Chapter 6 Practice Quiz Consumer Choice Theory

1. Chapter 6 Practice Quiz Consumer Choice Theory

2. 1. As an individual consumes more of a given good, the marginal utility of that good to the consumer a. rises at an increasing rate. b. rises at a decreasing rate. c. falls. d. rises. C. As a consumer consumes more and more of anything, the satisfaction received on the last unit becomes less and less with each unit.

3. 2. The amount of added utility that a consumer gains from the consumption of one more unit of a good is called a. incremental utility. b. total utility. c. diminishing utility. d. marginal utility. D. The word “margin” means that last unit or the last increment.

4. 3. A certain consumer buys only food and compact discs. If the quantity of food bought increases, while that of compact discs remains the same, the marginal utility of food will a. fall relative to the marginal utility of compact discs. b. rise relative to the marginal utility of compact discs. c. rise, but not as fast as the marginal utility of compact discs falls. d. fall, but not as fast as the marginal utility of compact discs falls. • As more units of food are purchased, the marginal utility diminishes, while that of compact disks remains the same.

5. 4. Rational consumers will continue to consume two goods until a. the marginal utility per dollar’s worth of the two goods is the same. b. the marginal utility is the same for each good. c. the prices of the two goods are equal. d. the prices of the two goods are unequal. A. If a consumer can raise his/her marginal utility by purchasing more of a good, more units of that good will be purchased. At the point that marginal utility cannot be increased by purchasing more units of either good, the consumer will stop purchasing.

6. 5. Assume a person’s consumption of just the right amounts of pork and chicken is in equilibrium. We can conclude that the a. marginal utility of pork must equal the marginal utility of chicken. b. price of pork must equal the price of chicken. c. ratio of marginal cost to price must be the same in both the pork and the chicken markets. d. ratio of marginal utility to price must be the same for pork and chicken. D. In terms of satisfaction, the two goods become identical at the point of equilibrium.

7. 6. Assume an individual consumes only milk and doughnuts, and has arranged consumption so that the last glass of milk yields 12 utils and the last doughnut 6 utils. If the price of milk is $1 per glass and the price of a doughnut is $.50, we can conclude that the a. consumer should consume less milk and more doughnuts. b. price of milk is too high relative to doughnuts. c. consumer should consume more milk and fewer doughnuts. d. consumer is in equilibrium. D. At this point, the ratio of utils to price is the same.

8. 7. Suppose an individual consumes pizza and cola. To reach consumer equilibrium, the individual must consume pizza and cola so that the a. price paid for the two goods is the same. b. marginal utility of the two goods is equal. c. ratio of marginal utility to price is the same for both goods. d. ratio of marginal utility of cola to marginal utility of pizza is 1. C. When the ratio of utils to price is the same for two goods, the consumer cannot increase his/her satisfaction by buying more of either.

9. 8. A state of consumer equilibrium for goods consumed prevails when the a. marginal utility of all goods is the same. b. marginal utility per dollar’s worth of two goods is the same. c. price of two goods is the same. d. marginal cost per dollar spent on two goods is the same. B. When the marginal utility of two goods is the same, the consumer cannot increase his/her level of satisfaction by purchasing more of either good.

10. 9. The change in quantity demanded resulting from a change in purchasing power is known as the a. income effect. b. substitution effect. c. law of demand. d. consumer equilibrium effect. A. When prices decline the purchasing power of the consumer increases, and vice versa. Therefore, a change in prices has the same effect on the buying power of the consumer as if his/her income had changed.

11. Exhibit 4 Total Utility for Multiplex Tickets, Video Rentals, and Popcorn Total Utility from Multiplex Tickets Total Utility from Video Rentals Total Utility from Popcorn 1 bag (8 utils) 2 bags (13 utils) 3 bags (15 utils) 4 bags (16 utils) 1 movie (30 utils) 2 movies (54 utils) 3 movies (72 utils) 4 movies (84 utils) 1 video (14 utils) 2 videos (24 utils) 3 videos (30 utils) 4 videos (32 utils)

12. 10. In Exhibit 4, assume Multiplex tickets cost $6 each, video rentals cost $2 each, and bags of popcorn cost $1 each. What is the marginal utility of renting a third video? a. 6 utils. b. 8 utils. c. 10 utils. d. 30 utils. A. If the total utility for 2 videos is 24 utils and the total utility for 3 videos is 30 utils, the additional utils added by the third video is 6.

13. 11. In Exhibit 4, assume Multiplex tickets cost $6 each, video rentals cost $2 each, and bags of popcorn cost $1 each. Suppose the consumer has $12 per week to spend on Multiplex tickets, video rentals, and popcorn. What combination of goods will give the consumer the most utility? a. 1 movie, 3 videos, and no popcorn. b. 1 movie, 2 videos, and 2 bags of popcorn. c. 1 movie, 1 video, and 4 bags of popcorn. d. 2 movies, no video, and no bags of popcorn. B. 67 total utils are achieved with this combination, a yields 60 utils, c yields 60 utils and d yields 54 utils.

14. 12. In Exhibit 4, assume the Multiplex tickets cost $6 each, video rentals cost $2 each, and bags of popcorn cost $1 each. Suppose the consumer has $12 per week to spend on multiplex tickets, video rentals, and popcorn. In consumer equilibrium, what is the marginal utility per dollar for each of the three goods? a. 5 utils per dollar b. 9 utils per dollar c. 13 utils per dollar d. 22 utils per dollar A. First compute the marginal utility for each item. Second, divide the price for each item into the MU of each item. Third, the consumer purchases items according to the highest MU/$1. The result in order of purchase is 1 bag of popcorn, 1 video rental, 1 movie ticket, 1 bag of popcorn and 1 video rental for a total of $12.

15. 13. The law of diminishing marginal utility exists for the first four units of a good if they have marginal utilities of a. 1, 2, 4, 8 b. 8, 4, 1, 2 c. 4, 8, 2, 1 d. 8, 4, 2, 1 D. The law of diminishing marginal utility states that the marginal utility must fall as more is consumed. This is true only for answer d.

16. 14. The demand curve is downward sloping because of the law of a. diminishing marginal utility. b. diminishing consumer equilibrium. c. consumer equilibrium. d. diminishing utility maximization. A. Since the marginal utility falls for each additional unit of a good consumed, the consumer will only purchase more of a good at a lower price (the law of demand).

17. 15. The total utilities associated with the first 5 units of consumption of good X are 15, 30, 40, 47, and 50, respectively. What is the marginal utility associated with the third unit? a. 15 b. 70 c. 85 d. 10 e. 45 D. The marginal utility is computed as the difference between 30 utils for the second unit and 40 utils for the third unit, which is 10 marginal utils.