-43     In the following graph the consumer’s income is $1,200. At what price of Y are Y₂ units demanded?

 

1. $ 8
2. $10
3. $15
4. $16
5. $12

Answer: e

Difficulty: 03 Hard

Topic: Individual Demand and Market Demand Curves

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-05

 

5-44     In the following graph the consumer’s income is $1,200. At point B,

1. the rate at which the consumer is willing to substitute X for Y is greater than it is at point A.
2. the consumer is willing to give up more Y in order to gain an extra unit of X than at point A.
3. the consumer will receive more Y for each unit of X exchanged in the market than at point A.
4. both a and b
5. all of the above

Answer: e

Difficulty: 003 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-45     Lord Greystroke uses his limited income to purchase fruits and nuts; he is currently buying 10 pounds of fruits at a price of $2 per pound and 5 pounds of nuts at a price of $6 per pound. The last pound of fruits added 10 units to Lord Greystroke’s total utility, while the last pound of nuts added 30 units. Lord Greystroke

1. is making the utility-maximizing choice.
2. should buy more fruits and less nuts because the last pound of fruits cost less than the last pound of nuts.
3. should buy more fruits and less nuts because the last dollar spent on fruits added more to total utility than the last dollar spent on nuts.
4. should buy more nuts and less fruits because the last pound of nuts added more to total utility than the last pound of fruits.
5. should buy more nuts and less fruits because the last dollar spent on nuts added more to total utility than the last dollar spent on fruits.

Answer: a

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-04

 

5-47     In the following graph the price of Y is $50. If U₂ is the maximum attainable utility, the price of X is

 

 

10. $10.
11. $15.
12. $20.
13. $25.
14. none of the above

Answer: b

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-48     In the following graph the price of Y is $50. At point A,

 

1. the consumer can exchange two units of X for one unit of Y and keep utility unchanged.
2. the consumer can exchange two units of X for one unit of Y and keep income unchanged.
3. the consumer receives twice as much marginal utility from X as from Y.
4. both a and b
5. all of the above

Answer: d

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-49     In the following graph the price of Y is $50. The consumer’s demand curve for X is

1. D₁.
2. D₂.
3. D₃.
4. D₄.

Answer: d

Difficulty: 02 Medium

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-50     Suppose that 25 units of X and 16 units of Y give a consumer the same satisfaction as 15 units of X and 18 units of Y. Then

1. the consumer can exchange five units of X for one unit of Y and keep utility unchanged.
2. the consumer can exchange one unit of X for 1/5 unit of Y and keep utility unchanged.
3. the market rate of exchange of X for Y is 1/5.
4. both a and b
5. all of the above

Answer: d

Difficulty: 02 Medium

Topic: Indifference Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

5-51     Lulu consumes only candy and cookies; she is currently buying more cookies than candy with her limited income. The last bag of candy gave Lulu the same additional utility as the last bag of cookies, and the prices of candy and cookies are the same. Lulu

1. is maximizing utility given a limited income because the prices of candy and cookies are the same.
2. is maximizing satisfaction given a limited income because the marginal utility per dollar is the same for candy and cookies.
3. could get more satisfaction from the same income by buying more candy and less cookies.
4. could get more satisfaction from the same income by buying more cookies and less candy.

Answer: b

Difficulty: 01 Easy

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-52     In the following graph the price of Y is $15. What is?

1. 12
2. 15
3. 20
4. 25
5. none of the above

Answer: b

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-03

 

5-53     In the following graph the price of Y is $15. What is ?

1. 10
2. 12
3. 18
4. 20
5. none of the above

Answer: e

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-03

 

5-54     In the following graph the price of Y is $15. At point B,

1. the consumer can exchange one unit of X for one unit of Y and keep income unchanged.
2. the marginal rate of substitution of X for Y is greater than it is at point A.
3. the consumer’s utility is greater than it is at point A.
4. both a and b
5. all of the above

Answer: b

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-55     In the following graph the price of Y is $15. What does the curve in the lower graph show?

1. how a consumer’s utility-maximizing choices of X and Y change when the budget constraint changes
2. how a consumer’s preferences change when income changes
3. how a consumer’s utility-maximizing choices of X changes when the price of X changes
4. how a consumer’s utility-maximizing choices of Y changes when the price of Y changes
5. both c and d

Answer: c

Difficulty: 02 Medium

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-56     Suppose that utility-maximizing consumers in San Francisco pay three times as much for apples as for peaches. What is the ratio of the marginal utility of apples to the marginal utility of peaches?

1. 1/3
2. 2/3
3. 3
4. none of the above
5. cannot determine without further information

Answer: c

Difficulty: 01 Easy

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-04

 

5-57     Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X and Y are, respectively, $5 and $10.

Units of the Good	Total Utility of X	Total Utility of Y
1 2 3 4 5 6 7 8	50 95 135 170 200 225 245 260	400 750 950 1100 1220 1320 1400 1450

 

Given the above, if the consumer buys the third unit of Y,

1. the marginal utility of the third unit is 950 units of satisfaction.
2. the marginal utility per dollar spent on Y is 200.
3. the marginal utility per dollar spent on Y is 20.
4. both a and b.

Answer: c

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-04

 

5-58     Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X and Y are, respectively, $5 and $10.

Units of the Good	Total Utility of X	Total Utility of Y
1 2 3 4 5 6 7 8	50 95 135 170 200 225 245 260	400 750 950 1100 1220 1320 1400 1450

 

Given the above, if the consumer has $65 to spend on X and Y, the utility-maximizing bundle is

1. 3X and 5Y.
2. 4X and 4Y.
3. 5X and 2Y.
4. 1X and 6Y.
5. 2X and 7Y.

Answer: d

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

5-59     Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X and Y are, respectively, $5 and $10.

Units of the Good	Total Utility of X	Total Utility of Y
1 2 3 4 5 6 7 8	50 95 135 170 200 225 245 260	400 750 950 1100 1220 1320 1400 1450

 

Given the above, if the consumer has $110 to spend on X and Y, which combination will the consumer choose?

1. 5X and 4Y
2. 6X and 8Y
3. 7X and 6Y
4. 8X and 7Y
5. 7X and 7Y

Answer: b

Difficulty: 03 Hard

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-04

 

 

 

5-60     What is the equation for budget line LM, given in the above graph?

1. Y = 10 + 1.5X
2. Y = 10 – (2/3)X
3. Y = 1.5 + 1.5X
4. Y = 1.5 – 10X
5. Y = 0.667 + 1.5X

Answer: b

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

 

5-61     What is the equation for budget line RS, given the above graph?

1. Y = 10 + 18X
2. Y = 10 – 1.8X
3. Y = 15 + (9/5)X
4. Y = 1.8 + (9/5)X
5. Y = 18 – (18/10)X

Answer: e

Difficulty: 01 Easy

Topic: The Consumer’s Budget Constraint

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

5-62     The market demand curve

1. shows how much all consumers demand at various prices.
2. is the vertical summation of the demand curves of all the consumers in the market.
3. is quite complex to construct, given the demand curves of the individual consumers.
4. all of the above

Answer: a

Difficulty: 01 Easy

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-63     Market demand

1. is the horizontal summation of the individual demand curves.
2. slopes downward.
3. shows how market purchases vary with price.
4. both a and b
5. all of the above

Answer: e

Difficulty: 01 Easy

Topic: Individual Demand and Market Demand Curves

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-05

 

5-64     Assume James purchases only two goods, steak and chicken, with his weekly income of $60. The price of steak is $10 and the price of chicken is $5. The following table shows the marginal utility James gets from each additional pound of steak and chicken:

 

Quantity	Marginal utility of steak	Marginal utility of chicken
1	70	50
2	60	40
3	50	30
4	40	20
5	32	10
6	16	5

 

Given the above information, what quantities of steak and chicken should James purchase to maximize his utility?

1. 3 steak, 2 chicken
2. 5 steak, 2 chicken
3. 4 steak, 4 chicken
4. 2 steak, 5 chicken
5. none of the above

Answer: c

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-04

 

5-65     Assume James purchases only two goods, steak and chicken, with his weekly income of $60. The price of steak is $10 and the price of chicken is $5. The following table shows the marginal utility James gets from each additional pound of steak and chicken:

 

Quantity	Marginal utility of steak	Marginal utility of chicken
1	70	50
2	60	40
3	50	30
4	40	20
5	32	10
6	16	5

 

Given the above information, if the price of steak falls to $8, what quantities of steak and chicken should James purchase to maximize his utility?

1. 6 steak, 2 chicken
2. 5 steak, 3 chicken
3. 4 steak, 4 chicken
4. 5 steak, 4 chicken
5. 3 steak, 6 chicken

Answer: d

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-04

 

• Refer to the following indifference map for a consumer who has an income of $48 to spend on goods X and Y and the market prices of X and Y are both $4:

 

In order to maximize utility subject to her budget constraint, this consumer should buy how many units of good X?

1. 0
2. 4
3. 6
4. 8
5. 12

Answer: b

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

• Refer to the following indifference map for a consumer who has an income of $48 to spend on goods X and Y and the market prices of X and Y are both $4:

 

Now suppose the price of good X increases to $12 while the price of good Y remains $4. Utility will be maximized on which indifference curve?

1. I
2. II
3. III
4. On an indifference curve below I
   Answer: b

Difficulty: 01 Easy

Topic: Utility Maximization

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

• Refer to the following indifference map for a consumer who has an income of $48 to spend on goods X and Y and the market prices of X and Y are both $4:

 

 

After the price of good X increases to $12 while the price of good Y remains $4, how many units of good X would be purchased?

1. 0
2. 2
3. 4
4. 8
5. 12

Answer: a

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-03

 

• The consumer faces a budget constraint because the market price of X is $3, the market price of Y is $3, and the consumer’s budget is $90.How many units of X and Y would be purchased?
  1. 0 units of X, 0 units of Y.
  2. 10 units of X, 20 units of Y.
  3. 20 units of X, 20 units of Y.
  4. 30 units of X, 30 units of

Answer: b

Difficulty: 02 Medium

Topic: Utility Maximization

AACSB: Analytical Thinking

Blooms: Apply

Learning Objective: 05-03

 

5-70     In the figure below, a consumer faces a market price of X equal to $3, a market price of Y equal to $3, and the consumer’s budget is $90. In order for this consumer to choose the corner solution at point E, which of the following must occur?

 

6. price of X must rise to $6.
7. price of Y must rise to $6.
8. price of X must rise to $9.
9. price of Y must rise to $9.

Answer: c

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-71     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. What is the consumer’s income?

1. $12,000
2. $12,200
3. $12,250
4. $12,400
5. $12,600

Answer: e

Difficulty: 02 Medium

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-72     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. The equation of the budget line passing through point r is _______________.

 

1. Y = 800 – 4X
2. Y = 900 – 4X
3. Y = 800 – 5X
4. Y = 900 – 5X

Answer: b

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-73     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. At point N on the demand curve for X, the price of X is $____.

 

1. $48
2. $50
3. $56
4. $60
5. $64

Answer: c

Difficulty: 02 Medium

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-74     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. At point r on indifference curve I, the MRS is _____ and _____ units of good X are purchased.

 

1. 2; 40
2. 2; 45
3. 4; 40
4. 4; 45
5. 5; 45

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-75     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. When the price of X increases from point M to point N along the demand curve, $___________ of income must be temporarily given to the consumer to isolate the substitution effect.

 

1. $10,080
2. $10,160
3. $10,240
4. $10,300
5. $10,380

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-76     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. When the price of X increases from point M to point N along the demand curve, the substitution effect of the price increase is ________.

 

1. –135
2. –140
3. –145
4. –150
5. –155

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-77     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. When the price of X increases from point M to point N along the demand curve, the income effect of the price increase is ________.

 

1. 175
2. 180
3. –175
4. –180
5. none of the above

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-78     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. When the price of X increases from point M to point N along the demand curve, the total effect of the price increase is ________.

 

1. –335
2. –425
3. +20
4. +40

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-79     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $14. When the price of X increases from point M to point N along the demand curve, it is clear that good X ___________ (is, is not) a Giffen good because _______________.

 

1. is; the total effect of the price increase is negative.
2. is; the income effect reinforces the substitution effect.
3. is; the income effect is larger than the substitution effect.
4. is not; the substitution effect reinforces the income effect.
5. is not; good X is an inferior good.

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

 

 

 

5-80     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. What is the consumer’s income?

 

1. $250
2. $280
3. $320
4. $360
5. $400

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-81     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. The equation of the budget line passing through point r is _______________.

 

1. Y = 80 – (10/3)X
2. Y = 90 – (10/3)X
3. Y = 80 – 0.3X
4. Y = 90 – 0.3X

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-82     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. At point R on the demand curve for X, the price of X is $____.

 

1. $8
2. $10
3. $12.50
4. $14
5. $15

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-83     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. At point B on indifference curve I, the MRS is _____ and _____ units of good X are purchased.

 

1. 3/10; 5
2. 3/10; 6
3. 3/10; 8
4. 10/3; 5
5. 10/3; 6

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-84     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, $___________ of income must be temporarily given to the consumer to isolate the substitution effect.

 

1. $175
2. $180
3. $200
4. $360
5. $400

Answer: b

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-85     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, the substitution effect of the price increase is ________.

 

1. –6
2. –7.5
3. –8
4. –9
5. –10

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-86     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, the income effect of the price increase is ________.

 

1. 8
2. 10
3. –8
4. –10
5. –12

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-87     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, the total effect of the price increase is ________.

 

1. +2
2. +2.5
3. –15.5
4. –18
5. –21

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-88     The figure below shows a consumer maximizing utility at two different prices (the left panel) and the consumer’s demand for good X at the same two prices of good X (the right panel). The price of good Y is $4.50. When the price of X increases from point S to point R along the demand curve, it is clear that good X ___________ (is, is not) a Giffen good because _______________.

 

1. is not; the substitution effect reinforces the income effect.
2. is not; good X is an inferior good.
3. is; the total effect of the price increase is negative.
4. is; the income effect reinforces the substitution effect.
5. is; the income effect is larger than the substitution effect.

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-89     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $17 and the consumer’s income is $7,650. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve I. Which of the following points are points on this consumer’s demand curve?

 

 

8. P_x = $8.50 and Q_x = 200
9. P_x = $8.50 and Q_x = 300
10. P_x = $25.50 and Q_x = 200
11. P_x = $25.50 and Q_x = 300
12. both b and c are points on demand

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-90     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $17 and the consumer’s income is $7,650. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve I. The substitution effect of the change in the price of X is

 

 

1. 50
2. 100
3. 150
4. –100
5. –150

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-91     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $17 and the consumer’s income is $7,650. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve I. The income effect of the change in the price of X is

 

 

1. 50
2. 100
3. 150
4. –100
5. –150

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-92     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $17 and the consumer’s income is $7,650. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve I. The total effect of the change in the price of X is

 

 

1. 50
2. 100
3. 150
4. –100
5. –150

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-93     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $17 and the consumer’s income is $7,650. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve I. Good X is a(an) ___________ good but not a _________ good.

 

1. normal; substitute
2. normal; Giffen
3. inferior; Giffen
4. Giffen; normal
5. Giffen; substitute

Answer: c

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-94     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $7 and the consumer’s income is $700. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II. Which of the following points are NOT points on this consumer’s demand curve?

 

 

1. P_x = $5 and Q_x = 60
2. P_x = $10 and Q_x = 70
3. P_x = $5 and Q_x = 70
4. P_x = $10 and Q_x = 28
5. a and b are NOT points on demand

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-95     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $7 and the consumer’s income is $700. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II. The substitution effect of the change in the price of X is

 

 

1. +12
2. +10
3. –10
4. +32
5. +42

Answer: d

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-96     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $7 and the consumer’s income is $700. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II. The income effect of the change in the price of X is

 

 

1. +12
2. +10
3. –10
4. +32
5. +42

Answer: b

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-97     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $7 and the consumer’s income is $700. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II. The total effect of the change in the price of X is

 

 

1. +12
2. +10
3. –10
4. +32
5. +42

Answer: e

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-98     The following figure shows a portion of a consumer’s indifference map and budget lines. The price of good Y is $7 and the consumer’s income is $700. Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve I. Next the price of good X changes so that the consumer moves to a new utility-maximizing equilibrium at point B on indifference curve II. Good X is a(an) ___________ good and thus cannot be a _________ good.

 

1. normal; Giffen
2. inferior; Giffen
3. substitute; Giffen
4. Giffen; normal
5. Giffen; substitute

Answer: a

Difficulty: 03 Hard

Topic: Substitution and Income Effects

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-07

 

5-99     In the following figure, a consumer faces a market price of X equal to $6, a market price of Y equal to $6, and the consumer’s budget is $180. In order for this consumer to choose the corner solution at point E, which of the following must occur?

 

18. price of X must rise to $18.
19. price of X must fall to $3.
20. price of Y must rise to $9.
21. price of Y must rise to $18.
22. both b and d must occur.

Answer: a

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-100   In a world with only two goods X and Y, which of the following statements is NOT true when a consumer faces a corner solution and spends all of her income on good X?

1. The marginal utility per dollar spent on good X is greater than the marginal utility per dollar spent on good Y over the entire amount of her income.
2. For every consumption bundle on her budget line, the marginal utility of good X is greater than the marginal utility of good Y.
3. A sufficiently large decrease in the price of good Y, holding the price of good X constant, can result in an interior solution.
4. The marginal rate of substitution is not equal to the relative price ratio at the corner solution.

Answer: b

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-101   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $12, respectively. The consumer has $1,000 to spend on goods X and Y. The utility-maximizing bundle is

 

1. 40 units of good X and 10 units of good Y.
2. 10 units of good X and 40 units of good Y.
3. 20 units of good X and 18 units of good Y.
4. 50 units of good X and 0 units of good Y.
5. none of the above

Answer: e

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-102   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $12, respectively. The consumer has $1,000 to spend on goods X and Y. The utility-maximizing bundle ________ (is, is not) a corner solution because __________________.

 

1. is; the consumer spends all income on good X to buy 50 units of X.
2. is; the consumer spends all income on good Y to buy 50 units of Y.
3. is not; the consumer buys 10 units of X and 40 units of Y.
4. is not; MRS equals the slope of the budget line.
5. is not; MRS does not equal the slope of the budget line.

Answer: b

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-103   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $12, respectively. The consumer has $1,000 to spend on goods X and Y. For the utility-maximizing bundle, the marginal rate of substitution is ____________________ the slope of the budget line (in absolute value), and the ratio MU/P for good X is ____________ the ratio MU/P for good Y.

 

1. greater than; greater than
2. greater than; less than
3. less than; greater than
4. less than; less than
5. equal to; equal to

Answer: d

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-104   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $50, respectively. The consumer has $500 to spend on goods X and Y. The utility-maximizing bundle is

 

1. 5 units of good X and 20 units of good Y.
2. 15 units of good X and 15 units of good Y.
3. 25 units of good X and 0 units of good Y.
4. 37.5 units of good X and 0 units of good Y.
5. none of the above

Answer: c

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-105   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $50, respectively. The consumer has $500 to spend on goods X and Y. The utility-maximizing bundle ________ (is, is not) a corner solution because __________________.

 

1. is; the consumer spends all income on good X to buy 25 units of X.
2. is; the consumer spends all income on good Y to buy 37.5 units of Y.
3. is not; the consumer buys 5 units of X and 20 units of Y.
4. is not; MRS equals the slope of the budget line.
5. is not; MRS does not equal the slope of the budget line.

Answer: a

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06

 

5-106   A consumer has the indifference map shown below. The market prices of X and Y are $20 and $50, respectively. The consumer has $500 to spend on goods X and Y. For the utility-maximizing bundle, the marginal rate of substitution is ____________________ the slope of the budget line (in absolute value), and the ratio MU/P for good X is ____________ the ratio MU/P for good Y.

 

1. greater than; greater than
2. greater than; less than
3. less than; greater than
4. less than; less than
5. equal to; equal to

Answer: a

Difficulty: 03 Hard

Topic: Corner Solutions

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-06