Deck 21: Consumer Utility and Optimization

Question 1

(Figure: Marginal Rate of Substitution) Refer to the figure.What is the marginal rate of substitution (MRS) betweenBundle A and Bundle B?
Figure: Marginal Rate of Substitution

A)4.5; the consumer is willing to trade 4.5 movie downloads for one music download.
B)three; the consumer is willing to give up three movie downloads for an additional music download.(True Answer
)Correct
C)1.5; the consumer will buy 1.5 times as many music downloads as movie downloads.
D)one; the consumer faces a one-to-one trade-off.

Answer 1

B

Question 2

Consumers maximize their utility when:

A)the total benefits are greater than total costs.
B)the marginal utility per dollar is equal across all goods consumed and all income is spent.
C)they consume the good on which they place the highest overall value.
D)they diversify their consumption across goods.

Answer 2

B

Question 3

The consumption bundle that maximizes utility for a consumeris the bundle that:

A)equates the slope of the budget constraint with the slope of the indifference curve.
B)maximizes marginal utility across all goods.
C)minimizes the costs of production.
D)maximizes the marginal rate of substitution.

Answer 3

A

Question 4

(Figure: Coffee and Comic Books) Refer to the figure. Aconsumer has $5 to spend on comic books (priced at $1 percomic book) and coffee (priced at $1 per cup). Using the figure,how many comic books and cups of coffee will this consumerpurchase?

A)three comic books and two cups of coffee
B)two comic books and three cups of coffee (True Answer )Correct
C)2.5 comic books and 2.5 cups of coffee
D)one comic book and four cups of coffee

Question 5

An increase in the price of a good leads to a(n) ______ in themarginal utility per dollar of that good, and thus a(n) ______ inthe quantity purchased.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 6

(Figure: Budget Constraint) Refer to the figure. What is therelative price of music downloads to movie downloads?

A)3
B)1/3
C)5
D)4

Question 7

(Figure: Indifference Curve) Refer to the figure. Which of thefollowing points generates the highest level of utility for theconsumer?

A)A
B)B
C)C
D)D

Question 8

A)The optimal consumption bundle contains five movie downloads and 10 music downloads.
B)The MRS is 0.50 at the optimal consumption bundle.
C)The price per music download is half as expensive as the price per movie download.
D)In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music
Downloads.

Question 9

At the consumer's optimal consumption bundle, the MRSXY is 4, and the marginal utility of Good X is 8. What is the marginalutility of Good Y?

A)1/2
B)2
C)24
D)16

Question 10

If there are only two goods in the economy, chocolate andpeanut butter, and the price of chocolate falls, the new utilitymaximizing bundle for a typical consumer would entailconsuming ______ peanut butter and ______ chocolate.

A)less; more
B)more; less
C)more; more
D)less; less

Question 11

(Figure: Budget Constraint) Refer to the figure. If the price ofsneakers rises, then the budget constraint in the figure will:

A)not change.
B)become steeper.
C)become flatter.
D)shift to the left.

Question 12

(Figure: Budget Constraint) Refer to the figure. A consumerhas $45 to spend on movie and music downloads per month.What is the price per movie and music download?

A)$15 per movie download and $0.45 per music download
B)$3 per movie download and $1 per music download (True Answer )Correct
C)$2.50 per movie download and $1.50 per music download
D)$10 per movie download and $0.80 per music download

Question 13

(Figure: Coffee and Comic Books) Refer to the figure. Aconsumer has $2 to spend on comic books (priced at $1 percomic book) and coffee (priced at $1 per cup). To maximizeutility, should this consumer buy two cups of coffee?

A)Yes, buying two cups of coffee maximizes the consumer's total utility.
B)Yes, because the marginal utility of the second comic book is less than the marginal utility of the second cup of
Coffee.
C)No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils).(True
Answer )Correct
D)No, the consumer should buy two comic books to maximize utility.

Question 14

(Figure: Water vs. Soda) Refer to the figure. The figurerepresents the marginal utility Janet receives when sheconsumes bottled water and soda. The prices of bottled waterand sodas are both $1 each. Janet has $2 to spend andconsumes two bottles of water and no soda.

A)She would be better off if she consumed one bottle of water and one soda.
B)She would be better off if she consumed two sodas instead of two bottles of water.
C)She is maximizing her utility.
D)The marginal utility of soda will be higher than the marginal utility of bottled water.

Question 15

Figure: Coffee and Comic Books (Figure: Coffee and Comic Books) Refer to the figure. Theprice of comic books is $0.50. Using the diagram, the marginalutility per dollar for the third comic book is:

A)11.
B)5.5.
C)22.
D)11.5.

Question 16

Amy purchased four cantaloupes at $2 each and threewatermelons at $4 each. If Amy is following the optimalconsumption rule, the marginal utility of the fourth cantaloupeand third watermelon are:

A)12 and 24, respectively.
B)four and three, respectively.
C)40 and 10, respectively.
D)six and eight, respectively.

Question 17

(Figure: Budget Constraint) Refer to the figure. The slope ofthe budget constraint in the figure above is equal to:

A)the price of sneakers divided by the price of flip- flops.
B)the price of flip-flops divided by the price of gas.(True Answer )Correct
C)the quantity of flip-flops divided by the quantity of sneakers.
D)the quantity of sneakers divided by the quantity of flip- flops.

Question 18

(Figure: Water vs. Soda) Refer to the figure. The figurerepresents the marginal utility Janet receives when sheconsumes bottled water and soda. The prices of bottled waterand sodas are both $1 each. Janet has $5 to spend. What mix ofbottled water and soda will maximize Janet's utility?

A)five bottles of water
B)four bottles of water and one soda
C)three bottles of water and two sodas
D)2.5 bottles of water and 2.5 sodas

Question 19

By assuming diminishing marginal utility, we mean that:

A)consumers get less overall value from goods as their income rises.
B)consumers value some goods more than others.
C)the cost of producing goods declines as output increases.
D)consumers value additional units of a good less than the previous unit.

Question 20

A)The price of music downloads decreased.
B)The price of movie downloads increased.
C)This consumer's income increased.
D)This consumer's income decreased.

Question 21

If the marginal utility of apples is 4 and marginal utility ofgrapes is 4, the consumer is maximizing utility.

Question 22

The income effect is:

A)represented by a pivot in the budget constraint from a change in price.
B)the change in consumption caused by a change in purchasing power from a price change.
C)an increase in price caused by a change in market demand from an increase in income.
D)the increase in the price of leisure caused by higher wages.

Question 23

If an individual's labor supply curve is downward sloping, thisindicates that:

A)the individual has become wealthier.
B)the income effect dominates the substitution effect.(True Answer )Correct
C)the substitution effect dominates the income effect.
D)the individual faces a diminishing marginal utility for leisure.

Question 24

A)$60
B)$100
C)$40
D)$10

Question 25

Which of the following methods have been used to reduce thedisincentive effects of welfare on labor supply?
I) The government reduces welfare benefits by $1 of every $1 oflabor income earned
II)The government limits the amount of time that someone cancollect welfare
III) The government provides an Earned Income Tax Creditthat supplements the income of the working poor.

A)I and III only
B)II and III only
C)II only
D)I, II, and III

Question 26

(Figure: Labor Supply) Refer to the figure. The figurerepresents the budget constraint and indifference curves for the

A)the income effect will dominate and the consumer will work more.
B)the substitution effect will dominate and the consumer will work more.
C)the income effect will dominate and the consumer will work less.
D)the substitution effect will dominate and the consumer will work less.

Question 27

If the marginal utility per dollar for hamburgers is 2, and themarginal utility per dollar for pizza is 1, then this consumershould consume more hamburgers.

Question 28

A partner at a major law firm spent $90 for a ticket to theRockstar Energy Mayhem Festival, featuring Disturbed,Godsmack, and Megadeth and then lost it. Should he buyanother $90 ticket?

A)Yes, there is no substitution effect and the income effect is trivial given his wealth.
B)Yes, there is a positive substitution effect and the income effect is large given his wealth.
C)No, there is some substitution effect and the income effect is trivial given his wealth.
D)No, there is a positive substitution effect and the income effect is large given his wealth.

Question 29

The demand curve is downward sloping due to diminishingmarginal utility.

Question 30

Barry's wage increased and he responded by working morehours. Which of the following must be true?

A)Leisure is an inferior good.
B)The substitution effect of the wage increase dominated the income effect.
C)The income effect of the wage increase dominated the substitution effect.
D)The substitution and income effect both increased hours of work.

Question 31

After purchasing and then losing a ticket to a concert, arational consumer would:

A)not repurchase the ticket since the lost ticket is a sunk cost.
B)always repurchase the ticket as long as the price hasn't changed.
C)repurchase the ticket as long as the price hasn't changed and the income effect is high.
D)repurchase the ticket as long as the price hasn't changed and the income effect is low.

Question 32

(Figure: Labor Supply and Welfare) Refer to the figure. Thepresence of the welfare program causes this person to:

A)reduce hours of work from 12 to 0.
B)increase hours of work from 0 to 12.
C)reduce hours of work from 12 to 9.
D)reduce hours of work from 8 to 3.

Question 33

A)At 13 hours of leisure and income of $45.19, the worker earns a wage of $4.17 an hour.
B)The labor supply curve is downward sloping.(True Answer )Correct
C)The substitution effect dominates the income effect.
D)This worker chooses to work more hours if paid higher wages.

Question 34

A)The labor supply curve is downward sloping.
B)The labor supply curve is upward sloping.(True Answer )Correct
C)The income effect denominates the substitution effect.
D)The worker earns $6.00 an hour.

Question 35

Figure: Labor Supply and Welfare (Figure: Labor Supply and Welfare) Refer to the figure. Thebudget constraint is:

A)ABC.
B)BD.
C)ABDC.
D)ABD.

Question 36

If the price of Good X is $10 and price of Good Y is $15, theslope of the budget constraint is -1.5.

Question 37

Which of the following statements is TRUE?

A)The income effect of a wage increase is to consume less leisure.
B)The substitution effect of a wage decrease is to consume less leisure.
C)The price of leisure decreases with a decrease in wages.
D)The price of leisure increases with an increase in income.

Question 38

The slope of the indifference curve is equal to the marginal rateof substitution.

Question 39

If the marginal utility per dollar for hamburgers is higher thanthe marginal utility per dollar for Tacos, then in order tomaximize utility the consumer should only consumehamburgers.

Question 40

(Figure: Income and Substitution Effects) Refer to the figure.What caused this consumer to switch optimal consumptionbundles from Bundle A to Bundle B?

A)a decrease in consumer income available for music downloads
B)a decrease in the price of music downloads
C)an increase in the price of music downloads (True Answer )Correct
D)an increase in the price of movie downloads

Question 41

Which of the following statements is TRUE?
I) A mutual fund pools money from many different investorsand uses that money to invest in many different firms
II)Mutual funds that are run by managers who try to pick thebest performing stocks usually outperform the S&P 500
III) Passive mutual funds do not try to select winning stocks;they mimic broader markets like the S&P 500.

A)I only
B)I and II only
C)I and III only
D)II and III only

Question 42

A mutual fund pools money from many customers and investsthe money in many firms. The fees charged by fund managersare:

A)lower in bond funds.
B)higher in passive funds.
C)lower in passive funds.
D)higher in bond funds.

Question 43

Over a long period of time which investment strategy istypically more profitable?

A)active
B)passive
C)introversive
D)subversive

Question 44

Consumption Bundle A contains six donuts and 2 cups ofcoffee, and consumption Bundle B contains four donuts and 1.5cups of coffee. Bundle A and Bundle B could lie on the sameindifference curve.

Question 45

Suppose the price of apples rises making oranges relatively lessexpensive. The increase in orange consumption as a result ofthe price change is an example of the income effect.

Question 46

Which of the following refers to a mutual fund for which itsmanager buys and sells stocks regularly in order to maximizethe fund's returns?

A)liquid fund
B)efficient market fund
C)active fund
D)passive fund

Question 47

In a market of 2,000 investors who each year flip a coin topredict market success or failure, how many investors will havebeen consistently right after five years?
Assume the coin tossesyield heads exactly 50 percent of the time.

A)31
B)62
C)500
D)1,000

Question 48

Indifference curves can never cross.

Question 49

The major difference between active and passive mutual fundsis that:

A)active funds are classed as mutual funds, but passive funds are not.
B)active funds involve stock picks by managers, while passive funds involve stock picks by the investors themselves.
C)active funds are more risky than passive funds.
D)active funds involve stock picks by managers, while passive funds match the movements of a broad market index.(True
Answer )Correct

Question 50

Which of the following are advantages of saving your money ina mutual fund?
I) You have professional fund management
II)Mutual funds have always outperformed the S&P 500
III) People with smaller amounts of money can diversify risk.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Question 51

Suppose 1,000 experts flip a coin once each year and half saythe market will go up, while the other half say the market willgo down. After six years how many experts would have beencorrect every year?

A)15
B)62
C)8
D)31

Question 52

(Figure: Mutual Funds) Refer to the figure. From this MutualFunds figure, John Stossel dart-throwing experiment we cansay that:

A)mutual funds typically outperform the S&P 500.
B)mutual fund managers are no smarter than monkeys.
C)knowledge of stock market behavior does not guarantee its predictability.
D)mutual funds can never outperform the stock market.

Question 53

Which of the following is TRUE of mutual funds?
I) Active funds generally give higher returns than passive funds
II)Most mutual funds generally give higher returns than broadstock indexes.

A)I only
B)II only
C)both I and II
D)neither I nor II

Question 54

John Stossel's dart-throwing experiment showed that:

A)picking stocks at random can outperform the stock picks of major Wall Street experts.
B)Wall Street experts have inside information, which makes beating their stock picks difficult.
C)Companies with longer names are likely to outperform market averages.
D)Economic theory regarding the stock market is flawed.

Question 55

If another unit of Good X gives a consumer 15 additional unitsof satisfaction, and another unit of Good Y gives 45 additionalunits of satisfaction, the MRS is equal to 1/3.

Question 56

The utility maximizing consumption bundle for a consumer isthe bundle that maximizes marginal utility across all goods.

Question 57

John Stossel picked Wall Street stocks at random, and hisportfolio outperformed what proportion of expert stockbrokersand fund managers?

A)50 percent
B)60 percent
C)80 percent
D)90 percent

Question 58

If the wage rate increases and the income effect exactly offsetsthe substitution effect, the labor supply curve is vertical.

Question 59

Which of the following are helpful in stock investmentstrategies?

A)buying undervalued stocks
B)holding stocks for a long period of time
C)lucky picks
D)All of the answers are correct.

Question 60

Some skeptical economists say that successful brokers likeWarren Buffett are:

A)able to see the future.
B)just lucky.
C)incredibly smart at picking winning stocks.
D)likely to remain successful.

Question 61

If the efficient markets hypothesis is valid, then a personshould:
I) buy mutual funds
II)diversify
III) follow a buy-and-hold strategy.

A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Question 62

Consider the market for ABC Company's stock. What shouldhappen in this market after an announcement that the companyis having financial difficulties?

A)The demand for the stock would shift to the left.(True Answer )Correct
B)The demand for the stock would shift to the right.
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Question 63

The efficient markets hypothesis implies that in the stockmarket:

A)everyone can earn more than everyone else some of the time.
B)no one can systematically earn more than the average market return.
C)people with more funds earn higher returns.
D)people can use technical analysis to systematically earn high returns.

Question 64

According to the efficient markets hypothesis, the person whomost likely earns the highest return for holding the stock ofCompany ABC on a single day is:

A)a person who follows a buy-and-hold strategy.
B)an active trader who knows the historical prices of ABC.
C)ABC's CEO who has inside information about the company's new projects.
D)None of the answers is correct: No one can outperform anyone else at any time.

Question 65

One of the problems with investment advice that claims youshould buy stock in a certain company or sector of the economyis that:

A)no one else knows such advice.
B)asset prices likely reflect that information already.(True Answer )Correct
C)investment advice is not regulated.
D)sellers know less than buyers in the financial markets.

Question 66

Consider the market for ABC Company's stock. What shouldhappen to the stock for this company if there is a rumor thatthe company is set to merge with another very profitablecompany?

A)The demand for the stock would shift to the left.
B)The demand for the stock would shift to the right.(True Answer )Correct
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Question 67

If a person diversifies her stock portfolio, then:

A)the expected return of her portfolio will increase.
B)the risk of her portfolio will decrease.
C)both the risk and expected return of her portfolio will increase.
D)neither the risk nor the expected return of her portfolio will change.

Question 68

When Chernobyl melted down in the Soviet Union, the:

A)price of U.S.basketballs increased.
B)prices of assets reacted slowly to the information.
C)price of U.S.potatoes increased.
D)stock prices of U.S.nuclear plants increased.

Question 69

Which of the following individuals is using information outsidethe efficient markets hypothesis?
Someone who:

A)has information about the aging U.S.population and expects stock for companies that cater to senior citizens to increase in
Value.
B)reads in the newspaper about a merger between two profitable firms and expects the stock prices for these
Companies to rise.
C)while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells her stock in
The company.
D)hears a rumor that a top bank may be in trouble, and decides to sell his stock in that company.

Question 70

The efficient markets hypothesis implies that an investor:

A)cannot systematically outperform the market as a whole over time.
B)should rely on publicly available information to outperform the market.
C)should buy and sell lower volumes of shares.
D)can manage a portfolio and regularly outperform the whole market.

Question 71

Consider the market for ABC Company's stock. What shouldhappen to the stock for ABC Company after a merger with ahighly successful supply firm is announced?

A)The demand for the stock would shift to the left.
B)The demand for the stock would shift to the right.(True Answer )Correct
C)The supply of the stock would shift to the left.
D)The supply of the stock would shift to the right.

Question 72

If a person follows a buy-and-hold strategy, she will initiallyhold stocks:

A)until the stock prices rise.
B)until the stock prices fall.
C)until the stock prices stabilize.
D)whether or not stock prices rise or fall.(True Answer )Correct

Question 73

Which of the following statements is TRUE?
I) For every transaction in the stock market there is a buyerand a seller
II)At any point in time, the price of a stock tends to reflect allavailable public information about the company's futureprospects
III) A revolutionary cancer treatment pill will be released nextyear. An investor will get rich by buying stock in that companynow.

A)I and II only
B)III only
C)II and III only
D)I, II, and III

Question 74

Which of the following statements is TRUE?
I) The riskiest stocks tend to move in sync with the economy
II)A relatively safe stock is one that does not vary much withthe state of the economy
III) Health care stocks are some of the riskiest stocks.

A)III only
B)I and II only
C)II and III only
D)I only

Question 75

Technical analysis:

A)looks for patterns in stock prices.
B)can systematically beat market averages, according to research economists.
C)is useful for predicting when stocks will stay above certain price thresholds.
D)All of the answers are correct.

Question 76

Stocks are a good investment if:
I) one is prepared to hold them for a while through marketfluctuations
II)one can buy them immediately after prices have fallen
III) one is not averse to risk.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Question 77

The fact that the majority of stock mutual funds cannotoutperform the stock market averages is consistent with:

A)the no free lunch principle.
B)the risk-return trade-off principle.
C)the efficient markets hypothesis.
D)the active trading hypothesis.

Question 78

An efficient stock market means that:

A)it is difficult to outperform the market, since stock prices convey all relevant public information about a company.(True
Answer )Correct
B)traders with inside information cannot even outperform market averages.
C)new information is slowly reflected in stock prices.
D)All of the answers are correct.

Question 79

About the only way to beat a well-functioning market and makemoney in the short run is:
I) through the efficient markets hypothesis
II)if one has insider information
III) through extreme speed and foresight.

A)I only
B)II and III only
C)II only
D)I, II, and III

Question 80

Popular U.S. stock indexes include:
I) FDICII. Dow Jones Industrial AverageIII. NASDAQ

A)I and II only
B)I and III only
C)II and III only
D)I, II, and III