Theory of Consumer Choice Practice Questions

1. Theory of Consumer Choice Practice Questions

2. Scenario 1. Budget Constraint. Tom is trying to decide how to allocate his $50 budget for CD purchases and DVD rentals when the price of a CD is $10 and the price of a DVD rental is $5. • Which of the following combinations of CD purchases and DVD rentals lies inside Tom’s budget line? • 5 CDs and 10 DVDs • 5 CDs and 0 DVDs • 0 CDs and 5 DVDs • 10 CDs and 5 DVDs • 2 CDs and 7 DVDs

3. Scenario 1. Budget Constraint. Tom is trying to decide how to allocate his $50 budget for CD purchases and DVD rentals when the price of a CD is $10 and the price of a DVD rental is $5. • Which of the following combinations of CD purchases and DVD rentals lies inside Tom’s budget line? • 5 CDs and 10 DVDs • 5 CDs and 0 DVDs • 0 CDs and 5 DVDs • 10 CDs and 5 DVDs • 2 CDs and 7 DVDs

4. Assume that the price of both goods is $1 per unit, and you consume 3 units of Good X and 3 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

5. Assume that the price of both goods is $1 per unit, and you consume 3 units of Good X and 3 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

6. Assume that the price of both goods is $1 per unit, and you consume 4 units of Good X and 2 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of X and more of Y. • more of both X and Y. • less of both X and Y. • more of X and less of Y. • the current quantity of both goods.

7. Assume that the price of both goods is $1 per unit, and you consume 4 units of Good X and 2 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of X and more of Y. • more of both X and Y. • less of both X and Y. • more of X and less of Y. • the current quantity of both goods.

8. Assume that the price of Good X is $2 per unit and the price of Good Y is $1 per unit, and you consume 3 units of Good X and 3 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

9. Assume that the price of Good X is $2 per unit and the price of Good Y is $1 per unit, and you consume 3 units of Good X and 3 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

10. Assume that the price of Good X is $1 per unit and the price of Good Y is $2 per unit, and you consume 4 units of Good X and 2 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

11. Assume that the price of Good X is $1 per unit and the price of Good Y is $2 per unit, and you consume 4 units of Good X and 2 units of Good Y. To maximize utility, assuming that the goods are divisible, you would consume: • less of both X and Y. • more of both X and Y. • less of X and more of Y. • more of X and less of Y. • the current quantity of both goods.

12. David’s marginal utilities for milkshakes and burgers are given in the accompanying table. The price of milkshakes is $2, and the price of burgers is $5. If Max’s income is $10, how many milkshakes and how many burgers does he buy to maximize his utility? • 1 shake and 1 burger • 0 shakes and 2 burgers • 5 shakes and 0 burgers • 2 shakes and 1 burger • 6 shakes and 2 burgers.

13. David’s marginal utilities for milkshakes and burgers are given in the accompanying table. The price of milkshakes is $2, and the price of burgers is $5. If Max’s income is $10, how many milkshakes and how many burgers does he buy to maximize his utility? • 1 shake and 1 burger • 0 shakes and 2 burgers • 5 shakes and 0 burgers • 2 shakes and 1 burger • 6 shakes and 2 burgers.

14. If a consumer buys more of Good X and less of Good Y, the _____ of Good X will _____, and the ______ of Good Y will _____. • marginal utility; fall; marginal utility; rise • marginal utility; rise; marginal utility; fall • total utility; fall; marginal utility; rise • marginal utility; rise; total utility; rise • total utility; rise; total utility; rise

15. If a consumer buys more of Good X and less of Good Y, the _____ of Good X will _____, and the ______ of Good Y will _____. • marginal utility; fall; marginal utility; rise • marginal utility; rise; marginal utility; fall • total utility; fall; marginal utility; rise • marginal utility; rise; total utility; rise • total utility; rise; total utility; rise

16. If a consumer purchases a combination of commodities A and B such that MUa/Pa = 50 and MUb/Pb = 30, to maximize utility, the consumer should: • buy less of both A and B. • buy more of both A and B. • buy more of A and less of B. • buy less of A and more of B. • make no changes to the current combination of A and B.

17. If a consumer purchases a combination of commodities A and B such that MUa/Pa = 50 and MUb/Pb = 30, to maximize utility, the consumer should: • buy less of both A and B. • buy more of both A and B. • buy more of A and less of B. • buy less of A and more of B. • make no changes to the current combination of A and B.

18. If a consumer purchases a combination of commodities A and B such that MUa/Pa = 100 and MUb/Pb = 80, to maximize utility, the consumer should: • buy less of both A and B. • buy more of both A and B. • buy more of A and less of B. • buy less of A and more of B. • make no changes to the current combination of A and B.

19. If a consumer purchases a combination of commodities A and B such that MUa/Pa = 100 and MUb/Pb = 80, to maximize utility, the consumer should: • buy less of both A and B. • buy more of both A and B. • buy more of A and less of B. • buy less of A and more of B. • make no changes to the current combination of A and B.

20. Generally, each successive unit of a good consumed will cause marginal utility to • increase at an increasing rate. • increase at a decreasing rate. • increase at a constant rate. • decrease. • either increase or decrease.

21. Generally, each successive unit of a good consumed will cause marginal utility to • increase at an increasing rate. • increase at a decreasing rate. • increase at a constant rate. • decrease. • either increase or decrease.

22. Assume there are two goods, good X and good Y. Good X costs $5 and good Y costs $10. If your income is $200, which of the following combinations of good X and good Y is on your budget line? • 0 units of good X and 18 units of good Y • 0 units of good X and 20 units of good Y • 20 units of good X and 0 units of good Y • 10 units of good X and 12 units of good Y • all of the above.

23. Assume there are two goods, good X and good Y. Good X costs $5 and good Y costs $10. If your income is $200, which of the following combinations of good X and good Y is on your budget line? • 0 units of good X and 18 units of good Y • 0 units of good X and 20 units of good Y • 20 units of good X and 0 units of good Y • 10 units of good X and 12 units of good Y • all of the above.

24. The optimal consumption rule states that total utility is maximized when all income is spent and • MU/P is equal for all goods. • MU is equal for all goods. • P/MU is equal for all goods. • MU is as high as possible for all goods. • The amount spent on each good is equal.

25. The optimal consumption rule states that total utility is maximized when all income is spent and • MU/P is equal for all goods. • MU is equal for all goods. • P/MU is equal for all goods. • MU is as high as possible for all goods. • The amount spent on each good is equal.

26. A consumer is spending all of her income and receiving 100 utils from the last unit of good A and 80 utils from the last unit of good B. If the price of good A is $2 and the price of good B is $1, to maximize total utility the consumer should buy • more of good A. • more of good B. • less of good B. • more of both goods. • less of both goods.

27. A consumer is spending all of her income and receiving 100 utils from the last unit of good A and 80 utils from the last unit of good B. If the price of good A is $2 and the price of good B is $1, to maximize total utility the consumer should buy • more of good A. • more of good B. • less of good B. • more of both goods. • less of both goods.

28. The optimal consumption bundle is always represented by a point • inside the consumer’s budget line. • outside the consumer’s budget line. • at the highest point on the consumer’s budget line. • on the consumer’s budget line. • at the horizontal intercept of the consumer’s budget line.

29. The optimal consumption bundle is always represented by a point • inside the consumer’s budget line. • outside the consumer’s budget line. • at the highest point on the consumer’s budget line. • on the consumer’s budget line. • at the horizontal intercept of the consumer’s budget line.