Principles of Macroeconomics by John Sayre – Test Bank

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Sample Questions Posted Below

 

 

 

 

Chapter 05

Consumer Choice

 

 

Multiple Choice Questions

  1. What is meant by the term margin?
    A.A measure of desire.
    B. The extra or additional unit.
    C. A measure of the ability to purchase.
    D. The difference between the total and the average.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What is meant by the term utility?
    A.A measure of a product’s usefulness.
    B. A measure of necessity.
    C. The satisfaction or pleasure derived from the consumption of a product.
    D. The benefit derived from the production of a product.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

 

 

  1. What is the amount of additional utility derived from the consumption of an extra unit of a product called?
    A.Marginal utility.
    B. Optimal utility.
    C. Marginal demand.
    D. Optimal demand.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What is marginal utility?
    A.The utility derived from marginal products.
    B. The utility derived from the consumption of all products.
    C. The utility derived from the consumption of the average product.
    D. The utility derived from the consumption of an extra unit of a product.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What is the correct expression for marginal utility?
    A.TU/price.
    B. DTU/price.
    C. DTU/Dquantity.
    D. TU/quantity.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What does the law of diminishing marginal utility state?
    A.That the amount of additional utility increases as successive units of a product are consumed.
    B. That the amount of total utility decreases at an increasing rate.
    C. That the amount of total utility decreases at a decreasing rate.
    D. That the amount of additional utility decreases as successive units of a product are consumed.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What is the correct expression for marginal utility?
    A.It is equal to total utility divided by quantity consumed.
    B. It is the change in total utility resulting from a change in the quantity consumed.
    C. It is equal to total utility divided by the quantity demanded.
    D. It is equal to the additional utility divided by the quantity consumed.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. If total utility is falling, what is also true?
    A.Marginal utility must be negative.
    B. Marginal utility must also be falling.
    C. Marginal utility must be greater than total utility.
    D. Marginal utility must be rising.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. When is total utility at a maximum?
    A.When marginal utility is at a maximum.
    B. When marginal utility is zero.
    C. When marginal utility is equal to total utility.
    D. When marginal utility is greater than total utility.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Which of the following is correct in reference to the law of diminishing marginal utility?
    A.The amount of additional utility decreases as successive units of a product are consumed.
    B. Marginal utility increases at first, but after some point starts to decline.
    C. Total utility declines at first, but after some point starts to increase.
    D. Marginal utility increases as more of a product is consumed.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. When is marginal utility equal to zero?
    A.When TU is zero.
    B. When MU is at its maximum.
    C. When TU is at its maximum.
    D. When MU is at its minimum.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

Quantity Consumed Total Utility
1 30
2 55
3 75
4 90
5 100
6 105
7 105
8 100

 

  1. Refer to the information above to answer this question. If the price of this product is $5, how many units should this consumer purchase?
    A.4.
    B. 5.
    C. 6.
    D. Cannot be answered from this information.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

Quantity Consumed Total Utility Marginal Utility
1   50
2 98  
3 143 45
4 183  
5   33
6 241  
7   15
8 254  


  1. Refer to the above information to answer this question. What is the marginal utility of the 3rd unit?
    A.30.
    B. 45.
    C. 48.
    D. 143.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to the above information to answer this question. What is the total utility of 7 units?
    A.15.
    B. 25.
    C. 256.
    D. 271.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to the above information to answer this question. After the consumption of how many units will total utility be maximized?
    A.4.
    B. 5.
    C. 7.
    D. 8.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to the above information to answer this question. How many units should this consumer purchase?
    A.0.
    B. 1.
    C. 7.
    D. 8.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What concept explains why a consumer should purchase the product which yields the greatest marginal utility per dollar spent?
    A.Law of diminishing marginal utility.
    B. Law of diminishing returns.
    C. Optimal purchasing rule.
    D. Consumer surplus rule.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

Suppose that Reza buys two products and that the marginal utility of an additional carton of soy milk is 20 and its price is $1.25, whereas the marginal utility for an additional orange costing 50 cents is 7.

 

  1. Refer to the above information to answer this question. What can be deduced?
    A.The MU per dollar spent on soya milk is equal to that of an orange.
    B. The MU per dollar spent on soya milk is greater than that of an orange.
    C. The MU per dollar spent on soya milk is less than that of an orange.
    D. The MU per dollar spent on soya milk is 25.
    E. The MU per dollar spent on an orange is $3.50.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. What can be deduced?
    A.Reza should buy more oranges.
    B. Reza should reduce his consumption of soya milk.
    C. Reza should buy more soya milk.
    D. Reza should divide his budget equally between soya milk and oranges.
    E. Nothing can be deduced.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following graph shows the marginal utility derived from milk and giant cookies purchased by Sandeep.


  1. Refer to the above graph to answer this question. What would be Sandeep’s total utility if he consumed 5 milk and 5 cookies?
    A.10.
    B. 14.
    C. 80.
    D. 124.
    E. 130.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to the above graph to answer this question. Which of the following combinations will give Sandeep the greatest total utility?
    A.2 milk and 5 cookies.
    B. 3 milk and 4 cookies.
    C. 4 milk and 3 cookies.
    D. 5 milk and 2 cookies.
    E. 6 milk and 1 cookie.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to the above graph to answer this question. If the price of both milk and cookies are $1 and Sandeep has a budget of $7, how many will he purchase if he wishes to maximize his total utility?
    A.2 milk and 5 cookies.
    B. 3 milk and 4 cookies.
    C. 4 milk and 3 cookies.
    D. 5 milk and 2 cookies.
    E. 6 milk and 1 cookie.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above graph to answer this question. If the price of milk is $2, the price of a cookie is $1 and Sandeep has a budget of $7, how many will he purchase if he wishes to maximize his total utility?
    A.0 milk and 7 cookies.
    B. 1 milk and 5 cookies.
    C. 2 milk and 3 cookies.
    D. 3 milk and 1 cookie.
    E. 3 milk and 4 cookies.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following graph shows the total utility obtained from rice crackers and beer by Carla.

 

  1. Refer to the above graph to answer this question. If the price of both rice crackers and beer are $2, and Carla has a budget of $14, how much of each will she purchase if she wishes to maximize her total utility?
    A.3 crackers and 4 beers.
    B. 4 crackers and 3 beers.
    C. 5 crackers and 2 beers.
    D. 6 crackers and 1 beer.
    E. 7 crackers.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above graph to answer this question. If the price of rice crackers are $2, beer is $3, and Carla has a budget of $14, how much of each will she purchase if she wishes to maximize her total utility?
    A.1 cracker and 4 beers.
    B. 2 crackers and 3 beers.
    C. 3 crackers and 3 beers.
    D. 4 crackers and 2 beers.
    E. 5 crackers and 1 beer.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above graph to answer this question. If the price of rice crackers are $3, beer is $2, and Carla has a budget of $15, how much of each will she purchase if she wishes to maximize her total utility?
    A.2 crackers and 4 beers.
    B. 3 crackers and 3 beers.
    C. 3 crackers and 4 beers.
    D. 4 crackers and 3 beers.
    E. 5 crackers.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following table shows Ketta’s utility for eggs and bacon.

Quantity Eggs: Total Utility Bacon Total Utility
1 10 12
2 18 21
3 24 28
4 28 33
5 30 36

 

 

  1. Refer to the above information to answer this question. If Ketta has a budget of $5 and the price of both eggs and bacon are $1, what will be her optimal purchase?
    A.5 bacon.
    B. 1 egg and 4 bacon.
    C. 2 eggs and 3 bacon.
    D. 3 eggs and 2 bacon.
    E. 4 eggs and 1 bacon.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Ketta has a budget of $8 and the price of both eggs and bacon are $1, what will be her optimal purchase?
    A.1 egg and 7 bacon.
    B. 2 eggs and 6 bacon.
    C. 3 eggs and 5 bacon.
    D. 4 eggs and 4 bacon.
    E. 5 eggs and 3 bacon.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Ketta has a budget of $8 and the price of eggs are $2 and bacon is $1, what will be her optimal purchase?
    A.0 egg and 8 bacon.
    B. 1 egg and 6 bacon.
    C. 2 eggs and 4 bacon.
    D. 3 eggs and 2 bacon.
    E. 4 eggs and 0 bacon.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following table shows Erica’s utility for muffins and grapefruit.

Quantity Muffins Marginal Utility Grapefruit Marginal Utility
1 80 75
2 70 72
3 60 66
4 50 62
5 40 56

 

 

  1. Refer to the above information to answer this question. If Erica has a budget of $5 and the price of both muffins and grapefruit are $1, what will be her optimal purchase?
    A.1 muffin and 4 grapefruit.
    B. 2 muffins and 3 grapefruit.
    C. 3 muffins and 2 grapefruit.
    D. 4 muffins and 1 grapefruit.
    E. 5 muffins.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Erica has a budget of $5 and the price of both muffins and grapefruit are $1, what will be the total utility of her optimal purchase?
    A.66 utils.
    B. 126 utils.
    C. 136 utils.
    D. 363 utils.
    E. 423 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Erica has a budget of $8 and the price of both muffins and grapefruit are $1, what will be her optimal purchase?
    A.1 muffin and 7 grapefruit.
    B. 2 muffin and 6 grapefruit.
    C. 3 muffins and 5 grapefruit.
    D. 4 muffins and 4 grapefruit.
    E. 5 muffins and 3 grapefruit.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Erica has a budget of $8 and the price of both muffins and grapefruit are $1, what will be the total utility of her optimal purchase?
    A.96 utils.
    B. 116 utils.
    C. 210 utils.
    D. 331 utils.
    E. 541 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Erica has a budget of $5 and the price of a muffin is $2 and a grapefruit is $1, what will be her optimal purchase?
    A.0 muffin and 5 grapefruit.
    B. 1 muffin and 3 grapefruit.
    C. 2 muffins and 1 grapefruit.
    D. 3 muffins and 0 grapefruit.
    E. 3 muffins and 1 grapefruit.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Erica has a budget of $5 and the price of a muffin is $2 and a grapefruit is $1, what will be the total utility of her optimal purchase?
    A.56 utils.
    B. 96 utils.
    C. 145 utils.
    D. 146 utils.
    E. 331 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following table shows Pierre’s utility for bagels and cider.

Quantity Bagels: Marginal Utility Cider: Marginal Utility
1 20 20
2 10 16
3 8 12
4 3 9
5 1 4

 

 

  1. Refer to the above information to answer this question. If Pierre has a budget of $12 and the price of both bagels and cider are $2, what will be his optimal purchase?
    A.1 bagel and 5 ciders.
    B. 2 bagels and 4 ciders.
    C. 3 bagels and 3 ciders.
    D. 4 bagels and 2 ciders.
    E. 5 bagels and 1 ciders.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Pierre has a budget of $12 and the price of both bagels and cider are $2, what will be the total utility of his optimal purchase?
    A.9 utils.
    B. 10 utils.
    C. 21 utils.
    D. 87 utils.
    E. 97 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Pierre has a budget of $12, the price of bagels is $1 and cider is $2, what will be his optimal purchase?
    A.2 bagel and 5 ciders.
    B. 4 bagel and 4 ciders.
    C. 6 bagels and 3 ciders.
    D. 8 bagels and 2 ciders.
    E. 10 bagels and 1 ciders.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. If Pierre has a budget of $12, the price of bagels is $1 and cider is $2, what will be the total utility of his optimal purchase?
    A.12 utils.
    B. 41 utils.
    C. 50 utils.
    D. 57 utils.
    E. 98 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

Maria is considering her lunch purchase. Unfortunately, the deli doesn’t have a very extensive menu: apples at $0.50 each, bagels at $1 each, and cappuccino at $2 each. Her utility from each is shown in the table below.


Quantity Apples Marginal Utility Bagels Marginal Utility Cappuccino Marginal Utility
1 50 90 150
2 38 80 140
3 33 60 100
4 25 40 60
5 15 20 20

 

  1. Refer to the above information to answer this question. Suppose that Maria only has $5 to spend on lunch. How should she allocate her spending so as to maximize her total utility?
    A.2 apples and 4 bagels.
    B. 2 apples, 2 bagels and 1 cappuccino.
    C. 2 apples and 2 cappuccinos.
    D. 1 bagel and 2 cappuccinos.
    E. 3 bagels and 1 cappuccino.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. Suppose that Maria only has $5 to spend on lunch. If she allocates her spending so as to maximize her total utility, what will be her total utility?
    A.393 utils.
    B. 408 utils.
    C. 500 utils.
    D. 548 utils.
    E. 636 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. Suppose that Maria has $7 to spend on lunch. How should she allocate her spending so as to maximize her total utility?
    A.2 apples, 2 bagels and 2 cappuccinos.
    B. 2 apples, 4 bagels and 1 cappuccino.
    C. 4 apples, 1 bagel and 2 cappuccinos.
    D. 4 apples, 3 bagels and 1 cappuccino.
    E. 4 apples and 5 bagels.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to the above information to answer this question. Suppose that Maria has $7 to spend on lunch. If she allocates her spending so as to maximize her total utility, what will be her total utility?
    A.436 utils.
    B. 508 utils.
    C. 500 utils.
    D. 526 utils.
    E. 548 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Assume that Gina is allocating her budget optimally between two products. If the MU of product X is 40 and its price is $8, what must be the price of product Y if its MU is 60?
    A.$7.50.
    B. $12.
    C. $16.
    D. $40.
    E. $300.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. According to consumer research, what happens to the proportion of disposable income which is spent by Canadians on the various product groups as the level of income increases?
    A.The fraction spent on both food and travel increases whereas the amount spent on shelter decreases.
    B. The fraction spent on both food and shelter decreases whereas the amount spent on travel increases.
    C. The fraction spent on both food and travel decreases whereas the amount spent on shelter increases.
    D. The fraction spent on food decreases whereas the amount spent on both travel and shelter increases.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-03 Explain how marginal utility theory is applicable to real-world examples.
Topic: 05-05 What Determines Your Priority Spending?

  1. In many countries, income earned from financial investments is taxed at a higher rate than income earned from employment. What might explain this?
    A.The marginal utility from employment dollars is greater than that from investment dollars.
    B. The marginal utility from employment dollars is less than that from investment dollars.
    C. The consumer surplus derived from employment income is greater than that from investment income.
    D. The consumer surplus derived from employment income is smaller than that from investment income.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-03 Explain how marginal utility theory is applicable to real-world examples.
Topic: 05-07 Shouldn’t Incomes Be More Equally Distributed?’

  1. Why does the demand curve slope downward?
    A.Since the marginal utility increases with increased consumption, people will be eager to buy more at lower prices.
    B. Since the marginal utility decreases with increased consumption, the price must fall in order to induce people to buy more.
    C. Since total utility increases with increased consumption, a lower price is necessary to encourage increased production.
    D. Lower prices mean a lower consumer surplus which will encourage increased consumption.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. If a consumer buys more than one unit of a product, which of the following statements is true?
    A.The value of the last unit purchased must be greater than the value of the previous units, otherwise it would not be bought.
    B. The consumer rates the value of each unit equally, otherwise she would not buy more of the item.
    C. The value of the last unit purchased is always less than the value of the previous units.
    D. It is the value of the first unit purchased which determines the total number of units which will be purchased.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

 


  1. Refer to the graph above to answer this question. What is the maximum price that would be paid by this consumer, assuming that partial units cannot be purchased?
    A.$9.
    B. $10.
    C. $16.
    D. $18.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the graph above to answer this question. At what quantity would this consumer maximize her total utility?
    A.5.
    B. 9.
    C. 10.
    D. 18.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

The following table shows Mia’s $ marginal utility for litres of soya milk:


Quantity
(in litres)
$MU
1 $15
2 10
3 8
4 2
5 1
6 0.50
7 0

 

  1. If the price of soya milk is $8 per litre, what is the maximum number of litres that Mia will buy?
    A.0.
    B. 1.
    C. 2.
    D. 3.
    E. 7.

 

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Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. If the price of soya milk is $2 per litre, what is the maximum number of litres that Mia will buy?
    A.1.
    B. 3.
    C. 4.
    D. 6.
    E. 7.

 

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Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above table to answer this question. Suppose that Mia has a budget of $7 and the price of a litre of soya milk is $1, what is the maximum quantity that Mia might purchase?
    A.0.
    B. 4 litres.
    C. 5 litres.
    D. 6 litres.
    E. Cannot be determined.

 

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Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above table to answer this question. Suppose that Mia has a budget of $7 and the price of a litre of soya milk is $1, how much consumer surplus will Mia receive as a result of her purchases?
    A.0.
    B. $1.
    C. $15.
    D. $35.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Refer to the above table to answer this question. Suppose that soya milk is free, how much will Mia consume?
    A.0.
    B. 4 litres.
    C. 5 litres.
    D. 7 litres.
    E. Cannot be determined.

 

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Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

Suppose that Irina is prepared to pay a maximum of $2.40 for her first glass of cranberry juice, but for each subsequent glass she is only prepared to pay 20 cents less than the previous one.

 

  1. Refer to the above information to answer this question. If the price of cranberry juice is 80 cents per glass, how many glasses will she purchase?
    A.3 glasses.
    B. 8 glasses.
    C. 9 glasses.
    D. 10 glasses.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above information to answer this question. If the price of cranberry juice is 80 cents a glass, how much consumer surplus will she receive as a result of her purchases?
    A.0.
    B. $0.80.
    C. $13.60.
    D. $14.40.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above information to answer this question. If cranberry juice is free, how many glasses will she consume?
    A.0 glasses.
    B. 10 glasses.
    C. 11 glasses.
    D. 13 glasses.
    E. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. In which book is the diamond-water paradox first mentioned?
    A.Marx’s Das Kapital.
    B. Keynes’s General Theory.
    C. Ricardo’s Principles of Political Economy and Taxation.
    D. Adam Smith’s Wealth of Nations.
    E. Marshall’s Principles of Economics.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. What is meant by the term consumer surplus?
    A.It is the difference between the actual price of a product and its real value.
    B. It is the surplus which consumers receive from a product as a result of a drop in its price.
    C. It is the difference between what the consumer is willing to pay and the actual price of the product.
    D. It is the difference between the price which consumers pay for a product and the actual costs of production.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. What is the correct formula for MCS (marginal consumer surplus)?
    A.$MU-price.
    B. Price-$MU.
    C. $TU-price.
    D. DTU/price.
    E. DTU/Dquantity.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. What is the term for the difference between the consumer’s evaluation of a product and the price which is paid for it?
    A.Price discrimination.
    B. Price elasticity of demand.
    C. Consumer indifference.
    D. Consumer surplus.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Which of the following statements is correct regarding demand and consumer surplus?
    A.The greater the elasticity of demand, the greater will be the consumer surplus.
    B. The greater the elasticity of demand, the smaller will be the consumer surplus.
    C. The greater the number of substitutes for a product, the greater will be the consumer surplus.
    D. The smaller the elasticity of demand, the smaller will be the consumer surplus.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

The following table shows the utility (measured in dollars) which Lisa derives from water (in 50 litre drums) and diamonds (uncut 1 carat stones).


Quantity Water
Total $Utility
Diamonds
Total $Utility
1 500 150
2 700 290
3 800 420
4 850 520
5 875 600
6 885 660

 

  1. Refer to the above information to answer this question. If the price of both water and diamonds is $100 per unit, and Lisa has $500 to spend, how many units of each would she purchase?
    A.5 waters.
    B. 4 waters and 1 diamond.
    C. 3 waters and 2 diamonds.
    D. 2 waters and 3 diamonds.
    E. 1 water and 4 diamonds.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above information to answer this question. If the price of both water and diamonds is $100 per unit, and Lisa has $500 to spend, what is the value of her total consumer surplus if she purchases the optimal quantity?
    A.0.
    B. $375.
    C. $620.
    D. $875.
    E. $1,120.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Refer to the above information to answer this question. If the price of both water and diamonds is $100 per unit, and Lisa has $700 to spend, how many units of each would she purchase?
    A.7 water
    B. 4 water and 3 diamonds.
    C. 3 water and 4 diamonds.
    D. 2 water and 5 diamonds.
    E. 1 water and 6 diamonds.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Refer to the above information to answer this question. If the price of both water and diamonds is $120 per unit, and Lisa has $720 to spend, how many units of each would she purchase?
    A.6 water.
    B. 4 water and 2 diamonds.
    C. 3 water and 3 diamonds.
    D. 2 water and 3 diamonds.
    E. 2 water and 4 diamonds.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

 


  1. Refer to the graph above to answer this question. The graph shows Becky’s demand for blueberries which can be purchased in any quantities and sold at any price. What is Becky’s total consumer surplus if the price of each kilogram of blueberries is $2?
    A. $2.
    B. $4.
    C. $6.
    D. $12.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Refer to the graph above to answer this question. The graph shows Becky’s demand for blueberries which can be purchased in any quantities and sold at any price. What is Becky’s total expenditure if the price of each kilogram of blueberries is $2?
    A.$2.
    B. $4.
    C. $6.
    D. $12.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Refer to the graph above to answer this question. The graph shows Becky’s demand for blueberries which can be purchased in any quantities and sold at any price. What is Becky’s total willingness to pay for 6 kilograms of blueberries if the price of each kilogram of blueberries is $2?
    A.$2.
    B. $18.
    C. $6.
    D. $12.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. What is price discrimination?
    A.The selling of different products to the same customer at different prices.
    B. The selling of an identical product to different customers at the same price.
    C. The selling of an identical product to different customers at different prices.
    D. The selling of different products to different customers at different prices.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. What is the term for the selling of an identical product at a different price to different customers for reasons other than cost?
    A.Price discrimination.
    B. Product substitution.
    C. Marginal utility.
    D. Consumer surplus.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

In Longolia, beer drinking is associated with blood types. The demand for beer of the three major blood groups is shown below:

Price of
Litres of Beer
Type A
Daily Quantity
Type B
Daily Quantity
Type 0
Daily Quantity
5 18 41 60
4.50 26 48 65
4 34 55 70
3.50 42 62 75
3. 50 69 80
2.5 58 76 85

 

  1. Refer to the above information to answer this question. If the beer producers charged the same price to all consumers, in order to maximize total revenue what would that price be?
    A.$5.00.
    B. $4.50.
    C. $4.00.
    D. $3.50.
    E. $3.00.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. If the beer producers charged the same price to all consumers, what would be the total revenue received?
    A.$550.
    B. $595.
    C. $625.50
    D. $636.
    E. $670.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. If the beer producers could price discriminate on the basis of blood types, in order to maximize total revenue what price should be charged to type A, type B and type O respectively?
    A.$3, $3 and $4.
    B. $3, $4 and $4.
    C. $3, $4 and $5.
    D. $3.50, $4 and $4.50.
    E. $4, $4.50 and $5.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. If the beer producers could price discriminate on the basis of blood types, what would be their maximum total revenue?
    A.$550.
    B. $595.
    C. $625.50.
    D. $636.
    E. $670.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. For a price change from $5 to $4.50, which consumer group has the lowest price elasticity of demand?
    A.Type A.
    B. Type B.
    C. Type O.
    D. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. For a price change from $3 to $2.50, which consumer group has the lowest price elasticity of demand?
    A.Type A.
    B. Type B.
    C. Type O.
    D. Cannot be determined.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the above information to answer this question. If the beer producers could price discriminate on the basis of blood types, in order to maximize revenue, which of the following statements is correct?
    A.The consumer group with the highest price elasticity of demand should be charged the highest price.
    B. The consumer group with the highest price elasticity of demand should be charged the lowest price.
    C. The consumer group with the lowest price elasticity of demand should be charged the lowest price.
    D. The consumer group which should be charged the highest price depends upon which has the smallest marginal utility.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

 


  1. Refer to the graph above to answer this question. The graph shows a tennis coach charges $20 per hour for tennis lessons for adults and $10 per hour for tennis lessons for children. The tennis coach is practicing:
    A.Peak load pricing
    B. Three part pricing
    C. Price discrimination
    D. Bundling
    E. All of the choices are correct.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the graph above to answer this question. The graph shows a tennis coach charges $20 per hour for tennis lessons for adults and $10 per hour for tennis lessons for children. What is the total revenue of the tennis coach?
    A.$20.
    B. $30.
    C. $80.
    D. $110.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Refer to the graph above to answer this question. The graph shows a tennis coach charges $20 per hour for tennis lessons for adults and $10 per hour for tennis lessons for children. Suppose the coach provides lessons to the children only. What is the amount of the consumer surplus of the children taking the tennis lessons?
    A.$20.
    B. $50.
    C. $120.
    D. $160.
    E. Cannot be determined.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. What is marginal utility?
    A.It is the total satisfaction resulting from consuming a product.
    B. It is the total satisfaction resulting from consuming all products.
    C. It is the additional satisfaction resulting from consuming one more unit of all products.
    D. It is the additional satisfaction resulting from consuming one more unit of a product.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. When is total utility at a maximum?
    A.When marginal utility is maximum.
    B. When marginal utility is zero.
    C. When marginal utility is increasing
    D. When marginal utility is decreasing.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What is the law of diminishing marginal utility?
    A.The amount of additional utility decreases as successive units of a product is consumed.
    B. Marginal utility increases quickly at first, but more slowly later.
    C. Total utility declines at first, but after some point starts to increase.
    D. While total utility rises with the consumption of additional units, marginal utility is always constant.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Which of the following is a correct statement of the optimal purchasing rule?
    A.MUA/MUB = PB/PA.
    B. MUA/PA = MUB/PB.
    C. PA/MUB = PB/MUA.
    D. PA/PB = MUB/MUA.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. What will happen if MUA/PA>MUB/PB?
    A.The price of A will be forced to drop.
    B. The price of B will be forced to drop.
    C. The consumer will purchase more of product A.
    D. The consumer will purchase more of product B.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

Table 5.13
Quantity Consumed Total Utility
1 30
2 55
3 75
4 90
5 100
6 105
7 105
8 100

 

  1. Refer to Table 5.13 to answer this question. What is the marginal utility of the 5th unit?
    A.10.
    B. 20.
    C. 100.
    D. Cannot be answered from this information.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to Table 5.13 to answer this question. With the consumption of what quantity is marginal utility equal to zero.
    A.1.
    B. 5.
    C. 7.
    D. 8.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. In order for price discrimination to work, three conditions must be fulfilled. Which of the following is not one of those conditions?
    A.The seller must be able to identify and separate different groups of buyers.
    B. The different groups of buyers must have different elasticities of demand.
    C. The product must be a necessity.
    D. It must be impossible to resell the product.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Suppose that, for a certain consumer, the marginal utility of product A is equal to 40 and its price is $42, while the marginal utility of product B is 30 and its price is $40. What conclusion can be inferred from this?
    A.This consumer should buy more of product A and less of product B.
    B. This consumer should buy more of product B and less of product A.
    C. This consumer should buy more of product B, because it is cheaper.
    D. This consumer should buy neither product since the prices exceed the marginal utilities.
    E. This consumer should buy more of product B because it gives greater value for money.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

Table 5.14 
Quantity TU MU
1 100 ___
2 ___ 90
3 270 ___
4 ___ 70
5 400 ___
6 ___ 50
     


  1. Refer to Table 5.14 to answer this question. What are the missing numbers in the total utility column?
    A.135, 305, and 435.
    B. 90, 340, and 450.
    C. 190, 340, and 450.
    D. Cannot be determined with the information given.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Refer to Table 5.14 to answer this question. What are the missing numbers in the marginal utility column?
    A.0, 80, and 60.
    B. 100, 80, and 60.
    C. 100, 90, and 82.
    D. Cannot be determined with the information given.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Under which of the following circumstances will consumers’ surplus be greatest?
    A.When price is high and demand is elastic.
    B. When price is low and demand is inelastic.
    C. When price is low and demand is elastic.
    D. When price is high and demand is inelastic.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Which of the following statements is true about price discrimination?
    A.It is practiced on the basis of age, time, and the volume of purchases.
    B. It is illegal in Canada.
    C. It works with luxury goods but not with necessities.
    D. It works with necessities but not with luxury goods.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

Table 5.15 
Quantity Consumed MU Apples MU Bananas
1 20 18
2 18 17
3 16 14
4 14 11
5 12 8
6 10 5
7 8 2
8 6 0

 

  1. Refer to Table 5.15 to answer this question. Suppose that the price of both apples and bananas is $1 each and this consumer has $8 to spend. In order to maximize her total utility, how many of each should she purchase?
    A.3 apples and 5 bananas.
    B. 4 apples and 4 bananas.
    C. 5 apples and 3 bananas.
    D. 8 apples.
    E. 8 bananas.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to Table 5.15 to answer this question. Suppose that the price of an apple is $2 and the price of a banana is $1 and this consumer has $8 to spend. In order to maximize her total utility, how many of each should she purchase?
    A.1 apple and 6 bananas.
    B. 2 apples and 4 bananas.
    C. 3 apples and 2 bananas.
    D. 4 apples.
    E. 8 bananas.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. What does the diamond-water paradox refer to?
    A.The fact that water is far more plentiful than diamonds, even though people need more diamonds.
    B. The fact that water is far more valuable than diamonds, yet its price tends to be far lower.
    C. The fact that although people don’t necessarily want diamonds, they are prepared to pay a high price for them.
    D. The fact that diamonds are more plentiful than water in some countries.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Which of the following products are likely to yield the greatest amount of consumer surplus?
    A.Water.
    B. Diamonds.
    C. Ice cream.
    D. A Persian carpet.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

 

 

  1. Refer to Figure 5.5 to answer this question. If partial units cannot be purchased, what is the value of total consumer surplus at a price of $5?
    A.$10.
    B. $12.
    C. $20.
    D. $35.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Refer to Figure 5.5 to answer this question. If partial units cannot be purchased, at what price is the total consumer surplus equal to $21?
    A.$3.
    B. $4.
    C. $5.
    D. $6.
    E. $9.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Suppose that Jon is purchasing the optimal amounts of apples and oranges. The marginal utility of the last apple is 8 and of the last orange is 6. If the price of an apple is $1, what must be the price of an orange?
    A.50 cents.
    B. 75 cents.
    C. $1.33.
    D. $1.40.
    E. Cannot be determined from this information.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

The following table shows Ketta’s total utility for coffee and croissants.


Table 5.16 
Quantity Coffee
Total Utility
Croissants
Total Utility
1 10 11
2 18 20
3 24 27
4 28 32
5 30 35
     

 

  1. Refer to Table 5.16 to answer this question. If Ketta has a budget of $15 and the price of both coffees and croissants are $3, what will be her optimal purchase?
    A.5 croissants.
    B. 1 coffee and 4 croissants.
    C. 2 coffees and 3 croissants.
    D. 3 coffees and 2 croissants.
    E. 4 coffees and 1 croissant.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to Table 5.16 to answer this question. If Ketta has a budget of $15 and the price of croissants is $3, but the price of coffees is $2, what will be her optimal purchase?
    A.5 croissants.
    B. 3 coffees and 2 croissants
    C. 3 coffees and 3 croissants
    D. 4 coffees and 3 croissants.
    E. 6 coffees and 1 croissant.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Suppose that the price of a plate of sushi is $10 and that Jan’s marginal utility is 8 while Jin’s marginal utility is 12. What can be deduced from this information?
    A.That Jin should buy the sushi, but Jan should not.
    B. That Jin likes sushi better than does Jan.
    C. That Jan’s MU per $ spent on sushi is greater than Jin’s.
    D. No deductions can be made from this information.

 

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Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

Table 5.14    
LATTES PIECES OF PASTRY
Quantity MU MU per Dollar spent Quantity MU MU per Dollar spent
1 120 —— 1 —— 15
2 90 —— 2 —— 12.5
3 65 —— 3 —— 8.75
4 45 —— 4 —— 5.25
5 25 —— 5 —— 4
6 23 —— 6 —— 2.5
7 10 —— 7 —— 0

 

  1. Refer to Table 5.17 to answer this question. Assume that the price of a pastry is $4 each. What are the missing numbers in the MU column for pastries?
    A.15, 6.25, 2.92, 1.31, 0.80, 0.42, 0.
    B. 15, 25, 26.25, 21, 20, 15, 0.
    C. 120, 90, 65, 45, 25, 23, 10.
    D. 60, 50, 35, 21, 16, 10, 0.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Refer to Table 5.17 to answer this question. Assume that the price of a latté is $5 and pastries are priced at $4 each. If Kyle has $36 to spend how many units of each will he buy in order to maximize his TU?
    A.2 lattés and 6 pastries.
    B. 3 lattés and 5 pastries.
    C. 4 lattés and 4 pastries.
    D. 5 lattés and 3 pastries.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

 

True / False Questions

  1. The term “marginal” means the difference between averages.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Utility is defined as the satisfaction or pleasure derived from the consumption of a product.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Marginal utility is the additional utility derived from the consumption of one more unit of a product.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. The law of diminishing marginal utility suggests that as successive units of a product are consumed, total utility declines.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. If the MU per dollar spent on product A is greater than on product B, then a rational consumer should consume more of product B to compensate.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. It is the marginal utility of the last unit consumed that determines how much a consumer is prepared to pay for a product.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Consumer surplus is the additional amount that consumers have to pay if they really need a particular product.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. The consumer surplus derived from products that have an inelastic demand is greater than that from products with an elastic demand.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Price discrimination is the practice of charging different prices for different products.
    FALSE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Price discrimination cannot be practiced if consumers are able to resell the product.
    TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

 

Short Answer Questions

  1. What does marginal utility mean, and what is the law of diminishing marginal utility?

Marginal utility is the amount of additional utility derived from the consumption of an extra unit of a product. The law of diminishing marginal utility suggests that marginal utility decreases as successive units of a product are consumed.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Explain why a rational consumer does not spend all of her income buying only her favorite product.

A rational consumer does not spend all of her income buying only her favorite product because her favorite product remains her favorite only up to a point. With increased consumption of that product its marginal utility falls to the point that some other product eventually becomes more desirable at which point she will switch products.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-03 Explain how marginal utility theory is applicable to real-world examples.
Topic: 05-04 Why Our Favourite Things Are Not Always Our Favourites

  1. “If marginal utility is decreasing, then total utility must also be decreasing”. Is this correct?

No this is incorrect. It doesn’t matter whether the marginal utility is increasing, decreasing or remaining constant, if it has a positive value then total utility must be increasing. In other words, the statement would be correct only if the marginal utility is both decreasing and negative

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Explain what is meant by the term consumer surplus.

Consumer surplus is the difference between what a customer is willing to pay and the actual price of the product. In other words, it is the difference between the consumer’s subjective evaluation of each unit of a product and the market’s objective value (the price).

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Define the following: a) utility b) marginal utility c) the law of diminishing marginal utility.
  2. a) utility: the satisfaction or pleasure derived from the consumption of a product.
    b) marginal utility: the amount of additional utility derived from the consumption of an extra unit of a product
    c) law of diminishing marginal utility: the amount of additional utility decreases as successive units of a product are consumed

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. What conditions must exist in order for price discrimination to be practiced?

Four conditions must prevail for price discrimination to be successful:

· groups within society that have different elasticities of demand have to be identified.
· these groups must be separable from others
· those groups receiving the lower prices must be prevented from re-selling the product to others
· the seller must have control over the price

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Demonstrate graphically and explain verbally the concept of consumer surplus.

Consumer surplus is the value a consumer gets from buying a product less its price. This is easily illustrated in a supply and demand diagram as the area under the demand curve and above the price between the origin and the equilibrium quantity. It is shown as the shaded area in the diagram below.

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Assume the utility Janet obtains from consuming apples is given in the table below.


Number of apples Total utility Marginal Utility
1 7 7
2 13 6
3 18 5
4 22 4
5 25 3
6 27 2
7 28 1
8 28 0
9 27 -1
10 25 -2

(a) At what point does diminishing marginal utility set in?
(b) If apples were freely given away at zero cost, how many apples would she choose to consume?
(c) If Janet is at her level of maximum utility from apple consumption, what will happen to her level of utility if she consumes an additional apple?

(a) Marginal utility is always diminishing.
(b) If apples were available to Janet for consumption at zero cost, she would choose to consume 7 apples (28 units of utility).
(c) If she consumes her 8th apple, its marginal utility is zero and therefore does not contribute to her total utility.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. You have determined that the following utility values can be obtained by reading your Economics book.


Number of Chapters Total Utility Marginal Utility
0 0  
1 2  
2 4  
3 6  
4 8  
5 10  
6 12  

(a) Compute marginal utility.
(b) Does the example illustrate the principle of diminishing marginal utility? Explain.

(a) The completed table:

Number of Chapters Total Utility Marginal Utility
0 0  
1 2 2
2 4 2
3 6 2
4 8 2
5 10 2
6 12 2

(b) No this example does not illustrate the principle of diminishing marginal utility. Diminishing marginal utility means that as more of something is consumed the marginal utility values will eventually decline. In this example marginal utility is constant.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. You have $5 to spend on any combination of goods A and B. The price of good A is $2 and the price of good B is $1. You have calculated the following utility values for yourself:
Units TUA MUA MUA/PA TUB MUB MUB/PB
0 0     0    
1 16     30    
2 30     50    
3 40     58    
4 46     64    

(a) Fill in the empty columns of the table.
(b) You have purchased 2 units of good A and 1 unit of good B. Are you maximizing your utility? If so, explain why. If not, what combination of goods should you buy?

(a) The completed table:

Units TUA MUA MUA/PA TUB MUB MUB/PB
0 0     0    
1 16 16 8 30 30 30
2 30 14 7 50 20 20
3 40 10 5 58 8 8
4 46 6 3 64 6 6

 

(b) If you purchase 2 of A and 1 of B you are not maximizing your utility. To see why not, use the utility maximizing rule. For good A compute MUA/PA = 7 and for good B compute MUB/PB = 30. Since MUB/PB > MUA/PA you are not at a utility maximizing combination of goods; you should reallocate your $5 and buy more B and less A. The utility maximizing combination here is to buy 1 of A and 3 of B. With this latter combination we see that MUA/PA = 8 = MUB/PB and we have satisfied the utility maximizing rule.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. You have just spent two hours studying microeconomics and this has made you very hungry. You have $10 to spend on a snack and decide to go to Taco Bell. Putting your newly acquired economics knowledge to use, you have developed the following table to assist with your purchase decision:
Double Decker Tacos
(P = $1)
Chicken Burrito Supremes
(P = $2)
Q TU MU MU/P Q TU MU MU/P
0 0     0 0    
1 20     1 28    
2 34     2 46    
3 44     3 54    
4 48     4 56    
5 48     5 56    
6 42     6 52    

 

(a) Fill in the missing values in the table above.
(b) If you bought 6 tacos and 2 burritos are you maximizing your utility? Explain.

(a) The completed table:

Double Decker Tacos
(P = $1)
Chicken Burrito Supremes
(P = $2)
Q TU MU MU/P Q TU MU MU/P
0 0     0 0    
1 20 20 20 1 28 28 14
2 34 14 14 2 46 18 9
3 44 10 10 3 54 8 4
4 48 4 4 4 56 2 1
5 48 0 0 5 56 0 0
6 42 -6 -6 6 52 -4 -2

 

(b) By purchasing 6 tacos and 2 burritos you are not maximizing your utility. At this level of consumption you have put yourself into the following position:

MU/P for tacos = -6 < 9 = MU/P for burritos.

You can use the rational choice rule to reallocate your $10 and increase your total utility. Rather than the above allocation, you should purchase each item until your MU/P is the same for both munchies. Doing so will result in the purchase of 4 double Decker tacos and 3 chicken burrito Supremes.

To see why this is the case, think about each purchase individually, and pick the item that will give you the highest MU/P. Reasoning in this way, you would make the following decisions:

First dollar spent on a taco
Second through fourth dollars spent on one taco and one burrito
Fifth dollar spent on a taco
Sixth and seventh dollars spent on a burrito
Eighth through tenth dollars spent on one taco and one burrito

After this allocation, the MU/P for each item is the same (and equal to 4).

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Given Jon’s marginal utility form consuming packets of potato chips below, calculate his total utility for each quantity.


Quantity Total Utility Marginal Utility
1   50
2   46
3   40
4   32
5   22
6   10
7   2

 

Quantity Total Utility Marginal Utility
1 50 50
2 96 46
3 136 40
4 168 32
5 190 22
6 200 10
7 202 2

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. June’s evaluation of packets of nacho chips in terms of $MU is as follows: 1st packet: $4; 2nd packet: $3.50; 3rd packet: $2.90; 4th packet: $2.30; 5th packet: $1.60. If the price of nacho chips is $1.50, and June buys 5 packets, calculate her marginal consumer surplus for each packet and the total consumer surplus form all 5.

MCS: $2.50; $2; $1.40; $0.80; $0.10
TCS: $6.80

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-04 Provide a theoretical rationale for downward-sloping demand curves.
Topic: 05-08 Marginal Utility and Demand

  1. Suppose that Melissa spends recreation time and money on two leisure activities: Tennis and fishing. The cost per hour of tennis (court fees) and per hour of fishing (boat rentals) is $4. The table below shows the total utility that Melissa derives from the two activities.
Tennis Fishing
Number of Hours Total Utility Marginal Utility Number of Hours Total Utility Marginal Utility
1 20   1 31  
2 39   2 58  
3 57   3 79  
4 74   4 94  
5 89   5 101  
6 102   6 102  

 

  1. a) Complete the columns of marginal utilities.
    b) Assume that Melissa has a budget of $20. To maximize her total utility, how much would she allocate her spending between the two activities? What is the resulting total utility?
    c) At the end of the day, Melissa digs deep in her pocket and discovers an extra $4. If she allocates this additional spending between the two activities so as to maximize her total utility, what will be the final totals?
    d) Suppose that Melissa’s utility from the two activities remains unchanged the next day, when she arrives with $20 in her pocket. To her pleasure, she discovers that the hourly charge on court fees has decrease to $3. How will she allocate her expenditures in order to maximize her total utility?
  2. a)
Tennis Fishing
Number of Hours Total Utility Marginal Utility Number of Hours Total Utility Marginal Utility
1 20 20 1 31 31
2 39 19 2 58 27
3 57 18 3 79 21
4 74 17 4 94 15
5 89 15 5 101 7
6 102 13 6 102 1
  1. b) $12 on fishing and $8 on tennis. TU = 115
    c) $12 on fishing and $12 on tennis. TU = 136
    d) $8 on fishing and $12 on tennis. TU = 133

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Yoko has $10 to spend on lunch. The deli doesn’t have a very extensive menu: pears at $0.75 each; bagels at $1.50 each and cappuccino at $2 each. Given her utility figures in the table below, how should she allocate her $10?
  Pears Bagels Cappucino
Quantity Total Utility Total Utility Total Utility
1 80 200 270
2 154 350 480
3 200 470 630
4 240 560 735
5 260 610 825

 

2 pears; 3 bagels; and 2 cappuccinos

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. The figure below indicates Richard’s demand for bus tickets.

    a) What is Richard’s total consumer surplus if the price of tickets is $3 each?
    b) What is Richard’s total consumer surplus if the price of tickets is $2 each?

  2. a) $14
    b) $22.50

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. What is the significance of the marginal utility being equal to zero?

Marginal utility is the additional amount of utility derived from the consumption of an extra unit of a product. If marginal utility is equal to zero, there is no utility derived from the extra unit; total utility must be at a maximum.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. “Total utility declines when marginal utility declines.” Evaluate this statement.

This statement is false. Total utility declines when marginal utility is negative. When marginal utility starts to decline, total utility is still increasing, but at a decreasing rate.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. “When a consumer chooses between two products, it will purchase the good that yields a higher marginal utility.” Evaluate this statement.

Uncertain. The statement is true if the prices of the two products are identical. If the prices are not identical, the consumer will choose the product that has the higher marginal utility per dollar spent.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. A new bakery has just opened, and in an attempt to attract awareness, it is offering free unlimited samples of its chocolate chip cookies. Assuming you can only consume the cookies in-store (you cannot take them home), how many pieces of cookie would you have?

You will stop consuming when the additional piece of cookie yields no more satisfaction. This occurs when the marginal utility of the last piece of cookie consumed is zero.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Table 5.1 shows Raj’s utility from bananas. Complete the table.

    Table 5.1

Q MU TU
1   23
2 16  
3 9  
4   52
5 1  
6   53
7   51

 

Q MU TU
1 23 23
2 16 39
3 9 48
4 4 52
5 1 53
6 0 53
7 2 51

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Table 5.2 shows Rachel’s total utility from consuming ice cream sandwiches. Is it possible that the marginal utility of the 4th unit is 14?

    Table 5.2

Q TU
1 30
2 50
3 65
4  
5 79
6 80

No, if the marginal utility for the 4th unit is 14 then the marginal utility for the 5th unit will be zero. Since the marginal utility for the 6th unit is 1, this will violate the law of diminishing marginal utility.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Table 5.3 shows Sam’s marginal utility for Goods A, B, C, and D.

    Table 5.3

QA MUA MUB QC MUC QD MUD
1 30 1 32 50 1 15
2 25 2 16 40 2 9
3 20 3 8 30 3 3
4 15 4 4 20 4 1
5 5 5 2 10 5 0

 

Suppose the prices for Good A, B, C, and D are $5, $8, $20, and $3 respectively. If Sam’s budget of $62, what is the Sam’s consumption bundle?
What is his total utility?

QA MUA/PA QB MUB/PB QC MUC/PC QD MUP/PD
1 6 1 4 1 2.5 1 5
2 5 2 2 2 2 2 3
3 4 3 1 3 1.5 3 1
4 3 4 0.5 4 1 4 0.33
5 1 5 0.25 5 0.5 5 0
  1. a) Sam’s consumption bundle will be 4 units of Good A and 2 units each of Goods B, D, and 1 unit of C.
    b) 212 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Table 5.4 shows Matt’s total utility for Goods A, B, C, and D.

    Table 5.4

QA TUA Q TUB Q TUC
1 5 1 10 1 16
2 9 2 18 2 20
3 12 3 24 3 23
4 14 4 28 4 25
5 14.5 5 30 5 26

 

Suppose the prices for Good A, B, and C are $1, $2, and $3 respectively. If Matt’s budget is $20, what is the Matt’s consumption bundle?
What is his total utility?

  1. a) Matt’s consumption bundle will be 4 units of Good A, 5 units of Good B, and 2 unit of Good C.
    b) 64 utils.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. What is price discrimination? What conditions must exist in order for price discrimination to be practiced?

Price discrimination means that the same product, with the same cost of production, is being sold to different consumers at different prices. In order to price discriminate, the seller must be able to identify and separate consumer groups with different demand elasticities, to have some control over price and to ensure that their sales are final.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-06 Explain why some sellers charge different prices to different consumers for the same product.
Topic: 05-10 Price Discrimination

  1. Table 5.5 shows the Brian’s total utility from consuming peanut butter chocolate chip cookies.

    Table 5.5


Q TU
1 50
2 95
3 135
4 ???
5 200
6 225

Which of the following are feasible amounts of the total utility of 4 units?

  1. a) 160 b) 170 c) 180
    b) 170
    c) The marginal utility of the 4th unit must be less than the marginal utility of the 3rd unit and greater than marginal utility of the 5th Since the marginal utility for the 5th unit is 25 and the marginal utility for the 3rd unit is 40, the total utility for the 4th unit must be greater than 167 and less than 175.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Table 5.6 shows Nelson’s total utility for Goods A and B.

    Table 5.6

QA TUA QB TUB
1 10 1 11
2 15 2 18
3 17 3 22
4 15 4 23
5 11 5 22

 

Suppose the prices for both Good A and B are $1 each.

a) If Nelson’s budget is $3, what will his consumption bundle?
b) If Nelson’s budget is $4, what will his consumption bundle?
c) If Nelson’s budget is $6, what will his consumption bundle?
d) If Nelson’s budget is $10, what will his consumption bundle?

  1. a) 1 unit of Good A and 2 units of Good B.
    b) 2 units of Good A and 2 units of Good B.
    c) 3 units of Good A and 3 units of Good B.
    d) 3 units of Good A and 4 units of Good B. (You would not purchase more of either since the MUs of additional units are negative).

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Differentiate between marginal utility and total utility.

Marginal utility is the additional satisfaction derived from the consumption of an extra unit of a product. Total utility is the total satisfaction derived from the consumption of all units of a product. Total utility is equal to the summation of marginal utility from each unit consumed.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. Can marginal utility be negative? Explain.

Yes, marginal utility can be negative. If the additional unit consumed yields dissatisfaction, then marginal utility is negative. Suppose the marginal utility of your fourth cup of coffee is zero, if you consume the fifth cup you will become ill, thus the marginal utility of the fifth cup of coffee will be negative.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Explain the law of diminishing marginal utility.
Topic: 05-01 The Law of Diminishing Marginal Utility

  1. For the following diagram, suppose the quantity traded is Q0 and the market price is P0, shade in the area of

    a) total consumer surplus.
    b) total expenditure.
    c) maximum value that consumers are willing to pay for Q0.

 

 

Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Explain why consumers generally value a product more than the purchase price they pay.
Topic: 05-09 Consumer Surplus

  1. Suppose that MUC/PC < MUA/PA, MUC/PC = MUB/PB, and MUC/PC > MUD/PD, which good should be your next purchase?

Good A.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

  1. Table 5.8 shows Jacintha’s marginal utility for Goods A and B.

    Table 5.8

QA MUA QB MUB
1 60 1 60
2 24 2 18
3 6 3 3
4 2 4 -3
5 -2 5 -9

 

  1. a) Suppose Jacintha’s budget is $12 and PA = PB = $2, should she spend her entire budget? Explain why or why not.
    b) Suppose Jacintha’s budget is $20 and PA = PB = $2, should she spend her entire budget? Explain why or why not.
  2. a) Yes, Jacintha should spend her entire budget. Jacintha will be able to make six purchases. She will purchase 3 units of Good A and 3 units of Good B. All units purchased have a positive marginal utility; total utility is maximized.
    b) No, Jacintha should not spend her entire budget. Jacintha’s total utility is maximized when she purchases 4 units of Good A and 3 units of Good B. Any other additional units of Good A or Good B will give her dissatisfaction; total utility will decrease if she continues to consume

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Derive a consumers’ purchasing rule that ensures satisfaction is maximized.
Topic: 05-02 Optimal Purchasing Rule

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