Chapter 6

T or F If total utility increases from 10 to 15 for the second unit of a good consumed, the marginal utility of the second unit is 25.

False

T or F The income effect is the concept that changes in consumption of a good result from changes in government spending.

False

T or F The law of diminishing marginal utility implies that the marginal utility of my fifth hot dog is less than the marginal utility of my second soda, other things constant.

False

T or F The substitution effect is the concept that changes in consumption of a good result from changes in the relative price of a jointly consumed good.

False

The principle that the extra satisfaction of a good or service declines as people consume more in a given period is called the _____ _____ _____ _____ _____.

Law of diminishing marginal utility

_____ utility is the change in total utility from one additional unit of a good or service.

Marginal

The change in quantity demanded of a good or service caused by a change in real income (purchasing power).

Income Effect

_____ _____ is the change in total utility from one additional unit of a good or service.

Marginal utility

_____ _____ is the change in quantity demanded of a good or service caused by the change in its price relative to substitutes.

Substitution effect

T or F A utility-maximizing consumer equalizes marginal utilities per dollar spent across all goods.

True

T or F IF total utility increases from 10 to 15 for the second unit of a good consumed, the marginal utility of the second unit is 5.

True

T or F If the price of a good decreases, the resulting increase in the quantity purchased decreases the marginal utility of the good.

True

T or F Marginal utility measures the increase in total utility you derive from consuming one more unit of a good.

True

T or F Marginal utility tends to fall as a person increases his or her consumption.

True

T or F The utility of a good measures its satisfaction rather than its usefulness.

True

T or F Utils are used by economists to measure the satisfaction a person obtains from consuming a good.

True

The satisfaction, or pleasure, that people receive from consuming a good or service.

Utility

_____ is the satisfaction, or pleasure, that people receive from consuming a good or service.

Utility

T or F Consuming one more of a good increases its marginal-utility-to-price ratio, and consuming one less of the other good lowers its marginal-utility-to-price ratio.

False

Consumer _____ is a condition in which total utility cannot increase by spending more of given budget on one good and spending less on another good.

Equilibrium

T or F Consumer equilibrium requires that the marginal utility per dollar spent be unequal for all goods.

False

_____ utility is the amount of satisfaction received from all the units of a good or service consumed.

Total

_____ _____ is the amount of satisfaction received from all the units of a good or service consumed.

Total utility

Assume the total utilities corresponding to the first four units of a product consumed are 8, 12, 14, 15, respectively. The marginal utility of the third unit consumed is: a. 2 b. 14. c. 3 d. 34

a. 2

Assume the total utility corresponding to the first four units of a product consumed are 8, 12, 14, and 15 respectively. The marginal utility of the third unit consumed is: a. 2 b. 14 c. 26 d. 34

a. 2

If the price of a product rises, consumers buy less of the good because the: a. MU/P of the good falls below the MU/P of other goods. b. MU/P of the good rises above the MU/P of other goods. c. marginal utility of the good diminishes. d. total utility of the good diminishes. e. marginal utility of the good rises.

a. MU/P of the good falls below the MU/P of other goods.

Consider a consumer who spends all income on only two goods: bread and wine. An extra loaf of bread would give the consumer 10 extra utils, while an extra bottle of wine would give the consumer 60 extra utils. Bread costs 50 cents per load, and wine costs $6 per bottle. In this situation, the consumer: a. could increase utility by buying more bread and less wine. b. could increase utility by purchasing more wine and less bread. c. has maximized utility and attained the consumer equilibrium. d. in violating the law of diminishing marginal utility.

a. could increase utility by buying more bread and less wine.

The demand curve is downward sloping because of the law of _____. a. diminishing marginal utility. b. diminishing consumer equilibrium. c. consumer equilibrium. d. diminishing utility maximization.

a. diminishing marginal utility

According to the utility model of consumer demand, the demand curve is downward-sloping because of the law of: a. diminishing marginal utility. b. diminishing consumer equilibrium. c. consumer equilibrium. d. diminishing utility maximization.

a. diminishing marginal utility.

If good A has a marginal utility of 30 and a price of $5, and good B has a marginal utility of 10 and a price of $2, then: a. good A is a better buy than good B. b. good B is a better buy than good A. c. goods A and B are of equal value to this consumer. d. neither good A nor B is worth the money. e. goods A and B should both be purchased.

a. good A is a better buy than good B.

Assume the price of good X increases. As a result, your real income decreases and you decrease the quantity of good X purchased each month. This is an example of the: a. income effect. b. consumer price effect. revenue effect. d. substitution effect. e. all of the above are correct

a. income effect.

Suppose a consumer is spending his or her entire budget. In order to obtain the most satisfaction from his or her purchases, all goods should: a. provide the same marginal utility per dollar. b. be consumed in equal quantities. c. have identical marginal utilities. d. give the consumer matching amounts of total utility.

a. provide the same marginal utility per dollar.

Utility is defined as the: a. sense of pleasure or satisfaction derived from consuming goods and services. b. cost of acquiring goods and services. c. profits consumers earn from consuming goods and services. d. monetary value to consumers of goods and services. e. desire to consume goods and services.

a. sense of pleasure or satisfaction derived from consuming goods and services.

The utility of a good measures its satisfaction rather than its usefulness. a. total utility / the change in quantity. b. income / the change in utility. c. quantity / the change in income. d. price / the change in utility. e. income / the change in price.

a. total utility / the change in quantity.

A rational consumer should not consume more of a good when: a. total utility is decreasing. b. marginal utility is diminishing. c. both a and b. d. income is decreasing. e. the price is high.

a. total utility is decreasing.

If a consumer wishes to maximize satisfaction given limited income and MUx/Px<MUy/Py then the consumer should: a. do nothing because she/he is in equilibrium b. buy more of X and less of Y c. Buy more of Y and less of X. d. buy more of both X and Y. e. buy less of both X and Y

c. Buy more of Y and less of X.

When the price of a good rises, one effect on this change in price is that some consumers switch to more affordable substitutes, which helps us understand the law of demand. What is this effect called? a. The marginal utility effect. b. The substitution effect c. The price effect d. The income effect

b. The substitution effect

Generally speaking, as more of a particular good is purchased, a consumer's marginal utility ____ and total utility ____. a. increases; decreases b. decreases; increases c. increases; increases d. decreases; decreases e. generalizations cannot be made

b. decreases; increases

If a consumer is maximizing his/her utility for a given income, the: a. marginal utility for every good purchased would be the same. b. marginal utility per dollar spent for all goods would be the same. c. marginal utility per dollar for all goods would be at a maximum. d. total expenditure on each good would be the same. e. number of units of each good consumed would be the same.

b. marginal utility per dollar spent for all goods would be the same.

If the marginal utility of each good consumers buy does not diminish but remains constant, we should witness consumers: a. buying no goods at all. b. spending all of their income on the good with the highest MU. c. buying one of each good. d. buying only the least expensive goods. e. become indifferent to what goods they buy.

b. spending all of their income on the good with the highest MU.

Assume the price of Levi jeans increases. As a result, you decrease the quantity of Levi jeans purchased each month and purchase more Lee jeans. This is an example of the: a. consumption effect b. utility effect c. income effect b. substitution effect

b. substitution effect

The fact that a gallon of gasoline commands a higher market price than a gallon of water indicates that: a. gasoline is an economic good but water is not. b. the marginal utility of gasoline is greater than the marginal utility of a gallon of water. c. the average utility of a gallon of gasoline is greater than the average utility of a gallon of water. d. the total utility of gasoline exceeds the total utility of water.

b. the marginal utility of gasoline is greater than the marginal utility of a gallon of water.

The income effect refers to a change in: a. the quantity demanded of a good because of a change in the buyer's money income. b. the quantity demanded of a good because of a change in the buyer's real income. c. income because of changes in the CPI. d. None of the above are correct

b. the quantity demanded of a good because of a change in the buyer's real income.

If a consumer wishes to maximize satisfaction given limited income and MUx/Px < MUy/Py then the consumer should: a. do nothing because she/he is in equilibrium. b. buy more of X and less of Y. c. buy more of Y and less of X. d. buy more of both X and Y. e. buy less of both X and Y.

c. buy more of Y and less of X.

"As consumption of a good increases, the extra satisfaction received from consuming an additional unit of the good decreases." This statement is known as the law of: a. demand. b. increasing costs. c. diminishing marginal utility. d. diminishing marginal returns. e. total utility.

c. diminishing marginal utility.

Consumer equilibrium is a condition in which total utility cannot increase by spending more of a given budget on one good and spending _____ on another good. a. zero b. more c. less d. an infinite amount

c. less

Consumers should continue to rearrange their consumption of two goods until: a. the prices of the two goods are equal for the last dollar spent on each good. b. marginal utility is the same for each good for the last dollar spent on each good. c. the marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good. d. the same amount of each is purchased.

c. the marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good.

According to the income effect, when the price of automobiles rises, people buy fewer automobiles because: a. they substitute other forms of transportation for driving. b. the nominal amount of their paychecks is smaller. c. the purchasing power of their income is reduced. d. their demand for automobiles is very elastic.

c. the purchasing power of their income is reduced.

Consumers tend to maximize: a. marginal utility. b. marginal utility per dollar. c. total utility. d. money holdings. e. consumer surplus.

c. total utility.

A condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good is called _____ _____.

consumer equilibrium

The total utilities associated with the first 5 units of consumption of good X are 15, 30, 40, 47, and 50, respectively. What is the marginal utility associated with the third unit? a. 15 b. 70 c. 85 d. 10 e. 45

d. 10

The law of diminishing marginal utility exists for the first four units of a good if they have marginal utilities of: a. 1, 2, 4, 8 b. 8, 4, 1, 2 c. 4, 8, 2, 1 d. 8, 4, 2, 1

d. 8, 4, 2, 1

The law of diminishing marginal utility exists for the first four units of a good if they have marginal utilities of: a. 4, 8, 2, 1 b. 8, 4, 1, 2 c. 1, 2, 4, 8 d. 8, 4, 2, 1

d. 8, 4, 2, 1

When the price of a normal good falls, then: a. both the income and substitution effects combine to cause the quantity demanded to increase. b. the substitution effect will cause people to buy more because the good is relatively less expensive. c. the income effect will cause people to buy more because of the increased purchasing power associated with the lower price. d. All of the above answers is correct

d. All of the above answers is correct

If water is essential for life, while diamonds are not, then why is water cheaper than diamonds? a. Because most people would rather die with a big diamond ring than live without one. b. Because the total utility generated by diamonds is larger than the total utility generated by water. c. Because most people do not understand that they need water to live. d. Because water is abundant, the marginal utility of water is low, and price reflects marginal utility , not total utility.

d. Because water is abundant, the marginal utility of water is low, and price reflects marginal utility , not total utility.

Which of the following statements is true? a. Total utility is the extra satisfaction from the consumption of a good or service. b. Marginal utility is the amount of satisfaction received from all the units of a good or service consumed. c. The law of diminishing marginal utility states that as more of a good or service is consumed total utility decreases. d. Consumer equilibrium is a combination of goods and services consumed which maximized total utility from a given budget.

d. Consumer equilibrium is a combination of goods and services consumed which maximized total utility from a given budget.

When the price of a good increases, one effect of this price increase is that consumers of that good experience a decline in their purchasing power that is like a decline in income. For normal goods, this contributes to the law of demand. What is this effect called? a. The marginal utility effect b. The substitution effect. c. The price effect. d. The income effect.

d. The income effect.

Which of the following statements is true about the total utility provided by a good? a. Total utility can never be negative. b. Total utility is maximized when marginal utility is maximized. c. Total utility continues to increase as more of the good is consumed. d. Total utility is maximized when marginal utility is zero (for total utility > 0). e. Total utility is maximized when marginal utility is zero (for total utility < 0).

d. Total utility is maximized when marginal utility is zero (for total utility > 0).

The price of diamonds is higher than the price of water because: a. diamonds give greater total utility than water. b. diamonds are more durable than water. c. the income effect will cause people to buy more because of the increased purchasing power associated with the lower price. d. all of the above answers are correct

d. all of the above answers are correct

Assume a consumer purchases a combination of goods X and Y such that MUx / -Px = 20 units of utility per dollar and MUy / Py = 10 units of utility per dollar. To maximize utility, the consumers should buy: a. neither X nor Y. b. less of both X and Y. c. more of both X and Y. d. more of X and less of Y. e. less of X and more of Y.

d. more of X and less of Y.

Assume a consumer purchases a combination of goods X and Y such that MUxPx = 40 units of utility per dollar and MUyPy = 20 units of utility per dollar, to maximize utility, the consumers should buy: a. more of both X and Y. b. less of both X and Y. c. neither X nor Y. d. more of X and less of Y. e. Less of X and more of Y.

d. more of X and less of Y.

Consumer equilibrium exists when: a. the marginal utility of each good and service consumed is equal. b. the total utility of each good and service consumed is equal. c. the marginal utility of each good and service consumed equals its price. d. ratio of marginal utility to price for all goods and services is equal.

d. ratio of marginal utility to price for all goods and services is equal.

The consumer equilibrium condition for two goods is achieved by equating the: a. marginal utilities of both goods for the last dollar spent on each good. b. prices of both goods for the last dollar spent on each good. c. marginal utility of one to the price of the other for the last dollar spent on each good. d. ratios of marginal utility to the price of both goods for the last dollar spent on each good.

d. ratios of marginal utility to the price of both goods for the last dollar spent on each good.

When the price of a good falls, consumers buy more of the good because it is cheaper relative to competing goods. This statement describes the: a. consumer equilibrium effect. b. price effect. c. income effect. d. substitution effect.

d. substitution effect.

Marginal utility is best computed as the ratio of: a. total utility to change in quantity consumed. b. the change in total utility to total quantity consumed. c. total quantity consumed to total utility. d. the change in total utility to change in quantity consumed.

d. the change in total utility to change in quantity consumed.

Total utility is measured by a mythical unit called the: a. pleasure unit b. useful unit c. bliss unit d. util

d. util

The law of _____ marginal utility is the principle that the extra satisfaction of a good or service declines as people consume more in a given period.

diminishing

If a consumer allocates income between goods A and B, total utility is maximized when: a. the marginal utility of A = the marginal utility of B. b. the marginal utility of A = the marginal utility of B = 0. c. the price of A = price of B. d. marginal utility of A / price of A = marginal utility of B / price of B = 0. e. marginal utility of A / price of A = marginal utility of B / price of B.

e. marginal utility of A / price of A = marginal utility of B / price of B.

If a consumer is spending all of his/her income in a manner where MUa / Pa is greater than MUb / Pb, then the consumer: a. is maximizing his/her utility. b. should increase his/her purchases of B and decrease the purchases of A. c. should spend more money on both goods. d. should spend less money on both goods. e. should increase the purchases of A and decrease the purchases of B.

e. should increase the purchases of A and decrease the purchases of B.

The change in quantity demanded of a good or service caused by a change in real income (purchasing power) is called the _____ _____.

income effect

The _____ effect is the change in quantity demanded of a good or service caused by the change in its price relative to substitutes.

substitution