True/False Chapter 5

The budget constraint always gives us the utility maximizing allocations of goods and services.

False. The budget constraint gives the feasible allocations given fixed prices and income.

The tendency for consumers to purchase more of a good or service as its price falls is captured by the law of increasing cost.

False. The law of demand.

The slope of the utility function gives as average utility.

False. The slope gives us the marginal utility.

The tendency for marginal utility to decline as consumption increases beyond some point is called the law of demand.

False. The tendency described in the question describes the law of diminishing marginal utility.

According to the rational spending rule, people should get the same average utility per average cost of the good across all varieties they consume.

False. They should get the same marginal utility per marginal cost of the good.

Consumer surplus measures how much a seller values the good.

False.

Rational spending rule gives us all the utility maximizing allocations a consumer can consume.

False. Given a fixed budget, a consumer cannot afford to consume all the combinations of goods implied by the rational spending rule.

On a graph, consumer surplus is represented by the area between the demand and supply curves.

False. It is the area below the demand curve and above the equilibrium price.

For any given quantity, the price on a demand curve represents any buyer's willingness to pay.

False. It measures the marginal buyer's willingness to pay.

Marginal utility is defined as the average utility obtained from total goods consumed.

False. Marginal utility is defined as the additional utility a person gains from consuming an additional unit of good.

According to the rational spending rule, people consume the good as long as they have higher marginal utility per price of the good.

False. Marginal utility should be equal to the marginal cost, which is the price of the good.

If a person does not have any budget constraint, s/he will consume the good until her/his marginal utility from the good goes to infinity.

False. S/he will consume the good until s/he gets zero marginal utility.

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility stayed the same with the first three pies you ate.

False. Utility increased. Since you enjoyed the first three pies, they must have added to your total utility.

The goal of utility maximization is to allocate your time in order to maximize your satisfaction.

False. Utility maximization is the process of allocating one's resources so as to obtain the greatest possible satisfaction (or, utility).

Utility is always fixed across time and across consumers.

False. Utility represents preferences, which can change across time and across different types of people.

According to the law of diminishing marginal utility you should stop consuming the good when your marginal utility from consuming the good starts to fall.

False. You will keep consuming the good until marginal utility is equal to the marginal cost.

In order to calculate consumer surplus in a market, we need to know the willingness to pay and price.

True

According to the law of diminishing marginal utility as you consume less of something, your marginal utility from consuming that good will increase.

True.

Consumer surplus is a good measure of economic welfare if buyers' preferences are the primary concern.

True.

Consumer surplus is the amount a consumer is willing to pay minus the amount s/he actually pays.

True.

Consumer surplus measures the benefit buyers receive from participating in a market.

True.

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.

True.