Practice Question ECON 203. Intermediate Microeconomics. Utility and Choice

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1 Practice Question ECON 203 Intermediate Microeconomics Utility and Choice 1. As long as the principle of diminishing marginal utility is operating, any increased consumption of a good a. lowers total utility. b. produces negative total utility. c. lowers marginal utility and, therefore, total utility. d. lowers marginal utility, but may raise total utility. 2. Among all the combinations of goods attainable by a consumer, the one that maximizes total utility is the one that a. maximizes the marginal utilities per dollar of each good. b. maximizes the marginal utilities per pound (or other physical unit) of each good. c. equates the marginal utilities per dollar of each good. d. equates the marginal utilities per pound (or other physical unit) of each good. 3. A utility contour (or indifference curve) shows all the alternative combinations of two consumption goods that a. can be produced with a given set of resources and technology. b. yield the same total of utility. c. can be purchased with a given budget at given prices. d. equate the marginal utilities of these goods and, therefore, make the consumer indifferent between them. When answering questions 4-6, consider the accompanying graph of a person s consumptionindifference curves:

2 4. This graph indicates that the consumer a. at A is indifferent between 0a of apples and 0b of butter b. at A is consuming either 0a of apples or 0b of butter. c. is indifferent between 0a of apples plus 0b of butter on the one hand and 0c of apples plus 0d of butter on the other. d. is correctly described by all of the above. 5. This graph also indicates that the consumer prefers combination a. A to B. b. C to B. c. B to D. d. E to F. 6. This graph also shows the consumer s marginal rate of substitution in the AB range to be a. 0a of apples for 0d of butter. b. 0a of apples for 0b of butter. c. 0c of apples for 0d of butter. d. ac of apples for bd of butter. 7.In the presence of declining marginal rates of substitution, consumers who again and again sacrifice a unit of one good cannot remain on their original consumption-indifference curves

3 (that is, they cannot maintain their original levels of welfare) unless they receive as compensation a. again and again equal units of another good. b. ever smaller units of another good. c. ever larger units of another good. d. either (a), (b), or (c), depending on the tastes of the consumer involved. 8. Which of the following is a correct representation of the budget constraint in a world with only food and f s shelter, where M = income, P = price of food, P = shelter price, S = the quantity of shelter, and F = the quantity of food. f s a. M = P (S) + P (F) s f s b. F = M/P - P /P (S) s s f c. S = M/P - P /P (F) s f s d. F = M(P ) + P /P (S) e. None of the above is correct. 9. All points on or below a budget constraint a. are attainable with the given income. b. are equally desirable. c. represent market basket combinations that exhaust the income available. d. are described, in part, by a, b, and c above. 10. For the graph of the budget line shown below, which statement is true? a. The vertical intercept represents all the money available for purchases. b. The distance AB shows the amount of money spent on OD amount of food. c. The distance AO shows the amount of money left over after purchasing OD amount of food. d. All of the above are true. e. None of the above is true. 11. If a man prefers Budweiser to Schlitz and Schlitz to Pabst, and if he is indifferent between Budweiser and Miller, he must a. prefer Miller to Pabst. b. prefer Schlitz to Miller. c. be indifferent between Schlitz and Miller. d. be indifferent between Budweiser and Pabst. e. be indifferent between Pabst and Miller. 12 An indifference curve is. a. a collection of market baskets that are equally desirable to the consumer. b. a collection of market baskets that the consumer can buy. c. a curve whose elasticity is constant for every price.

4 d. a curve which passes through the origin and includes all of the market baskets that the consumer regards as being equivalent. 13. Which of the following is not an assumption of ordinal utility analysis? a. Consumers are consistent in their preference. b. Consumers can measure the total utility received from any given basket of good. c. Consumers are non-satiated with respect to the goods they confront. d. All are necessary. e. None of the above. 14. As long as all prices remain constant, an increase in money income results in a. an increase in the slope of the budget line. b. a decrease in the slope of the budget line. c. an increase in the intercept of the budget line. d. a decrease in the intercept of the budget line. e. both (a) and (c). 15. If the prices of both goods increase by the same percent, the budget line will a. shift parallel to the left. b. shift parallel to the right. c. pivot about the x axis. d. pivot about the y axis. e. none of the above. Answers to questions: 1.d 2.c 3.b 4.c 5.d 6.d 7.c 8.e 9.a 10.d 11.a 12.a 13.b 14.c 15.a

5 Individual demand 1. Patty buys only two brands of golf balls: Jack Nickless and Olin 1. The more of any one she buys, the lower the marginal utility of that ball. In spending all her income, her marginal utility of a Nickless is 5and her marginal utility of an Olin 1 is 10. The price of a Nickless ball is $2 and the price of an Olin 1 is $3. Given this information, which of the statements is true? 1. In equilibrium, patty must give up three Olin 1 balls for two Nickless balls. 2. Patty would be willing to give up two Olin 1 : balls for one Nickless ball. 3. Patty could increase her satisfaction by trading Nickless for Olin 1. a. 1 only. b. 2 only. c. 3 only. d. 1 and 2 only. e. 1 and 3 only. 2 Bo Dacious buys 10 classical albums and 15 tubes of suntan lotion along with quantities of other goods. Suppose that the price of records rises by 90 cents per album and the price of suntan lotion falls by 60 cents per tube. Other prices and Bo s income remain unchanged. What will Bo do? a. Buy more albums and less suntan lotion. b. Buy fewer albums and more suntan lotion. c. Buy the same number of albums and more suntan lotion. d. Remain where she is since her present position is the best attainable one after prices change. 3. Suppose an individual spends all his income on only two goods, good X and good Y. Moreover, suppose that you were asked to derive his price consumption curve for good Y. Which of the following would be allowed to vary? a. Money income. b. The tastes of the consumer. c. The price of good X. d. The price good Y. 4. The compensated demand curve is the demand curve that a. shows only the income effect. b. shows only the substitution effect. c. shows both the income and substitution effects. d. shows the Giffen good demand curve. e. none of the above.

6 5. The substitution effect refers to a. the change in quantity demanded when the price of a substitute changes. b. the change in quantity demanded resulting from a change in total satisfaction, holding relative prices constant. c. the change in quantity demanded resulting from a change in relative prices, holding the level of satisfaction constant. d. the percentage change in quantity demanded resulting from a one percent change in all prices. e. a movement from one indifference curve to another. 6. The income effect of a price change a. is always positive. b. is always negative. c. may be positive or negative. d. is associated with a change in nominal income. e. is caused by changes in consumer tastes. 7. If a good is normal, then the demand curve for that good must be a. downward sloping. b. upward sloping. c. perfectly elastic. d. completely inelastic. e. either (a) or (b); whether it is one or the other depends on the relative magnitudes of the income and substitution effects. 8. The substitution effect of a price decrease for a good with a normal indifference curve pattern a. is always inversely related to the price change. b. measures the change in consumption of the good that is due to the consumer s feeling of being richer. c. is measured by the horizontal distance between the original and the new indifference curves. d. Is sufficient information to plot an ordinary demand curve for the commodity being considered. 9. The income effect a. always makes a consumer buy more of a good with a lowered price, all else being equal (because lowered price implies higher real income). b. always makes a consumer buy less of a good with an increased price, all else being equal (because increased price implies lower real income). c. is correctly describe by (a) and (b). d. is correctly described by neither (a) nor (b).

7 10. When the substitution effect of a lowered price is counteracted by the income effect, the good in question is a. an inferior good. b. a substitute good. c. an independent good. d. a normal good. 11. If the individual receives $5 per hour and is in equilibrium at point E, his or her income at this equilibrium point must be a. $40. b. $55. c. $65. d. $80. e. indeterminate. 12. In moving from point E to point G, one would conclude that a. leisure is normal and the supply curve is upward sloping. b. leisure is inferior and the supply curve is backward bending. c. leisure is neither normal nor inferior and the supply curve is backward bending. d. leisure is inferior and the supply curve is completely inelastic. e. leisure is neither normal nor inferior and the supply curve is completely inelastic. Answers: 1.c 2.b 3.d 4.b 5.c 6.c 7.a 8.a 9.d 10.a 11.a 12.e

8 Elasticity concepts: 1. In 1991, the price of gasoline fell significantly. At the new lower price, gasoline is a. relatively more price elastic. b. relatively more price inelastic. c. unaffected in terms of elasticity. d. unitarily elastic. e. none of the above. 2. Price elasticity of demand is defined to be a. the change in quantity demanded resulting from a 1 cent change in price. b. the percentage change in price resulting from a 1 unit change in quantity demanded. c. the percentage change in quantity demanded resulting from a 1 percent change in price. d. the maximum amount consumers will pay for 1 percent more of a good. e. the change in the price of a good divided by the resulting change in its quantity demanded. 3. Suppose that the price elasticity of demand for maple syrup has been estimated at -2. If quantity demanded increased by 10 percent, price must have changed by a. 5 percent lower. b. 5 percent higher. c. 10 percent lower. d. 10 percent higher. e. cannot be determined from the given information. 4. Along any straight-line, negatively sloped demand curve, a. the price elasticity and slope vary. b. the price elasticity varies, but the slope remains the same. c. the slope varies, but the price elasticity remains the same. d. the price elasticity and slope remain the same. e. none of the above are necessarily true. 5. Price elasticity at a given price is not affected by a. the price of complements. b. the price of substitutes. c. the consumer s income. d. a change in tastes. e. a change in supply.

9 6. The arc elasticity formula is used to estimate elasticity when a. the product is thought to be inelastic. b. the product is thought to be elastic. c. the demand function is known. d. there are two observations of price and quantity. e. none of the above. 7. At your favorite watering spot, happy hour prices are less than normal prices for all drinks except wine. No discount prices are offered for wine. You can conclude that a. wine drinkers may be price elastic. b. wine is a substitute and thus sales will rise without a price reduction. c. wine drinkers may be price inelastic. d. none of the above could be correct. 8. The price elasticity of demand is the same thing as the negative of the a. slope. b. reciprocal of slope. c. the first derivative of the demand function. d. reciprocal of slope times the ratio of price to quantity. e. all of the above. 9. An elasticity coefficient of -1 means that a. the demand curve is perfectly inelastic. b. the demand curve is perfectly elastic. c. the relative changes in price and quantity are equal. d. expenditures on the good would increase if prices were reduced. e. expenditures on the good would decrease if prices were reduced. 10. The most important determinant of price elasticity is a. the slope of the demand curve. b. the availability of substitutes. c. the price of other goods. d. the income of the consumer. e. the price of complements. 11. If consumers spend $15 million a month on CDs, regardless of whether the price they pay goes up or down, that implies that their price elasticity of demand for CDs is a. 0. b. 1. c. infinite. d. 15. e. cannot be determined.

10 12. The price elasticity of demand will increase with the length of the period to which the demand curve pertains because a. consumers incomes will increase. b. the demand curve will shift outward. c. all prices will increase over time. d. consumers will be better able to find substitutes. e. firms will be better able to produce the good for less. 1.b 2.C 3.a 4.b 5.e 6.d 7.c 8.d 9.c 10.b 11.b 12.D

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