Multiple Choice Tutorial Chapter 6 Consumer Choice and Demand

1. The substitution effect describes how a. an increase in income causes buyers to purchase different products b. the opportunities for minorities are affected by affirmative action’s policies c. the additional satisfaction from each additional unit of the product consumed in a given time period decreases d. a price increase creates incentives for buyers to seek alternatives D. The substitution effect occurs when the price of a good falls, consumers will substitute it for other goods, which are now relatively more expensive.

2. If the income effect is the only economic principle operating, when price increases the quantity a. demanded of a normal good will increase b. demanded of an inferior good will increase c. demanded of a complement will increase d. demanded of any good will decrease B. The income effect occurs when a fall in the price of a good increases consumer’s real income, making them more able to purchase all goods, so the quantity demanded increases.

3. Total utility a. has all of the following as correct responses b. decreases as price increases c. can be used to compare two people’s experiences d. depends on individual attitudes and preferences D. Utility is the satisfaction received from consuming a good or service or a collection of goods and services; satisfaction, sense of wellbeing.

4. A word that can be substituted for utility is a. cost b. price c. satisfaction d. income C. Same as previous answer.

5. Economic analysis of utility a. is used to teach consumers how to spend their income b. is used to explain how tastes develop and why different people have different tastes c. is used to measure utility objectively and to compare the utilities of different people d. assumes that tastes are given and that they are also stable D. Economists have little to say about the origin of tastes or why tastes seem to differ across individuals - they simply assume that although people have different tastes, an individual’s tastes are not changing all the time.

6. Marginal utility is the a. overall satisfaction from consuming a good b. additional satisfaction from consuming one more unit of a good c. average satisfaction from consuming a good d. the change in satisfaction from consuming 1% more of a good B. The word margin always means a change or the last increment. Marginal utility is the change in total utility derived from a one unit change in consumption of a good.

7. Total utility can be measured as a. the sum of all marginal utilities b. the sum of all average utilities c. the total revenue spent on goods and services d. the price of a product A. Total utility is the total satisfaction a consumer derives form consumption.

8. The basic hypothesis of utility theory states that as more of a commodity is consumed during a given period of time, a. total utility and marginal utility will both decrease b. total utility and marginal utility will both increase c. total utility will increase but marginal utility will eventually decrease C. Economists assume that the economy is made up of people who would rather have more of something then less. However, beyond a certain point, each additional unit of a good brings less and less satisfaction to a person.

9. Newspaper vending machines illustrate that newspaper publishers believe a. the average utility of two identical newspapers is zero or less b. the total utility from two identical newspapers is zero or less c. the marginal utility of a second identical newspaper is zero or less d. the marginal utility of a second identical newspaper is greater than the marginal utility of the first newspaper C. If this were not the case people would take more than one newspaper from the machine.

10. Using numerical values to measure utility a. is essential, and is the only way to analyze utility b. shows the relationship between total utility and marginal utility in a simple manner c. allows us to compare utility between different consumers d. is only possible in a world without scarcity B. A unit measure of utility is called a Util. The first hamburger bought may bring you 10 utils worth of satisfaction, a second hamburger may only bring you 7 utils etc.

11. Negative marginal utility means that a. total utility is also negative b. marginal utility is increasing c. the price of the product is increasing as additional units are consumed d. total utility is decreasing as additional units are consumed D. If you were forced to eat ten hamburgers beyond a certain amount, say four, each hamburger consumed will inflect pain instead of pleasure.

Q. Consumed T. Utility a. 20 1 100 b. 30 2 150 c. 60 3 180 d. 180 4 12. Given the following total utility schedule, what is the marginal utility of the third unit consumed? Q. Consumed 1 2 3 4 T. Utility 100 150 180 200 a. 20 b. 30 c. 60 d. 180 B. 180 minus 150 equals 30 utils.

Q. Consumed T. Utility a. 1 1 100 b. 2 2 200 c. 3 3 270 d. 4 4 320 13. Given the following total utility schedule, where does marginal utility begin to diminish? Q. Consumed 1 2 3 4 5 T. Utility 100 200 270 320 350 a. 1 b. 2 c. 3 d. 4 e. 5 C. At the third unit marginal utility is 70 whereas in the previous units it is 100.

14. If a good is offered to a rational individual for free, she will a. accept unlimited quantities of the good each time period b. stop consuming it when its marginal utility begins to increase c. stop consuming it when its marginal utility begins to diminish d. stop consuming it when its marginal utility equals zero D. When the marginal utility is zero a consumer receives no satisfaction from consuming that last unit.

15. As long as scarcity exists, a. product prices play no role in utility maximization b. income plays no role in utility maximization c. income and product prices must both be considered in utility maximization d. consumers maximize utility by consuming all products until their marginal utility is zero C. The reason why a good has a price is that there is not enough of it to go around to everyone who wants it for free. The one’s who receive the good are those who want it the most and have the money to pay for it.

16. In terms of utility theory, equilibrium in the real world means that a. households are consuming as much of every commodity as they would like b. households have spent their incomes in such a way that their overall satisfaction is maximized c. households have spent their incomes in such a way that their marginal utility is zero for every product consumed B. Economists always assume that consumers will make choices to maximize their total utility.

17. On a hot summer day, an individual decides to eat three ice-cream sundaes at a price of $2 each. If he is a utility-maximizer, what is the value of the marginal utility of the fourth sundae to him that day? a. less than $2 b. more than $2 c. zero d. negative A. This means that the person places a greater value on his $4 than he does on a fourth sundae.

18. The utility-maximizing combinations of goods occurs when a. the marginal utility of each good is equal b. the total utility of each good is equal c. the quantity consumed of each good is equal d. the marginal utility per dollar spent on each good is equal D. If a consumer can increase his total utility by purchasing less of one good and more of another good, he will do so. This person will have no incentive to change his spending priorities if by so doing will not increase his total utility.

19. As a utility-maximizer, you would be willing to pay twice as much for Good X as you pay for Good Y if a. Goods X and Y are substitutes for each other b. you purchase twice as much of Good Y as you do of Good X c. you spend equal amounts on both goods d. the last unit of Good X you buy is twice as satisfying as the last unit of Good Y you buy D. How much you are willing to spend on a good is determined by how much satisfaction you think you will derive from the good.

20. A utility-maximizing consumer buys only CDs and books 20. A utility-maximizing consumer buys only CDs and books. After all of his income is spent, he finds that the last CD he bought gave him 60 units of satisfaction, and the last book he purchased gave him 30 units of satisfaction. CDs cost $12 each and books cost $5 each. Which statement is true? a. he should buy fewer CDs and fewer books b. he should buy more CDs and more books c. he should buy more CDs and fewer books d. he should buy more books and fewer CDs D. The last CD has twice as much utility than the last book, however, the last CD is priced more than double the last book.

21. Johanna often buys her favorite soft drink every week 21. Johanna often buys her favorite soft drink every week. She will buy cans up to the last can where her marginal utility is greater than the price (MU>P). True False A. TRUE As long as her MU > P she is placing a greater value on the can of soda pop than she is the money she has to pay for the soda pop. At the first unit where her MU < P she will not buy that can of pop because she will not give up something of greater value to receive something of lower value.

22. To derive a consumer’s demand curve using utility analysis, note the effect of the consumer’s utility-maximizing combination of goods purchased when a. the consumer’s marginal utilities change b. the consumer’s income changes c. the consumer’s tastes and preferences change d. the price of a product changes D. A demand curve shows how many units will be demanded at various prices. Therefore, what is pertinent here is a change in price.

23. The law of demand states that a. quantity demanded is inversely related to price b. quantity demanded is directly related to income c. marginal utility is inversely related to quantity consumed d. demand curves are linear A. The word inverse here means “moves in the opposite direction.” As the price of a good increases consumers will tend to buy fewer units and vice versa.

24. In animal experiments examining implications of the law of demand, researchers a. discovered that the law of demand does not apply to animal behavior b. were unable to establish “prices”, so could not answer the question of whether the law of demand applies to animal behavior c. proved that rats will not drink root beer d. found that animal consumption choices are consistent with the law of demand D. Even animals make decisions, eat or not to eat, stay inside or go outside etc.

25. Along a consumer’s demand curve, price reflects a. the costs of production b. the dollar value of the total utility from the good c. the dollar value of the marginal utility of each additional unit of the good d. the maximum quantity which could be purchased, given income C. Economists derive demand curves by using marginal utility analysis. The price that a consumer is willing to pay for something is determined by their MU of that last unit.

26. Consumer surplus is defined as a. the amount by which quantity supplied exceeds quantity demanded at the current market price b. the amount by which quantity demanded exceeds quantity supplied at the current market price c. the difference between the maximization amount that a consumer is willing to pay for a given amount of a good and the amount that the consumer actually pays C. Because the price of identical units of a product is the same at one place at one time, some people will end up with consumer surplus, that is, all consumers are different.

27. If you are willing to pay $250 for a certain VCR, but you purchase it on sale for $200, your consumer surplus is a. impossible to determine from the information given b. 1/5 = 0.2 c. $250 d. $50 D. You bought the VCR for less money than you would be willing to pay for it, precisely $50 less.

28. When price decreases, consumer surplus a. increases b. remains constant c. decreases d. becomes negative A. In questions like this we always make the “everything else being equal” assumption. Everything else being equal, a person’s consumer surplus will increase as the price of the good decreases.

29. Let’s suppose you own a business and you are considering raising the price of your product. If the demand curve of your product faces an inelastic demand curve then the higher price will increase your total revenue. A. TRUE B. FALSE A. TRUE This is the definition of elasticity. If you raised your price and the result was a lower revenue then the product would face an elastic demand curve.

30. The market demand curve for a product is a. the horizontal sum of the demand curves for each of the individual brands of the product b. the horizontal sum of the demand curves of each of the individual buyers in the market c. the same as the demand curve facing each of the individual sellers in the market d. the same as the individual demand curve of one of the buyers in the market B. This is how economists determine the market demand curve for a product.

31. Which of the following is not true with regard to consumer surplus? a. consumer surplus reflects the net benefit to consumers from market exchange b. consumer surplus is zero if the good is given away for free c. consumer surplus is used as a measure of economic welfare d. consumer surplus can be used to compare the effects of different market structures and different tax policies B. If a good is given away for free when a person would have been willing to pay something for that good, then consumer surplus is positive.

32. Consumer surplus exists a. when actual market price is greater than the equilibrium market price b. when actual market is less than the equilibrium market price c. because producers charge a price that is greater than the cost of production d. when consumers pay the same price for each unit of a good, because the price reflects only the value of the last unit purchased to the consumer A. This means that there are people paying less for the good than they would be willing to pay

Last slide viewed Price Supply R P T Quantity K Exhibit 19.1

33. Refer to Exhibit 19-1. Consumer surplus at market equilibrium is a. represented by triangle RPT b. represented by triangle PTK c. represented by triangle RTK d. zero D. Consumer surplus at T is zero because, as a whole, at this level the quantity demanded exactly equals the quantity supplied. At prices above P there will be some consumers who were willing to pay a higher price but paid a lower price, thus they experience some consumer surplus.

34. A Medicaid experiment in California showed that a nominal fee of $1 charged for doctors’ visits a. caused beneficiaries to stop going to the doctor altogether b. significantly reduced benefits to those covered by Medicaid without reducing the cost of the program to taxpayers c. reduced the cost of the program to taxpayers without creating a substantial burden for recipients C. Society still benefited from the program because at one dollar there was considerable consumer surplus.

35. The cost of consumption has two components: a. the substitution effect and the income effect b. the law of demand and the law of diminishing marginal utility c. the price effect and the income effect d. the money price and the time price D. Let’s suppose that you want to see a movie and tickets are selling for $5, which you think is a fair price to see the movie. However, when you get to the theatre the line to get in extends all the way around the corner. Now, all of a sudden, the total price to see the movie is more than just the $5 ticket.

36. In most markets, each consumer a. faces the same money price and time price b. faces different money prices and different time prices c. faces the same money price but different time prices d. has the same individual demand curve for the product C. Wal-Mart may offer low prices, but if I have to drive 50 miles to get to the nearest Wal-Mart store, my time price is higher than someone who lives right next to the store.

37. Your willingness to pay additional dollars for time-saving goods depends primarily on a. the opportunity cost of your time b. your wealth and property c. your social status d. the distance between your home and your workplace A. Will you do home repairs yourself or hire someone to do the repairs? Assuming that the task is a simple one you can do (but time consuming), your decision will be partly based on how much money will you be giving up to do the repairs yourself because you cannot be making money and doing the repairs at the same time.

38. Which of the following people would probably be least likely to search the newspaper ads for bargains and clip store coupons? a. a retired person b. an unemployed person c. a waitress earning $5 an hour d. an attorney earning $100 an hour D. The attorney’s opportunity cost of spending time clipping coupons is very high compared to someone else who only makes $7 an hour.

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