Deck 6: Demand and the Consumer

Question 1

Utility

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

Answer 1

is the satisfaction yielded by the consumption of a product.

Question 2

Harry tells you that he prefers Irn- bru^TM to Tango^TM, Tango^TM to Strongbow^TM and Strongbow^TM
To Irn- bru^TM. This violates what assumption made when analysing consumer preferences?

A) That consumers are able to choose among all the combinations of goods and services available
B) That there is a diminishing marginal rate of substitution
C) That consumers are rational
D) That more is better

Answer 2

That consumers are rational

Question 3

Suppose you are eating hamburgers. The first hamburger gives you 16 units of satisfaction, the second hamburger 8 additional units, and the third brings the total utility to 30. What was the marginal utility of the third hamburger?

A) 8
B) 22
C) 10
D) 6

Answer 3

6

Question 4

For Matthew, the marginal utility of the tenth coffee in a day is zero.

A) This implies that Matthew's demand curve for coffees per day will become upward- sloping at ten coffees per day.
B) This suggests that Matthew must maximise utility by consuming ten coffees per day.
C) This is impossible because each additional unit of consumption of any good must provide positive marginal utility.
D) This suggests that Matthew must maximise utility by consuming zero cups of coffee per day.
E) This implies that, at a zero price, Matthew's demand curve will intersect the quantity axis at ten.

Question 5

If I gain 25 units of satisfaction from consuming five chocolates and 31 units of satisfaction from consuming six chocolates, then my marginal utility from the sixth chocolate is

A) - 25 units
B) - 6 units
C) 56 units
D) 31 units
E) 6 units

Question 6

The law of diminishing marginal utility allows us to conclude that

A) demand curves always slope downward and to the right.
B) consumer surplus can never be maximised.
C) supply curves always slope upward.
D) total utility will always increase by an increasing amount as consumption increases.
E) a consumer will always buy positive amounts of all goods.

Question 7

If marginal utility has become negative, we can infer that

A) total utility is falling with additional consumption.
B) total utility is increasing by smaller and smaller amounts.
C) the product is an inferior good.
D) total utility is also negative.

Question 8

Which of the following defines consumer surplus?

A) Individuals consume where: MUa/MUb = Pa/Pb
B) The extra satisfaction gained from consuming one extra unit of a good within a given time period
C) The excess of what a person would have been prepared to pay for a good over what that person actually pays
D) The attempt to maximise total consumer surplus
E) The excess of a person's total utility from the consumption of a good over the total amount that person spends on it

Question 9

You would be willing to pay a maximum of £50 to attend a concert, and you can buy a ticket for£30. Your consumer surplus is

A) - £20
B) £30
C) £20
D) £10
E) £80

Question 10

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

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

Question 11

Consumer surplus will be zero at any quantity if

A) demand is perfectly inelastic.
B) demand is unitarily elastic.
C) supply is perfectly elastic.
D) supply is perfectly inelastic.
E) demand is perfectly elastic.

Question 12

A consumer will buy more units of a good if the value of the good's

A) marginal utility is greater than its price.
B) total utility is less than its price.
C) marginal utility is less than its price.
D) marginal utility is equal to its price.
E) total utility is greater than its price.

Question 13

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

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

Question 14

The utility of a consumer durable is uncertain because

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 15

What are the three attitudes towards risk?

A) Accepting, rejecting, avoider
B) Avoiding, indifferent, loving
C) For, neutral, against
D) Averse, neutral, loving

Question 16

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?

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

Question 17

Insurance companies can lower their risks by

A) using the law of large numbers to make the number of claims more predictable.
B) granting large numbers of independent risk policies.
C) diversifying across insurance products.
D) all of the above

Question 18

Individuals take out insurance because they are

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

Question 19

In which of the following cases is the risk dependent?

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 20

The law of large numbers is defined as

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 21

Which of the following is an example of adverse selection?

A) Individuals with makes of cars that are widely known to be the target of car theft are more likely to insure their car.
B) Individuals who have a history of not being careful with their possessions are more likely to insure them against accidental damage.
C) Individuals with possessions that are costly to replace are more likely to insure them against accidental damage.
D) All of the above

Question 22

Which of the following describes moral hazard?

A) Following the signing of a contract there is an increased likelihood that one party will engage in problematic behaviour.
B) High risk individuals are less attracted to certain types of contract.
C) High risk individuals are more attracted to certain types of contract.
D) Prior to the signing of a contract there is an increased likelihood that one party will engage in problematic behaviour.

Question 23

Moral hazard create costs for insurance companies because

A) insurance companies are unable to diversify across insurance markets when there is a moral hazard problem.
B) individuals are more likely to engage in risky behaviour once they have the comfort offered by an insurance policy.
C) adverse selection has become a bigger problem in recent years.
D) all of the above

Question 24

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

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 25

An indifference curve is

A) the set of all goods that the consumer can afford given her income and the prices of the goods.
B) all combinations of goods (or characteristics) of X and Y that yield the same marginal utility.
C) all combinations of goods (or characteristics) of X and Y that yield the same total utility.
D) the set of all points of consumer equilibrium as the consumer's income changes.

Question 26

Assume Diana buys sweatshirts and T- shirts. Diana's marginal rate of substitution is

A) the rate at which she is willing to substitute sweatshirts for T- shirts.
B) the ratio of the MU of sweatshirts to the price of sweatshirts.
C) the point where she is maximising utility given her budget constraint.
D) the ratio of the price of T- shirts to the price of sweatshirts.

Question 27

An indifference curve is convex to the origin because

A) of the law of diminishing marginal utility.
B) more is better.
C) of the law of diminishing returns.
D) preferences remain constant.
E) consumers have a limited income.

Question 28

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

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 29

Which of the following is not a property of 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 30

Which of the following is not true of the marginal rate of substitution?

A) It is the rate at which we substitute good X for good Y in consumption.
B) It will be equal to the price ratio when the consumer maximises utility.
C) It is the ratio of the total utility of X to the total utility of Y.
D) It is the rate at which we substitute good X for good Y in production.
E) It is the ratio of the marginal utility of X to the marginal utility of Y.

Question 31

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?

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 32

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

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 33

Which of the following is not a limitation of the characteristics approach?

A) It may be impractical to create indifference curves.
B) Characteristics may be difficult to measure.
C) Most products have many characteristics which makes analysis difficult.
D) Consumer tastes are too static for the analysis to be useful.

Question 34

The marginal utility gain from the consumption of an additional unit of a good is closely linked to the price paid for the good.

Question 35

Total utility will rise whenever marginal utility is positive.

Question 36

Marginal utility is unrelated to total utility.

Question 37

Diminishing marginal utility implies that total utility increases at a decreasing rate.

Question 38

Consumer surplus will be zero at any quantity if demand is perfectly inelastic.

Question 39

Risk- averse behaviour is consistent with the diminishing marginal utility of income.

Question 40

Adverse selection occurs because of diminishing marginal utility.

Question 41

People gamble because they are what economists call 'risk- lovers'.

Question 42

Moral hazard occurs when people are less careful because they are insured.

Question 43

Firms often diversify in order to reduce risk.

Question 44

A person who is risk- neutral will take a gamble if the odds are favourable.

Question 45

If we have an inferior good and its price decreased, other things being equal, the quantity demanded of that good could fall if the substitution effect dominates the income effect.

Question 46

The slope of an indifference curve is the MRS. This can be defined as the amount of one characteristic (Y) that a consumer is prepared to give up for a one unit increase in the consumption of the other characteristic (X).

Question 47

The substitution effect will always move in the same direction as the income effect.

Question 48

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

Question 49

A change in consumer income that is spent only on the product in question will cause a shift in the whole efficiency frontier.

Question 50

Explain the concepts of total utility, marginal utility and diminishing marginal utility.

Question 51

Explain the law of diminishing marginal utility. Why does diminishing marginal utility cause the demand curve for a good to slope downward?

Question 52

What is the diamond- water paradox, and how can it be explained?

Question 53

Explain the utility- maximising rule.

Question 54

Explain what is meant by risk- loving, risk- neutral and risk- averse behaviour.

Question 55

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

Question 56

Explain why indifference curves and budget lines are important in analysing consumer behaviour.

Question 57

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.

Question 58

In Economics for Business 6e, the market for cereals is considered. What is the slope of the ray for each cereal?

Question 59

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?

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 60

Why can we relate the product characteristics analysis to cross- price elasticity of demand?

Question 61

What is the efficiency frontier?