e.
less of both X and Y.
96. As shown in Exhibit 6-3, assume that the price of good X is $2 per unit and the price of good Y is $1
per unit and your budget is $11. If you consume 3 units of good X and 4 units of good Y and maximize
utility, you should consume:
a.
neither X nor Y.
b.
more of X.
c.
more of Y.
d.
more of both X and Y.
e.
less of both X and Y.
97. As shown in Exhibit 6-3, assume that the price of good X is $1 per unit and the price of good Y is $2
per unit and your budget is $13. If you consume 4 units of good X and 2 units of good Y and maximize
utility, you should consume:
a.
neither X nor Y.
b.
more of X and less of Y.
c.
more of Y.
d.
more of both X and Y.
e.
less of both X and Y.
98. According to the utility model of consumer demand, the demand curve is downward-sloping because
of the law of:
a.
diminishing marginal utility.
c.
consumer equilibrium.
b.
diminishing consumer equilibrium.
d.
diminishing utility maximization.
Exhibit 6-4 Total utility for multiplex tickets, video rentals, and popcorn
Total Utility
from Multiplex Tickets
Total Utility
from Video Rentals
Total Utility
from Popcorn
1 movie (30 utils)
1 video (14 utils)
1 bag (8 utils)
2 movies (54 utils)
2 videos (24 utils)
2 bags (13 utils)
3 movies (72 utils)
3 videos (30 utils)
3 bags (15 utils)
4 movies (84 utils)
4 videos (32 utils)
4 bags (16 utils)
99. In Exhibit 6-4, assume the 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.
c.
10 utils.
b.
8 utils.
d.
30 utils.
100. In Exhibit 6-4, 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. 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 videos, and no bags of popcorn.
101. In Exhibit 6-4, 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 the consumer equilibrium, what is the marginal utility per dollar for each of
the three goods?
a.
5 utils per dollar.
c.
13 utils per dollar.
b.
9 utils per dollar.
d.
22 utils per dollar.
102. Suppose a consumer wants to obtain the highest possible satisfaction from goods purchased on a fixed
budget. Which of the following must be equal for all goods?
a.
Total utility.
c.
Average utility.
b.
Marginal utility.
d.
Marginal utility per dollar.
103. Consider a consumer who spends all income on only two goods: bread and wine. An extra loaf of
bread would give the consumer 10 extra util, while an extra bottle of wine would give the consumer 60
extra utils. Bread costs 50¢ per loaf, and wine costs $6 per bottle. In this situation, the consumer:
a.
could increase utility by buying more bread and less wine.
b.
could increase utility by purchasing more wine and less bread.
c.
has maximized utility and attained consumer equilibrium.
d.
is violating the law of diminishing marginal utility.
104. Suppose a consumer is spending his or her entire budget. In order to obtain the most satisfaction from
his or her purchases, all goods should:
a.
provide the same marginal utility per dollar.
b.
be consumed in equal quantities.
c.
have identical marginal utilities.
d.
give the consumer matching amounts of total utility.
105. Consider a consumer who spends all income on only two goods: pizza and soda. An extra slice of
pizza would give the consumer 60 extra utils, while an extra can of soda would give the consumer 20
extra utils. Pizza costs $3 per slice, and soda costs $1 per can. In this situation, the consumer:
a.
is buying too much pizza and not enough soda.
b.
should purchase more pizza and less soda.
c.
has maximized his or her total utility.
d.
needs to equate the marginal utilities for pizza and soda.
106. Which of the following statements is true?
a.
Total utility is the extra satisfaction from the consumption of a good or service.
b.
Marginal utility is the amount of satisfaction received from all the units of a good or
service consumed.
c.
The law of diminishing marginal utility states that as more of a good or service is
consumed total utility decreases.
d.
Consumer equilibrium is a combination of goods and services consumed which maximizes
total utility from a given budget.
107. If a consumer wishes to maximize satisfaction given limited income and MUx/Px < MUy/Py then the
consumer should:
a.
do nothing because she/he is in equilibrium.
b.
buy more of X and less of Y.
c.
buy more of Y and less of X.
d.
buy more of both X and Y.
e.
buy less of both X and Y.
108. Consumer equilibrium exists when:
a.
the marginal utility of each good and service consumed is equal.
b.
the total utility of each good and service consumed is equal.
c.
the marginal utility of each good and service consumed equals its price.
d.
ratio of marginal utility to price for all goods and services is equal.
2
18
17
13
3
15
14
9
4
12
11
7
5
10
8
5
109. Refer to Exhibit 6-5. Each dessert is priced at $1. If you had $10 to spend on desserts, which of the
following combinations of goods would you buy?
a.
5 units of brownies, 4 units of ice cream, and 1 unit of pie.
b.
4 units of brownies, 5 units of ice cream, and 1 unit of pie.
c.
4 units of brownies, 4 units of ice cream, and 2 units of pie.
d.
4 units of brownies, 3 units of ice cream, and 3 units of pie.
e.
3 units of brownies, 4 units of ice cream, and 3 units of pie.
Exhibit 6-6 Marginal utility for data for clothes and amusement
Quantity
Amusement
1
20
2
18
3
15
4
12
5
10
110. Refer to Exhibit 6-6. Clothes and amusements are priced at $10 each. The marginal utility per dollar
for the first unit of amusement is:
a.
0.5.
b.
1.5.
c.
2.0.
d.
5.0.
e.
20.0.
111. Refer to Exhibit 6-6. Clothes and amusements are priced at $10 each. If you had a budget of $50,
which of the following combinations of goods would you buy?
a.
4 units of clothes and 1 unit of amusement.
b.
3 units of clothes and 2 units of amusement.
c.
2 units of clothes and 3 units of amusement.
d.
1 unit of clothes and 4 units of amusement.
e.
5 units of clothes and 5 units of amusement.
112. Refer to Exhibit 6-6. Your budget is $50. The price of amusement goods is $10. If the price of clothes
falls to $4, which of the following statements is true?
a.
The marginal-utility-to-price ratio for clothes will decrease.
b.
The marginal-utility-to-price ratio for clothes will increase.
c.
The quantity demanded of clothes will decrease.
d.
Both b and c are true.
e.
The quantity demanded for amusement goods will remain constant.
113. The MU/P equalization principle means consumers will exhaust their expenditure budget so that, in the
end, the MU/P ratio is:
a.
zero for each good.
b.
higher for goods the consumer wants the most.
c.
maximized for the goods the consumer wants the most.
d.
higher than TU/P.
e.
the same for each good.
114. Greg spends his entire budget on two goods: he plays video games at the mall arcade and he buys
pizza. He discovers that his MU/P of video games is lower than his MU/P of pizza. From this, we
know that he would be:
a.
happier eating less pizza and playing fewer video games.
b.
happier eating less pizza and playing more video games.
c.
happier eating more pizza and playing fewer video games.
d.
indifferent to which selection he makes.
e.
as happy as possible, since he is already maximizing total utility.
115. If Allison’s marginal utility of her 100th dollar of income is greater than Brad’s marginal utility of his
10th dollar, then we can conclude:
a.
money means more to Allison.
b.
money means more to Brad.
c.
Brad is richer than Allison.
d.
Allison is richer than Brad.
e.
nothing, since we can’t make interpersonal utility comparisons.
116. If I buy 3 cups of coffee, paying $1 for each cup, and I would have been willing to pay up to $3 for the
first cup, up to $2 for the second cup, and up to $1 for the third cup, then my consumer surplus is:
a.
$6.
b.
$5.
c.
$3.
d.
$2.
e.
$1.
117. Carla is spending all her income on only two goods: apples and bananas. The price of an apple is $2
and the price of a banana is $1. If Carla’s marginal utility of an apple is 4 and her marginal utility of a
banana is 3, she should consume:
a.
more apples and fewer bananas to maximize total utility.
b.
more bananas and fewer apples to maximize total utility.
c.
more apples and more bananas to maximize total utility.
d.
fewer apples and fewer bananas to maximize total utility.
e.
her current amounts of apples and bananas to maximize total utility.
118. Suppose that Fernando allocates his lunch money to pizza and Coke. A Coke costs $1 and a slice of
pizza costs $1.50. The marginal utility of the last slice of pizza Fernando ate today was 30, and the
marginal utility of his last Coke was 25. Fernando spent all of his lunch money. From this information,
we can conclude that:
a.
Fernando allocated his money in a way that maximized his total utility.
b.
Fernando’s total utility would have been higher if he had purchased more Coke and less
pizza.
c.
Fernando’s total utility would have been higher if he had purchased more pizza and less
Coke.
d.
Fernando could have increased his total utility by purchasing more Coke but the same
quantity of pizza.
e.
Fernando could have increased his total utility by purchasing more pizza but the same
quantity of Coke.
Exhibit 6-7 Marginal utility for sandwiches and sodas
Quantity
1
2
3
4
5
119. Refer to Exhibit 6-7. If the price of a sandwich is $1 and the price of a soda is $1, Marian should spend
her first dollar on a ____ and her second dollar on a ____.
a.
sandwich; soda
b.
sandwich; sandwich
c.
soda; sandwich
d.
soda; soda
e.
neither good should be purchased since she has diminishing marginal utility
120. Refer to Exhibit 6-7. Diminishing marginal utility for sandwiches sets in after the ____ sandwich.
a.
first
b.
second
c.
third
d.
fourth
e.
fifth
121. Refer to Exhibit 6-7. If price of a sandwich is $1, the price of a soda is $1, and income is $5, Marian
should buy ____ sandwiches and ____ sodas.
a.
five; zero
b.
four; one
c.
three; two
d.
two; two
e.
one; four
122. If a consumer is choosing the optimal combinations of two goods X and Y, and then the price of good
Y decreases, this causes:
a.
MU/P of good X to increase, so the consumer now must buy more X to find a new optimal
combination.
b.
demand for good X to increase.
c.
MU/P of good Y to increase, so the consumer now must buy more Y to find a new optimal
combination.
d.
MU/P of good Y to decrease, so the consumer now must buy more Y to find a new
optimal combination.
e.
the demand for good X and good Y will not change.
123. Eric is maximizing his total utility through his choices of two goods: clothes and food. His marginal
utility of clothes is 60 and his marginal utility of food is 12. The price of clothes is $20. What must be
the price of food?
a.
12.
b.
6.
c.
4.
d.
1.
e.
0.
124. Georgia has a MU/P of 10 for tennis lessons, a MU/P of 6 for sewing lessons, and a U/P of 2 for
cooking lessons. In order to maximize utility, she should:
a.
take more cooking lessons.
b.
take more sewing lessons.
c.
take more tennis lessons.
d.
stay with her current choices.
e.
take fewer lessons of each choice.
Exhibit 6-8 Bea’s total utility of 3-minute telephone calls
Quantity of
3-Minute Calls
Total Utility of
Telephone Calls
0
0
1
15
2
28
3
38
4
45
5
50
6
48
125. Refer to Exhibit 6-8. Bea’s marginal utility of her second telephone call is:
a.
28.
b.
15.
c.
13.
d.
10.
e.
1.
126. Refer to Exhibit 6-8. Diminishing returns set in after which telephone call?
a.
The first.
b.
The second.
c.
The third.
d.
The fifth.
e.
The sixth.
127. If a consumer allocates income between goods A and B, total utility is maximized when:
a.
the marginal utility of A = the marginal utility of B.
b.
the marginal utility of A = the marginal utility of B = 0.
c.
the price of A = price of B.
d.
marginal utility of A / price of A = marginal utility of B / price of B = 0.
e.
marginal utility of A / price of A = marginal utility of B / price of B.
128. If good A has a marginal utility of 30 and a price of $5, and good B has a marginal utility of 10 and a
price of $2, then:
a.
good A is a better buy than good B.
b.
good B is a better buy than good A.
c.
goods A and B are of equal value to this consumer.
d.
neither good A nor B is worth the money.
e.
goods A and B should both be purchased.
129. If a consumer is spending all of his/her income in a manner where MUa / Pa = MUb / Pb, then the
consumer:
a.
should increase the consumption of A and decrease the consumption of B.
b.
is maximizing his/her utility.
c.
should increase the consumption of B and decrease the consumption of A.
d.
should increase the consumption of both A and B.
e.
should decrease the purchases of both A and B.
130. If a consumer is spending all of his/her income in a manner where MUa / Pa is greater than MUb / Pb,
then the consumer:
a.
is maximizing his/her utility.
b.
should increase his/her purchases of B and decrease the purchases of A.
c.
should spend more money on both goods.
d.
should spend less money on both goods.
e.
should increase the purchases of A and decrease the purchases of B.
131. Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MUa
= 15 and MUb = 75, and the Pa = $3 and the Pb = $15, then the consumer:
a.
is maximizing his/her utility.
b.
should increase his/her purchases of B and decrease the purchases of A.
c.
should spend more money on both goods.
d.
should spend less money on both goods.
e.
should increase the purchases of A and decrease the purchases of B.
132. Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MUa
= 15 and MUb = 80, and the Pa = $5 and the Pb = $20. Then the consumer:
a.
is maximizing his/her utility.
b.
should increase his/her purchases of B and decrease the purchases of A.
c.
should spend more money on both goods.
d.
should spend less money on both goods.
e.
should increase the purchases of A and decrease the purchases of B.
133. If a consumer is maximizing his/her utility for a given income, the:
a.
marginal utility for every good purchased would be the same.
b.
marginal utility per dollar spent for all goods would be the same.
c.
marginal utility per dollar for all goods would be at a maximum.
d.
total expenditure on each good would be the same.
e.
number of units of each good consumed would be the same.
134. A utility-maximizing consumer is currently spending all of his/her income on two products, A and B.
The MU of the last unit of A consumed is 50, the price of A is $25, and the price of B is $10. The MU
of the last unit of B consumed is:
a.
50.
b.
5.
c.
2.
d.
20.
e.
cannot determine from this limited information
135. If a consumer is indifferent between 5 units of A and 8 units of B, then the consumer would:
a.
also be indifferent between 4 units of A and 9 units of B.
b.
also be indifferent between 8 units of A and 5 units of B.
c.
prefer 6 units of A and 8 units of B.
d.
give up 1 unit of A if he/she could acquire 2 units of B.
e.
not trade product A in exchange for any units of product B.
136. Suppose you have spent your entire budget and for all the goods you purchase the marginal utilities per
dollar spent are identical. Which of the following is true?
a.
You are being irrational.
b.
You can increase your utility by reallocating your income.
c.
You will reduce your utility if you allocate income in any other way.
d.
You are minimizing your marginal utility.
e.
You can avoid diminishing marginal utility.
137. When the price of a good falls, consumers may increase the quantity consumed because they have
greater total purchasing power. This statement describes the:
a.
substitution effect.
c.
consumer equilibrium effect.
b.
income effect.
d.
price effect.
138. The income effect refers to a change in:
a.
income because of changes in the CPI.
b.
the quantity demanded of a good because of a change in the buyer’s real income.
c.
the quantity demanded of a good because of a change in the buyer’s money income.
d.
none of these.
139. Assume the price of pizza decreases. As a result, your real income increases and you increase the
quantity of pizza purchased each month. This is an example of the:
a.
substitution effect.
c.
revenue effect.
b.
income effect.
d.
consumer price effect.
140. Assume the price of Coca-Cola increases. As a result, your real income decreases and you decrease the
quantity of Coca-Cola purchased each month. This is an example of the:
a.
income effect.
c.
revenue effect.
b.
consumer price effect.
d.
substitution effect.
141. According to the income effect, when the price of automobiles rises, people buy fewer automobiles
because:
a.
they substitute other forms of transportation for driving.
b.
the nominal amount of their paychecks is smaller.
c.
the purchasing power of their income is reduced.
d.
their demand for automobiles is very elastic.
142. Assume the price of good X increases. As a result, your real income decreases and you decrease the
quantity of good X purchased each month. This is an example of the:
a.
income effect.
b.
consumer price effect.
c.
revenue effect.
d.
substitution effect.
e.
all of these.
143. JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a
key ingredient used to produce cola, falls. According to the substitution effect, which of the following
is most likely to occur?
a.
JoAnn will purchase less cola and more sparkling water.
b.
JoAnn will purchase more cola and less sparkling water.
c.
JoAnn will purchase more of all goods due to her higher real income.
d.
JoAnn’s demand curve will decrease (shift in), causing her to purchase less cola.
144. Which of the following is the best example of the substitution effect?
a.
Joe buys fewer apples and more oranges as the result of an increase in the price of apples.
b.
Joe buys more apples when his income increases.
c.
Joe buys an apple slicer when the price of apples decreases.
d.
Joe buys less sugar as the result of an increase in price of apples.
145. An increase in the consumption of a good resulting from a reduction in price that makes the good
cheaper in relation to other goods is called the:
a.
substitution effect.
c.
real balance effect.
b.
income effect.
d.
inelasticity effect.
146. Which of the following would cause a consumer to purchase less of a good when the price of the good
rises?
a.
The income effect
c.
Both a and b
b.
The substitution effect
d.
Neither a nor b
147. When the price of a good falls, consumers buy more of the good because it is cheaper relative to
competing goods. This statement describes the:
a.
consumer equilibrium effect.
c.
income effect.
b.
price effect.
d.
substitution effect.
148. According to the substitution effect, a decrease in the price of a product leads to an increase in the
quantity demanded because buyers:
a.
purchase more complementary goods.
c.
purchase fewer substitute goods.
b.
purchase more substitute goods.
d.
have more real income.
149. Assume the price of Advil increases. As a result, you decrease the quantity of Advil purchased each
month and purchase more Tylenol. This is an example of the:
a.
income effect.
c.
consumption effect.
b.
utility effect.
d.
substitution effect.
150. Assume the price of Nikes decreases. As a result, consumers increase the quantity of Nikes purchased
each year and purchase fewer Reeboks. This is an example of the:
a.
substitution effect.
c.
utility effect.
b.
income effect.
d.
consumption effect.
151. When Pepsi becomes more expensive relative to other beverages, people will purchase less Pepsi. This
observation is known as the:
a.
diamond-water paradox.
c.
substitution effect.
b.
law of diminishing marginal utility.
d.
income effect.
152. Assume the price of Levi jeans increases. As a result, you decrease the quantity of Levi jeans
purchased each month and purchase more Lee jeans. This is an example of the:
a.
consumption effect.
c.
income effect.
b.
utility effect.
d.
substitution effect.
153. JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a
key ingredient used to produce cola, falls. According to the income effect, which of the following is
most likely to occur?
a.
JoAnn will purchase less cola and more sparkling water.
b.
JoAnn will purchase more cola and less sparkling water.
c.
JoAnn will purchase more of most goods due to her higher real income.
d.
JoAnn’s demand curve will decrease (shift in), causing her to purchase less cola.
154. When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect is
called the:
a.
income effect.
c.
elasticity effect.
b.
substitution effect.
d.
monetary effect.
155. When the price of a normal good falls, then:
a.
both the income and substitution effects combine to cause the quantity demanded to
increase.
b.
the substitution effect will cause people to buy more because the good is relatively less
expensive.
c.
the income effect will cause people to buy more because of the increased purchasing
power associated with the lower price.
d.
all of these.
TRUE/FALSE
1. The utility of a good measures its usefulness.
2. Utils are used by economists to measure the satisfaction a person obtains from consuming a good.
3. The utility of a good measures its satisfaction rather than its usefulness.
4. The total utility of a good is equal to the marginal utility of the last unit consumed.
5. As we move down a person’s demand curve, marginal utility declines.
6. As an individual consumes more of a good, the marginal utility of that good declines.
7. If total utility increases from 10 to 15 for the second unit of a good consumed, the marginal utility of
the second unit is 25.
8. Water is plentiful in most of the world, so its price and total utility are low.
9. If total utility increases from 10 to 15 for the second unit of a good consumed, the marginal utility of
the second unit is 5.
10. Marginal utility measures the increase in total utility you derive from consuming one more unit of a
good.
11. Marginal utility is always a positive number.
12. A rational consumer will always shift a dollar from a good whose marginal-utility-to-price ratio is
lower to one whose marginal-utility-to–price is higher.
13. The marginal utility curve is downward sloping.
14. Typically, marginal utility is higher when a person consumes less of a good.
15. Typically, total utility derived decreases as more of a good is consumed.
16. The law of diminishing marginal utility states that marginal utility must diminish after the first unit of
consumption of every good or service.
17. The law of diminishing marginal utility implies that the marginal utility of my tenth pistachio nut is
less than the marginal utility of my third pistachio nut, other things constant.
18. The law of diminishing marginal utility implies that the marginal utility of my fifth hot dog is less than
the marginal utility of my second soda, other things constant.
19. The law of diminishing marginal utility states that total utility increases by smaller and smaller
increments as more of a good is consumed.
20. Marginal utility tends to fall as a person increases his or her consumption.
21. Consumer equilibrium requires that the marginal utility per dollar spent be the same for all goods.
22. Consuming one more of a good increases its marginal-utility-to-price ratio, and consuming one less of
the other good lowers its marginal-utility-to-price ratio.
23. If the price of a good decreases, the resulting increase in the quantity purchased decreases the marginal
utility of the good.
24. Consumer equilibrium requires that the marginal utility per dollar spent be unequal for all goods.
25. A utility-maximizing consumer equalizes marginal utilities per dollar spent across all goods.
26. The income effect is the concept that changes in consumption of a good result from changes in
purchasing power.
27. According to the income effect, lower prices give people more purchasing power with which to
increase the quantity demanded of goods.
28. The income effect is the concept that changes in consumption of a good result from changes in
government spending.
29. The substitution effect is the concept that changes in consumption of a good result from changes in the
relative price of a competing good.
30. Changes in relative prices create substitution effects.
31. The substitution effect is the concept that changes in consumption of a good result from changes in the
relative price of a jointly consumed good.
ESSAY
1. Use the idea of interpersonal comparisons of utility to argue for a progressive income tax system
where people in higher income brackets are charged higher tax rates on their extra income.
2. Michael spends $10 a month on Pez dispensers and Superman action figures. His marginal-utility-to–
price ratio for the Pez dispensers is 40, while his marginal-utility-to-price ratio for Superman action
figures is 47. Explain why Michael is not maximizing his utility and how can he change his behavior
to increase his utility?
3. Lori plans to buy a convertible this weekend. Her two favorite cars are the BMW, which would give
her 160,000 utils of satisfaction, and the Mitsubishi Eclipse Spyder, which would give her only
124,000 utils of satisfaction. The BMW that she wants sells for $37,220, while the Mitsubishi sells for
$28,200. She can afford either car.
a.
Which car will she buy in order to maximize her utility?
b.
To what price will her second choice have to fall to get her to make her first choice?
4. Justin Field just stopped at the Exxon station on the way to campus and bought four Butterfinger candy
bars, two 20-ounce bottles of grape-watermelon Snapple, and 10 gallons of gas. His marginal-utility-
to-price ratios are 3.21 for the Butterfingers, 4.8 for the Snapples, and 5.7 for the gas. Explain why this
set of purchases did not maximize Ryan’s utility and how could he have increased his utility.
5. Show, using utility theory, why a consumer who is initially maximizing her utility will alter her
consumption pattern in response to a change in the price of a good.