Deck 3: Consumer Behavior and Rational Choice

Question 1

Sarah Jones believes that Coke and Pepsi are perfect substitutes.That is,she is equally happy with a Coke or a Pepsi and cannot tell the difference between them.Her indifference curves:

A) are linear, with slope equal to -1.
B) are upward-sloping.
C) are linear, with slope equal to 1.
D) cross where she consumes equal amounts of Coke and Pepsi.
E) cannot be defined, since she likes both equally well.

Answer 1

A

Question 2

Don consumes bagels and cream cheese.He likes to place 2 ounces of cream cheese on each bagel,no more,no less.In this case,Don's indifference curves for bagels and cream cheese will be:

A) straight lines with slopes equal to -2.
B) L-shaped, or right angles.
C) upward-sloping.
D) horizontal lines.
E) vertical lines.

Answer 2

B

Question 3

Suppose Al is currently consuming four movies and four concerts per month.If his utility function is given by U = 15M^0.5C,where M represents the number of movies consumed and C represents the number of concerts attended,what is the marginal utility of the next concert Al will attend?

A) 15.
B) 30.
C) 60.
D) 120.
E) 960.

Answer 3

B

Question 4

Points along an indifference curve represent bundles of goods that:

A) cost the same amount to buy.
B) consumers don't like very much.
C) decline in marginal utility.
D) deliver equal utility.
E) cannot be compared.

Question 5

Indifference curves describe:

A) various consumer income levels.
B) alternative market prices for goods and services.
C) the quantities of a good or service that people are willing and able to buy at alternative prices.
D) producer production levels at alternative market prices.
E) consumer preferences.

Question 6

Susan is investing in the stock market.She is choosing among a variety of stocks; each stock has an expected return and a level of risk attached.Susan likes higher returns,but she dislikes risk.If we were to draw indifference curves for Susan over risk and expected return,they would be:

A) L-shaped.
B) linear.
C) upward-sloping.
D) downward-sloping.
E) vertical lines.

Question 7

John spends his budget on food and clothing each month.His utility function is given by TU = 100C^0.25F ^0.75.The marginal rate of substitution of clothing for food is:

A) 0.33F/C.
B) 0.25FC.
C) 0.33F²C.
D) 25F/C.
E) 0.66C/F.

Question 8

The marginal rate of substitution:

A) remains constant as the consumer moves around an indifference curve.
B) is constant if the goods are perfect complements.
C) decreases as the consumer moves down a typical indifference curve.
D) cannot be defined if the goods are perfect substitutes.
E) none of the above

Question 9

The consumer's optimal consumption of X and Y is characterized by:

A) (MU_X)(MU_Y) = P_XP_Y .
B) MU_X = P_X.
C) MU_X / MU_Y = P_Y / P_X .
D) MU_X / P_Y = MU_X / P_X .
E) MU_X / MU_Y = P_X / P_Y .

Question 10

At equilibrium,the marginal rate of substitution describes:

A) the slope of the budget constraint.
B) the number of units of one good that a consumer is willing to trade for an additional unit of another good, holding utility fixed.
C) the slope of the demand curve.
D) the number of units of one good that a consumer is willing to trade for an additional unit of another good in order to increase utility by 1 unit.
E) a and b

Question 11

A consumer buys 12 units of entertainment,measured on the horizontal axis,and 84 units of "all other things." The consumer's income elasticity of demand is equal to 1 for both goods.If income increases by 10%,then the consumer's marginal rate of substitution at the utility-maximizing market bundle will:

A) increase.
B) decrease.
C) be equal to 1.
D) remain constant.
E) There is insufficient information to answer the question.

Question 12

Points along an indifference curve represent bundles of goods that:

A) cost the same amount to buy.
B) consumers don't like very much.
C) decline in marginal utility.
D) deliver equal utility.
E) cannot be compared.

Question 13

Which of the following does not affect the shape of a consumer's indifference curves?

A) Age.
B) Education.
C) Tastes.
D) Prices.
E) Advertising.

Question 14

A consumer buys 12 units of entertainment and 84 units of "all other things." The consumer's income elasticity of demand is greater than 1 for entertainment and less than 1 for all other things.If income increases by 10%,then the consumer's marginal rate of substitution at the utility-maximizing market bundle will:

A) increase.
B) decrease.
C) be equal to 1.
D) remain constant.
E) There is insufficient information to answer the question.

Question 15

Betty is investing in the stock market.She is choosing among a variety of stocks; each stock has an expected return and a level of risk attached.Betty likes higher returns and she likes risk.If we were to draw indifference curves for Betty over risk and expected return,they would be:

A) L-shaped.
B) linear.
C) upward-sloping.
D) downward-sloping.
E) vertical lines.

Question 16

The marginal rate of substitution of X for Y is defined as:

A) P_X/P_Y .
B) P_X P_Y .
C) MU_X MU_Y .
D) MU_X/MU_Y .
E) MU_X/P_X .

Question 17

Consider the indifference map below.This map represents Larry's preferences over two goods,oranges and grapefruits.Larry:

A) does not like oranges and will not eat them.
B) gets greater utility from additional grapefruits, but not from additional oranges.
C) prefers oranges to grapefruits.
D) will always choose to consume equal amounts of oranges and grapefruits.
E) will always choose to consume a combination of oranges and grapefruits.

Question 18

Indifference curves cannot cross because:

A) consumers will always substitute 1 unit of a good for 1 unit of another good.
B) consumers prefer more to less.
C) a single consumption bundle would bring two different levels of utility.
D) all of the above.
E) b and c

Question 19

Suppose Al is currently consuming four movies and four concerts per month.If his utility function is given by U = 15M^0.5C,where M represents the number of movies seen and C represents the number of concerts attended,what is Al's total utility equal to?

A) 15.
B) 30.
C) 120.
D) 240.
E) 960.

Question 20

Suppose Al is currently consuming five movies and two concerts per month.If his utility function is given by U = 15MC,where M represents the number of movies seen and C represents the number of concerts attended,Al's total utility is equal to:

A) 10.
B) 15.
C) 30.
D) 75.
E) 150.

Question 21

Tom spends all his monthly income on pretzels and potato chips.Currently,he is maximizing his utility; the marginal utility of pretzels is 150,and the marginal utility of potato chips is 125.If pretzels cost $6 per box,how much do potato chips cost?

A) $2.
B) $3.
C) $4.
D) $5.
E) $6.

Question 22

Nancy has $100 to spend on books and compact disks.Books cost $10 and compact disks cost $20.The slope of Nancy's budget constraint (where the quantity of books is on the horizontal axis)is:

A) -0.5.
B) -2.
C) -5.
D) -10.
E) none of the above.

Question 23

Points along a budget constraint describe:

A) market baskets that cost the same amount of money.
B) market baskets that bring the consumer equal utility.
C) quantities of a good that the consumer is willing and able to buy at alternative market prices.
D) alternative prices that a producer might charge for a good.
E) alternative levels of utility that a consumer might get from consuming a given market basket.

Question 24

Betty spends all her income on cheese and crackers.She finds that the marginal utility of cheese is 10 and the marginal utility of crackers is 15.The price of cheese is $5 per unit,and the price of crackers is $3 per unit.At this point,Betty:

A) is maximizing her utility subject to her budget constraint.
B) should consume more cheese and fewer crackers.
C) should consume more crackers and less cheese.
D) should consume more crackers and more cheese.
E) should switch her consumption over to other goods that she likes better.

Question 25

In most cases,at the optimal consumption bundle:

A) the consumer cannot increase utility without some change in market conditions or preferences.
B) the last dollar spent on each good brings the same amount of satisfaction to the consumer.
C) the marginal rate of substitution is equal to the absolute values of the slope of the budget constraint.
D) the indifference curve is just tangent to the budget constraint.
E) all of the above

Question 26

Consider the following budget constraint.Dennis spends all his money on sweaters and sweatshirts.If the price of sweaters is $15,what is the price of sweatshirts?

A) $5.
B) $7.
C) $15.
D) $21.
E) None of the above.

Question 27

Consider the following budget constraint.Dennis spends all his money on sweaters and sweatshirts.If the price of sweaters is $15,how much money does Dennis have in his budget?

A) $7.
B) $75.
C) $105.
D) $178.
E) None of the above.

Question 28

Fred loves tomatoes.He makes soups,sauces,and stews with them; stuffs them; roasts them; and grills them.Fred has discovered a farmer's market where the price of a bushel of tomatoes depends on how many bushels are purchased.The first bushel is $15; the second,$12; the third,$10; and four or more,$9 each.Fred has $82 to spend on tomatoes and on "all other things" during the coming week.All other things sell for $1 per unit.Assume that all other things are measured on the vertical axis.What is Fred's marginal rate of substitution if he chooses to buy 5 bushels of tomatoes?

A) -9.
B) 0.10.
C) 12.
D) 1/15.
E) 1/9.

Question 29

A budget constraint:

A) must be convex to the origin if consumers prefer more to less.
B) will be upward-sloping if consumers consider one good a "bad."
C) must be downward-sloping if both goods have positive prices.
D) will be concave to the origin if the consumer's budget is fixed.
E) will always have slope equal to -1.

Question 30

A consumer's budget constraint changes slope whenever:

A) the consumer buys a different combination of goods.
B) relative prices change.
C) the consumer's income increases.
D) an indifference curve is tangent to it.
E) absolute prices change.

Question 31

Consider the following budget constraints.These constraints represent the market baskets that Edith can afford to buy at alternative:

A) prices of good X.
B) levels of income.
C) prices of good Y.
D) preferences over goods X and Y.
E) prices of goods X and Y.

Question 32

Jamie is considering the purchase of a new Ferrari for $100,000.Her income is $200,000,and her alternative is "all other things," which sell for $1 each.If all other things are plotted on the vertical axis and

A) 200,000; 1
B) 200,000; 2
C) 1/200,000; 1
D) 1/200,000; 2
E) none of the above

Question 33

Fred loves tomatoes.He makes soups,sauces,and stews with them; stuffs them; roasts them; and grills them.Fred has discovered a farmer's market where the price of a bushel of tomatoes depends on how many bushels are purchased.The first bushel is $15; the second,$12; the third,$10; and four or more,$9 each.Fred has $82 to spend on tomatoes and on "all other things" during the coming week.All other things sell for $1 per unit.Assume that all other things are measured on the vertical axis.What is the horizontal intercept of Fred's budget constraint?

A) 14.
B) 7.5.
C) 8.
D) 6.
E) 5.

Question 34

The consumer's optimal consumption of X and Y occurs where the consumer:

A) reaches the highest indifference curve that intersects the budget constraint.
B) reaches the highest budget constraint that is tangent to the indifference curve.
C) reaches the lowest indifference curve that intersects the budget constraint at any point.
D) reaches the highest indifference curve that is just tangent to the budget constraint.
E) is satiated with X and Y.

Question 35

Mary's indifference map and budget constraint for goods X and Y are shown below.If Mary spends all her money on X and Y,which bundle will she choose to maximize her utility?

A) A.
B) B.
C) C.
D) D.
E) E.

Question 36

Fred consumes quantities of butter and margarine; his utility function is given by U = 5M + 2B.If Fred has $10 to spend on butter and margarine,and if butter costs $2 per pound and margarine costs $1 per pound,what is his optimal bundle of butter and margarine?

A) 3 butter and 4 margarine.
B) 5 butter and 0 margarine.
C) 0 butter and 10 margarine.
D) 2 butter and 6 margarine.
E) None of the above.

Question 37

Jane spends $210 per month on wine and beer.Her utility function is given by TU = 100WB,where W represents the number of bottles of wine that she buys and B represents the number of cases of beer that she buys.If wine costs $10 per bottle and beer costs $15 per case,she will maximize utility by buying:

A) 10.5 bottles of wine and 7 cases of beer.
B) 2 bottles of wine and 3 cases of beer.
C) equal amounts of wine and beer.
D) 10 bottles of wine and 13.33 cases of beer.
E) none of the above.

Question 38

An increase in a consumer's income:

A) shifts the consumer's indifference curves out.
B) causes the consumer to buy more of every good.
C) shifts the consumer's budget constraint out.
D) causes the consumer to increase purchases of inferior goods.
E) causes the consumer to buy more inferior goods.

Question 39

The accompanying table describes Ben's preferences over cake and ice cream.The utility from consumption of one good is independent of the consumption of the other.The price of cake is $10 per unit,and the price of ice cream is $4 per unit.
If Ben has $50 to spend,the optimal combination of these goods is:

A) 4 units of cake and 1 unit of ice cream.
B) 3 units of cake and 5 units of ice cream.
C) 3 units of cake and 1 unit of ice cream.
D) 5 units of cake.
E) none of the above.

Question 40

Jamie is considering the purchase of a new car for $20,000.Her income is $60,000,and her alternative is "all other things," which sell for $1 each.If all other things are plotted on the vertical axis and her marginal rate of substitution is ,then she will buy car(s).

A) 15,000; 0
B) 15,000; 1
C) 15,000; 2
D) 15,000; 3
E) 1/15,000; 3

Question 41

Assume that the utility function of wine for a certain consumer is given by TU = 96Q - 3Q².If wine is free,to maximize utility,the amount the consumer should consume is:

A) 6 bottles of wine.
B) 16 bottles of wine.
C) 90 bottles of wine.
D) 93 bottles of wine.
E) unknown; there is insufficient information to determine this.

Question 42

The market demand curve is:

A) the vertical summation of the individual demand curves.
B) the horizontal summation of the individual demand curves.
C) the sum of the prices that each consumer is willing to pay for each quantity of output.
D) the sum of the quantities that each consumer is willing to buy at each price.
E) b and d

Question 43

The following diagram represents the demand for trips to a local swimming pool during the summer.If the price of a day of swimming is $5 per person,consumer surplus will be:

A) $0.
B) $1,500.
C) $11,250.
D) $20,000.
E) none of the above.

Question 44

The following diagram represents the demand for trips to a local swimming pool during the summer.If the city subsidizes the swimming pool so that swimming is free,the number of people swimming each day will be:

A) 0.
B) 500.
C) 1,000.
D) 1,500.
E) 2,000.

Question 45

An indifference map can be used to find a demand curve for a consumer.Given an initial equilibrium point,to find a demand curve for good X,change the:

A) consumer's income and draw a new budget constraint.
B) price of Y and draw a new budget constraint.
C) consumer's preferences.
D) price of X and draw a new budget constraint.
E) price of a substitute and draw a new budget constraint.

Question 46

The following table describes Ben's preferences over cake and ice cream.The utility from consumption of one good is independent of the consumption of the other.The price of cake is $10 per unit,and the price of ice cream is $4 per unit.
Ben's total utility at his optimal consumption bundle will be:

A) 56.
B) 200.
C) 270.
D) 310.
E) none of the above.

Question 47

Consumer surplus is defined as:

A) the quantities of a good or service that bring equal utility to the consumer.
B) the quantity of a good or service that is utility maximizing for the consumer.
C) the difference between what a consumer is willing to pay and what he or she actually pays for a good or service.
D) the difference between the market price and the marginal cost of producing a good or service.
E) none of the above.

Question 48

Consider the following indifference map.The price of Y is $5.Two points on a demand curve for good X are:

A) (8, $5) and (10, $5).
B) (3, $10) and (5, $20).
C) (3, $20) and (8, $5).
D) (3, $20) and (5, $10).
E) none of the above.

Question 49

Consumer surplus is important to firms because:

A) it represents value consumers receive that they do not pay for.
B) market prices must incorporate consumer surplus.
C) they must pay taxes based on the level of consumer surplus.
D) if firms can capture it, they can increase their profitability.
E) a and d

Question 50

A corner solution to a consumer choice problem suggests that:

A) the consumer is not rational.
B) one product is not purchased at all.
C) both products are preferred, but one at a lower rate than the other.
D) neither product is a normal good.
E) all of the above

Question 51

The following diagram represents the demand for trips to a local swimming pool during the summer.If the city subsidizes the swimming pool so that swimming is free,consumer surplus will be:

A) $0.
B) $1,500.
C) $11,250.
D) $20,000.
E) none of the above.

Question 52

Using the indifference map below,two points on a demand curve for good Y are:

A) (8, $5) and (10, $5).
B) (3, $10) and (5, $20).
C) (3, $20) and (8, $5).
D) (3, $20) and (5, $10).
E) The answer cannot be determined from the information given.