chapter 06 practice mc

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Ch. 06 Practice MC1. The utility of a good or service:

A. is synonymous with usefulness.B. is the satisfaction or pleasure one gets from consuming it.C. is easy to quantify.D. rarely varies from person to person.

2. The ability of a good or service to satisfy wants is called:A. utility maximization.B. opportunity cost.C. revenue potential.D. utility.

3. Refer to the above data. The value for X is:A. 15.B. 5.C. 55.D. 10.

4. Refer to the above data. The value for Z is:A. -5.

B. +5.C. -10.D. zero.

5. A product has utility if it:A. takes more and more resources to produce successive units of it.B. violates the law of demand.C. satisfies consumer wants.D. is useful.

6. The law of diminishing marginal utility states that:A.

total utility is maximized when consumers obtain the same amount of utility per unit of each product

consumed.B.

beyond some point additional units of a product will yield less and less extra satisfaction to aconsumer.

C. price must be lowered to induce firms to supply more of a product.D.

it will take larger and larger amounts of resources beyond some point to produce successive units of aproduct.

7. If the price of product X rises, then the resulting decline in the amount purchased will:A. necessarily increase the consumer's total utility from his total purchases.B. increase the marginal utility of the last unit consumed of this good.C. increase the total utility from purchases of this good.

D. reduce the marginal utility of the last unit consumed of this good.


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8. Total utility may be determined by:A. multiplying the marginal utility of the last unit consumed by the number of units consumed.B. summing the marginal utilities of each unit consumed.C. multiplying the marginal utility of the last unit consumed by product price.D. multiplying the marginal utility of the first unit consumed by the number of units consumed.

9. Refer to the above diagram. The marginal utility of the third unit of X is:A. 5.B. 4.C. 2.

D. 15.

10. Refer to the above diagram. Marginal utility:A. increases at an increasing rate.B. becomes negative after consuming 4 units of output.C. is found by dividing total utility by the number of units purchased.D. cannot be calculated from the total utility information.

11. If total utility is increasing, marginal utility:A. is positive, but may be either increasing or decreasing.B. must also be increasing.C. may be either positive or negative.

D. will be increasing at an increasing rate.

12. Suppose that MUx/Pxexceeds MUy/Py. To maximize utility the consumer who is spending all her moneyincome should buy:A. less of X only if its price rises.B. more of Y only if its price rises.C. more of Y and less of X.D. more of X and less of Y.

13. Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa= 5 andMUb/Pb= 8. Ben should purchase:A. more of A and less of B.B. more of B and less of A.C. more of both A and B.D. less of both A and B.


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14. A consumer is maximizing her utility with a particular money income when:A. the total utility derived from each product consumed is the same.B. MUa/Pa= MUb/Pb= MUc/Pc= ... = MUn/Pn.C. MUa= MUb= MUc= ... = MUn.D. Pa= Pb= Pc= ... = Pn.

15. Assume MUcand MUdrepresent the marginal utility that a consumer gets from products C and D, therespective prices of which are Pcand Pd. The consumer will increase his total utility from a specificmoney outlay by spending more on C and less on D if initially:A.

B.

C.

D.

16. If MUa/Pa= 100/$35 = MUb/Pb= 300/? = MUc/Pc= 400/?, the prices of products band cin consumerequilibrium:A. cannot be determined from the information given.B. are $105 and $140 respectively.

C. are $105 and $175 respectively.D. are $100 and $200 respectively.

Answer the question on the basis of the following total utility data for products L and M. Assumethat the prices of L and M are $3 and $4 respectively and that the consumer's income is $18.

17. Refer to the above data. What level of total utility does the rational consumer realize in equilibrium?A. 87 utilsB. 104 utilsC. 51 utilsD. 58 utils

18. An increase in the price of product A will:A. increase the marginal utility per dollar spent on A.B. decrease the marginal utility per dollar spent on A.C. not affect the marginal utility per dollar spent on A.D. cause utility-maximizing consumers to buy more of A.

19. Frank is purchasing products C and D in utility-maximizing amounts. If the price of C is $4 and the priceof D is $2, then:A. the marginal utility of D is twice that of C.B. the marginal utility of D is the same as that of C.C. the marginal utility of C is twice that of D.D. the marginal utility of C is four times that of D.

20. The theory of consumer behavior assumes that consumers attempt to maximize:A. the difference between total and marginal utility.B. total utility.C. average utility.

D. marginal utility.


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21. When a consumer shifts purchases from product X to product Y the marginal utility of:A. X falls and the marginal utility of Y rises.B. X rises and the marginal utility of Y falls.C. both X and Y rises.D. both X and Y falls.

22. Prashanth decides to buy a $75 ticket to a particular New York professional hockey game rather than a$50 ticket for a particular Broadway play. We can conclude that Prashanth:A. is relatively unappreciative of the arts.B. obtains more marginal utility from the play than from the hockey game.C. has a higher "marginal utility to price ratio" for the hockey game than for the play.D. has recently attended several other Broadway plays.

23. Diminishing marginal utility explains why:A. the income effect exceeds the substitution effect.B. the substitution effect exceeds the income effect.C. supply curves are upsloping.D. demand curves are downsloping.

24. A consumer's demand curve for a product is downsloping because:

A. total utility falls below marginal utility as more of a product is consumed.B. marginal utility diminishes as more of a product is consumed.C. time becomes less valuable as more of a product is consumed.D. the income and substitution effects precisely offset each other.

Answer the question on the basis of the following marginal utility data for products X and Y. Assumethat the prices of X and Y are $4 and $2 respectively and that the consumer's income is $18.

25. Refer to the above data. What quantities of X and Y should be purchased to maximize utility?A. 2 of X and 1 of YB. 4 of X and 5 of YC. 2 of X and 5 of YD. 2 of X and 6 of Y

26. Refer to the above data. If the price of X decreases to $2, then the utility-maximizing combination of thetwo products is:A. 2 of X and 5 of Y.B. 4 of X and 6 of Y.C. 6 of X and 3 of Y.D. 4 of X and 5 of Y.


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27. If the prices of X and Y are $2 and $4 per unit, respectively, and this consumer has $10 in income tospend, to maximize total utility this consumer should buy:A. 1 units of X and 1 units of Y.B. 2 units of X and 2 units of Y.C. 1 units of X and 2 units of Y.D. 5 units of X and no units of Y.

28. In introducing the opportunity cost of time into the theory of consumer behavior we find that, all elseequal:A. one should consume less of time-intensive goods.B. one should consume more of time-intensive goods.C. the consumer's equilibrium position is not altered.D.

the marginal utility derived from each product must be multiplied by consumption time in determiningequilibrium.

29. The diamond-water paradox arises because:A. essential goods may be cheap while nonessential goods may be expensive.B. the marginal utility of certain products increases, rather than diminishes.C. essential goods are always higher priced than nonessential goods.D. we sometimes fail to use money as a standard of value.

30. Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item

is purchased separately?A.

Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet ashaving a price of zero.

B. MU/P is greater at all-you-can-eat restaurants.C. People who eat at all-you-can-eat restaurants do not experience diminishing marginal utility.D.

Food at all-you-can-eat restaurants tends to have fewer calories, so consumers feel the need to consumea greater volume of food.

31. If you receive a gift whose market price is $20, but you consider it to be worth only $10, then:

A. there is a $10 or 50 percent value gain.B. there may or may not be a value loss.C. there is a $10 or 50 percent value loss.D. you can be relatively certain the giver was a sibling or other close relative.

32. According to economists, gift registries, returning gifts for cash refunds, and "recycling gifts":A.

are inefficient because the time spent in these activities is never worth the benefit recipients receivefrom doing them.

B. are efficient because the recipient gets exactly what he wants.C. are more efficient than if givers simply gave cash gifts.D.

increase the efficiency of gift-giving because they allow the recipient to consume goods that providegreater utility and transfer away those goods that are less satisfying.

33. According to prospect theory, what strategy will firms typically employ with regard to pricing and

packaging their goods, when faced with rising production costs?A.

Firms will increase both package sizes and prices, but will increase prices more to communicate toconsumers that the product has greater value.

B.

Firms will reduce package sizes but keep prices the same, thus increasing the per unit price of thegood.

C.

Firms will keep package sizes the same, but lower prices and attempt to cover the higher costs withgreater revenue.

D.

According to prospect theory, the choice of strategy doesn't matter, as consumers are generally able torecognize price increases regardless of what form they take.


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34. According to the concept of framing effects:A. advertising power is limited because of the inability of firms to change consumers' perspectives.B. all people will assign the same utility to a given situation, regardless of their previous status quo.C. whether a new situation is viewed as a gain or a loss depends on one's starting position.D. firms should never raise prices or reduce wages.

35. Suppose that Dairy Barn Foods produces a regular sour cream with 10 grams of fat per serving, anda "low fat" sour cream with only 5 grams of fat per serving (assume that this is still considered a lot of fatto consume per serving). According to prospect theory, how should Dairy Barn promote its "low fat" sourcream?A. It should make no mention of fat content, either in absolute terms, or relative to its regular sour cream.B. It should advertise that the "low fat" sour cream has only "half the fat" of the regular sour cream.C. It should advertise that the "low fat" sour cream has only 5 grams of fat per serving.D.

It won't matter what strategy Dairy Barns use, as consumers are sufficiently informed as to not beaffected by the advertising.

36. Josh will receive a salary of $300,000 next year. According to prospect theory:A. Josh will be happy with that amount regardless of what he has made in the past.B. Josh will only be happy with that salary if everyone else around him makes less than he does.C. Josh will only be happy with that salary if his cost of living has not increased.

D. Josh's satisfaction with that salary depends on how much he made in the past.

37. Why do credit card companies typically require small minimum payment amounts on their customers'monthly credit card statements?A.

Credit card companies are concerned that their customers will be put in financial distress if required tomake higher payments.

B.

Credit card companies want to promote faster repayment, and customers will be encouraged to paymore each month if they're able to pay well beyond the minimum.

C.

Credit card companies want to increase profits by promoting slower repayment, and actual customerpayments will be anchored by the smaller payment requirements.

D.

Credit card companies actually charge the highest minimum payment they are allowed by law to

charge.38. Because of "mental accounting:"

A. people are better able to process price changes than changes in product sizes.B. people tend to be less risk averse.C. people pay too little on their monthly credit card bills.D. people isolate purchases and sometimes make irrational decisions.

39. Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he waswilling to sell it, but for no less than $80. According to behavioral economists:A. Alex's behavior is consistent with the endowment effect.B. Alex's behavior is irrational because of inconsistent anchoring.

C. Alex should sell the ball if he's offered any amount over $50.D. Alex's behavior is irrational because his frame has changed.

40. According to the "endowment effect:"A.

people are willing to pay more for things they don't own, than they would have to receive to give upsomething they already have.

B. people feel gains and losses with equal intensity.C. people assign higher values to things they own than things they don't.D. the intensity of feelings from gains and losses depends on how much wealth one possesses.


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41. (Last Word) Participation in company retirement savings programs has increased dramaticallybecause:A. participation was required by the company.B. enrollment in these programs was set as the default option and workers had to request to be unenrolled.C.

not being enrolled in these programs was set as the default options, and people's aversion to being toldwhat to do prompted many to request enrollment.

D. endowment effects encourage greater saving.

42. The budget line shows:A. the amount of product A that a consumer is willing to give up to obtain one more unit of product B.B.

all possible combinations of two goods that can be purchased, given money income and the prices ofthe goods.

C. all equilibrium points on an indifference map.D. all possible combinations of two goods that yield the same level of utility to the consumer.

43. Which of the following statements is notcorrect?A. A reduction in money income will shift the budget line to the right.B.

A reduction in money income accompanied by an increase in product prices will necessarily shift thebudget line to the left.

C. An increase in product prices will shift the budget line to the left.

D. An increase in money income will shift the budget line to the right.

44. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the:A. prices of CandDcannot be determined.B. price of Cis $2 and the price ofDis $4.C. consumer can obtain a combination of 5 units of both CandD.D. price of Cis $4 and the price ofDis $2.

45. Refer to the budget line shown in the diagram above. Given the same money income, reductions in theprices of both products CandDwill:

A. shift the budget line outward on the horizontal axis, but leave it anchored at "10" on the vertical axis.B. shift the budget line to the left.C. shift the budget line to the right.D. have no effect on the budget line.

46. Refer to the budget line shown in the diagram above. The absolute value of the slope of the budget lineis:A. MUC/MUD.B. one-half.C. PD/PC.D. PC/PD.


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47. A change in the slope of a budget line is solely the result of a change in:A. consumer preferences.B. the price of one good relative to the other.C. money income.D. the slope of the indifference curve that is tangent to the budget line.

48. The movement of the budget line fromBBto bbin the above figure suggests that income has:A. increased and the price ofXhas decreased.

B. fallen and the price of Yhas increased.C. fallen and the price of Yhas decreased.D. decreased but there have been no price changes.

49. If the budget line shifts fromBBto bbin the above diagram we can infer that the:A. price of Yhas increased and the price ofXhas decreased.B. price of Yhas decreased and the price ofXhas increased.C. prices of bothXand Yhave increased.D. prices of bothXand Yhave decreased.

50. The slope of a budget line reflects the:A. elasticity of demand for the two products.

B. price ratio of the two products.C. amount of the consumer's income.D. utility ratio of the two products.

51. Assume initially that the price of X (measured on the horizontal axis) is $9 and the price of Y (measuredon the vertical axis) is $4. If the price of X now declines to $6, the budget line will:A. be unaffected.B. shift outward on the vertical axis.C. shift inward on the horizontal axis.D. shift outward on the horizontal axis.


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52. The indifference curve in the above diagram yields Juan 100 units of utility. If Juan's money income wereto increase by 20 percent, the indifference curve would:A. shift leftward.B. shift rightward.C. become steeper.D. not be affected.

53. An indifference curve shows all:

A. possible equilibrium positions on an indifference map.B. equilibrium combinations of two products that are obtainable with a given money income.C. combinations of two products yielding the same total utility to a consumer.D.

possible combinations of two products that a consumer can purchase, given her income and the pricesof the products.

54. The marginal rate of substitution measures the:A. magnitude of the substitution effect.B. total utility received by a consumer when equilibrium is achieved.C. extra utility that a consumer derives from successive units of a product.D. consumer's willingness to substitute one product for another so that total utility will remain constant.

55. The marginal rate of substitution:A.

may increase or decrease on a given indifference curve, depending on whether the substitution or theincome effect is dominant.

B. increases as one moves southeast along an indifference curve.C. is constant at all points on the budget line.D. declines as one moves southeast along an indifference curve.

56. Which of the following is correct?A. Budget lines are linear and upsloping; indifference curves are downsloping and concave to the origin.B.

Budget lines are linear and downsloping; indifference curves are downsloping and concave to theorigin.

C. Budget lines are linear and downsloping; indifference curves are downsloping and convex to theorigin.D.

Budget lines are downsloping and convex to the origin; indifference curves are linear anddownsloping.


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57. Refer to the above diagram wherexyis the relevant budget line andI1,I2, andI3are indifference curves.The equilibrium position for the consumer is at:A. any point onxy.B. pointM.C. point K.D. pointJ.

58. In the above diagram:A. the consumer is indifferent between pointsAandB, but neither point maximizes his utility.B. the consumer is indifferent between pointsAandBand either point will maximize his utility.C. any combination ofXand Yentailing more of Yand less ofXthan shown atBwould be preferred.D. any combination ofXand Yentailing more ofXand less of Ythan shown atAwould be preferred.

59. Refer to the above diagram. The budget line shift which moves the consumer's equilibrium position frompointAto pointBsuggests:A. an increase in the quantity of Ydemanded.B. a decrease in the quantity of Ydemanded.

C. a leftward shift in the demand curve for Y.D. a rightward shift in the demand curve for Y.


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60. (Consider This) A topographical map shows successively higher equal-elevation lines, whereas anindifference map shows successively higher levels of total:A. utility.B. revenue.C. profit.D. cost.


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Ch. 06 Practice MC Key1. B2. D3. A

4. A5. C6. B7. B8. B9. B10. B11. A

12. D13. B14. B15. C16. B17. C18. B

19. C20. B21. B22. C23. D24. B25. C26. D27. C28. A29. A30. A31. C32. D33. B

34. C35. B36. D


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37. C38. D39. A40. C41. B42. B

43. A44. D45. C46. D47. B48. B49. A

50. B51. D52. D53. C54. D55. D56. C57. C

58. A59. A60. A


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Ch. 06 Practice MC SummaryCategory # of Questions

AACSB: Analytic 32

AACSB: Reflective Thinking 28

Bloom's: Level 1 Remember 15

Bloom's: Level 2 Understand 15

Bloom's: Level 3 Apply 16

Bloom's: Level 4 Analyze 9

Bloom's: Level 5 Evaluate 5

Difficulty: 1 Easy 15

Difficulty: 2 Medium 31

Difficulty: 3 Hard 14

Learning Objective: 06-01 Define and explain the relationship between total utility; marginal utility; and the law of diminishing marginal utility.

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Learning Objective: 06-02 Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase.

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Learning Objective: 06-03 Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model.

2

Learning Objective: 06-04 Discuss how the utility-maximization model helps highlight the income and substitution effects of a price change.

1

Learning Objective: 06-05 Relate how behavioral economics and prospect theory shed light on many consumer behaviors. 9

Learning Objective: 06-06 (Appendix) Relate how the indifference curve model of consumer behavior derives demand curves from budget lines; indifference curves; and utility maximization.

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McConnell - Chapter 06 73

Status: New 10

Topic: Applications and extensions 5

Topic: Budget lines 10

Topic: Derivation of the demand curve 1

Topic: Efficiently functioning markets 1Topic: Equilibrium at tangency; equivalency at equilibrium 2

Topic: Indifference curves 6

Topic: Law of diminishing marginal utility 11

Topic: Prospect theory 9

Topic: Theory of consumer behavior 11

Topic: Utility maximization and the demand curve 5

Type: Graph 11

Type: Table 6

chapter 06 practice mc

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