Economics 251

Review Questions Chapter 21 Consumer Behavior and Utility Maximization

 

 

 

(1)                 "If the price of a product falls, that product becomes cheaper and people will want to purchase more of it in place of other goods." This statement best describes:

 

(a)                 the income effect.

(b)                 the substitution effect.

(c)                 a complimentary good.

(d)                 an inferior good.

 

(2)                 "A fall in the price of a good increases the real income or purchasing power of consumers so that they are able to buy more of the product". This statement best describes:

 

(a)                 the income effect.

(b)                 the substitution effect.

(c)                 a complimentary good.

(d)                 an inferior good.

 

(3)                 Which of the following is correct? When the price of a normal good Z falls:

 

(a)                 both the income and substitution effects cause the consumer to buy more

(b)                 both the income and substitution effects cause the consumer to buy less.

(c)                 the income effect causes the consumer to buy less, but the substitution effect causes her to buy more.

(d)                 the income effects causes the consumer to buy more, but the substitution effect causes her to buy less.

 

(4)                 The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is:

 

(a)                 26 units of utility.

(b)                 6 units of utility.

(c)                 8 units of utility.

(d)                 38 units of utility.

 

(5)                 The marginal utility of the last unit of A consumed is 12 and the marginal utility of the last unit of B consumed is 8. What set of prices for A and B respectively would be consistent with consumer equilibrium?

 

(a)                 $4 and $6.

(b)                 $6 and $4.

(c)                 $8 and $12.

(d)                 $16 and $9.

 

(6)                 George decides to buy a $75 ticket to a particular New York Rangers (professional hockey) game rather than a $50 ticket for a particular Broadway play. We can conclude that George:

 

(a)                 is particularly unappreciative of the arts.

(b)                 obtains more marginal utility from the play than from the hockey game.

(c)                 has a higher "marginal utility to price ratio" for the hockey game than for the play.

(d)                 likes only hockey and not Broadway plays.

 

(7)                 Assume you are spending your full budget and purchasing such amounts of X and Y that the marginal utility from the last units consumed is 40 and 20 utils respectively. Assume that: (i) the prices of X and Y are $8 and $4 respectively; and (ii) it takes 3 hours to consume a unit of X and 1 hour to consume a unit of Y;, and (iii) your time is worth $2 per hour. You:

 

(a)                 should substitute X for Y until the marginal utility per hour is the same for both products.

(b)                 are consuming X and Y in the optimal amounts.

(c)                 should consume less of Y and more of X.

(d)                 should consume less of X and more of Y.

 

(8)                 "Essential" water is cheaper than "nonessential" diamonds because:

 

(a)                 new industrial uses of diamonds have been discovered.

(b)                 the supply of water is great relative to the demand, and the supply of diamonds is small relative to demand.

(c)                 although the total utility of diamonds is greater, their marginal utility is small.

(d)                 the supply of diamonds is great relative to demand, and the supply of water is small relative to demand.

 

Utilize the information in Table 1 to answer Questions (9), (10), and (11).

Table 1

 

Units Units

of J MU(J) of K MU(K)

1 56 1 32

2 48 2 28

3 32 3 24

4 24 4 20

5 20 5 12

6 16 6 10

7 12 7 8

 

(9)                 In Table 1, if the consumer has income of $52 and the prices of J and K are $8 and $4 respectively, the consumer will maximize utility by purchasing:

 

(a)                 2 units of J and 7 units of K.

(b)                 5 units of J and 5 units of K.

(c)                 4 units of J and 5 units of K.

(d)                 6 units of J and 3 units of K.

 

(10)             In Table 1, what level of total utility is realized from the equilibrium combination of J and K?

 

(a)                 156 utils.

(b)                 124 utils.

(c)                 276 utils.

(d)                 36 utils.

 

(11)             In Table 1, if the consumer's income was cut to $28, he would maximize satisfaction by purchasing:

 

(a)                 3 units of J and 3 units of K.

(b)                 1 unit of J and 3 units of K.

(c)                 4 units of J and 1 unit of K.

(d)                 2 units of J and 3 units of K.

 

 

(12)             Other things equal, if the marginal utility from successive units of product Y diminishes very rapidly, we would expect:

 

(a)                 the price elasticity of demand for Y to be high.

(b)                 Y to be a substitute good.

(c)                 the price elasticity of demand for Y to be low.

(d)                 the price elasticity of demand for Y to be unitary.

 

(13)             A consumer's demand curve for a product is downward-sloping because:

 

(a)                 total utility falls below marginal utility as more of a product is consumed.

(b)                 marginal utility diminishes as more of a product is consumed.

(c)                 time becomes less valuable as more of a product is consumed.

(d)                 the income and substitution effects precisely offset each other.

 

 

(14) The income effect is important if:

 

(a) the good or service is a large share of the budget of the consumer.

(b) the good or service is a luxury good or a necessity.

(c) the good or service has a low price elasticity of demand.

(d) the good or service has a high income elasticity of demand.

 

 

(15) Which of the following are true about the law of diminishing marginal utility.

 

(a) Total utility increases continuously as consumption of the good or service increases.

(b) Marginal utility increases as the consumption of the good or service increases.

(c) Marginal utility decreases as the consumption of the good or service increases.

(d) Total utility decreases as the consumption of the good or service increases.