MCQ

MARGINAL UTILITY AND CONSUMER CHOICE
1. The law of diminishing marginal utility holds that

a. as people consume more of a good, total utility increases, then decreases
b. both water and diamonds have a low marginal utility in the desert
c. marginal utility diminishes when too much is consumed
d. increasing consumption leads to smaller additions to total utility
e. total utility actually decreases for some consumers if they consume too much
2. The paradox in the water-diamond paradox is that

a. water is very useful but has a low value and diamonds are less useful but have a high value
b. diamonds are expensive and water is cheap
c. diamonds have a high total utility but a low marginal utility
d. the price of water is high but its marginal utility is low, while the opposite is true for diamonds
e. water is a very abundant but priceless resource, while diamonds are scarce but easy to price
3. The marginal-utility-to-price ratio is a representation of the

a. law of demand
b. total satisfaction a consumer gets from a good
c. additional satisfaction a consumer gets from a good
d. satisfaction per dollar spent that a consumer gets from a good
e. true market value of a good determined by supply and demand
4. To say that some people enjoy consumer surplus means that they
a. pay less than they would have been willing to pay for a good
b. are accomplished shoppers who only purchase products that are good values
c. pay exactly what a good is worth to them
d. only purchase items that are on sale since the sale increases the marginal utility-to-price ratio
e. pay a price that is higher than they expected to pay for an item
5. We are unable to make interpersonal comparisons of utilities of money because

a. the law of diminishing marginal utility does not apply to money
b. it is impossible to compare the satisfaction different people get from money
c. the measurement of utility in hypothetical units makes comparisons impossible
d. money has a high total utility but a low marginal utility
e. money has a low total utility but a high marginal utility
2 CHAPTER 5 MARGINAL UTILITY AND CONSUMER CHOICE
1. The law of demand tells us that

a. the quantity demanded increases as price falls
b. demand increases because price falls
c. people respond to price changes
d. demand creates its own supply, meaning that if there's a demand, supply will be created to satisfy it
e. demand depends on people having income to satisfy it
2. The law of diminishing marginal utility

a. is another way of expressing the law of demand
b. states that people's inclination to consume basic goods falls as incomes increase
c. shows that goods lose their individual values as the total utility of all goods decreases
d. is the utility equivalent to the law of increasing costs
e. states that total utility rises at a decreasing rate as consumption increases
3. The water-diamond paradox can be explained by showing that

a. water's total utility may be lower than diamonds’, but its marginal utility is higher
b. water's total utility may be lower than diamonds’, and its marginal utility is lower as well
c. water's total utility is less than its marginal, but diamonds’ total utility is higher than their marginal
d. water's total utility may be higher than diamonds’, but its marginal utility is lower
e. total utility for both water and diamonds decreases as their marginal utilities increase
4. Given the marginal-utility-to-price ratio equalization principle, if MU1/P1 > MU2/P2,

a. the consumer should consume more of good 1 and less of good 2
b. the consumer should consume more of good 2 and less of good 1
c. total utility of good 1 is greater than total utility of good 2
d. total utility of good 2 is greater than total utility of good 1
e. the price of good 1 must fall
5. The law of diminishing marginal utility suggests that

a. total utility will begin to diminish
b. additional units of consumption will add less to total utility
c. consumers' wants are insatiable
d. most consumers will limit their consumption even when they earn high incomes
e. marginal utility diminishes faster than total utility as more goods are consumed
6. The marginal-utility-to-price ratio tells us that if the price of a good falls, then, ceteris paribus
a. its marginal-utility-to-price ratio falls
b. its marginal-utility-to-price ratio rises
c. its marginal utility falls
d. its marginal utility rises
e. consumers buy less of the good
7. The value of a good to a consumer depends on

a. its total utility
INTRO TO MICROECONOMICS 3
b. the marginal utility of the first unit consumed
c. the average utility of the units consumed
d. the marginal utility of the last unit consumed
e. the ratio of its marginal utility to total utility
8. Consumer surplus for the whole market

a. is the value placed on the sum of the marginal utilities of a good for all consumers
b. is the triangular area between the demand curve and the equilibrium price in a demand and supply graph
c. corresponds to the area below the market price in a graph of the demand curve
d. is the utility that is left over after a consumer pays for a good
e. emerges when the consumer pays the equivalent of the good's marginal utility
9. You would be inclined to bid on a good at an auction if

a. its MU/P was higher than those for other goods you consume
b. its MU/P was lower than those for other goods you consume
c. the consumer surplus was less than its price
d. the consumer surplus was greater than the marginal utility from consuming the good
e. the marginal utility was higher than its price
10. Suppose that Jessica’s MU/P is 8 for swimming lessons, 12 for voice lessons, and 4 for
piano lessons. In order for Jessica to maximize total utility, she should definitely
a. take more swimming lessons
b. take more voice lessons
c. take more piano lessons
d. find some other activities because the values for MU/P are very low
e. take fewer lessons of each type
11. Suppose that Ron paid a scalper (a seller in the black market for tickets) $300 for a
ticket to see the Rolling Stones and his true willingness to pay was $500. We can be
sure that
a. the ticket scalper extracted all the possible consumer surplus from Ron
b. Ron’s consumer surplus was low because he paid more than face value for the ticket
c. Ron’s consumer surplus was the $60 face value of the ticket
d. Ron’s marginal-utility-to-price ratio for the concert was extremely high compared
to that for other goods
e. Ron enjoyed $200 of consumer surplus from the purchase
12. Suppose that development of oil fields around the Caspian Sea leads to an increase in the
world supply of gasoline. This change in the market for gasoline would lead to
a. an increase in the equilibrium price and lower consumer surplus
b. a decrease in the equilibrium price and greater consumer surplus
c. an increase in the equilibrium price and greater consumer surplus
d. a decrease in the equilibrium price and lower consumer surplus
e. no change in consumer surplus
13. Suppose that George goes to his favorite ice cream store and buys three single -dip cones,
the first for three dollars, the second for two dollars, and the third for one dollar, but enjoys
no consumer surplus from the experience. We know that George must
a. have paid the same price for each cone
b. have been cheated by the ice cream store-owner
c. not like ice cream very much
d. have paid prices for the cones that correspond to points on his demand curve
e. not have maximized total utility that day
14. As the price of a good falls, people buy more of it because

a. the demand for the good increases
b. they have more income to spend on the good
c. the marginal utility from additional units of consumption of the good increases
d. the marginal-utility-to-price ratio for the good increases
e. consumer surplus from consumption of the good increases
15. An increase in the price of a good causes people to buy less of it because
a. the demand for the good decreases
b. they have less income to spend on the good
c. the marginal utility from additional units of consumption of the good decreases
d. the marginal-utility-to-price ratio for the good decreases
e. consumer surplus from consumption of the good decreases
16. If there is diminishing marginal utility of income, then it may increase social welfare
(assuming that it is reasonable to compare utility levels among people) to increase taxes
on
a. the incomes of the rich and give the funds to the poor
b. the incomes of the poor to provide funds for job training
c. cigarettes
d. the incomes of the poor and give it to the richer classes
e. consumption goods
17. Producer surplus can be represented graphically in a demand and supply diagram as the
a. area between price and the supply curve
b. slope of the demand curve
c. elasticity of the demand curve
d. area above the demand curve
e. area between the demand curve and price
18. One might argue that French chefs understand the law of diminishing marginal utility better
than American chefs because
a. French chefs are able to price their meals higher than American chefs
b. the French serve many courses of small portions, keeping the marginal utility of each one high
c. the French focus on large portions and unlimited trips to the salad bar, keeping total utility high
d. the only way to get people to eat American cuisine is to keep prices very low,
suggesting a low marginal utility
e. the waiters in French restaurants are instructed to help customers to equate the MU/P
among different menu items by carefully explaining the various choices
19. Suppose that your roommate comes back to the dormitory exclaiming about what a great
deal she got on a new shirt that she would have purchased at the regular price for $35, but
she bought on sale for $6. An appropriate response would be to
a. make an interpersonal comparison of utility and remark that the shirt is ugly and not
worth even $6 to you
b. suggest that your roommate is now enjoying $29 of consumer surplus
c. suggest that the shirt was on sale because it has a low marginal utility
d. suggest that your roommate’s total utility from the shirt is 35 utils
e. suggest that your roommate’s total utility from the shirt is at least $29
20. A consumer who has spent all of her income on clothes and food and finds that her
marginal-utility-to- price ratio is higher for clothes than for food should, in the future,
rearrange purchases to maximize total utility by
a. purchasing more food and less clothes
b. purchasing more of both commodities
c. purchasing more clothes and less food
d. purchasing less of both commodities
e. paying closer attention to the law of diminishing marginal utility for both commodities
The following questions relate to the interdisciplinary and theoretical perspectives in the text.
21. Research on the marginal utility of money by sociologists and political scientists suggests that
a. most people have an overwhelming desire for more income because more goods increase their utility
b. people are far happier in rich countries than in poor countries because more
consumption goods are available
c. hard work that increases income is rewarding because it increases consumption and utility
d. the marginal utility of income above the subsistence level is not very great
e. material possessions are more important to happiness than friends, family, and health
22. Suppose that you are an engineering major and you are required to take English 101, the
writing class required of all first-year students. You aren’t a great writer but at least you
know that every sentence needs a subject, a verb, and the appropriate modifiers. You can
earn a B grade in the class in 100 hours of out-of- class work, whereas, the average first
year student requires 150 hours of work to earn a B. In this case, you enjoy
a. no consumer surplus
b. 50 hours of consumer surplus
c. no producer surplus
d. 50 hours of producer surplus
e. the market price for a B grade in English 101, which is only 100 hours
23. Which of the following activities is least likely to exhibit the law of diminishing marginal utility?
a. a student answering multiple choice questions for an economics course
b. a wealthy individual shopping for a third luxury car
c. a child at a new school making ten new friends at once
d. a track athlete at practice running the 400 meter dash ten times in a row
e. a rock musician playing a “hit” song in concert for the 100th time
24. Experiments involving laboratory white rats suggest that

a. rats do not respond to price changes in the same way that human consumers do
b. as a rat is forced to bar-push more for a reward, theyit does so in order to consume more
c. rats have very narrow tastes, so experiments that test their consumption
behavior are not very meaningful
d. rats rearrange their consumption in response to changes in the “price” of available food items
e. rats can distinguish between different brands of root beer
1. The indifference curve approach to demand curves requires that

a. a consumer be able to put precise utility values on different sets of goods
b. utils be counted very carefully
c. we make interpersonal comparisons of utility
d. a consumer have a sufficiently large budget to buy many different items
e. a consumer be able to rank utilities of different goods
2. An indifference curve is formed by constructing combinations of goods that

a. are rated with higher utilities than other goods
b. are within the consumer’s budget constraint
c. are not subject to the law of diminishing marginal utility
d. yield identical levels of utility for a consumer
e. are substituted for one another at a constant marginal rate
3. The marginal rate of substitution is the rate at which a consumer

a. measures utils for additional units of consumption
b. will give up units of one good for units of another good while holding utility constant
c. runs up against the monthly budget constraint
d. finds substitute goods for goods whose prices are increasing
e. compares the utility rankings of sets of goods that might be substitutable
4. A consumer’s budget constraint is formed by

a. subtracting the cost of various budget items from the consumer’s income
b. setting the consumer’s income equal to the sum of the price times the quantity for all goods consumed
c. adding up the prices of all the items in the household budget
d. comparing the marginal-utility-to-price ratios of the most preferred goods the consumer buys
e. dividing income by the price of the most expensive good consumed
1. Which of the following is true about combinations of goods represented by an indifference curve?
a. the marginal utilities of the combinations decrease, descending along the curve
b. combinations are equally preferred to one another
c. the marginal utilities of the combinations increase, descending along the curve
d. each combination matches its price
e. they lie on a straight line
2. A budget line
a. represents the total value of all combinations on an indifference curve
b. is determined by a set of prices, indicating combinations of goods a consumer can
buy with given income
c. is derived by consumers to fix the combinations of goods they can buy and how much they can save
d. is an equation representing what a consumer would buy if income matched prices
e. curves inward (is concave) to the origin.
3. The indifference curve approach to demand derivation is based on

a. precise comparisons of measurements of utility levels from the consumption of sets of goods
b. a recent invention called the utilometer
c. interpersonal comparisons of utility
d. the fact that the marginal utility of money is diminishing
e. consumer preferences between sets of goods
4. Indifference curves that are downward sloping and convex to the origin reflect
a. the abandonment of utility theory with the indifference curve approach
b. the increasing marginal utility of certain goods
c. the increasing ease of substituting one good for another
d. the declining marginal rate of substitution
e. the rising marginal rate of substitution
5. Suppose a consumer, with an income of $100, faces a $1 price for soda and a $2 price for
hot dogs. The consumer's budget line will intersect the hot dog and soda axes at
a. 100 hot dogs and 50 sodas
b. 50 hot dogs and 100 sodas
c. 100 hot dogs and 200 sodas
d. 75 hot dogs and 150 sodas
e. points that cannot be determined without an indifference map
6. Given the information in question 6, suppose that the price of hot dogs increases to $4
each. This price increase would result in all of the following except
a. a change in the soda intercept
b. a decrease in the maximum number of hot dogs that can be purchased
c. a shift to an indifference curve corresponding to a lower utility level for the consumer
d. a possible decrease in soda consumption since hot dogs and sodas are complementary goods
e. a nonparallel shift in the budget constraint toward the origin
7. Suppose the consumer's income in questions 5 and 6 increases to $200. If the prices of
sodas and hot dogs are $1 and $2, respectively, the increase in income would result in all
of the following except
a. a doubling of each intercept to the axes for sodas and hot dogs
b. a change in the shape of the consumer's indifference curves
c. a shift to an indifference curve corresponding to a higher utility level for the consumer
d. a parallel shift in the budget constraint
e. an increase in either or both soda and hot dog consumption
8. One problem with the marginal-utility-to-price ratio approach to understanding the law of demand is that
a. it forces us to make interpersonal comparisons of utility
b. the measurement of utility seems so unrealistic
c. people find it impossible to rank their preferences
d. many times, the law of diminishing marginal utility is violated
e. the theory is useless for the development of tax policies
9. The distinction between an indifference curve and an indifference map is that

a. an indifference curve allows utility levels to fluctuate while utility is constant on an indifference map
b. indifference curves are convex toward the origin while indifference maps are concave
c. an indifference map is comprised of many indifference curves
d. an indifference map has a rising marginal rate of substitution
e. the law of diminishing marginal utility is less evident in an indifference map than on
an indifference curve
10. A demand curve that is derived using the indifference curve approach will
a. be more sensitive to income changes than one derived using the marginal-utility-to-price ratio approach
b. have the same characteristics as one derived using the marginal-utility-to-price ratio approach
c. allow for interpersonal comparisons of utility to be made with precision
d. show a declining marginal rate of substitution
e. be more likely to have a positive slope than one derived using the marginal-
utility-to-price ratio approach
114 MULTIPLE CHOICE QUESTIONS.MULTIPLE CHOICE UTILITY
CHAPTER 5 MARGINAL QUESTIONS
AND CONSUMER CHOICE
1. The concept of utility was introduced by
(a) Marshall
(b) Hicks and allen
(c) Geremy Bentham
(d) Gossen
2. Cardinal utility analysis to consumer equilibrium was developed by
(a) Marshall
(b) Hicks and Allen
(c) Geremy Bentham
(d) Gossen
3. Ordinal utility analysis is otherwise known as
(a) Gossens second law
(b) Cardinality approach
(c) Indifference curve analysis
(d) Rationality approach
4. Ordinal utility analysis Was developed by
(a) J.R.Hicks & R.J.D. Allen
(b) Samualson
(c) Marshall and Jevons
(d) Slutsky
5. Total utility curve
a. Always rises
b. First falls then rises
c. Always falls
d. First rises and then falls after reaching its maximum
5. Total utility is maximum when
(a) Marginal utility is zero
(b) Marginal utility is maximum
(c) Marginal utility increases
(d) Average utility is maximum
6. Marginal utility is
(a) Always zero
(b) Increases at a diminishing rate
(c) The utility derived from last unit
(d) All the above
7. Total utility is
(a) The sum total of marginal utilities
(b) Entire utility derived from whole consumption
(c) Increases at a diminishing rate
(d) All the above
8. When Total utility is increasing at an decreasing rate, marginal utility is
(a) Constant
(b) Negative
(c) Increasing
(d) Decreasing
9. Which of the following is called gossans first law
(a) Law of substitution
(b) Law of equi marginal utility

116 (c) Law of diminishing
CHAPTER marginal utility UTILITY AND CONSUMER CHOICE
5 MARGINAL
(d) None of the above
10. At saturation point MU of a commodity is
(a) Positive
(b) Negative
(c) Zero
(d) Increasing
11. A consumer reaches equilibrium when
(a) Marginal utility is equal to price
(b) Marginal utility greater than price
(c) Marginal utility less than price
(d) Total utility is equal to price
12. Marshalian cardinal utility analysis assumes
(a) Marginal utility of money is zero
(b) Marginal utility of money is decreasing
(c) Marginal utility of money is increasing
(d) Marginal utility of money is constant
13. When individuals income rises (everything remain the same) his demand for a
normal good
(a) Rises
(b) Falls
(c) Remains the same
(d) negative
14. When individuals income falls (everything remain the same) his demand for a
normal good
(a) Rises
(b) Falls
(d) Negative
15. When individuals income falls (everything remain the same) his demand for
an inferior good
118 (a) Rises CHAPTER 5 MARGINAL UTILITY AND CONSUMER CHOICE
(b) Falls
(d) We cannot say without additional information
16. Other things being equal a decrease in demand can be caused by
(a) A fall in price of the commodity
(b) A fall in income of the consumer
(c) A rise in price of the substitute
(d) None of these
17. When price of a product falls, more of it is purchased because of
(a) The substitution effect
(b) The income effect
(c) Neither substitution effect nor income effect
(d) Both the substitution and income effects
19.“Utility or satisfaction is a subjective concept; therefore it could only be ranked”.

The statement supports
(a) Cardinal utility theorist
(b) Ordinal utility theorist
(c) Behavioral theorist of the firm
20. The basic doctrine of consumers surplus is based on
(a) Indifference curve analysis
(b) Revealed preference theory
(c) Law of substitution
(d) Law of diminishing marginal utility
21. According to Marshall, The law of diminishing marginal utility
(a) Applies on money in the manner in which it applies on commodity
(b) Do not applies on money except bank money
(c) Does not applies on bank money but applies on cash

(d) Applies on all commodities except money
22. An indifference curve represent
(a) Four commodities
(b) Less than two commodities
(c) Only two commodities
(d) Only one commodity
23. Indifference curve is always
(a) Concave to the origin
(b) Convex to the oringin
(c) L shaped
(d) A straight line
24. Engel curve for giffen good is
(a) Positively sloped
(b) Negatively sloped
(c) Horizontal straight line
(d) Vertical straight line
25. Price effect is
(a) Income effect – substitution effect
(b) Substitution effect – income effect
(c) Income effect + substitution effect
(d) Income effect + substitution effect- negative effects
26. For a giffen good, when price falls
(a) Demand increases at a faster rate
(b) Demand decreases
(c) Demand remains constant
(d) Demand curve has a negative slope
27. Inferior goods are the goods with
(a) Falling Income effect
(b) Rising Income effect

120 (c) Negative income effect5
CHAPTER MARGINAL UTILITY AND CONSUMER CHOICE
(d) Positive Marshallian effects
28. Indifference curves are
(a) Always parallel
(b) May be parallel
(c) May not be parallel
(d) Both b and c
29. Revealed preference theory assumes
(a) Weak ordering
(b) Strong ordering
(c) Constant ordering
(d) Multiple ordering
30. Hicks Allen indifference theory is based on
(a) Weak ordering
(b) Strong ordering
(c) Constant ordering
(d) Multiple ordering
31. Income consumption curve of an inferior commodity is
(a) Positively sloped
(b) Backward bending
(c) Downward slopping straight line
(d) Showing constant income effect
32. In case of a convex indifference curve
(a) MRS xy is constant
(b) MRS xy is increasing
(c) MRS xy is negligible
(d) MRS xy is diminishing
33.‘Higher the indifference curve higher will be level of satisfaction’. The

statement is
(a) Always true
(b) Always false
(c) Sometimes true and sometimes false
(d) True only if price effect is positive
34. As per indifference curve analysis, consumer always try to reach
(a) Higher indifference
(b) Lower indifference curve
(c) Middle indifference curve
(d) Lower income price line
35. As per indifference curve analysis consumer equilibrium is attained when
(a) Slope of indifference curve is constant
(b) Slopes of both indifference curve and income price line are equal
(c) Slopes of both indifference curve and income price line are opposite
(d) Both income price line and indifference curve are parallel.
36. The slope of a budget line is
(a) The satisfaction level of both the commodities
(b) The income level of the consumer
(c) The price ratio of both the commodities under consideration
(d) Price level of a country
37. At the point of tangency the slope of indifference curve is
(a) Differ from point to point
(b) Is equal on the other side of the mid point
(c) Is the same
(d) Is increasing
38. The slope of a budget line throughout its length is
(a) The satisfaction level of both the commodities
(b) The income level of the consumer
(c) The price ratio of both the commodities under consideration
(d) Price level of a country

122 39. The income effect for a commodity
CHAPTER 5 is MARGINAL UTILITY AND CONSUMER CHOICE
(a) Is always positive
(b) Is always negative
(c) Depends upon price effect
(d) Determines the nature of the commodity
40. The substitution effect for a commodity is
(a) Is always positive
(b) Depends upon the nature of the commodity
(c) Depends upon price effect
(d) Sometimes negative and sometimes positive
41. Which method is used by Hicks to eliminate the income effect when price of a
product is changed
(a) Compensating variation in income
(b) The cost difference
(c) The over compensation effect
(d) Substituting variation in price
42. Which of the following statements is true
(a) Hicksian substitution effect is greater than Slutsky substitution effect

(b) Slutsky substitution effect is greater than Hicksian substitution effect
(c) Hicksian substitution effect is same and equal to Slutsky substitution
effect
(d) Hicksian substitution effect is the reverse of slusky substitution effect
43. According to Hicks substitution effect is
(a) The movement to a higher indifference curve
(b) The movement to a lower indifference curve
(c) The movement along an indifference curve
(d) The movement to a decreased consumption

TOStrong
INTRO44. ordering means
MICROECONOMICS 123
(a) Absence of indifference
(b) Presence of indifference
(c) No difference between different combinations
45. In the fundamental theorem of consumption and to prove the law of demand,
Samualson uses
(a) Compensating variation in income
(b) The cost difference
(c) The over compensation effect
(d) Substituting variation in price
46. If negative income effect is greater than positive substitution effect : price
effect will be
(a) Zero
(b) Negative
(c) Positive
(d) Positive and greater than one
47. If negative income effect is greater than positive substitution effect : the
product will be
(a) A normal good
(b) An inferior good
(c) A giffen good
(d) A complementary good
48. If both the products X & Y are normal goods
(a) Slopes down towards right
(b) Slopes up towards right
(c) Slopes up towards left
(d) Slopes down towards left
49. If negative income effect is less than positive substitution effect : the product
will be
(a) A normal good
(b) An inferior good
(c) A giffen good
(d) A complementary good
50. Which of the following statement is FALSE with regard to marginal utility
(a) Marginal utility is the utility derived from last unit
(b) As consumption increases Marginal utility goes on diminishing
(c) At saturation point marginal utility is Zero
(d) Marginal utility increases at a diminishing range
51. Which of the following statement is TRUE with regard to total utility
(a) Total utility is the utility derived from last unit
(b) Total utility increases at a diminishing range
(c) As consumption increases total utility goes on diminishing
(d) At saturation point total utility is negative
52. According to Marshall consumer surplus is:
(a) Total utility – marginal utility
(b) Total utility + Marginal utility
(c) Total utility derived – Price
(d) Price – Marginal utility

53. When the price of a product falls for a normal good, the:
(a) income and substitution effects will encourage consumers to purchase
more of the product.
(b) income and substitution effects will encourage consumers to purchase less
of the product.
(c) substitution effect will encourage consumers to purchase less of the
product and the income effect will encourage them to purchase more.
(d) substitution effect will encourage consumers to purchase more of the
product and the income effect will encourage them to purchase less.
54. The reason the substitution effect works to encourage a consumer to buy less of a
product when its price increases is:
(a) the real income of the consumer has been increased.
(b) the real income of the consumer has been decreased.
(c) the product is now relatively more expensive than it was before.
(d) other products are now relatively more expensive than they were before.
Page 1
255. George consumes only two goods, pizza and
CHAPTER compact discs.
5 MARGINAL Both AND
UTILITY are normal goodsCHOICE
CONSUMER for
George. Suppose the price of pizza decreases. George's consumption of compact discs
will:
(a) increase due to the income effect.
(b) increase due to the substitution effect.
(c) increase due to a negative income elasticity.
(d) remain unchanged, since the income elasticity of pizza is greater than 0.
56. The total utility of a product is calculated by:

(a) summing the marginal utility from the first unit of a product that is
consumed and the last unit of a product that is consumed.
(b) multiplying the marginal utility of a unit of the product consumed
times the average quantity consumed.
(c) summing the marginal utilities for each successive unit of the product
that is consumed.
(d) multiplying price times quantity and dividing by the marginal utility.
57. Which of the following defines marginal utility?

(a) the change in total utility divided by the price of a product
(b) the maximum amount of satisfaction from consuming a product
(c) the total satisfaction received from consuming as much of the product
that is available for consumption
(d) the additional satisfaction received from consuming one more unit of a
product
58. Which best expresses the law of diminishing marginal utility?
(a) The more consumption of a product, the smaller is the total and marginal
utility from the consumption.
(b) The less consumption of a product, the greater is the total and marginal
utility of the consumption.
(c) The more consumption of a product, the smaller is the marginal
utility from consuming an additional unit.
(d) The more consumption of a produc t, the smaller is the total andmarginal
utility from the consumption.
59. Which situation is consistent with the law of diminishing marginal utility?
(a) The more pizza Henry eats, the more he enjoys another slice.
(b) The more pizza Henry eats, the less he enjoys another slice.
(c) Henry's marginal utility from eating pizza becomes positive after
eating three slices.
(d) Henry's marginal utility from eating pizza reaches a maximum when total
utility is zero.
60. Children who refuse to eat Brussels sprouts at dinner are making the statement that
the marginal utility of Brussels sprouts is:
(a) zero. C) positive, but decreasing.
(b) negative. D) less than the total utility.
61. When marginal utility is decreasing but positive, total utility is:
(a) increasing at a decreasing rate. C) increasing at an increasing rate.
(b) decreasing at a decreasing rate. D) decreasing at an increasing rate.
62. A consumer with a fixed income will maximize utility when each good is purchased in
amounts such that the:
(a) total utility is the same for each good.
(b) marginal utility of each good is maximized.
(c) marginal utility per dollar spent is the same for all goods.
(d) marginal ut ility per dollar spent is maximized for each good.
63. If a rational consumer is in equilibrium, then:

(a) the marginal utility obtained from one product is equal to the
marginal utility obtained from any other product.
(b) a reallocation of income would increase the consumer's total utility.
(c) the marginal utility per last dollar spent is the same for all goods consumed.
(d) total utility becomes zero.
Page 3
64. If you know that the marginal utility per dollar spent on product Alpha is less than the marginal utility per dollar
spent on product Beta, consumers who spend all their income on these two products can:
4 CHAPTER
(a) maximize total utility but 5 MARGINAL
not marginal utility. UTILITY AND CONSUMER CHOICE
(b) maximize marginal utility but not total utility.
(c) increase total utility by buying more of Beta and less of Alpha.
(d) increase total utility by buying more of Alpha and less of Beta.
Use the following to answer questions 13-15:
Answer the next question(s) based on the table below showing the marginal utility schedules for product X and
product Y for a hypothetical consumer. The price of product X is $4 and the price of product Y is $2. The income of the
consumer is $20.
Product X Product Y
Quantity MUx Quantity MUy
1 32 1 24
2 28 2 20
3 24 3 16
4 20 4 12
5 16 5 8
65. Refer to the above table. If the consumer can only buy product X, how much will the consumer buy and what will
be the total utility?
(a) 4X and 20 B) 4X and 104 C) 5X and 16 D) 5X and 120
66. Refer to the above table. If the consumer buys both product X and product Y, how much will the consumer buy
of each to maximize utility?
(a) 4X and 2Y B) 3X and 4Y C) 4X and 3Y D) 5X and 3Y
67. Refer to the above table. When the consumer purchases the utility- maximizing combination of product X
and product Y, total utility will be:
A) 72. B) 84. C) 136. D) 156.
68. A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 40
units and Y is 16 units. The unit price of X is $5. The price of Y is:
(a) $1 per unit. B) $2 per unit. C) $3 per unit. D) $4 per unit.
69. Which is an explanation for why the demand curve is downsloping?

(a) normal goods
(b) the law of supply
(c) the law of diminishing marginal utility
(d) the law of increasing opportunity cost
POS S I B I L I T I E S , P RE F E R E N CE S , A N D CHOI CE S 5
Consumption Possibilities
1. Which of the following statements best describes a
consumer’s budget line?
a. It shows all combinations of goods among which the
consumer is indifferent.
b. It shows the limits to a consumer’s set of affordable
consumption choices.
c. It shows the desired level of consumption for the
consumer.
d. It shows the consumption choices made by a
consumer
2. The magnitude of the slope of the budget line

a. is defined as marginal rate of substitution.
b. equals the relative price of the good measured along the
horizontal axis.
c. increases when income increases.
d. decreases when income increases.
3. The budget line can shift or rotate

a. only when income changes.
b. only when prices change.
c. when either income or prices change.
d. None of the above because changes in income and prices do
not shift or rotate the budget line.
6 CH A P TE R 8
Use Figure 8.5 for the next two questions. 5. Suppose that the price of a movie rises and nothing
FIGURE 8.5 else changes. This change means the budget line
Multiple Choice Questions 4 and 5 a. rotates around the vertical intercept and becomes
steeper.
b. rotates around the vertical axis and becomes
Soda (six-packs per month)
flatter.
c. shifts rightward and becomes steeper.
d. shifts rightward and does not change its slope.
Budget line 6. Sue consumes apples and bananas. Suppose that

Sue’s income doubles and that the prices of apples
and bananas also double. Sue’s budget line will
a. shift leftward but not change slope.
b. remain unchanged.
c. shift rightward but not change slope.
d. shift rightward and become steeper.
7. As a consumer moves rightward along an indiffer-

Movies (per month)
ence curve, the
a. consumer remains indifferent among the differ-
4. Suppose that this consumer’s income increases and ent combinations of goods.
nothing else changes. As a result, the consumer’s b. consumer generally prefers the combinations of
budget line goods farther rightward along the indifference
a. rotates around the vertical intercept and becomes curve.
steeper. c. income required to buy the combinations of the
b. rotates around the vertical axis and becomes goods always increases.
shallower. d. relative price of both goods falls.
c. shifts rightward and becomes steeper.
8. Indifference curves shift or rotate
d. shifts rightward and its slope does not change.
a. only when income changes.
b. only when prices change.
c. when either income or prices change.
d. with none of the above because changes in in-
come and prices do not shift indifference curves.
9. If your local newspaper reported that wearing plaid

clothing was a sure way to obtain good grades, stu-
dents’
a. budget lines would shift rightward to compensate
for the higher price of plaid clothing.
b. budget lines would rotate so that more plaid
clothing would be purchased.
c. preferences would change in favor of more plaid
clothing.
d. None of the above.
10. Diminishing marginal rate of substitution means 13. Which of the following statements about Figure 8.6
that is correct?
a. the budget line has a negative slope. a. Point a is preferred to point d, but a is not
b. the budget line does not shift when people’s affordable.
preferences change. b. The consumer is indifferent between points d
c. indifference curves might have a positive slope. and c, but c is more affordable.
d. indifference curves will be concave. c. Point b is preferred to point d , but b is not
affordable.
11. If two goods are perfect substitutes, their d. Both points a and d cost the same, but a is pre-
a. indifference curves are positively sloped straight ferred to d.
lines.
b. indifference curves are negatively sloped straight 14. What is the best affordable point of consumption?
lines. a. a
c. indifference curves are L-shaped. b. b
d. marginal rate of substitution is infinity. c. c
d. d
12. If the indifference curves between two goods are L-
shaped, the goods are 15. A consumer is in equilibrium when the consump-
a. complementary goods. tion point is on
b. substitute goods. a. the budget line.
c. normal goods. b. an indifference curve.
d. inferior goods. c. the highest indifference curve that just touches
the budget line.
Predicting Consumer Behavior d. None of the above.
Use Figure 8.6 for the next two questions.
16. Which of the following is true when the consumer is
FIGURE 8.6
at the best affordable point?
Multiple Choice Questions 13 and
a. The point is on the budget line and highest at-
14 tainable indifference curve.
Hot dogs (quantity per month)
b. The slope of the budget line equals the slope of

the indifference curve.
c. The MRS equals the relative price.
d. All of the above are true at the best affordable
point.
17. Which of the following statements is true?

d a. The law of diminishing marginal rate of substi-
tution means that indifference curves are convex
a
(bowed out).
b I3
b. A demand curve can be derived from the indif-
c I2 ference curve/budget line analysis.
I1 c. Demand curves and indifference curves measure
the same things.
Hamburgers (quantity per month)
d. Demand curves and indifference curves have
negative slopes for the same reason.
8 CH A P TE R 8
18. When the price of an orange falls, the income effect 22. The new consumer equilibrium is at point
a. increases the consumption of oranges if oranges a. a.
are a normal good. b. b.
b. increases the consumption of oranges if oranges c. c.
are an inferior good. d. d.
c. always increases the consumption of oranges.
d. always decreases the consumption of oranges. 23. When you examine the effect from a change in price
while (hypothetically) changing income to keep the
19. When oranges fall in price, the substitution effect consumer on the same indifference curve, you are
a. increases the consumption of oranges if oranges examining the
are a normal good. a. price effect.
b. increases the consumption of oranges if oranges b. income effect.
are an inferior good. c. substitution effect.
c. always increases the consumption of oranges. d. ceterus paribus effect.
d. always decreases the consumption of oranges.
24. When the price of a normal good falls, the income
Use Figure 8.7 for the next three questions. effect the quantity demanded and the substi-
FIGURE 8.7 tution effect the quantity demanded.
Multiple Choice Questions 20, 21, a. increases; increases
22 b. increases; decreases
Tacos (quantity per month)
c. decreases; increases
d. decreases; decreases
a
25. An inferior good

a. has a substitution effect opposite that of a normal
good.
b b. has an income effect opposite that of a normal
good.
c. has a price effect opposite that of a normal good.
d I d. is one that breaks after its first use.
c
I1 2 Work-Leisure Choices
26. The substitution effect from a rise in the wage rate
a. motivates a decrease in leisure.
b. motivates an increase in leisure.
Slices of pizza (quantity per month)
c. has the same effect on leisure as does the income
20. The change in the budget line is the result of a(n) effect.
d. None of the above.
a. fall in the price of a slice of pizza.
b. fall in the price of a taco. 27. Over the past 100 years, the quantity of labor sup-
c. increase in income. plied has decreased as wages have risen. This change
d. None of the above indicates that the income effect
21. With the change in the budget line, the consumer’s a. and the substitution effect have both discouraged
real income measured in units of tacos leisure.
b. and the substitution effect have both encouraged
a. definitely increased.
leisure.
b. definitely decreased.
c. encouraging leisure has dominated the substitu-
c. did not change.
tion effect discouraging leisure.
d. might have changed, but it is impossible to tell
d. has not affected the work–leisure choice
from the figure.
10 CH A P TE R 8

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MARGINAL UTILITY AND CONSUMER CHOICE

1. The law of diminishing marginal utility holds that

2. The paradox in the water-diamond paradox is that

3. The marginal-utility-to-price ratio is a representation of the

5. We are unable to make interpersonal comparisons of utilities of money because

1. The law of demand tells us that

2. The law of diminishing marginal utility

3. The water-diamond paradox can be explained by showing that

4. Given the marginal-utility-to-price ratio equalization principle, if MU1/P1 > MU2/P2,

5. The law of diminishing marginal utility suggests that

7. The value of a good to a consumer depends on

8. Consumer surplus for the whole market

9. You would be inclined to bid on a good at an auction if

14. As the price of a good falls, people buy more of it because

24. Experiments involving laboratory white rats suggest that

1. The indifference curve approach to demand curves requires that

2. An indifference curve is formed by constructing combinations of goods that

3. The marginal rate of substitution is the rate at which a consumer

4. A consumer’s budget constraint is formed by

3. The indifference curve approach to demand derivation is based on

9. The distinction between an indifference curve and an indifference map is that

1. The concept of utility was introduced by

(b) Hicks and allen

(c) Geremy Bentham

2. Cardinal utility analysis to consumer equilibrium was developed by

(b) Hicks and Allen

(c) Geremy Bentham

3. Ordinal utility analysis is otherwise known as

(a) Gossens second law

(b) Cardinality approach

(c) Indifference curve analysis

(d) Rationality approach

4. Ordinal utility analysis Was developed by

(a) J.R.Hicks & R.J.D. Allen

(c) Marshall and Jevons

b. First falls then rises

d. First rises and then falls after reaching its maximum

5. Total utility is maximum when

(a) Marginal utility is zero

(b) Marginal utility is maximum

(c) Marginal utility increases

(d) Average utility is maximum

(a) Always zero

(b) Increases at a diminishing rate

(c) The utility derived from last unit

(d) All the above

(a) The sum total of marginal utilities

(b) Entire utility derived from whole consumption

(c) Increases at a diminishing rate

(d) All the above

8. When Total utility is increasing at an decreasing rate, marginal utility is

9. Which of the following is called gossans first law

(a) Law of substitution

(b) Law of equi marginal utility

10. At saturation point MU of a commodity is

11. A consumer reaches equilibrium when

(a) Marginal utility is equal to price

(b) Marginal utility greater than price

(c) Marginal utility less than price

(d) Total utility is equal to price

12. Marshalian cardinal utility analysis assumes

(a) Marginal utility of money is zero

(b) Marginal utility of money is decreasing