Set 8

Economists use the term utility to mean
1. the value of a product before it has been advertised.
2. the satisfaction a consumer obtains from a good or service.
3. any characteristic of a good or service which cannot be measured.
4. the contribution a good or service makes to social welfare.
Economists use the term marginal utility to mean
1. additional satisfaction gained divided by additional cost of the last unit.
2. additional satisfaction gained by the consumption of one more unit of a good.
3. total satisfaction gained when consuming a given number of units.
4. the process of comparing marginal units of all goods which could be purchased.
The law of diminishing marginal utility states that
1. total satisfaction will decrease as more units of the good are consumed.
2. the satisfaction derived from each additional unit of a good consumed will decrease.
3. total utility will become negative.
4. Both the first and third option.
By total consumer surplus economists mean (in P-Q space)
1. The area of t he triangle formed by the demand curve, the price axis and the
  equilibrium price line.
2. the area between the average revenue and marginal revenue curves.
3. C. the difference between the maximum price the consumer is willing to pay for a good
  (vertical-intercept of demand curve) and the minimum price the producer is willing to sell at (vertical intercept of supply curve).
4. A and C.
The equation for Rida’s demand curve for bouquets of flowers is P = 40 - 2Q. If the price of a bouquet is E18, her consumer surplus will be
1. E198
2. E121.
3. E11.
4. E242.
The price of an ice cream cone is $1.50 and you buy three ice cream cones per week. If the price of an ice cream cone falls to $1.25 and you still buy three ice cream cones per week, which of the following is (are) correct?
1. The marginal utility of the fourth ice cream cone per week must be worth less than $1.25 to you.
2. The total utility of the four ice cream cones per week must be worth less than $5.75 (=3*$1.50 +$1.25) to you.
3. The total utility of the four ice cream cones per week must be less than $5.00 (3*$1.25+$1.25) to you.
4. None of the above.
Economists have used the idea of diminishing marginal utility to explain why
1. demand curves slope downwards.
2. demand curves become flatter at lower prices.
3. demand curves are inelastic.
4. Both the first and second option
A consumer will buy more units of a good if the value of the good's
1. total utility is greater than price.
2. marginal utility is less than price.
3. marginal utility is greater than price.
4. total utility is less than price.
The diamond-water paradox can be explained by suggesting that the price of a product is determined by
1. consumer incomes.
2. its marginal utility.
3. consumer surplus.
4. diminishing marginal utility.
A utility-maximising consumer changes her spending on goods X and Y until
1. MUx = MUy
2. Px (MUx) = Py(MUy)
3. TUx/Px = TUy/Py
4. MUx (Py) = MUy (Px)
The MUx/MUy ratio is 10 and the Px/Py ratio is 8, so the consumer should buy
1. less X and more Y.
2. more X and more Y.
3. more X and less Y.
4. lkess X and less Y.
Economists define an indifference curve as the set of points
1. at which the consumer is in equilibrium as the consumer's income changes.
2. which yield the same marginal utility.
3. which yield the same total utility.
4. At which the consumer is in equilibrium as prices change.
Which of the following is a property of an indifference curve?
1. the marginal rate of substitution is constant as you move along an indifference curve.
2. marginal utility is constant as you move along an indifference curve.
3. it is convex to the origin.
4. total utility is greatest where the 45 degree line cuts the indifference curve.
The limits imposed on household choices by income, wealth, and product prices are captured by the
1. budget constraint.
2. choice set.
3. assumption of perfect knowledge.
4. preference set.
Waris has E5000 a week to spend on units of food and clothing. The unit price of food is E100 and the unit price of clothing is E250. Which of the following pairs of food and clothing are in the Waris's choice set?
1. 50 units of clothing and 50 units of food.
2. 20 units of clothing and 50 units of food.
3. 10 units of clothing and 25 units of food.
4. 0 units of clothing and 50 units of food.
If a household's money income is doubled,
1. the budget constraint will shift in and parallel to the old one.
2. the budget constraint is not affected.
3. the budget constraint will swivel outward at the Y-intercept.
4. the budget constraint will shift out parallel to the old one .
The curve that is traced out when we keep indifference curves constant and move the budget line parallel to its original position is
1. the income-consumption curve.
2. the Engel curve.
3. the demand curve.
4. the income-demand curve
The curve that is traced out when we keep indifference curves constant and swivel the budget line at the Y-intercept to reflect a change the price of good X, is
1. the Engel curve.
2. the demand curve for X.
3. the substitution curve.
4. the price-consumption curve for X.
The curve that is traced out when we keep indifference curves and the total effective budget constant and only change the relative price of good X (i.e. slope of budget line) is:
1. the Engel curve.
2. the demand curve for X.
3. the substitution curve.
4. the price-consumption curve for X.
If the income and substitution effects of a price increase work in the same direction the good whose price has changed is a
1. inferior good.
2. Giffen good.
3. normal good.
4. superior good.
If the price (or budget) line has a slope of -2 and it cuts indifference curve ICa at points P and R (given that the slope of ICa at point P is -4 and at point R is -1), the consumer can maximize utility by:
1. choosing consumption bundle P
2. choosing consumption bundle R
3. moving to a higher indifference curve
4. we don’t enough information to answer the question
Indifference curves cannot
1. be L shaped
2. be straight lines
3. intersect
4. all of the above
The main problem with marginal utility analysis is:
1. that it cannot solve problems involving more than two goods
2. its cardinal measurement of utility
3. its inability to explain the diamond-water paradox
4. all of the above
This question is about the demand for washing machines under uncertainty about whether the machine will turn out to be a good buy or a bad one. The odds ratio (OR) is defined as the ratio of the probability of the machine being good to the probability of the machine being bad. Let’s say the OR is < 1, and the consumer does not buy the machine. What can you conclude about the consumer ’s attitude towards risk?
1. She is risk averse
2. She is risk neutral
3. She is risk loving
4. We do not have enough information to answer the question
The concept of diminishing marginal utility of income (DMUy) helps explain:
1. why a marginal dollar might have higher utility for a pauper than a millionaire
2. why the total utility curve (in Utility-Income space) is convex
3. why the average consumer is risk-averse
4. all of the above
“Moral hazard” and “adverse selection” are problems related to asymmetric information, that arise
1. in ex-ante and ex-post contexts, respectively
2. in ex-post and ex-ante contexts, respectively
3. in ex-ante contexts
4. in ex-post contexts

Set 8

Quiz