Question 1

If there is a change in price of the cereal brand and no change in budget, there will be a movement up its ray.

Accepted Answer

A) True 
 B)False

Question 2

Total utility will rise whenever marginal utility is positive.

Accepted Answer

A) True 
 B)False

Question 3

Individuals take out insurance because they are

Accepted Answer

A)  irrational. 
B)  risk- averse. 
C)  risk- loving. 
D)  rational. 
A)  irrational. 
B)  risk- averse. 
C)  risk- loving. 
D)  rational.

Question 4

Explain how the terms 'adverse selection' and 'moral hazard' are used in talking about insurance.

Accepted Answer

• Adverse selection occurs when insuranc

Question 5

Which of the following is not a property of an indifference curve?

Accepted Answer

A)  An indifference curve is convex to the origin. 
B)  As you move from one indifference curve to another indifference curve closer to the origin, utility increases. 
C)  The marginal rate of substitution diminishes as you move down the indifference curve. 
D)  The consumer is indifferent between any two points on an indifference curve. 
A)  An indifference curve is convex to the origin. 
B)  As you move from one indifference curve to another indifference curve closer to the origin, utility increases. 
C)  The marginal rate of substitution diminishes as you move down the indifference curve. 
D)  The consumer is indifferent between any two points on an indifference curve.

Question 6

Consider a consumer who only eats brand A cereal. If there is an increase in the consumer's budget, all of which is spent on extra brand A cereal and prices do not change, which of the following will be true?

Accepted Answer

A)  The ray for cereal brand A will pivot towards the vertical axis. 
B)  There will be a movement up along the ray of cereal brand A. 
C)  The ray for cereal brand A will pivot towards the horizontal axis. 
D)  There will be a movement down along the ray of cereal brand A. 
A)  The ray for cereal brand A will pivot towards the vertical axis. 
B)  There will be a movement up along the ray of cereal brand A. 
C)  The ray for cereal brand A will pivot towards the horizontal axis. 
D)  There will be a movement down along the ray of cereal brand A.

Question 7

Adverse selection occurs because of diminishing marginal utility.

Accepted Answer

A) True 
 B)False

Question 8

Assume your demand for a can of soft drink remains constant, but the price increases. Your consumer surplus

Accepted Answer

A)  remains constant. 
B)  may increase or decrease depending on the amount of the price increase. 
C)  increases. 
D)  decreases. 
A)  remains constant. 
B)  may increase or decrease depending on the amount of the price increase. 
C)  increases. 
D)  decreases.

Question 9

The utility of a consumer durable is uncertain because

Accepted Answer

A)  you cannot predict when it will break down or be replaced. 
B)  you may buy the product for one price today, but the seller may lower the price tomorrow. 
C)  you may be unduly influenced by the product's glossy brochure. 
D)  A and C 
A)  you cannot predict when it will break down or be replaced. 
B)  you may buy the product for one price today, but the seller may lower the price tomorrow. 
C)  you may be unduly influenced by the product's glossy brochure. 
D)  A and C

Question 10

Insurance companies can reduce the moral hazard problem with which of the following methods?

Accepted Answer

A)  Offering a no claims bonus 
B)  Making the insured pay the first £50 of any insurance claim 
C)  Raising the insurance premium 
D)  A and B 
A)  Offering a no claims bonus 
B)  Making the insured pay the first £50 of any insurance claim 
C)  Raising the insurance premium 
D)  A and B

Question 11

As long as indifference curves are convex to the origin, utility maximisation will take place

Accepted Answer

A)  where the budget constraint intersects the indifference curve. 
B)  where the consumer spends all of his income on one good. 
C)  where the consumer spends half of his income on each good. 
D)  at the point at which the indifference curve is just tangent to the budget constraint. 
A)  where the budget constraint intersects the indifference curve. 
B)  where the consumer spends all of his income on one good. 
C)  where the consumer spends half of his income on each good. 
D)  at the point at which the indifference curve is just tangent to the budget constraint.

Question 12

Utility

Accepted Answer

A)  can be used to compare different people's likes and dislikes. 
B)  is the satisfaction yielded by the consumption of a product. 
C)  can be easily measured. 
D)  all of the above 
A)  can be used to compare different people's likes and dislikes. 
B)  is the satisfaction yielded by the consumption of a product. 
C)  can be easily measured. 
D)  all of the above

Question 13

Which of the following is not an assumption on which the characteristics theory is based?

Accepted Answer

A)  The characteristics are not measurable. 
B)  All products possess various characteristics. 
C)  Different brands possess characteristics in different proportions. 
D)  The characteristics determine consumer choice. 
A)  The characteristics are not measurable. 
B)  All products possess various characteristics. 
C)  Different brands possess characteristics in different proportions. 
D)  The characteristics determine consumer choice.

Question 14

In which of the following cases is the risk dependent?

Accepted Answer

A)  Life assurance for people over 65 
B)  Accident insurance for members of a family on holiday 
C)  Accidental damage to cars across the country 
D)  Insurance against loss of income from accidents for workers all over the country, in different companies 
A)  Life assurance for people over 65 
B)  Accident insurance for members of a family on holiday 
C)  Accidental damage to cars across the country 
D)  Insurance against loss of income from accidents for workers all over the country, in different companies

Question 15

Consider two makes of car: A and B. A has lots of speed and a little comfort, whereas B has lots of comfort but only a little speed. The producer of brand A wants to increase demand for the product and tries lowering the price, but finds only a very small increase in demand. Why?

Accepted Answer

A)  Because cars A and B are close substitutes 
B)  Because cars A and B are close complements 
C)  Because cars A and B are not close complements 
D)  Because cars A and B are not close substitutes 
A)  Because cars A and B are close substitutes 
B)  Because cars A and B are close complements 
C)  Because cars A and B are not close complements 
D)  Because cars A and B are not close substitutes

Question 16

The diamond- water paradox is easily resolved once one recognises that the price of a product tends to reflect its

Accepted Answer

A)  consumer surplus. 
B)  marginal value. 
C)  total value. 
D)  average value. 
E)  use value. 
A)  consumer surplus. 
B)  marginal value. 
C)  total value. 
D)  average value. 
E)  use value.

Question 17

The law of large numbers is defined as

Accepted Answer

A)  the more policies an insurance company issues, the more predictable will be the number of claims. 
B)  the more independent the risks of claims from the policies issued, the more predictable will be the number of claims made. 
C)  the larger the number of events of a particular type, the more predictable will be their average outcome. 
D)  where an insurance company expands into new types of insurance. 
A)  the more policies an insurance company issues, the more predictable will be the number of claims. 
B)  the more independent the risks of claims from the policies issued, the more predictable will be the number of claims made. 
C)  the larger the number of events of a particular type, the more predictable will be their average outcome. 
D)  where an insurance company expands into new types of insurance.

Question 18

For a normal good, the income and substitution effects work in the same direction. For an inferior good, the income and substitution effects work in opposite directions. Does this imply that the demand curve for an inferior good is upward- sloping? Explain.

Accepted Answer

No. As long as the income effe

Question 19

Marginal utility is unrelated to total utility.

Accepted Answer

A) True 
 B)False

Question 20

If you are prepared to accept odds of 10/1 on drawing an ace from a pack of cards (i.e. you win £10 for a £1 bet if you draw an ace), then how would your risk attitude be described?

Accepted Answer

A)  Risk- neutral 
B)  Risk- loving 
C)  Risk- averse 
D)  Need more information to say 
A)  Risk- neutral 
B)  Risk- loving 
C)  Risk- averse 
D)  Need more information to say

Exam 6: Demand and the Consumer

If there is a change in price of the cereal brand and no change in budget, there will be a movement up its ray.

Total utility will rise whenever marginal utility is positive.

Individuals take out insurance because they are

Explain how the terms 'adverse selection' and 'moral hazard' are used in talking about insurance.

Which of the following is not a property of an indifference curve?

Consider a consumer who only eats brand A cereal. If there is an increase in the consumer's budget, all of which is spent on extra brand A cereal and prices do not change, which of the following will be true?

Adverse selection occurs because of diminishing marginal utility.

Assume your demand for a can of soft drink remains constant, but the price increases. Your consumer surplus

The utility of a consumer durable is uncertain because

Insurance companies can reduce the moral hazard problem with which of the following methods?

As long as indifference curves are convex to the origin, utility maximisation will take place

Utility

Which of the following is not an assumption on which the characteristics theory is based?

In which of the following cases is the risk dependent?

Consider two makes of car: A and B. A has lots of speed and a little comfort, whereas B has lots of comfort but only a little speed. The producer of brand A wants to increase demand for the product and tries lowering the price, but finds only a very small increase in demand. Why?

The diamond- water paradox is easily resolved once one recognises that the price of a product tends to reflect its

The law of large numbers is defined as

For a normal good, the income and substitution effects work in the same direction. For an inferior good, the income and substitution effects work in opposite directions. Does this imply that the demand curve for an inferior good is upward- sloping? Explain.

Marginal utility is unrelated to total utility.

If you are prepared to accept odds of 10/1 on drawing an ace from a pack of cards (i.e. you win £10 for a £1 bet if you draw an ace), then how would your risk attitude be described?

The Business Environment and Business Economics

Economics and the World of Business

Business Organisations

The Working of Competitive Markets

Business in a Market Environment

Demand and the Firm

Products, Marketing and Advertising

Costs of Production

Revenue and Profit

Profit Maximisation Under Perfect Competition and Monopoly

Profit Maximisation Under Imperfect Competition

An Introduction to Business Strategy

Alternative Theories of the Firm

Growth Strategy

The Small-Firm Sector

Pricing Strategy

Labour Markets, Wages and Industrial Relations

Investment and the Employment of Capital

Reasons for Government Intervention in the Market

Government and the Firm

Government and the Market

Globalisation and Multinational Business

International Trade

Trading Blocs

The Macroeconomic Environment of Business

The Balance of Payments and Exchange Rates

Banking, Money and Interest Rates

Business Activity, Employment and Inflation

Demand-Side Policy

Supply-Side Policy

International Economic Policy

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