Chapter 7 2.doc

Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1 Chapter 7 Consumer Choice Using Utility Theory 7.1 Total and Marginal Utility 1) How is utility defined as? A) ease of use B) government provided goods like electricity C) the satisfaction experienced from consuming a good D) the change in benefit from producing one additional unit of a good Answer: C Diff: 1 Topic: Total and Marginal Utility Skill: Definition 2) Which of the following statements about marginal utility is correct? A) the change in total utility resulting from getting one additional unit of a good B) as consumption of a particular good increases, marginal utility decreases C) the satisfaction experienced from consuming a good D) A and B are correct. Answer: D Diff: 1 Topic: Total and Marginal Utility Skill: Definition 3) If Maria gets 80 utils from consuming five cookies, 100 utils from consuming six cookies and 120 utils from consuming seven cookies, then Maria's marginal utility from the sixth cookie is: A) 100 utils. B) 80 utils. C) 40 utils. D) 20 utils. Answer: D Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills

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4) If Joshua gets 200 utils from consuming three slices of pizza, 220 utils from consuming four slices of pizza and 230 utils from consuming five slices of pizza, then the Joshua's marginal utility from the fifth slice of pizza is: A) 230 utils. B) 30 utils. C) 20 utils. D) 10 utils. Answer: D Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 5) If the consumer gets 40 utils from consuming four CDs, 45 utils from consuming five CDs and 48 utils from consuming six CDs, then the consumer's marginal utility from the fifth CD is: A) 5 utils. B) 10 utils. C) 42.5 utils. D) 45 utils. Answer: A Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 6) If the consumer gets 40 utils from consuming four CDs, 45 utils from consuming five CDs and 48 utils from consuming six CDs, then the consumer's marginal utility from the sixth CD is: A) 3 utils. B) 8 utils. C) 46.5 utils. D) 48 utils. Answer: A Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 7) If Crystal gets 140 utils from eating one yogurt, 145 utils from eating two yogurts and 148 utils from eating three yogurts, then Crystal's total utility is: A) increasing. B) decreasing. C) decreasing at decreasing rate. D) constant. Answer: A Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 2 Copyright © 2012 Pearson Education, Inc.

8) If the consumer gets 40 utils from consuming four CDs, 45 utils from consuming five CDs and 48 utils from consuming six CDs, then the consumer's marginal utility is: A) increasing. B) decreasing. C) constant. D) increasing at an increasing rate. Answer: B Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 9) Diminishing marginal utility implies: A) as the consumption of a good increases marginal utility decreases. B) as the consumption of a good increases marginal utility increases. C) as the consumption of a good increases total utility decreases. D) as the consumption of a good increases total utility increases. Answer: A Diff: 2 Topic: Total and Marginal Utility Skill: Conceptual AACSB: Reflective Thinking 10) The law of diminishing marginal utility is that as the consumption of a particular product increases, marginal utility decreases. Answer: TRUE Diff: 2 Topic: Total and Marginal Utility Skill: Conceptual AACSB: Reflective Thinking 11) Utility is the benefit a consumer gets from consuming a good. Answer: TRUE Diff: 1 Topic: Total and Marginal Utility Skill: Definition 12) Marginal utility of beer is the change in utility when production of beer changes. Answer: FALSE Diff: 1 Topic: Total and Marginal Utility Skill: Conceptual AACSB: Reflective Thinking

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13) If the consumer gets 30 utils from consuming four DVDs, 50 utils from consuming five DVDs and 60 utils from consuming six DVDs, then the consumer's marginal utility from the fifth DVD is 10 utils. Answer: FALSE Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 14) Diminishing marginal utility is when total utility declines as a consumer consumes more of a good. Answer: FALSE Diff: 2 Topic: Total and Marginal Utility Skill: Conceptual AACSB: Reflective Thinking 15) Explain what diminishing marginal utility is. Answer: It is when marginal utility declines as consumption of a particular good increases. Diff: 2 Topic: Total and Marginal Utility Skill: Conceptual AACSB: Reflective Thinking 16) If the consumer gets 90 utils from consuming four movies, 120 utils from consuming five movies and 140 utils from consuming six movies, calculate the consumer's marginal utility from the fifth and sixth movies. Answer: The fifth movie gives the consumer 30 utils of marginal utility and the sixth movie provides the consumer with 20 utils of utility. Diff: 2 Topic: Total and Marginal Utility Skill: Analytical AACSB: Analytic Skills 7.2 Consumer Choice 1) Consumers' ability to purchase a good or service is limited by: A) their income only. B) the prices for the goods or services only. C) both the prices and their income. D) their preferences. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 4 Copyright © 2012 Pearson Education, Inc.

2) Which of the following statements about consumer choice theory is TRUE? A) Given the limitations dictated by people's incomes and prices, it helps the consumer choose a commodity bundle of the highest level of utility. B) It provides insights into how consumers make decisions. C) It helps us understand changes in consumption patterns. D) All of the above are true about consumer choice theory. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 3) A decrease in a consumer's budget set can be caused by: A) an increase in prices. B) a decrease in prices. C) an increase in income. D) a change in preferences. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 4) A consumer's budget set: A) is the set of all affordable combinations of two goods. B) includes only combinations of two goods that leave the consumer with leftover money. C) includes only combinations of two goods that exhaust the budget. D) Both A and C are correct answers. Answer: A Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Definition 5) What is the consumer budget line? A) It shows a consumer's tradeoff between two goods. B) It shows the quantity of a single good that a consumer is willing to buy at different prices. C) It shows combinations of two or more different consumers' budget set. D) It includes all combinations of two goods that exhaust the consumer's budget. Answer: D Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Definition

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6) Which of the following statements is incorrect? A) A consumer's budget line includes all the combinations of goods that exhaust the consumer's budget. B) The slope of the budget line equals the market tradeoff between two goods. C) The slope of the budget line is the opportunity cost to a consumer of one good in terms of another good. D) The budget line represents what the consumer wants to do. Answer: D Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 7) Which of the following statements about a consumer's budget line is correct? I. The budget line shows all the combinations of two goods that exhaust the consumer's budget. II. The slope of the budget line shows the market tradeoff between two goods. III. The budget line represents the consumer's preferences or tastes. A) I only B) I and II only C) I and III only D) II and III only Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking

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8) Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of movies and T-shirts? A) A, B and C B) B, C and D C) C, D and F D) A, C and E Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 9) Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of movies and T-shirts? A) A, B and C B) B, C and D C) C, D and G D) A, C and E Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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10) Refer to Figure 7.1. Which of the following are the combinations of movies and T-shirts that would exhaust the budget? A) A and C B) C and E C) B and G D) A and B Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 11) Refer to Figure 7.1. Which of the following are the combinations of movies and T-shirts that would exhaust the budget? A) A and E B) C and F C) D and E D) A and G Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 12) Refer to Figure 7.1. Which of the following statements is incorrect? A) Bundle A costs less than bundle E. B) Bundle C costs as much as bundle D. C) Bundle B costs more than bundle C. D) Bundle F costs more than bundle C. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 13) Refer to Figure 7.1. Which of the following statements is incorrect? A) Bundle F costs less than bundle D. B) Bundle C costs as much as bundle E. C) Bundle G costs more than bundle C. D) Bundle B costs less than bundle C. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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14) Suppose Jackie can buy either video games or DVDs. If the prices of both goods double, and Jackie's income also doubles, what will happen to Jackie's budget line? A) It will shift out. B) It will shift in. C) It will not change. D) It will swivel so that the slope is twice as steep. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 15) What set of all possible combinations does the budget line show? A) The set of all possible combinations that yield the same level of utility to the consumer. B) The set of all possible combinations that maximize a consumer's utility. C) The set of all possible combinations that can be purchased, given the consumer's income and the price of the goods. D) The set of all possible combinations that are equilibrium points. Answer: C Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Definition 16) Suppose Carolyn is on a fixed monthly income of $200 to spend on food while she is in medical school. Further, suppose the price of a single-serving macaroni and cheese is $4 and the price of a baguette is $2. Which one of the following consumption combinations is possible given these prices and income? A) 40 macaroni and cheeses, 50 baguettes B) 15 macaroni and cheeses, 80 baguettes C) 20 macaroni and cheeses, 60 baguettes D) 20 macaroni and cheeses, 100 baguettes Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills

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17) Suppose Mario is given a monthly income of $400 to spend on food while at college. Further, suppose the price of a frozen meal is $8 and the price of a cup of soup is $4. Which one of the following consumption combinations is possible given these prices and income? A) 40 frozen meals, 50 cups of soup B) 15 frozen meals, 80 cups of soup C) 20 frozen meals, 60 cups of soup D) 10 frozen meals 100 cups of soup Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills 18) Suppose that Kelly has a monthly fixed income of $ 1000 and has $200 of her income allocated to buy cookies and movies. Suppose that there is an increase in the price for movies but not in the price for cookies, this will: A) shift the budget line parallel to the left. B) shift the budget line parallel to the right. C) change the slope of the budget line. D) not affect the budget line because income remains constant. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Analytic Skills 19) Suppose that Joyce has a monthly fixed income of $ 2000 and has $100 of her income allocated to buy shoes and pants. Suppose that there is a decrease in the price for shoes but not in the price for pants, this will: A) shift the budget line parallel to the left. B) shift the budget line parallel to the right. C) change the slope of the budget line. D) not affect the budget line because income remains constant. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Analytic Skills

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20) The budget line will shift parallel to the right if: A) income increases. B) income decreases. C) the price of the good on the vertical axis increases. D) the price of the good on the vertical axis decreases. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 21) The budget line will shift parallel to the left if: A) income increases. B) income decreases. C) the price of the good on the vertical axis increases. D) the price of the good on the vertical axis decreases. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 22) Suppose that John has a monthly fixed amount of $200 of his income allocated to buy beer and cigarettes. Suppose that there is an increase in the price for cigarettes and in the price for beer, this will shift: A) indifference curves to the left. B) indifference curves to the right. C) the budget line to the left. D) the budget line to the right. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills 23) Assume that you have a monthly fixed income of $ 1500 and has $50 of your income allocated to buy pizza and ice cream. Suppose that there is a decrease in the price for pizza and in the price for ice cream, this will shift: A) indifference curves to the left. B) indifference curves to the right. C) the budget line to the left. D) the budget line to the right. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills 11 Copyright © 2012 Pearson Education, Inc.

24) Increases in consumer income shift: A) indifference curves to the left. B) indifference curves to the right. C) the budget line to the left. D) the budget line to the right. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 25) Decreases in consumer income shift: A) indifference curves to the left. B) indifference curves to the right. C) the budget line to the left. D) the budget line to the right. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 26) A change in the slope of a budget line reflects: A) a change in the marginal rate of substitution. B) a change in the consumer's preferences. C) a change in consumer income. D) a change in the relative prices of the two goods. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 27) A change in the relative prices of two goods is represented graphically by: A) a change in the slope of an indifference curve. B) a rightward parallel shift of the budget line. C) a leftward parallel shift of the budget line. D) a change in the slope of the budget line. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking

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28) The absolute value of the slope of the budget line is: A) the ratio of the marginal utility of one good to the marginal utility of the other good. B) the ratio of the marginal utility of one good to the price of the other good. C) the ratio of the price of one good to the price of the other good. D) dependent on consumer income. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 29) The budget set is: A) all the points on the budget line. B) the area below the budget line. C) the endpoints of the budget line. D) all the points on the budget line and the area to the left of the budget line. Answer: D Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Definition 30) Suppose that Helen has $50 to spend. Tacos cost $2 and burritos cost $5. Which of the following combinations is NOT on her budget line? A) 0 tacos and 10 burritos B) 0 burritos and 25 tacos C) 8 burritos and 5 tacos D) 10 burritos and 3 tacos Answer: D Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills 31) Suppose that Jessica has a fixed income of $100 per month, which she spends entirely on movies and paperback books. The price of movies is $5 and the price of paperback books is $10. Which of the following combinations is NOT on her budget line? A) 5 paperback books and 10 movies B) 10 paperback books and 0 movies C) 3 paperback books and 14 movies D) 8 paperback books and 5 movies Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills

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32) Suppose that Jeremy has a fixed income of $150 per month, which he spends entirely on movies and books. The price of movies is $5 and the price of books is $15. Which of the following combinations does NOT exhaust his budget? A) 3 books and 21 movies B) 6 books and 12 movies C) 5 books and 17 movies D) 4 books and 18 movies Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills

33) Refer to Figure 7.2. The change in the budget line from line 1 to line 2 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) an increase in the price of coconuts. D) a decrease in consumer income. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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34) Refer to Figure 7.2. The change in the budget line from line 2 to line 3 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) an increase in the price of coconuts. D) an increase in consumer income. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 35) Refer to Figure 7.2. The change in the budget line from line 3 to line 2 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) an increase in the price of coconuts. D) a decrease in consumer income. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 36) Refer to Figure 7.2. The change in the budget line from line 2 to line 1 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) a decrease in consumer income. D) a decrease in the price of coconuts. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 37) Refer to Figure 7.2. The change in the budget line from line 4 to line 3 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) an increase in the price of coconuts. D) an increase in consumer income. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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38) Refer to Figure 7.2. The change in the budget line from line 3 to line 1 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) an increase in the price of coconuts. D) a decrease in consumer income. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 39) Refer to Figure 7.2. The shift in the budget line from line 1 to line 3 could be due to: A) an increase in the price of papayas. B) a decrease in the price of papayas. C) a decrease in the price of coconuts. D) a decrease in consumer income. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 40) Refer to Figure 7.2. The change in the budget line from line 1 to line 4 could be due to a(n) ________ in the price of papayas and a(n) ________ in the price of coconuts. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Diff: 3 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 41) Refer to Figure 7.2. The change in the budget line from line 4 to line 1 could be due to a(n) ________ in the price of papayas and a(n) ________ in the price of coconuts. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: C Diff: 3 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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42) Refer to Figure 7.3. The change in the budget line from line 1 to line 2 could be due to: A) an increase in the price of burritos. B) a decrease in the price of tacos. C) a decrease in the price of burritos. D) an increase in the consumer's income. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 43) Refer to Figure 7.3. The change in the budget line from line 2 to line 1 represents: A) an increase in the price of burritos. B) a decrease in the price of tacos. C) a decrease in income. D) no change in the price of tacos. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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44) Refer to Figure 7.3. The change in the budget line from line 3 to line 1 represents: A) an increase in the price of burritos. B) a decrease in the price of tacos. C) a decrease in income. D) no change in the price of tacos. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 45) Refer to Figure 7.3. The shift in the budget line from line 1 to line 3 represents: A) an increase in the price of burritos. B) a decrease in the price of tacos. C) an increase in income. D) no change in the price of tacos. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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46) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. Then the opportunity cost to her of a book is: A) one hamburger. B) two hamburgers. C) three hamburgers. D) four hamburgers. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 47) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. Then the opportunity cost to her of a hamburger is: A) one book. B) one half of a book. C) one third of a book. D) one fourth of a book. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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48) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. If her budget line rotates from AB to AD, A) her income has increased by $20. B) her income has decreased by $20. C) the price of book has increased by $1. D) the price of book has decreased by $1. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 49) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $60 income. If her budget line rotates from AB to BC, A) her income has increased to $80. B) her income has decreased to $40. C) the price of hamburger has increased by $0.50. D) the price of hamburger has decreased by $0.50. Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 50) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $60 income. If her budget line shifts from AB to CD, A) her income has increased to $80. B) her income has decreased to $40. C) the price of book has decreased by $1. D) the price of hamburger has decreased by $0.50. Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 51) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $120 income. Then the prices of a hamburger and a book are: A) $2 and $5, respectively. B) $3 and $6, respectively. C) $4 and $7, respectively. D) $5 and $8, respectively. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 20 Copyright © 2012 Pearson Education, Inc.

52) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $120 income. If her budget line rotates from CD to AD, A) her income has increased by $30. B) her income has decreased by $30. C) the price of a hamburger has increased by $1. D) the price of a hamburger has decreased by $1. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 53) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $120 income. If her budget line rotates from CD to BC, A) her income has increased by $30. B) her income has decreased by $30. C) the price of a book has increased by $2. D) the price of a book has decreased by $2. Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 54) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $120 income. If her budget line shifts from CD to AB, A) her income has decreased to $60. B) her income has decreased to $90. C) the price of a book has increased by $2. D) the price of a hamburger has increased by $1. Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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55) Refer to Figure 7.5. Assume that Julie currently faces budget line AB. Which of the following events would cause the rotation of her budget line from AB to AC? A) a decrease in the price of rental videos B) a decrease in the price of pizza C) an increase in Julie's income D) a decrease in the prices of both pizza and rental videos Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 56) Refer to Figure 7.5. Assume that Julie currently faces budget line AB. Which of the following events would cause the rotation of her budget line from AB to BF? A) a decrease in the price of rental videos B) a decrease in the price of pizza C) an increase in Julie's income D) a decrease in the prices of both pizza and rental videos Answer: B Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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57) Refer to Figure 7.5. Assume that Julie currently faces budget line AC. If her income remains unchanged, which of the following events could cause the shift of her budget line from AC to DE? A) a decrease in the price of pizza and an increase in the price of rental videos B) an increase in the price of pizza and a decrease in the price of rental videos C) a decrease in both prices D) an increase in both prices Answer: C Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 58) Refer to Figure 7.5. Assume that Julie currently faces budget line DE. If her income remains unchanged, which of the following events could cause the shift of her budget line from DE to AC? A) a decrease in the price of pizza and an increase in the price of rental videos B) an increase in the price of pizza and a decrease in the price of rental videos C) a decrease in both prices D) an increase in both prices Answer: D Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills 59) Refer to Figure 7.5. Assume that Julie currently faces budget line DE. If her income remains unchanged, which of the following events could cause the shift of her budget line from DE to BF? A) a decrease in the price of pizza and an increase in the price of rental videos B) an increase in the price of pizza and a decrease in the price of rental videos C) a decrease in both prices D) an increase in both prices Answer: A Diff: 2 Topic: Consumer Constraints and the Budget Line, graphing Skill: Analytical AACSB: Analytic Skills

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60) Suppose that for Sarah the marginal benefit per dollar spent on pork exceeds the marginal benefit per dollar spent on chicken. Sarah can always increase her utility by buying: A) more pork and less chicken. B) less pork and more chicken. C) more of both goods. D) Sarah is already maximizing utility. Answer: A Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 61) Suppose that for George the marginal benefit per dollar spent on tuna is less than the marginal benefit per dollar spent on ham. The consumer can always increase his utility by buying: A) more tuna and less ham. B) less tuna and more ham. C) more of both goods. D) The consumer is already maximizing utility. Answer: B Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 62) Suppose that for Virginia the marginal benefit per dollar spent on make-up is less than the benefit per dollar spent on clothes. Virginia can always increase her utility by buying: A) more make-up and fewer clothes. B) fewer make-up and more clothes. C) more of both goods. D) Virginia is already maximizing utility. Answer: B Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 63) Suppose that the marginal benefit per dollar spent on bicycles exceeds the marginal benefit per dollar spent on skateboards. The consumer can always increase her utility by buying: A) more bicycles and fewer skateboards. B) fewer bicycles and more skateboards. C) more of both goods. D) The consumer is already maximizing utility. Answer: A Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 24 Copyright © 2012 Pearson Education, Inc.

64) Suppose that the marginal benefit per dollar spent on pop tarts exceeds the marginal benefit per dollar spent on waffles. The consumer can always increase her utility by buying: A) more pop tarts and fewer waffles. B) fewer pop tarts and more waffles. C) more of both goods. D) The consumer cannot increase her utility. Answer: A Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 65) Suppose that the marginal benefit per dollar spent on pop tarts is less than the marginal benefit per dollar spent on waffles. The consumer can always increase her utility by buying: A) more pop tarts and fewer waffles. B) fewer pop tarts and more waffles. C) more of both goods. D) The consumer cannot increase her utility. Answer: B Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Analytical AACSB: Analytic Skills 66) A consumer should increase her consumption of good X relative to good Y if: A) the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar spent on good Y. B) the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar spent on good Y. C) the marginal benefit per dollar spent on good X is the same as the marginal benefit per dollar spent on good Y. D) none of the above Answer: A Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Conceptual AACSB: Reflective Thinking

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67) A consumer should increase her consumption of good Y relative to good X if: A) the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar spent on good Y. B) the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar spent on good Y. C) the marginal benefit per dollar spent on good X is the same as the marginal benefit per dollar spent on good Y. D) none of the above Answer: B Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Conceptual AACSB: Reflective Thinking

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Additional Application TELEVISION VERSUS RADIO ADVERTISING The equimarginal rule is a general-purpose rule that can be used by any person or organization that has at least two alternative activities. For example, consider a firm that has a fixed amount of money to spend on advertising. The firm could use the equimarginal rule to pick the best mix of radio and television advertising. The benefit of advertising is the resulting increase in sales revenue, and the marginal benefit equals the increase in revenue from one more minute of airtime. Using the equimarginal rule, the firm would pick the combination of radio and TV advertisements where the bang per buck of radio equals the bang per buck of TV:

We can use a simple example to show how the firm could apply the equimarginal rule. Suppose the firm has a fixed advertising budget and initially uses 5 minutes of radio ads and 5 minutes of TV ads. Suppose an additional minute of radio advertising increases sales revenue by $5,000, and an additional minute of TV advertising increases sales revenue by $8,000. If the price of radio advertising is $1,000 per minute and the price of TV advertising is $4,000 per minute, the bang per buck of radio is 5, compared to only 2 for TV:

In this case, radio gives a bigger bang per buck, so it would be sensible to run more radio ads and fewer TV ads. The firm will continue to increase radio ads and decrease TV ads until the bang per buck for radio equals the bang per buck for TV. 68) Recall the Application on "Television Versus Radio Advertising." If a firm can buy a TV ad for $1000 and a radio spot for $50 and it estimates at its current level of advertising that the marginal sales revenue from TV ads at $5,000 and the marginal sales revenue from radio ads at $250, the firm should: A) purchase more TV spots and fewer radio spots. B) purchase more radio spots and fewer TV spots. C) stop advertising all together. D) not change advertising purchases. Answer: D Diff: 2 Topic: Additional Application Skill: Analytical AACSB: Analytic Skills

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69) Recall the Application on "Television Versus Radio Advertising." If a firm with a fixed advertising budget can buy a TV ad for $1000 and a radio spot for $50 and it estimates at its current level of advertising that the marginal sales revenue from TV ads at $5,000 and the marginal sales revenue from radio ads at $300, the firm should: A) purchase more TV spots and fewer radio spots. B) purchase more radio spots and fewer TV spots. C) stop advertising all together. D) not change advertising purchases. Answer: B Diff: 2 Topic: Additional Application Skill: Analytical AACSB: Analytic Skills 70) Recall the Application on "Television Versus Radio Advertising." In deciding where to spend its advertising budget, a firm will consider: A) the relative price of TV and radio ads. B) marginal sales revenue from each media divided by the price of each media. C) firm profits. D) fixed costs. Answer: B Diff: 2 Topic: Additional Application Skill: Conceptual AACSB: Reflective Thinking 71) A consumer's budget line is very similar with a demand curve in that both curves show the possible combination of two goods. Answer: FALSE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 72) All the combinations of two goods on a consumer's budget line must generate different levels of utility. Answer: TRUE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 73) A consumer can afford any combinations of two goods on or below the budget line. Answer: TRUE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 28 Copyright © 2012 Pearson Education, Inc.

74) A consumer's budget set includes all affordable combinations of two goods. Answer: TRUE Diff: 1 Topic: Consumer Constraints and the Budget Line Skill: Definition 75) An increase in income shifts the budget line to the right. Answer: TRUE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 76) An increase in income shifts the budget line to the left. Answer: FALSE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 77) An increase in consumer's income does not change the slope of the budget line. Answer: TRUE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 78) Other things being equal, an increase in the price of a good will always make a consumer worse off. Answer: TRUE Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 79) If the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar spent on good Y, the consumer should consume more X and less Y. Answer: TRUE Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Conceptual AACSB: Reflective Thinking

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80) What does the consumer's budget line show? Answer: The budget line shows what the consumer can do in the market place. Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Conceptual AACSB: Reflective Thinking 81) Baseballs cost $5 each and baseball gloves cost $20. Assume you have $100 to spend on these items. Putting baseballs on the vertical axis, draw the budget line representing this situation. What is the slope of the budget line? Answer: The budget line should be a straight line with vertical intercept at B = 20 (= $100/$5), and horizontal intercept at G = 5 (= $100/$20). The slope is -4. Diff: 2 Topic: Consumer Constraints and the Budget Line Skill: Analytical AACSB: Analytic Skills 82) Explain why the equimarginal rule is a necessary condition for utility maximization. Answer: The easiest way to explain this is to consider what would happen if the marginal benefit per dollar spent on good X were not equal to the marginal benefit per dollar spent on good Y. Suppose that the marginal benefit per dollar spent on good X exceeds the marginal benefit per dollar spent on good Y. Then the consumer could spend one fewer dollar on Y and one more dollar on X and still be within her budget constraint. She would lose utility equal to approximately "the marginal benefit of good Y / the price of good Y," but would gain utility equal to approximately "the marginal benefit of good X / the price of good X." Since the latter is greater than the former, total utility would increase. Therefore utility could NOT have been maximized before. A similar argument holds when the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar spent on good Y. Diff: 2 Topic: Making Choices Using the Equimarginal Rule Skill: Conceptual AACSB: Reflective Thinking 7.3 The Individual Demand Curve 1) The relationship between the price of a good and the quantity that a single consumer is willing to buy during a particular time period is shown by the: A) market supply curve. B) individual supply curve. C) market demand curve. D) individual demand curve. Answer: D Diff: 1 Topic: The Individual Demand Curve Skill: Definition

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2) Which of the following statements are TRUE about an individual demand curve? A) An individual demand curve is negatively sloped and shows the price of a good and the quantity that a single consumer is willing to sell during a particular time period. B) An individual demand curve is positively sloped and shows the price of a good and the quantity that all consumers are willing to buy during a particular time period. C) An individual demand curve is negatively sloped and shows the quantity of a good that a single consumer is willing to buy, and the amount of time to consume the good. D) An individual demand curve is negatively sloped and shows the price of a good and the quantity that a single consumer is willing to buy during a particular time period. Answer: D Diff: 1 Topic: The Individual Demand Curve Skill: Definition 3) Robert's demand curve for pizza: A) shows the quantity of pizza that Robert consumes as his income changes. B) assumes that the only variables that change are the price of pizza and the quantity of pizza demanded by Robert. C) makes no assumptions about Robert's income. D) assumes that the only variable that changes is Robert's preference for pizza. Answer: B Diff: 2 Topic: The Individual Demand Curve Skill: Conceptual AACSB: Reflective Thinking 4) Kim's demand curve for sodas: A) assumes that the only variables that change are the price of sodas and the quantity of sodas demanded by Kim. B) shows the quantity of sodas Kim consumes as her preference for sodas change. C) makes no assumptions about Kim's preference for sodas. D) assumes that the only variable that changes is Kim's income. Answer: A Diff: 2 Topic: The Individual Demand Curve Skill: Conceptual AACSB: Reflective Thinking 5) The change in the quantity consumed that is caused by a change in the relative price of a good, with real income held constant, refers to the A) substitution effect. B) income effect. C) equimarginal rule. D) law of diminishing marginal utility. Answer: A Diff: 1 Topic: The Income and Substitution Effects of a Price Change Skill: Definition 31 Copyright © 2012 Pearson Education, Inc.

6) The change in the quantity consumed that is caused by a change in real income, with the relative prices held constant, refers to the A) substitution effect. B) income effect. C) equimarginal rule. D) law of diminishing marginal utility. Answer: B Diff: 1 Topic: The Income and Substitution Effects of a Price Change Skill: Definition 7) Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both goods to be normal goods. If Claudia's income increases and the prices of the two goods remain constant, she will A) rent more DVDs and purchase less chewing gum. B) rent more DVDs and purchase more chewing gum. C) rent fewer DVDs and purchase more chewing gum. D) rent fewer DVDs and purchase less chewing gum. Answer: B Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 8) Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both goods to be normal goods. If Claudia's income stays constant and the relative price of DVD rentals increases, she will A) rent more DVDs and purchase less chewing gum. B) rent more DVDs and purchase more chewing gum. C) rent fewer DVDs and purchase more chewing gum. D) rent fewer DVDs and purchase less chewing gum. Answer: C Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking

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9) Dino spends his income on two goods, cigars and peppermints. He considers both goods to be normal goods. If Dino's income decreases and the prices of the two goods remain constant, he will purchase A) more cigars and fewer peppermints. B) more cigars and more peppermints. C) fewer cigars and more peppermints. D) fewer cigars and fewer peppermints. Answer: D Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 10) Dino spends his income on two goods, cigars and peppermints. He considers both goods to be normal goods. If Dino's income remains constant and the relative price of cigars decreases, he will purchase A) more cigars and fewer peppermints. B) more cigars and more peppermints. C) fewer cigars and more peppermints. D) fewer cigars and fewer peppermints. Answer: A Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 11) If the relative price of plasma TVs (a normal good) decreases and real income increases, the quantity of plasma TVs increases, which is represented by a ________. A) movement downward along the demand curve B) movement upward along the demand curve C) rightward shift of the demand curve D) leftward shift of the demand curve Answer: A Diff: 2 Topic: Points on the Demand Curve Skill: Conceptual AACSB: Reflective Thinking

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12) For normal goods, the substitution effect and the income effect work in ________, generating a ________ sloped demand curve. A) opposite directions; downward B) the same direction; downward C) opposite directions; upward D) the same; upward Answer: B Diff: 2 Topic: Points on the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Recall the Application about the proposed tax on soft drinks to answer the following question(s). 13) Recall the Application. All else equal, if the equimarginal rule is applied, a tax added to soft drinks will ________ the consumption of soft drinks and ________ the consumption of substitutes, such as fruit juice. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Diff: 2 Topic: Application 1, A Tax on Soft Drinks Skill: Conceptual AACSB: Reflective Thinking Recall the Application about the price of online music to answer the following question(s). 14) Recall the Application. Frankie spends $20 per month to download 20 songs. The price of online music is going to increase by $1.00 per download, and Frankie's real income is going to increase by $20 per month. Assuming the relative prices of other goods do not change, Frankie will A) continue to download 20 songs per month. B) download more than 20 songs per month. C) download less than 20 songs per month. D) download more than 20 but less than 40 songs per month. Answer: C Diff: 2 Topic: Application 2, The Price of Pirate Songs Skill: Conceptual AACSB: Reflective Thinking

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15) The individual demand curve shows the relationship between quantity demanded and the price of a product. Answer: TRUE Diff: 1 Topic: The Individual Demand Curve Skill: Definition 16) The individual demand curve is drawn holding tastes, income and the prices of other goods constant. Answer: TRUE Diff: 2 Topic: The Individual Demand Curve Skill: Conceptual AACSB: Reflective Thinking 17) An income effect comes about because a price reduction of one product increases a consumers real income. Answer: TRUE Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 18) A substitution effect comes about because a price reduction of one product gives consumers more income to spend on other goods. Answer: FALSE Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 19) If Linda's income goes up, she will consume more of all normal goods. Answer: TRUE Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 20) If consumer income and prices all are cut in half, then the consumers' real income doubles. Answer: FALSE Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking

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21) If consumer income and all prices double, then the budget line does not change. Answer: TRUE Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 22) What assumptions are required to draw an individual demand curve? Answer: The individual demand curve assumes that tastes, prices of other goods, expectations and income are constant. Diff: 2 Topic: The Individual Demand Curve Skill: Conceptual AACSB: Reflective Thinking 23) Explain the income and substitution effects. Answer: The income effect is for people to consume more of normal goods when the prices of a good falls increasing real income. The substitution effect is for people to consume more of a relatively cheaper good whose price has fallen. Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Conceptual AACSB: Reflective Thinking 7.4 Consumer Puzzles: Free Goods and Branding Recall the Application about Amazon.com's shipping charges to answer the following question(s). 1) Recall the Application. What was the difference in sales between Amazon.com introducing a free shipping for U.S. order over $25 compared to cheap shipping offered by a company in France for orders over $25? A) Sales increase by relatively small amounts with the free shipping than with the cheap shipping. B) Sales increase dramatically with the free shipping than with the cheap shipping. C) Consumers in France were better off than consumers in the US. D) Consumers are highly responsive to discounts in France than in the US. Answer: B Diff: 2 Topic: Application 3, The Big Difference Between $0.20 and Free! Skill: Conceptual AACSB: Reflective Thinking

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2) Recall the Application. If a company in the U.S. would like to increase sales, what would be the best incentive for customer to consume more of a product? A) Offer discounted goods or services. B) Incorporate free goods or services. C) Consumers are indifferent to any kind of incentives. D) None of the above will persuade customers to buy more of a product. Answer: B Diff: 2 Topic: Application 3, The Big Difference Between $0.20 and Free! Skill: Conceptual AACSB: Reflective Thinking Recall the Application about the taste testes between Coke and Pepsi to answer the following question(s). 3) Recall the Application. Product branding impacts consumers' preferences. Which of the following is why people prefer Coke when doing the tests? A) Coca-Cola did the tests with consumers seeing the labels. B) Pepsi runs its blind tasting tests. C) The test were done during the summer. D) Consumers were randomly chosen. Answer: A Diff: 2 Topic: Application 4, Neuroscience and the Cola Challenge Skill: Fact 7.5 Appendix 1: Consumer Constraints and Preferences 1) What does an indifference curve show? A) different ways for a consumer to reach various levels of satisfaction B) a unique combination of two goods that generates a particular level of utility C) the preferences of an individual consumer D) the similarities between two goods Answer: C Diff: 1 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking

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2) Which of the following statements about a consumer's indifference curve is correct? I. The indifference curve is negatively sloped. II. The indifference curve becomes flatter as we move downward along the curve. III. The slope of the indifference curve shows the market tradeoff between two goods. A) I only B) I and II only C) I and III only D) I, II, and III Answer: B Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 3) As we move upward along a consumer's indifference curve, the marginal rate of substitution: A) increases and the indifference curve becomes flatter. B) decreases and the indifference curve becomes flatter. C) increases and the indifference curve becomes steeper. D) decreases and the indifference curve becomes steeper. Answer: C Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 4) As we move downward along a consumer's indifference curve, the consumer's tradeoff between two goods: A) increases and the consumer's utility increases. B) decreases and the consumer's utility decreases. C) increases and the consumer's utility remains unchanged. D) decreases and the consumer's utility remains unchanged. Answer: D Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 5) All combinations along a consumer's indifference curve generate ________ utility level A) greater B) lower C) the same D) There is not sufficient information. Answer: C Diff: 1 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 38 Copyright © 2012 Pearson Education, Inc.

6) All combinations of two goods above a consumer's indifference curve generate ________ utility than combinations of the two goods on the curve. A) greater B) lower C) the same D) There is not sufficient information. Answer: A Diff: 1 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 7) An indifference curve represents the set of: A) all possible combinations of goods that yield the same level of utility to the consumer. B) all possible combinations of goods that maximize a consumer's utility. C) all possible combinations of two goods that can be purchased, given the consumer's income and the price of the goods. D) all equilibrium points. Answer: A Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Definition 8) What is the slope of an indifference curve called? A) marginal rate of consumption B) marginal rate of substitution C) marginal result of demand D) marginal utility rate Answer: B Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Analytical AACSB: Analytic Skills 9) What is the absolute value of the slope of an indifference curve? A) the ratio of the marginal utility of one good to the price of the other good B) the marginal rate of substitution between one good and the other C) the result of the quantity demanded at the price of one good to the price of the other good D) It is dependent on consumer income. Answer: B Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Analytical AACSB: Analytic Skills

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10) Which of the following preference rankings is NOT consistent with Figure 7.6? A) B is preferred to A. B) C is preferred to B. C) D is preferred to C. D) E is preferred to D. Answer: C Diff: 2 Topic: Consumer Preferences: Indifference Curves, graphing Skill: Analytical AACSB: Analytic Skills 11) Which of the following preference rankings is NOT consistent with Figure 7.6? A) I is preferred to H. B) H is preferred to G. C) G is preferred to F. D) F is preferred to E. Answer: C Diff: 2 Topic: Consumer Preferences: Indifference Curves, graphing Skill: Analytical AACSB: Analytic Skills

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12) Which of the following preference rankings is NOT consistent with Figure 7.6? A) The consumer is indifferent between F and G, which are preferred to D. B) The consumer prefers E to C, which is preferred to B. C) The consumer is indifferent between C and D, which are preferred to A. D) The consumer prefers H to E, which is preferred to G. Answer: D Diff: 2 Topic: Consumer Preferences: Indifference Curves, graphing Skill: Analytical AACSB: Analytic Skills 13) Which of the following preference rankings is NOT consistent with Figure 7.6? A) The consumer prefers G to D, which is preferred to B. B) The consumer prefers I to H, which is preferred to F. C) The consumer prefers G to E, which is preferred to D. D) The consumer prefers H to D, which is preferred to E. Answer: D Diff: 2 Topic: Consumer Preferences: Indifference Curves, graphing Skill: Analytical AACSB: Analytic Skills 14) To represent the notion that consumers prefer more of a good to less, economists: A) draw indifference curves as downward sloping. B) draw budget constraints as downward sloping. C) shift budget constraints to the right. D) shift budget constraints to the left. Answer: A Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 15) An indifference curve map is a set of indifference curves, each with the same level of utility. Answer: FALSE Diff: 1 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 16) Indifference curves show what a consumer can do in the market place. Answer: FALSE Diff: 1 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 41 Copyright © 2012 Pearson Education, Inc.

17) An indifference curve becomes flatter ass we move downward along the curve. Answer: TRUE Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 18) In some instances, it is possible for indifference curves to cross one another. Answer: FALSE Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 19) Andrew believes that one unit of good X is perfectly substitutable for one unit of good Y. Explain whether or not his indifference curve becomes flatter as we move downward along the indifference curve. Answer: If Andrew considers each unit of good X as a perfect substitute for one unit of good Y, he will enjoy the same level of utility as he gives up one unit of good Y for each additional unit of good X. Thus his tradeoff between the two goods, or the marginal rate of substitution, remains unchanged. Therefore his indifference curve will be a downward-sloping straight line and will not become flatter as we move downward along the curve. Diff: 3 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 20) Explain why a consumer's indifference curve is negatively sloped. Answer: Consider a consumer's indifference curve that shows all combinations of two goods X (shown on the horizontal axis) and Y (shown on the vertical axis) that generate the same level of utility or satisfaction. As we move downward along the consumer's indifference curve, the consumer increases the consumption of good X. Since all combinations of the two goods on the indifference curve must generate the same level of utility, the consumer must decrease the consumption of good Y to keep his or her utility constant. Thus the consumer's indifference curve must be negatively sloped. Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking

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21) Explain the marginal rate of substitution between two goods. Answer: The marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute one good for another along the consumer's indifference curve. Since it is assumed that all combinations of two goods on an indifference curve must generate the same level of utility, a consumer must decrease the consumption of one good while increasing the consumption of another along the indifference curve. Furthermore, since it is implicitly assumed that consumers prefer balanced consumption to extremes, the marginal rate of substitution decreases as we move further downward along the indifference curve. Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 22) Explain why indifference curves can never cross. Answer: If indifference curves cross, then there exists a point on one indifference curve that lies strictly to the northeast of the other indifference curve. Call this point A. By definition, a consumer is indifferent between this point and the point where the indifference curves intersect (point B). Also by definition, the consumer is indifferent between point B and some point (point C) on the section of the indifference curve that lies to the southwest of point A. This means that by transitivity, the consumer is indifferent between point A and point C. But point A represents a combination of goods that has more of both goods than point C, so the consumer should not be indifferent between A and C. Diff: 2 Topic: Consumer Preferences: Indifference Curves Skill: Conceptual AACSB: Reflective Thinking 7.6 Appendix 2: Maximizing Utility 1) Which of the following statements is correct about the budget line and the indifference curve? A) The budget line represents the consumer's limitations and the indifference curve represents the consumer's preferences. B) The budget line represents the consumer's preferences and the indifference curve represents the consumer's limitations. C) The budget line represents the consumer's highest utility levels and the indifference curve represents the consumer's limitations. D) The budget line represents the consumer's preferences and the indifference curve represents the consumer's constraints. Answer: A Diff: 2 Topic: Maximizing Utility Skill: Conceptual AACSB: Reflective Thinking

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2) Given Anna's budget and the prices of two goods, Anna maximizes her utility by: A) choosing the combination of the two goods for which the MRS is equal to the price ratio. B) choosing the combination of the two goods for which the MRS is smaller than the price ratio. C) choosing the combination of the two goods for which the MRS is greater than the price ratio. D) There is not sufficient information. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 3) As a consumer moves along an indifference curve, the benefits of trading will be exhausted only when: A) the MRS equals the price ratio. B) the MRS is greater than the price ratio. C) the MRS is smaller than the price ratio. D) There is not sufficient information. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 4) Which of the following describes the utility-maximizing rule? A) A consumer's tradeoff between two goods is greater than the market tradeoff between the two goods. B) A consumer's tradeoff between two goods is equal to the market tradeoff between the two goods. C) A consumer's tradeoff between two goods is smaller than the market tradeoff between the two goods. D) There is not sufficient information. Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 5) Increases in utility are represented by moving: A) to an indifference curve to the northeast. B) to an indifference curve to the southwest. C) to a higher budget line. D) to a lower budget line. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 44 Copyright © 2012 Pearson Education, Inc.

6) Decreases in utility are represented by moving: A) to an indifference curve to the northeast. B) to an indifference curve to the southwest. C) to a higher budget line. D) to a lower budget line. Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 7) A consumer maximizes utility by choosing: A) a combination of goods such that the marginal rate of substitution is greater than the price ratio. B) a combination of goods such that the marginal rate of substitution is less than the price ratio. C) a combination of goods such that the marginal rate of substitution is equal to the price ratio. D) the highest indifference curve drawn on the indifference map. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 8) Suppose Arthur chooses a combination of goods such that his MRS is equal to the price ratio. Then we know: A) the absolute value of the slope of Arthur's budget constraint is steeper than the absolute value of the slope of his indifference curve. B) the absolute value of the slope of Arthur's indifference curve is steeper than the absolute value of the slope of his budget constraint. C) Arthur is maximizing his utility. D) Arthur could gain more utility by purchasing less of both goods. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking

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9) Refer to Figure 7.7. The marginal rate of substitution (in absolute value) is ________ the price ratio (in absolute value) at point A; ________ the price ratio at point B; and ________ the price ratio at point C (trading peaches for herbs). A) greater than; less than; equal to B) less than; equal to; greater than C) equal to; less than; equal to D) greater than; equal to; less than Answer: D Diff: 3 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 10) Which of the following preference rankings is consistent with Figure 7.7? A) D is preferred to B, which is preferred to C. B) C is preferred to B, which is preferred to A. C) A is preferred to B, which is preferred to C. D) D is preferred to A, which is preferred to C. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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11) Which of the following preference rankings is consistent with Figure 7.7? A) D is preferred to B, which is equivalent in utility terms to C. B) C is preferred to B, which is preferred to A. C) A is preferred to B, which is preferred to D. D) D is preferred to A, which is equivalent in utility terms to C. Answer: D Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 12) Refer to Figure 7.7. Which of the following is true? A) D is preferred to B. B) A is preferred to C. C) C is preferred to A. D) B is preferred to D. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 13) Refer to Figure 7.7. The consumer is indifferent between which two pairs of points? A) A and B B) A and C C) B and C D) all of the above Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 14) Refer to Figure 7.7. Which point can the consumer NOT afford? A) A B) B C) C D) D Answer: D Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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15) Refer to Figure 7.7. If the consumer is purchasing the combination of peaches and herbs represented by point A, she could increase utility by purchasing: A) more of both goods. B) more peaches and fewer herbs. C) more herbs and fewer peaches. D) The consumer cannot increase her utility because she is spending all of her money. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 16) Refer to Figure 7.7. If the consumer is purchasing the combination of peaches and herbs represented by point C, she could increase utility by purchasing: A) more of both goods. B) more peaches and fewer herbs. C) more herbs and fewer peaches. D) The consumer cannot increase her utility because she is spending all of her money. Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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17) Which of the following combinations in Figure 7.8 describes a situation where a consumer's subjective tradeoff between the two goods (in absolute value) is greater than the market tradeoff between the two goods? A) A B) B C) C D) There is not sufficient information. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 18) Which of the following combinations in Figure 7.8 describes a situation where a consumer's subjective tradeoff between the two goods (in absolute value) is less than the market tradeoff between the two goods? A) A B) B C) C D) There is not sufficient information. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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19) Which of the following combinations in Figure 7.8 describes a situation where a consumer's subjective tradeoff between the two goods (in absolute value) is equal to the market tradeoff between the two goods? A) A B) B C) C D) There is not sufficient information. Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 20) Refer to Figure 7.8. If a consumer is in a situation where her subjective tradeoff between the two goods (in absolute value) is greater than the market tradeoff between the two goods, she can maximize her utility by purchasing: A) more books and fewer movie tickets. B) fewer books and more movie tickets. C) fewer books and fewer movie tickets. D) more books and more movie tickets. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 21) Refer to Figure 7.8. If a consumer is in a situation where her subjective tradeoff between the two goods (in absolute value) is less than the market tradeoff between the two goods, she can maximize her utility by purchasing: A) more books and fewer movie tickets. B) fewer books and more movie tickets. C) fewer books and fewer movie tickets. D) more books and more movie tickets. Answer: B Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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22) Refer to Figure 7.9. If Tracy moves from point B to point A, which of the following statements is NOT consistent with her situation? A) Each additional movie ticket she buys has a smaller positive impact on her utility. B) Each additional book she gives up has a larger negative impact on her utility. C) Tracy is willing to trade many books to get one additional movie ticket. D) Tracy is willing to trade many movie tickets for an additional book. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills 23) Refer to Figure 7.9. If Tracy moves from point B to point C, which of the following statements is NOT consistent with her situation? A) Each additional movie ticket she gives up has a larger negative impact on her utility. B) Each additional book she gives up has a smaller positive impact on her utility. C) Tracy is willing to trade many books to get one additional movie ticket. D) Tracy is willing to trade many movie tickets for an additional book. Answer: D Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing Skill: Analytical AACSB: Analytic Skills

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24) Suppose that Daniel is maximizing his utility, and then his monthly income increases from $1200 to $1300. Daniel will end up: A) on a lower indifference curve than before. B) on the same indifference curve as before. C) on a higher indifference curve than before. D) shifting his budget line to the left. Answer: C Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 25) Suppose that a consumer is maximizing her utility, and then the consumer's income decreases. What will happen? A) The consumer will end up on a lower indifference curve than before. B) The consumer will end up on the same indifference curve as before. C) The consumer will end up on a higher indifference curve than before. D) The consumer's budget line will shift to the right. Answer: A Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking Recall the Application about a consumer's marginal rate of substitution to answer the following question(s). 26) Recall the Application. If a utility maximizing consumer consumes two goods, DVDs that cost $15 and pizzas that cost $10, the consumer's marginal rate of substitution would be: A) no pizzas for DVDs. B) 1.5 DVDs for a pizza. C) 1.5 pizzas for a DVD. D) no DVDs for a pizza. Answer: B Diff: 2 Topic: Application 1, What's Your MRS? Skill: Analytical AACSB: Analytic Skills

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27) Recall the Application. If a consumer is maximizing utility, then we can find that consumers marginal rate of substitution by: A) the ratio of the consumers measured marginal utilities. B) the ratio of income to prices. C) the ratio of total utility to prices. D) the ratio of the prices of the goods. Answer: D Diff: 2 Topic: Application 1, What's Your MRS? Skill: Conceptual AACSB: Reflective Thinking Recall the Application about Amazon.com's shipping charges to answer the following question(s). 28) Recall the Application. If a firm wants to increase sales in the United States, what should they do based on the information given in the Application? A) produce larger quantities of the product B) offer discounted products C) incorporate free products into their marketing D) discount the shipping price to almost zero Answer: C Diff: 2 Topic: Application 2, The Big Difference Between $0.20 and Free! Skill: Conceptual AACSB: Reflective Thinking 29) A person maximizes utility by setting the marginal benefit of one good equal to the marginal benefit of the other. Answer: FALSE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 30) A consumer maximizes her utility when she chooses the combination of two goods where the indifference curve is tangent to the budget line. Answer: TRUE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking

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31) The MRS does not have to equal the price ratio for utility to be maximized. Answer: FALSE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 32) Prices of goods and income are the only things a consumer must consider when deciding how much of a good to purchase. Answer: FALSE Diff: 1 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 33) A consumer can improve her well-being if her marginal rate of substitution exceeds the price ratio. Answer: TRUE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 34) A consumer can improve her well-being if her marginal rate of substitution is equal to the price ratio. Answer: FALSE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 35) A consumer maximizes his utility by choosing the quantity to consume where his marginal benefit is the greatest. Answer: FALSE Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 36) Explain the utility maximization rule. Answer: Consumers maximize utility when they pick their consumption bundle so that the marginal rate of substitution equals the price ratio. Diff: 2 Topic: The Utility-Maximizing Rule: MRS = Price Ratio Skill: Conceptual AACSB: Reflective Thinking 54 Copyright © 2012 Pearson Education, Inc.

7.7 Appendix 3: Drawing the Individual Demand Curve 1) Suppose that we draw Clara's demand curve for books using both her budget line and indifference curves for movies and books. Which of the following variables is held fixed? I. Clara's preferences for the two goods II. The price of movies III. Clara's income A) I and II only B) I and III only C) II and III only D) I, II and III Answer: D Diff: 2 Topic: The Negatively Sloped Demand Curve Skill: Conceptual AACSB: Reflective Thinking 2) Suppose that we draw Tom's demand curve for hot dogs using both his budget line and indifference curves for hot dogs and sandwiches. Which of the following variables is held fixed? I. Tom's preferences for the two goods II. The price of sandwiches III. The price of hot dogs A) I and II only B) I and III only C) II and III only D) I, II and III Answer: A Diff: 2 Topic: The Negatively Sloped Demand Curve Skill: Conceptual AACSB: Reflective Thinking

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3) If the consumer in Figure 7.10 begins at point A, the change in the budget line is due to: A) the price of good X falling. B) the price of good X rising. C) the price of good Y falling. D) the price of good Y rising. Answer: B Diff: 2 Topic: The Negatively Sloped Demand Curve, graphing Skill: Analytical AACSB: Analytic Skills 4) If the consumer in Figure 7.10 begins at point A, when the price of good X rises, the consumption of X changes to: A) X1. B) X2. C) X3. D) X4. Answer: B Diff: 2 Topic: The Negatively Sloped Demand Curve, graphing Skill: Analytical AACSB: Analytic Skills

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5) If the consumer in Figure 7.10 begins at point A, then: A) the price of X increases and the quantity of X falls. B) income falls and the consumption of X and Y falls. C) the price of Y falls and the quantity of Y rises. D) rises and the consumption of X and Y rises. Answer: A Diff: 2 Topic: The Negatively Sloped Demand Curve, graphing Skill: Analytical AACSB: Analytic Skills 6) Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both goods to be normal goods. If Claudia's income stays constant and the relative prices of DVD rentals and chewing gum increase, Claudia's budget line shifts ________ and she will shift to a ________ indifference curve. A) outward; higher B) outward; lower C) inward; higher D) inward; lower Answer: D Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Analytical AACSB: Analytic Skills 7) Dino spends his income on two goods, cigars and peppermints. He considers both goods to be normal goods. If Dino's income increases and the prices of the two goods remain constant, Dino's budget line ________ and he will shift to a ________ indifference curve. A) shifts outward; higher B) shifts outward; lower C) does not shift; higher D) shifts inward; higher Answer: A Diff: 2 Topic: The Income and Substitution Effects of a Price Change Skill: Analytical AACSB: Analytic Skills

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Recall the Application about the price of online music to answer the following question(s). 8) Recall the Application. Frankie spends $20 per month to download 20 songs. The price of online music is going to increase by $1.00 per download, and Frankie's real income is going to increase by $20 per month. Assuming the relative prices of other goods do not change, Frankie will A) move down his existing budget line toward the "other goods." B) move up his budget line toward "music downloads." C) see his budget curve shift outward. D) see his budget curve shift inward. Answer: A Diff: 2 Topic: Application 3, The Price of Pirate Songs Skill: Analytical AACSB: Analytic Skills 9) A demand curve is drawn holding the price of other goods constant. Answer: TRUE Diff: 2 Topic: The Negatively Sloped Demand Curve Skill: Conceptual AACSB: Reflective Thinking 10) A demand curve is drawn allowing for changes in preferences. Answer: FALSE Diff: 2 Topic: The Negatively Sloped Demand Curve Skill: Conceptual AACSB: Reflective Thinking 11) Explain the ceteris paribus assumption we use when we draw a demand curve. Answer: Ceteris paribus means "other things being equal." To draw a consumer's demand curve for a product, we assume that everything except for the price of the product is fixed. In other words, we allow only the price of the product to vary, holding fixed the consumer's income, preferences, and the prices of related goods. Diff: 2 Topic: The Negatively Sloped Demand Curve Skill: Conceptual AACSB: Reflective Thinking

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