Chapter 7 2

Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1
Chapter 7 Consumer Choice Using Utility Theory
7.1 Total and Marginal Utility
1) How is utility defined as?

A) ease of use
B) government provided goods like electricity
C) the satisfaction experienced from consuming a good
D) the change in benefit from producing one additional unit of a good
Answer: C
Diff: 1
Topic: Total and Marginal Utility
Skill: Definition
2) Which of the following statements about marginal utility is correct?

A) the change in total utility resulting from getting one additional unit of a good
B) as consumption of a particular good increases, marginal utility decreases
C) the satisfaction experienced from consuming a good
D) A and B are correct.
Answer: D
Diff: 1
Skill: Definition
3) If Maria gets 80 utils from consuming five cookies, 100 utils from consuming six cookies and
120 utils from consuming seven cookies, then Maria's marginal utility from the sixth cookie is:
A) 100 utils.
B) 80 utils.
C) 40 utils.
D) 20 utils.
Answer: D
Diff: 2
Skill: Analytical
AACSB: Analytic Skills
1
Copyright © 2012 Pearson Education, Inc.
4) If Joshua gets 200 utils from consuming three slices of pizza, 220 utils from consuming four
slices of pizza and 230 utils from consuming five slices of pizza, then the Joshua's marginal
utility from the fifth slice of pizza is:
A) 230 utils.
B) 30 utils.
C) 20 utils.
D) 10 utils.
Answer: D
Diff: 2
Skill: Analytical
5) If the consumer gets 40 utils from consuming four CDs, 45 utils from consuming five CDs
and 48 utils from consuming six CDs, then the consumer's marginal utility from the fifth CD is:
A) 5 utils.
B) 10 utils.
C) 42.5 utils.
D) 45 utils.
Answer: A
Diff: 2
Skill: Analytical
and 48 utils from consuming six CDs, then the consumer's marginal utility from the sixth CD is:
A) 3 utils.
B) 8 utils.
C) 46.5 utils.
D) 48 utils.
Answer: A
Diff: 2
Skill: Analytical
7) If Crystal gets 140 utils from eating one yogurt, 145 utils from eating two yogurts and 148
utils from eating three yogurts, then Crystal's total utility is:
A) increasing.
B) decreasing.
C) decreasing at decreasing rate.
D) constant.
Answer: A
Diff: 2
Skill: Analytical
2
and 48 utils from consuming six CDs, then the consumer's marginal utility is:
A) increasing.
B) decreasing.
C) constant.
D) increasing at an increasing rate.
Answer: B
Diff: 2
Skill: Analytical
9) Diminishing marginal utility implies:

A) as the consumption of a good increases marginal utility decreases.
B) as the consumption of a good increases marginal utility increases.
C) as the consumption of a good increases total utility decreases.
D) as the consumption of a good increases total utility increases.
Answer: A
Diff: 2
Skill: Conceptual
AACSB: Reflective Thinking
10) The law of diminishing marginal utility is that as the consumption of a particular product
increases, marginal utility decreases.
Answer: TRUE
Diff: 2
Skill: Conceptual
11) Utility is the benefit a consumer gets from consuming a good.

Answer: TRUE
Diff: 1
Skill: Definition
12) Marginal utility of beer is the change in utility when production of beer changes.
Answer: FALSE
Diff: 1
Skill: Conceptual
3
13) If the consumer gets 30 utils from consuming four DVDs, 50 utils from consuming five
DVDs and 60 utils from consuming six DVDs, then the consumer's marginal utility from the fifth
DVD is 10 utils.
Answer: FALSE
Diff: 2
Skill: Analytical
14) Diminishing marginal utility is when total utility declines as a consumer consumes more of a
good.
Answer: FALSE
Diff: 2
Skill: Conceptual
15) Explain what diminishing marginal utility is.

Answer: It is when marginal utility declines as consumption of a particular good increases.
Diff: 2
Skill: Conceptual
16) If the consumer gets 90 utils from consuming four movies, 120 utils from consuming five
movies and 140 utils from consuming six movies, calculate the consumer's marginal utility from
the fifth and sixth movies.
Answer: The fifth movie gives the consumer 30 utils of marginal utility and the sixth movie
provides the consumer with 20 utils of utility.
Diff: 2
Skill: Analytical
7.2 Consumer Choice
1) Consumers' ability to purchase a good or service is limited by:

A) their income only.
B) the prices for the goods or services only.
C) both the prices and their income.
D) their preferences.
Answer: C
Diff: 2
Topic: Consumer Constraints and the Budget Line
Skill: Conceptual
4
2) Which of the following statements about consumer choice theory is TRUE?
A) Given the limitations dictated by people's incomes and prices, it helps the consumer choose a
commodity bundle of the highest level of utility.
B) It provides insights into how consumers make decisions.
C) It helps us understand changes in consumption patterns.
D) All of the above are true about consumer choice theory.
Answer: D
Diff: 2
Skill: Conceptual
3) A decrease in a consumer's budget set can be caused by:

A) an increase in prices.
B) a decrease in prices.
C) an increase in income.
D) a change in preferences.
Answer: A
Diff: 2
Skill: Conceptual
4) A consumer's budget set:

A) is the set of all affordable combinations of two goods.
B) includes only combinations of two goods that leave the consumer with leftover money.
C) includes only combinations of two goods that exhaust the budget.
D) Both A and C are correct answers.
Answer: A
Diff: 1
Skill: Definition
5) What is the consumer budget line?

A) It shows a consumer's tradeoff between two goods.
B) It shows the quantity of a single good that a consumer is willing to buy at different prices.
C) It shows combinations of two or more different consumers' budget set.
D) It includes all combinations of two goods that exhaust the consumer's budget.
Answer: D
Diff: 1
Skill: Definition
5
6) Which of the following statements is incorrect?
A) A consumer's budget line includes all the combinations of goods that exhaust the consumer's
budget.
B) The slope of the budget line equals the market tradeoff between two goods.
C) The slope of the budget line is the opportunity cost to a consumer of one good in terms of
another good.
D) The budget line represents what the consumer wants to do.
Answer: D
Diff: 1
Skill: Conceptual
7) Which of the following statements about a consumer's budget line is correct?

I. The budget line shows all the combinations of two goods that exhaust the consumer's
budget.
II. The slope of the budget line shows the market tradeoff between two goods.
III. The budget line represents the consumer's preferences or tastes.
A) I only
B) I and II only
C) I and III only
D) II and III only
Answer: B
Diff: 2
Skill: Conceptual
6
8) Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of
movies and T-shirts?
A) A, B and C
B) B, C and D
C) C, D and F
D) A, C and E
Answer: C
Diff: 2
Topic: Consumer Constraints and the Budget Line, graphing
Skill: Analytical
9) Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of

movies and T-shirts?
A) A, B and C
B) B, C and D
C) C, D and G
D) A, C and E
Answer: C
Diff: 2
Skill: Analytical
7
10) Refer to Figure 7.1. Which of the following are the combinations of movies and T-shirts that
would exhaust the budget?
A) A and C
B) C and E
C) B and G
D) A and B
Answer: B
Diff: 2
Skill: Analytical
11) Refer to Figure 7.1. Which of the following are the combinations of movies and T-shirts that
would exhaust the budget?
A) A and E
B) C and F
C) D and E
D) A and G
Answer: C
Diff: 2
Skill: Analytical
12) Refer to Figure 7.1. Which of the following statements is incorrect?

A) Bundle A costs less than bundle E.
B) Bundle C costs as much as bundle D.
C) Bundle B costs more than bundle C.
D) Bundle F costs more than bundle C.
Answer: C
Diff: 2
Skill: Analytical
13) Refer to Figure 7.1. Which of the following statements is incorrect?

A) Bundle F costs less than bundle D.
B) Bundle C costs as much as bundle E.
C) Bundle G costs more than bundle C.
D) Bundle B costs less than bundle C.
Answer: A
Diff: 2
Skill: Analytical
8
14) Suppose Jackie can buy either video games or DVDs. If the prices of both goods double, and
Jackie's income also doubles, what will happen to Jackie's budget line?
A) It will shift out.
B) It will shift in.
C) It will not change.
D) It will swivel so that the slope is twice as steep.
Answer: C
Diff: 2
Skill: Conceptual
15) What set of all possible combinations does the budget line show?
A) The set of all possible combinations that yield the same level of utility to the consumer.
B) The set of all possible combinations that maximize a consumer's utility.
C) The set of all possible combinations that can be purchased, given the consumer's income and
the price of the goods.
D) The set of all possible combinations that are equilibrium points.
Answer: C
Diff: 1
Skill: Definition
16) Suppose Carolyn is on a fixed monthly income of $200 to spend on food while she is in
medical school. Further, suppose the price of a single-serving macaroni and cheese is $4 and the
price of a baguette is $2. Which one of the following consumption combinations is possible
given these prices and income?
A) 40 macaroni and cheeses, 50 baguettes
B) 15 macaroni and cheeses, 80 baguettes
C) 20 macaroni and cheeses, 60 baguettes
D) 20 macaroni and cheeses, 100 baguettes
Answer: C
Diff: 2
Skill: Analytical
9
17) Suppose Mario is given a monthly income of $400 to spend on food while at college.
Further, suppose the price of a frozen meal is $8 and the price of a cup of soup is $4. Which one
of the following consumption combinations is possible given these prices and income?
A) 40 frozen meals, 50 cups of soup
B) 15 frozen meals, 80 cups of soup
C) 20 frozen meals, 60 cups of soup
D) 10 frozen meals 100 cups of soup
Answer: C
Diff: 2
Skill: Analytical
18) Suppose that Kelly has a monthly fixed income of $ 1000 and has $200 of her income
allocated to buy cookies and movies. Suppose that there is an increase in the price for movies but
not in the price for cookies, this will:
A) shift the budget line parallel to the left.
B) shift the budget line parallel to the right.
C) change the slope of the budget line.
D) not affect the budget line because income remains constant.
Answer: C
Diff: 2
Skill: Conceptual
19) Suppose that Joyce has a monthly fixed income of $ 2000 and has $100 of her income
allocated to buy shoes and pants. Suppose that there is a decrease in the price for shoes but not in
the price for pants, this will:
A) shift the budget line parallel to the left.
B) shift the budget line parallel to the right.
C) change the slope of the budget line.
D) not affect the budget line because income remains constant.
Answer: C
Diff: 2
Skill: Conceptual
10
20) The budget line will shift parallel to the right if:
A) income increases.
B) income decreases.
C) the price of the good on the vertical axis increases.
D) the price of the good on the vertical axis decreases.
Answer: A
Diff: 2
Skill: Conceptual
21) The budget line will shift parallel to the left if:
A) income increases.
B) income decreases.
C) the price of the good on the vertical axis increases.
D) the price of the good on the vertical axis decreases.
Answer: B
Diff: 2
Skill: Conceptual
22) Suppose that John has a monthly fixed amount of $200 of his income allocated to buy beer
and cigarettes. Suppose that there is an increase in the price for cigarettes and in the price for
beer, this will shift:
A) indifference curves to the left.
B) indifference curves to the right.
C) the budget line to the left.
D) the budget line to the right.
Answer: C
Diff: 2
Skill: Analytical
23) Assume that you have a monthly fixed income of $ 1500 and has $50 of your income
allocated to buy pizza and ice cream. Suppose that there is a decrease in the price for pizza and in
the price for ice cream, this will shift:
Answer: D
Diff: 2
Skill: Analytical
11
24) Increases in consumer income shift:
Answer: D
Diff: 2
Skill: Conceptual
25) Decreases in consumer income shift:

Answer: C
Diff: 2
Skill: Conceptual
26) A change in the slope of a budget line reflects:

A) a change in the marginal rate of substitution.
B) a change in the consumer's preferences.
C) a change in consumer income.
D) a change in the relative prices of the two goods.
Answer: D
Diff: 2
Skill: Conceptual
27) A change in the relative prices of two goods is represented graphically by:
A) a change in the slope of an indifference curve.
B) a rightward parallel shift of the budget line.
C) a leftward parallel shift of the budget line.
D) a change in the slope of the budget line.
Answer: D
Diff: 2
Skill: Conceptual
12
28) The absolute value of the slope of the budget line is:
A) the ratio of the marginal utility of one good to the marginal utility of the other good.
B) the ratio of the marginal utility of one good to the price of the other good.
C) the ratio of the price of one good to the price of the other good.
D) dependent on consumer income.
Answer: C
Diff: 2
Skill: Conceptual
29) The budget set is:

A) all the points on the budget line.
B) the area below the budget line.
C) the endpoints of the budget line.
D) all the points on the budget line and the area to the left of the budget line.
Answer: D
Diff: 1
Skill: Definition
30) Suppose that Helen has $50 to spend. Tacos cost $2 and burritos cost $5. Which of the
following combinations is NOT on her budget line?
A) 0 tacos and 10 burritos
B) 0 burritos and 25 tacos
C) 8 burritos and 5 tacos
D) 10 burritos and 3 tacos
Answer: D
Diff: 1
Skill: Analytical
31) Suppose that Jessica has a fixed income of $100 per month, which she spends entirely on
movies and paperback books. The price of movies is $5 and the price of paperback books is $10.
Which of the following combinations is NOT on her budget line?
A) 5 paperback books and 10 movies
B) 10 paperback books and 0 movies
C) 3 paperback books and 14 movies
D) 8 paperback books and 5 movies
Answer: D
Diff: 2
Skill: Analytical
13
32) Suppose that Jeremy has a fixed income of $150 per month, which he spends entirely on
movies and books. The price of movies is $5 and the price of books is $15. Which of the
following combinations does NOT exhaust his budget?
A) 3 books and 21 movies
B) 6 books and 12 movies
C) 5 books and 17 movies
D) 4 books and 18 movies
Answer: C
Diff: 2
Skill: Analytical
33) Refer to Figure 7.2. The change in the budget line from line 1 to line 2 could be due to:
A) an increase in the price of papayas.
B) a decrease in the price of papayas.
C) an increase in the price of coconuts.
D) a decrease in consumer income.
Answer: C
Diff: 2
Skill: Analytical
14
D) an increase in consumer income.
Answer: D
Diff: 2
Skill: Analytical
Answer: D
Diff: 2
Skill: Analytical
C) a decrease in consumer income.
D) a decrease in the price of coconuts.
Answer: D
Diff: 2
Skill: Analytical
D) an increase in consumer income.
Answer: D
Diff: 2
Skill: Analytical
15
Answer: A
Diff: 2
Skill: Analytical
39) Refer to Figure 7.2. The shift in the budget line from line 1 to line 3 could be due to:
C) a decrease in the price of coconuts.
Answer: B
Diff: 2
Skill: Analytical
40) Refer to Figure 7.2. The change in the budget line from line 1 to line 4 could be due to a(n)
________ in the price of papayas and a(n) ________ in the price of coconuts.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Answer: B
Diff: 3
Skill: Analytical
41) Refer to Figure 7.2. The change in the budget line from line 4 to line 1 could be due to a(n)
________ in the price of papayas and a(n) ________ in the price of coconuts.
Answer: C
Diff: 3
Skill: Analytical
16
A) an increase in the price of burritos.
B) a decrease in the price of tacos.
C) a decrease in the price of burritos.
D) an increase in the consumer's income.
Answer: C
Diff: 2
Skill: Analytical
43) Refer to Figure 7.3. The change in the budget line from line 2 to line 1 represents:
C) a decrease in income.
D) no change in the price of tacos.
Answer: A
Diff: 2
Skill: Analytical
17
44) Refer to Figure 7.3. The change in the budget line from line 3 to line 1 represents:
C) a decrease in income.
Answer: C
Diff: 2
Skill: Analytical
45) Refer to Figure 7.3. The shift in the budget line from line 1 to line 3 represents:
C) an increase in income.
Answer: C
Diff: 2
Skill: Analytical
18
46) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. Then the
opportunity cost to her of a book is:
A) one hamburger.
B) two hamburgers.
C) three hamburgers.
D) four hamburgers.
Answer: B
Diff: 2
Skill: Analytical
47) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. Then the
opportunity cost to her of a hamburger is:
A) one book.
B) one half of a book.
C) one third of a book.
D) one fourth of a book.
Answer: B
Diff: 2
Skill: Analytical
19
48) Refer to Figure 7.4. Assume that Ashley faces budget line AB with her $60 income. If her
budget line rotates from AB to AD,
A) her income has increased by $20.
B) her income has decreased by $20.
C) the price of book has increased by $1.
D) the price of book has decreased by $1.
Answer: D
Diff: 2
Skill: Analytical
49) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $60 income. If her
budget line rotates from AB to BC,
A) her income has increased to $80.
B) her income has decreased to $40.
C) the price of hamburger has increased by $0.50.
D) the price of hamburger has decreased by $0.50.
Answer: D
Diff: 2
Skill: Analytical
budget line shifts from AB to CD,
A) her income has increased to $80.
C) the price of book has decreased by $1.
D) the price of hamburger has decreased by $0.50.
Answer: A
Diff: 2
Skill: Analytical
51) Refer to Figure 7.4. Assume that Ashley faces budget line CD with her $120 income. Then
the prices of a hamburger and a book are:
A) $2 and $5, respectively.
B) $3 and $6, respectively.
C) $4 and $7, respectively.
D) $5 and $8, respectively.
Answer: B
Diff: 2
Skill: Analytical
20
budget line rotates from CD to AD,
C) the price of a hamburger has increased by $1.
D) the price of a hamburger has decreased by $1.
Answer: C
Diff: 2
Skill: Analytical
budget line rotates from CD to BC,
C) the price of a book has increased by $2.
D) the price of a book has decreased by $2.
Answer: C
Diff: 2
Skill: Analytical
budget line shifts from CD to AB,
A) her income has decreased to $60.
C) the price of a book has increased by $2.
D) the price of a hamburger has increased by $1.
Answer: B
Diff: 2
Skill: Analytical
21
55) Refer to Figure 7.5. Assume that Julie currently faces budget line AB. Which of the following
events would cause the rotation of her budget line from AB to AC?
A) a decrease in the price of rental videos
B) a decrease in the price of pizza
C) an increase in Julie's income
D) a decrease in the prices of both pizza and rental videos
Answer: A
Diff: 2
Skill: Analytical
56) Refer to Figure 7.5. Assume that Julie currently faces budget line AB. Which of the following
events would cause the rotation of her budget line from AB to BF?
A) a decrease in the price of rental videos
B) a decrease in the price of pizza
C) an increase in Julie's income
D) a decrease in the prices of both pizza and rental videos
Answer: B
Diff: 2
Skill: Analytical
22
57) Refer to Figure 7.5. Assume that Julie currently faces budget line AC. If her income remains
unchanged, which of the following events could cause the shift of her budget line from AC to
DE?
A) a decrease in the price of pizza and an increase in the price of rental videos
B) an increase in the price of pizza and a decrease in the price of rental videos
C) a decrease in both prices
D) an increase in both prices
Answer: C
Diff: 2
Skill: Analytical
58) Refer to Figure 7.5. Assume that Julie currently faces budget line DE. If her income remains
unchanged, which of the following events could cause the shift of her budget line from DE to
AC?
Answer: D
Diff: 2
Skill: Analytical
59) Refer to Figure 7.5. Assume that Julie currently faces budget line DE. If her income remains
unchanged, which of the following events could cause the shift of her budget line from DE to
BF?
Answer: A
Diff: 2
Skill: Analytical
23
60) Suppose that for Sarah the marginal benefit per dollar spent on pork exceeds the marginal
benefit per dollar spent on chicken. Sarah can always increase her utility by buying:
A) more pork and less chicken.
B) less pork and more chicken.
C) more of both goods.
D) Sarah is already maximizing utility.
Answer: A
Diff: 2
Topic: Making Choices Using the Equimarginal Rule
Skill: Analytical
61) Suppose that for George the marginal benefit per dollar spent on tuna is less than the
marginal benefit per dollar spent on ham. The consumer can always increase his utility by
buying:
A) more tuna and less ham.
B) less tuna and more ham.
D) The consumer is already maximizing utility.
Answer: B
Diff: 2
Skill: Analytical
62) Suppose that for Virginia the marginal benefit per dollar spent on make-up is less than the
benefit per dollar spent on clothes. Virginia can always increase her utility by buying:
A) more make-up and fewer clothes.
B) fewer make-up and more clothes.
D) Virginia is already maximizing utility.
Answer: B
Diff: 2
Skill: Analytical
63) Suppose that the marginal benefit per dollar spent on bicycles exceeds the marginal benefit
per dollar spent on skateboards. The consumer can always increase her utility by buying:
A) more bicycles and fewer skateboards.
B) fewer bicycles and more skateboards.
D) The consumer is already maximizing utility.
Answer: A
Diff: 2
Skill: Analytical
24
64) Suppose that the marginal benefit per dollar spent on pop tarts exceeds the marginal benefit
per dollar spent on waffles. The consumer can always increase her utility by buying:
A) more pop tarts and fewer waffles.
B) fewer pop tarts and more waffles.
D) The consumer cannot increase her utility.
Answer: A
Diff: 2
Skill: Analytical
65) Suppose that the marginal benefit per dollar spent on pop tarts is less than the marginal
benefit per dollar spent on waffles. The consumer can always increase her utility by buying:
A) more pop tarts and fewer waffles.
B) fewer pop tarts and more waffles.
D) The consumer cannot increase her utility.
Answer: B
Diff: 2
Skill: Analytical
66) A consumer should increase her consumption of good X relative to good Y if:
A) the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar
spent on good Y.
B) the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar
spent on good Y.
C) the marginal benefit per dollar spent on good X is the same as the marginal benefit per dollar
spent on good Y.
D) none of the above
Answer: A
Diff: 2
Skill: Conceptual
25
67) A consumer should increase her consumption of good Y relative to good X if:
A) the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar
spent on good Y.
B) the marginal benefit per dollar spent on good X is smaller than the marginal benefit per dollar
spent on good Y.
C) the marginal benefit per dollar spent on good X is the same as the marginal benefit per dollar
spent on good Y.
D) none of the above
Answer: B
Diff: 2
Skill: Conceptual
26
Additional Application
TELEVISION VERSUS RADIO ADVERTISING
The equimarginal rule is a general-purpose rule that can be used by any person or organization
that has at least two alternative activities. For example, consider a firm that has a fixed amount of
money to spend on advertising. The firm could use the equimarginal rule to pick the best mix of
radio and television advertising. The benefit of advertising is the resulting increase in sales
revenue, and the marginal benefit equals the increase in revenue from one more minute of
airtime. Using the equimarginal rule, the firm would pick the combination of radio and TV
advertisements where the bang per buck of radio equals the bang per buck of TV:
We can use a simple example to show how the firm could apply the equimarginal rule. Suppose
the firm has a fixed advertising budget and initially uses 5 minutes of radio ads and 5 minutes of
TV ads. Suppose an additional minute of radio advertising increases sales revenue by $5,000,
and an additional minute of TV advertising increases sales revenue by $8,000. If the price of
radio advertising is $1,000 per minute and the price of TV advertising is $4,000 per minute, the
bang per buck of radio is 5, compared to only 2 for TV:
In this case, radio gives a bigger bang per buck, so it would be sensible to run more radio ads and
fewer TV ads. The firm will continue to increase radio ads and decrease TV ads until the bang
per buck for radio equals the bang per buck for TV.
68) Recall the Application on "Television Versus Radio Advertising." If a firm can buy a TV ad
for $1000 and a radio spot for $50 and it estimates at its current level of advertising that the
marginal sales revenue from TV ads at $5,000 and the marginal sales revenue from radio ads at
$250, the firm should:
A) purchase more TV spots and fewer radio spots.
B) purchase more radio spots and fewer TV spots.
C) stop advertising all together.
D) not change advertising purchases.
Answer: D
Diff: 2
Topic: Additional Application
Skill: Analytical
27
69) Recall the Application on "Television Versus Radio Advertising." If a firm with a fixed
advertising budget can buy a TV ad for $1000 and a radio spot for $50 and it estimates at its
current level of advertising that the marginal sales revenue from TV ads at $5,000 and the
marginal sales revenue from radio ads at $300, the firm should:
A) purchase more TV spots and fewer radio spots.
B) purchase more radio spots and fewer TV spots.
C) stop advertising all together.
D) not change advertising purchases.
Answer: B
Diff: 2
Skill: Analytical
70) Recall the Application on "Television Versus Radio Advertising." In deciding where to spend
its advertising budget, a firm will consider:
A) the relative price of TV and radio ads.
B) marginal sales revenue from each media divided by the price of each media.
C) firm profits.
D) fixed costs.
Answer: B
Diff: 2
Skill: Conceptual
71) A consumer's budget line is very similar with a demand curve in that both curves show the
possible combination of two goods.
Answer: FALSE
Diff: 2
Skill: Conceptual
72) All the combinations of two goods on a consumer's budget line must generate different levels
of utility.
Answer: TRUE
Diff: 2
Skill: Conceptual
73) A consumer can afford any combinations of two goods on or below the budget line.
Answer: TRUE
Diff: 2
Skill: Conceptual
28
74) A consumer's budget set includes all affordable combinations of two goods.
Answer: TRUE
Diff: 1
Skill: Definition
75) An increase in income shifts the budget line to the right.

Answer: TRUE
Diff: 2
Skill: Conceptual
76) An increase in income shifts the budget line to the left.

Answer: FALSE
Diff: 2
Skill: Conceptual
77) An increase in consumer's income does not change the slope of the budget line.
Answer: TRUE
Diff: 2
Skill: Conceptual
78) Other things being equal, an increase in the price of a good will always make a consumer
worse off.
Answer: TRUE
Diff: 2
Skill: Conceptual
79) If the marginal benefit per dollar spent on good X is greater than the marginal benefit per
dollar spent on good Y, the consumer should consume more X and less Y.
Answer: TRUE
Diff: 2
Skill: Conceptual
29
80) What does the consumer's budget line show?
Answer: The budget line shows what the consumer can do in the market place.
Diff: 2
Skill: Conceptual
81) Baseballs cost $5 each and baseball gloves cost $20. Assume you have $100 to spend on
these items. Putting baseballs on the vertical axis, draw the budget line representing this
situation. What is the slope of the budget line?
Answer: The budget line should be a straight line with vertical intercept at B = 20 (= $100/$5),
and horizontal intercept at G = 5 (= $100/$20). The slope is -4.
Diff: 2
Skill: Analytical
82) Explain why the equimarginal rule is a necessary condition for utility maximization.
Answer: The easiest way to explain this is to consider what would happen if the marginal benefit
per dollar spent on good X were not equal to the marginal benefit per dollar spent on good Y.
Suppose that the marginal benefit per dollar spent on good X exceeds the marginal benefit per
dollar spent on good Y. Then the consumer could spend one fewer dollar on Y and one more
dollar on X and still be within her budget constraint. She would lose utility equal to
approximately "the marginal benefit of good Y / the price of good Y," but would gain utility
equal to approximately "the marginal benefit of good X / the price of good X." Since the latter is
greater than the former, total utility would increase. Therefore utility could NOT have been
maximized before. A similar argument holds when the marginal benefit per dollar spent on good
X is smaller than the marginal benefit per dollar spent on good Y.
Diff: 2
Skill: Conceptual
7.3 The Individual Demand Curve
1) The relationship between the price of a good and the quantity that a single consumer is willing
to buy during a particular time period is shown by the:
A) market supply curve.
B) individual supply curve.
C) market demand curve.
D) individual demand curve.
Answer: D
Diff: 1
Topic: The Individual Demand Curve
Skill: Definition
30
2) Which of the following statements are TRUE about an individual demand curve?
A) An individual demand curve is negatively sloped and shows the price of a good and the
quantity that a single consumer is willing to sell during a particular time period.
B) An individual demand curve is positively sloped and shows the price of a good and the
quantity that all consumers are willing to buy during a particular time period.
C) An individual demand curve is negatively sloped and shows the quantity of a good that a
single consumer is willing to buy, and the amount of time to consume the good.
D) An individual demand curve is negatively sloped and shows the price of a good and the
quantity that a single consumer is willing to buy during a particular time period.
Answer: D
Diff: 1
Skill: Definition
3) Robert's demand curve for pizza:

A) shows the quantity of pizza that Robert consumes as his income changes.
B) assumes that the only variables that change are the price of pizza and the quantity of pizza
demanded by Robert.
C) makes no assumptions about Robert's income.
D) assumes that the only variable that changes is Robert's preference for pizza.
Answer: B
Diff: 2
Skill: Conceptual
4) Kim's demand curve for sodas:

A) assumes that the only variables that change are the price of sodas and the quantity of sodas
demanded by Kim.
B) shows the quantity of sodas Kim consumes as her preference for sodas change.
C) makes no assumptions about Kim's preference for sodas.
D) assumes that the only variable that changes is Kim's income.
Answer: A
Diff: 2
Skill: Conceptual
5) The change in the quantity consumed that is caused by a change in the relative price of a good,
with real income held constant, refers to the
A) substitution effect.
B) income effect.
C) equimarginal rule.
D) law of diminishing marginal utility.
Answer: A
Diff: 1
Topic: The Income and Substitution Effects of a Price Change
Skill: Definition
31
6) The change in the quantity consumed that is caused by a change in real income, with the
relative prices held constant, refers to the
A) substitution effect.
B) income effect.
C) equimarginal rule.
D) law of diminishing marginal utility.
Answer: B
Diff: 1
Skill: Definition
7) Claudia spends her income on two goods, DVD rentals and chewing gum. She considers both
goods to be normal goods. If Claudia's income increases and the prices of the two goods remain
constant, she will
A) rent more DVDs and purchase less chewing gum.
B) rent more DVDs and purchase more chewing gum.
C) rent fewer DVDs and purchase more chewing gum.
D) rent fewer DVDs and purchase less chewing gum.
Answer: B
Diff: 2
Skill: Conceptual
goods to be normal goods. If Claudia's income stays constant and the relative price of DVD
rentals increases, she will
A) rent more DVDs and purchase less chewing gum.
B) rent more DVDs and purchase more chewing gum.
C) rent fewer DVDs and purchase more chewing gum.
D) rent fewer DVDs and purchase less chewing gum.
Answer: C
Diff: 2
Skill: Conceptual
32
9) Dino spends his income on two goods, cigars and peppermints. He considers both goods to be
normal goods. If Dino's income decreases and the prices of the two goods remain constant, he
will purchase
A) more cigars and fewer peppermints.
B) more cigars and more peppermints.
C) fewer cigars and more peppermints.
D) fewer cigars and fewer peppermints.
Answer: D
Diff: 2
Skill: Conceptual
10) Dino spends his income on two goods, cigars and peppermints. He considers both goods to
be normal goods. If Dino's income remains constant and the relative price of cigars decreases, he
will purchase
A) more cigars and fewer peppermints.
B) more cigars and more peppermints.
C) fewer cigars and more peppermints.
D) fewer cigars and fewer peppermints.
Answer: A
Diff: 2
Skill: Conceptual
11) If the relative price of plasma TVs (a normal good) decreases and real income increases, the
quantity of plasma TVs increases, which is represented by a ________.
A) movement downward along the demand curve
B) movement upward along the demand curve
C) rightward shift of the demand curve
D) leftward shift of the demand curve
Answer: A
Diff: 2
Topic: Points on the Demand Curve
Skill: Conceptual
33
12) For normal goods, the substitution effect and the income effect work in ________,
generating a ________ sloped demand curve.
A) opposite directions; downward
B) the same direction; downward
C) opposite directions; upward
D) the same; upward
Answer: B
Diff: 2
Topic: Points on the Demand Curve
Skill: Conceptual
Recall the Application about the proposed tax on soft drinks to answer the following
question(s).
13) Recall the Application. All else equal, if the equimarginal rule is applied, a tax added to soft
drinks will ________ the consumption of soft drinks and ________ the consumption of
substitutes, such as fruit juice.
Answer: B
Diff: 2
Topic: Application 1, A Tax on Soft Drinks
Skill: Conceptual
Recall the Application about the price of online music to answer the following question(s).
14) Recall the Application. Frankie spends $20 per month to download 20 songs. The price of
online music is going to increase by $1.00 per download, and Frankie's real income is going to
increase by $20 per month. Assuming the relative prices of other goods do not change, Frankie
will
A) continue to download 20 songs per month.
B) download more than 20 songs per month.
C) download less than 20 songs per month.
D) download more than 20 but less than 40 songs per month.
Answer: C
Diff: 2
Topic: Application 2, The Price of Pirate Songs
Skill: Conceptual
34
15) The individual demand curve shows the relationship between quantity demanded and the
price of a product.
Answer: TRUE
Diff: 1
Skill: Definition
16) The individual demand curve is drawn holding tastes, income and the prices of other goods
constant.
Answer: TRUE
Diff: 2
Skill: Conceptual
17) An income effect comes about because a price reduction of one product increases a
consumers real income.
Answer: TRUE
Diff: 2
Skill: Conceptual
18) A substitution effect comes about because a price reduction of one product gives consumers
more income to spend on other goods.
Answer: FALSE
Diff: 2
Skill: Conceptual
19) If Linda's income goes up, she will consume more of all normal goods.
Answer: TRUE
Diff: 2
Skill: Conceptual
20) If consumer income and prices all are cut in half, then the consumers' real income doubles.
Answer: FALSE
Diff: 2
Skill: Conceptual
35
21) If consumer income and all prices double, then the budget line does not change.
Answer: TRUE
Diff: 2
Skill: Conceptual
22) What assumptions are required to draw an individual demand curve?

Answer: The individual demand curve assumes that tastes, prices of other goods, expectations
and income are constant.
Diff: 2
Skill: Conceptual
23) Explain the income and substitution effects.

Answer: The income effect is for people to consume more of normal goods when the prices of a
good falls increasing real income. The substitution effect is for people to consume more of a
relatively cheaper good whose price has fallen.
Diff: 2
Skill: Conceptual
7.4 Consumer Puzzles: Free Goods and Branding
Recall the Application about Amazon.com's shipping charges to answer the following
question(s).
1) Recall the Application. What was the difference in sales between Amazon.com introducing a
free shipping for U.S. order over $25 compared to cheap shipping offered by a company in
France for orders over $25?
A) Sales increase by relatively small amounts with the free shipping than with the cheap
shipping.
B) Sales increase dramatically with the free shipping than with the cheap shipping.
C) Consumers in France were better off than consumers in the US.
D) Consumers are highly responsive to discounts in France than in the US.
Answer: B
Diff: 2
Topic: Application 3, The Big Difference Between $0.20 and Free!
Skill: Conceptual
36
2) Recall the Application. If a company in the U.S. would like to increase sales, what would be
the best incentive for customer to consume more of a product?
A) Offer discounted goods or services.
B) Incorporate free goods or services.
C) Consumers are indifferent to any kind of incentives.
D) None of the above will persuade customers to buy more of a product.
Answer: B
Diff: 2
Skill: Conceptual
Recall the Application about the taste testes between Coke and Pepsi to answer the
following question(s).
3) Recall the Application. Product branding impacts consumers' preferences. Which of the
following is why people prefer Coke when doing the tests?
A) Coca-Cola did the tests with consumers seeing the labels.
B) Pepsi runs its blind tasting tests.
C) The test were done during the summer.
D) Consumers were randomly chosen.
Answer: A
Diff: 2
Topic: Application 4, Neuroscience and the Cola Challenge
Skill: Fact
7.5 Appendix 1: Consumer Constraints and Preferences
1) What does an indifference curve show?

A) different ways for a consumer to reach various levels of satisfaction
B) a unique combination of two goods that generates a particular level of utility
C) the preferences of an individual consumer
D) the similarities between two goods
Answer: C
Diff: 1
Topic: Consumer Preferences: Indifference Curves
Skill: Conceptual
37
2) Which of the following statements about a consumer's indifference curve is correct?
I. The indifference curve is negatively sloped.
II. The indifference curve becomes flatter as we move downward along the curve.
III. The slope of the indifference curve shows the market tradeoff between two goods.
A) I only
B) I and II only
C) I and III only
D) I, II, and III
Answer: B
Diff: 2
Skill: Conceptual
3) As we move upward along a consumer's indifference curve, the marginal rate of substitution:
A) increases and the indifference curve becomes flatter.
B) decreases and the indifference curve becomes flatter.
C) increases and the indifference curve becomes steeper.
D) decreases and the indifference curve becomes steeper.
Answer: C
Diff: 2
Skill: Conceptual
4) As we move downward along a consumer's indifference curve, the consumer's tradeoff

between two goods:
A) increases and the consumer's utility increases.
B) decreases and the consumer's utility decreases.
C) increases and the consumer's utility remains unchanged.
D) decreases and the consumer's utility remains unchanged.
Answer: D
Diff: 2
Skill: Conceptual
5) All combinations along a consumer's indifference curve generate ________ utility level
A) greater
B) lower
C) the same
D) There is not sufficient information.
Answer: C
Diff: 1
Skill: Conceptual
38
6) All combinations of two goods above a consumer's indifference curve generate ________
utility than combinations of the two goods on the curve.
A) greater
B) lower
C) the same
Answer: A
Diff: 1
Skill: Conceptual
7) An indifference curve represents the set of:

A) all possible combinations of goods that yield the same level of utility to the consumer.
B) all possible combinations of goods that maximize a consumer's utility.
C) all possible combinations of two goods that can be purchased, given the consumer's income
and the price of the goods.
D) all equilibrium points.
Answer: A
Diff: 2
Skill: Definition
8) What is the slope of an indifference curve called?

A) marginal rate of consumption
B) marginal rate of substitution
C) marginal result of demand
D) marginal utility rate
Answer: B
Diff: 2
Skill: Analytical
9) What is the absolute value of the slope of an indifference curve?

A) the ratio of the marginal utility of one good to the price of the other good
B) the marginal rate of substitution between one good and the other
C) the result of the quantity demanded at the price of one good to the price of the other good
D) It is dependent on consumer income.
Answer: B
Diff: 2
Skill: Analytical
39
10) Which of the following preference rankings is NOT consistent with Figure 7.6?
A) B is preferred to A.
B) C is preferred to B.
C) D is preferred to C.
D) E is preferred to D.
Answer: C
Diff: 2
Topic: Consumer Preferences: Indifference Curves, graphing
Skill: Analytical
A) I is preferred to H.
B) H is preferred to G.
C) G is preferred to F.
D) F is preferred to E.
Answer: C
Diff: 2
Skill: Analytical
40
A) The consumer is indifferent between F and G, which are preferred to D.
B) The consumer prefers E to C, which is preferred to B.
C) The consumer is indifferent between C and D, which are preferred to A.
D) The consumer prefers H to E, which is preferred to G.
Answer: D
Diff: 2
Skill: Analytical
A) The consumer prefers G to D, which is preferred to B.
B) The consumer prefers I to H, which is preferred to F.
C) The consumer prefers G to E, which is preferred to D.
D) The consumer prefers H to D, which is preferred to E.
Answer: D
Diff: 2
Skill: Analytical
14) To represent the notion that consumers prefer more of a good to less, economists:
A) draw indifference curves as downward sloping.
B) draw budget constraints as downward sloping.
C) shift budget constraints to the right.
D) shift budget constraints to the left.
Answer: A
Diff: 2
Skill: Conceptual
15) An indifference curve map is a set of indifference curves, each with the same level of utility.
Answer: FALSE
Diff: 1
Skill: Conceptual
16) Indifference curves show what a consumer can do in the market place.
Answer: FALSE
Diff: 1
Skill: Conceptual
41
17) An indifference curve becomes flatter ass we move downward along the curve.
Answer: TRUE
Diff: 2
Skill: Conceptual
18) In some instances, it is possible for indifference curves to cross one another.
Answer: FALSE
Diff: 2
Skill: Conceptual
19) Andrew believes that one unit of good X is perfectly substitutable for one unit of good Y.
Explain whether or not his indifference curve becomes flatter as we move downward along the
indifference curve.
Answer: If Andrew considers each unit of good X as a perfect substitute for one unit of good Y,
he will enjoy the same level of utility as he gives up one unit of good Y for each additional unit
of good X. Thus his tradeoff between the two goods, or the marginal rate of substitution, remains
unchanged. Therefore his indifference curve will be a downward-sloping straight line and will
not become flatter as we move downward along the curve.
Diff: 3
Skill: Conceptual
20) Explain why a consumer's indifference curve is negatively sloped.

Answer: Consider a consumer's indifference curve that shows all combinations of two goods X
(shown on the horizontal axis) and Y (shown on the vertical axis) that generate the same level of
utility or satisfaction. As we move downward along the consumer's indifference curve, the
consumer increases the consumption of good X. Since all combinations of the two goods on the
indifference curve must generate the same level of utility, the consumer must decrease the
consumption of good Y to keep his or her utility constant. Thus the consumer's indifference
curve must be negatively sloped.
Diff: 2
Skill: Conceptual
42
21) Explain the marginal rate of substitution between two goods.
Answer: The marginal rate of substitution (MRS) is the rate at which a consumer is willing to
substitute one good for another along the consumer's indifference curve. Since it is assumed that
all combinations of two goods on an indifference curve must generate the same level of utility, a
consumer must decrease the consumption of one good while increasing the consumption of
another along the indifference curve. Furthermore, since it is implicitly assumed that consumers
prefer balanced consumption to extremes, the marginal rate of substitution decreases as we move
further downward along the indifference curve.
Diff: 2
Skill: Conceptual
22) Explain why indifference curves can never cross.

Answer: If indifference curves cross, then there exists a point on one indifference curve that lies
strictly to the northeast of the other indifference curve. Call this point A. By definition, a
consumer is indifferent between this point and the point where the indifference curves intersect
(point B). Also by definition, the consumer is indifferent between point B and some point (point
C) on the section of the indifference curve that lies to the southwest of point A. This means that
by transitivity, the consumer is indifferent between point A and point C. But point A represents a
combination of goods that has more of both goods than point C, so the consumer should not be
indifferent between A and C.
Diff: 2
Skill: Conceptual
7.6 Appendix 2: Maximizing Utility
1) Which of the following statements is correct about the budget line and the indifference curve?
A) The budget line represents the consumer's limitations and the indifference curve represents
the consumer's preferences.
B) The budget line represents the consumer's preferences and the indifference curve represents
the consumer's limitations.
C) The budget line represents the consumer's highest utility levels and the indifference curve
represents the consumer's limitations.
D) The budget line represents the consumer's preferences and the indifference curve represents
the consumer's constraints.
Answer: A
Diff: 2
Topic: Maximizing Utility
Skill: Conceptual
43
2) Given Anna's budget and the prices of two goods, Anna maximizes her utility by:
A) choosing the combination of the two goods for which the MRS is equal to the price ratio.
B) choosing the combination of the two goods for which the MRS is smaller than the price ratio.
C) choosing the combination of the two goods for which the MRS is greater than the price ratio.
Answer: A
Diff: 2
Topic: The Utility-Maximizing Rule: MRS = Price Ratio
Skill: Conceptual
3) As a consumer moves along an indifference curve, the benefits of trading will be exhausted
only when:
A) the MRS equals the price ratio.
B) the MRS is greater than the price ratio.
C) the MRS is smaller than the price ratio.
Answer: A
Diff: 2
Skill: Conceptual
4) Which of the following describes the utility-maximizing rule?

A) A consumer's tradeoff between two goods is greater than the market tradeoff between the two
goods.
B) A consumer's tradeoff between two goods is equal to the market tradeoff between the two
goods.
C) A consumer's tradeoff between two goods is smaller than the market tradeoff between the two
goods.
Answer: B
Diff: 2
Skill: Conceptual
5) Increases in utility are represented by moving:

A) to an indifference curve to the northeast.
B) to an indifference curve to the southwest.
C) to a higher budget line.
D) to a lower budget line.
Answer: A
Diff: 2
Skill: Conceptual
44
6) Decreases in utility are represented by moving:
A) to an indifference curve to the northeast.
B) to an indifference curve to the southwest.
C) to a higher budget line.
D) to a lower budget line.
Answer: B
Diff: 2
Skill: Conceptual
7) A consumer maximizes utility by choosing:

A) a combination of goods such that the marginal rate of substitution is greater than the price
ratio.
B) a combination of goods such that the marginal rate of substitution is less than the price ratio.
C) a combination of goods such that the marginal rate of substitution is equal to the price ratio.
D) the highest indifference curve drawn on the indifference map.
Answer: C
Diff: 2
Skill: Conceptual
8) Suppose Arthur chooses a combination of goods such that his MRS is equal to the price ratio.
Then we know:
A) the absolute value of the slope of Arthur's budget constraint is steeper than the absolute value
of the slope of his indifference curve.
B) the absolute value of the slope of Arthur's indifference curve is steeper than the absolute value
of the slope of his budget constraint.
C) Arthur is maximizing his utility.
D) Arthur could gain more utility by purchasing less of both goods.
Answer: C
Diff: 2
Skill: Conceptual
45
9) Refer to Figure 7.7. The marginal rate of substitution (in absolute value) is ________ the price
ratio (in absolute value) at point A; ________ the price ratio at point B; and ________ the price
ratio at point C (trading peaches for herbs).
A) greater than; less than; equal to
B) less than; equal to; greater than
C) equal to; less than; equal to
D) greater than; equal to; less than
Answer: D
Diff: 3
Topic: The Utility-Maximizing Rule: MRS = Price Ratio, graphing
Skill: Analytical
10) Which of the following preference rankings is consistent with Figure 7.7?
A) D is preferred to B, which is preferred to C.
B) C is preferred to B, which is preferred to A.
C) A is preferred to B, which is preferred to C.
D) D is preferred to A, which is preferred to C.
Answer: A
Diff: 2
Skill: Analytical
46
11) Which of the following preference rankings is consistent with Figure 7.7?
A) D is preferred to B, which is equivalent in utility terms to C.
B) C is preferred to B, which is preferred to A.
C) A is preferred to B, which is preferred to D.
D) D is preferred to A, which is equivalent in utility terms to C.
Answer: D
Diff: 2
Skill: Analytical
12) Refer to Figure 7.7. Which of the following is true?

A) D is preferred to B.
B) A is preferred to C.
C) C is preferred to A.
D) B is preferred to D.
Answer: A
Diff: 2
Skill: Analytical
13) Refer to Figure 7.7. The consumer is indifferent between which two pairs of points?
A) A and B
B) A and C
C) B and C
D) all of the above
Answer: B
Diff: 2
Skill: Analytical
14) Refer to Figure 7.7. Which point can the consumer NOT afford?
A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
47
15) Refer to Figure 7.7. If the consumer is purchasing the combination of peaches and herbs
represented by point A, she could increase utility by purchasing:
A) more of both goods.
B) more peaches and fewer herbs.
C) more herbs and fewer peaches.
D) The consumer cannot increase her utility because she is spending all of her money.
Answer: C
Diff: 2
Skill: Analytical
16) Refer to Figure 7.7. If the consumer is purchasing the combination of peaches and herbs
represented by point C, she could increase utility by purchasing:
A) more of both goods.
B) more peaches and fewer herbs.
C) more herbs and fewer peaches.
D) The consumer cannot increase her utility because she is spending all of her money.
Answer: B
Diff: 2
Skill: Analytical
48
17) Which of the following combinations in Figure 7.8 describes a situation where a consumer's
subjective tradeoff between the two goods (in absolute value) is greater than the market tradeoff
between the two goods?
A) A
B) B
C) C
Answer: A
Diff: 2
Skill: Analytical
subjective tradeoff between the two goods (in absolute value) is less than the market tradeoff
A) A
B) B
C) C
Answer: C
Diff: 2
Skill: Analytical
49
subjective tradeoff between the two goods (in absolute value) is equal to the market tradeoff
A) A
B) B
C) C
Answer: B
Diff: 2
Skill: Analytical
20) Refer to Figure 7.8. If a consumer is in a situation where her subjective tradeoff between the
two goods (in absolute value) is greater than the market tradeoff between the two goods, she can
maximize her utility by purchasing:
A) more books and fewer movie tickets.
B) fewer books and more movie tickets.
C) fewer books and fewer movie tickets.
D) more books and more movie tickets.
Answer: A
Diff: 2
Skill: Analytical
21) Refer to Figure 7.8. If a consumer is in a situation where her subjective tradeoff between the
two goods (in absolute value) is less than the market tradeoff between the two goods, she can
maximize her utility by purchasing:
A) more books and fewer movie tickets.
B) fewer books and more movie tickets.
C) fewer books and fewer movie tickets.
D) more books and more movie tickets.
Answer: B
Diff: 2
Skill: Analytical
50
22) Refer to Figure 7.9. If Tracy moves from point B to point A, which of the following
statements is NOT consistent with her situation?
A) Each additional movie ticket she buys has a smaller positive impact on her utility.
B) Each additional book she gives up has a larger negative impact on her utility.
C) Tracy is willing to trade many books to get one additional movie ticket.
D) Tracy is willing to trade many movie tickets for an additional book.
Answer: C
Diff: 2
Skill: Analytical
23) Refer to Figure 7.9. If Tracy moves from point B to point C, which of the following
statements is NOT consistent with her situation?
A) Each additional movie ticket she gives up has a larger negative impact on her utility.
B) Each additional book she gives up has a smaller positive impact on her utility.
C) Tracy is willing to trade many books to get one additional movie ticket.
D) Tracy is willing to trade many movie tickets for an additional book.
Answer: D
Diff: 2
Skill: Analytical
51
24) Suppose that Daniel is maximizing his utility, and then his monthly income increases from
$1200 to $1300. Daniel will end up:
A) on a lower indifference curve than before.
B) on the same indifference curve as before.
C) on a higher indifference curve than before.
D) shifting his budget line to the left.
Answer: C
Diff: 2
Skill: Conceptual
25) Suppose that a consumer is maximizing her utility, and then the consumer's income
decreases. What will happen?
A) The consumer will end up on a lower indifference curve than before.
B) The consumer will end up on the same indifference curve as before.
C) The consumer will end up on a higher indifference curve than before.
D) The consumer's budget line will shift to the right.
Answer: A
Diff: 2
Skill: Conceptual
Recall the Application about a consumer's marginal rate of substitution to answer the
following question(s).
26) Recall the Application. If a utility maximizing consumer consumes two goods, DVDs that
cost $15 and pizzas that cost $10, the consumer's marginal rate of substitution would be:
A) no pizzas for DVDs.
B) 1.5 DVDs for a pizza.
C) 1.5 pizzas for a DVD.
D) no DVDs for a pizza.
Answer: B
Diff: 2
Topic: Application 1, What's Your MRS?
Skill: Analytical
52
27) Recall the Application. If a consumer is maximizing utility, then we can find that consumers
marginal rate of substitution by:
A) the ratio of the consumers measured marginal utilities.
B) the ratio of income to prices.
C) the ratio of total utility to prices.
D) the ratio of the prices of the goods.
Answer: D
Diff: 2
Topic: Application 1, What's Your MRS?
Skill: Conceptual
Recall the Application about Amazon.com's shipping charges to answer the following
question(s).
28) Recall the Application. If a firm wants to increase sales in the United States, what should
they do based on the information given in the Application?
A) produce larger quantities of the product
B) offer discounted products
C) incorporate free products into their marketing
D) discount the shipping price to almost zero
Answer: C
Diff: 2
Skill: Conceptual
29) A person maximizes utility by setting the marginal benefit of one good equal to the marginal
benefit of the other.
Answer: FALSE
Diff: 2
Skill: Conceptual
30) A consumer maximizes her utility when she chooses the combination of two goods where the
indifference curve is tangent to the budget line.
Answer: TRUE
Diff: 2
Skill: Conceptual
53
31) The MRS does not have to equal the price ratio for utility to be maximized.
Answer: FALSE
Diff: 2
Skill: Conceptual
32) Prices of goods and income are the only things a consumer must consider when deciding
how much of a good to purchase.
Answer: FALSE
Diff: 1
Skill: Conceptual
33) A consumer can improve her well-being if her marginal rate of substitution exceeds the price
ratio.
Answer: TRUE
Diff: 2
Skill: Conceptual
34) A consumer can improve her well-being if her marginal rate of substitution is equal to the
price ratio.
Answer: FALSE
Diff: 2
Skill: Conceptual
35) A consumer maximizes his utility by choosing the quantity to consume where his marginal
benefit is the greatest.
Answer: FALSE
Diff: 2
Skill: Conceptual
36) Explain the utility maximization rule.

Answer: Consumers maximize utility when they pick their consumption bundle so that the
marginal rate of substitution equals the price ratio.
Diff: 2
Skill: Conceptual
54
7.7 Appendix 3: Drawing the Individual Demand Curve
1) Suppose that we draw Clara's demand curve for books using both her budget line and
indifference curves for movies and books. Which of the following variables is held fixed?
I. Clara's preferences for the two goods
II. The price of movies
III. Clara's income
A) I and II only
B) I and III only
C) II and III only
D) I, II and III
Answer: D
Diff: 2
Topic: The Negatively Sloped Demand Curve
Skill: Conceptual
2) Suppose that we draw Tom's demand curve for hot dogs using both his budget line and
indifference curves for hot dogs and sandwiches. Which of the following variables is held fixed?
I. Tom's preferences for the two goods
II. The price of sandwiches
III. The price of hot dogs
A) I and II only
B) I and III only
C) II and III only
D) I, II and III
Answer: A
Diff: 2
Skill: Conceptual
55
3) If the consumer in Figure 7.10 begins at point A, the change in the budget line is due to:
A) the price of good X falling.
B) the price of good X rising.
C) the price of good Y falling.
D) the price of good Y rising.
Answer: B
Diff: 2
Topic: The Negatively Sloped Demand Curve, graphing
Skill: Analytical
4) If the consumer in Figure 7.10 begins at point A, when the price of good X rises, the
consumption of X changes to:
A) X1.
B) X2.
C) X3.
D) X4.
Answer: B
Diff: 2
Skill: Analytical
56
5) If the consumer in Figure 7.10 begins at point A, then:
A) the price of X increases and the quantity of X falls.
B) income falls and the consumption of X and Y falls.
C) the price of Y falls and the quantity of Y rises.
D) rises and the consumption of X and Y rises.
Answer: A
Diff: 2
Skill: Analytical
goods to be normal goods. If Claudia's income stays constant and the relative prices of DVD
rentals and chewing gum increase, Claudia's budget line shifts ________ and she will shift to a
________ indifference curve.
A) outward; higher
B) outward; lower
C) inward; higher
D) inward; lower
Answer: D
Diff: 2
Skill: Analytical
7) Dino spends his income on two goods, cigars and peppermints. He considers both goods to be
normal goods. If Dino's income increases and the prices of the two goods remain constant, Dino's
budget line ________ and he will shift to a ________ indifference curve.
A) shifts outward; higher
B) shifts outward; lower
C) does not shift; higher
D) shifts inward; higher
Answer: A
Diff: 2
Skill: Analytical
57
Recall the Application about the price of online music to answer the following question(s).
8) Recall the Application. Frankie spends $20 per month to download 20 songs. The price of
online music is going to increase by $1.00 per download, and Frankie's real income is going to
increase by $20 per month. Assuming the relative prices of other goods do not change, Frankie
will
A) move down his existing budget line toward the "other goods."
B) move up his budget line toward "music downloads."
C) see his budget curve shift outward.
D) see his budget curve shift inward.
Answer: A
Diff: 2
Topic: Application 3, The Price of Pirate Songs
Skill: Analytical
9) A demand curve is drawn holding the price of other goods constant.

Answer: TRUE
Diff: 2
Skill: Conceptual
10) A demand curve is drawn allowing for changes in preferences.

Answer: FALSE
Diff: 2
Skill: Conceptual
11) Explain the ceteris paribus assumption we use when we draw a demand curve.
Answer: Ceteris paribus means "other things being equal." To draw a consumer's demand curve
for a product, we assume that everything except for the price of the product is fixed. In other
words, we allow only the price of the product to vary, holding fixed the consumer's income,
preferences, and the prices of related goods.
Diff: 2
Skill: Conceptual
58

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Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1

Chapter 7 Consumer Choice Using Utility Theory

7.1 Total and Marginal Utility

1) How is utility defined as?

2) Which of the following statements about marginal utility is correct?

9) Diminishing marginal utility implies:

11) Utility is the benefit a consumer gets from consuming a good.

15) Explain what diminishing marginal utility is.

7.2 Consumer Choice

1) Consumers' ability to purchase a good or service is limited by:

3) A decrease in a consumer's budget set can be caused by:

4) A consumer's budget set:

5) What is the consumer budget line?

7) Which of the following statements about a consumer's budget line is correct?

9) Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of

12) Refer to Figure 7.1. Which of the following statements is incorrect?

13) Refer to Figure 7.1. Which of the following statements is incorrect?

25) Decreases in consumer income shift:

26) A change in the slope of a budget line reflects:

29) The budget set is:

TELEVISION VERSUS RADIO ADVERTISING

75) An increase in income shifts the budget line to the right.

76) An increase in income shifts the budget line to the left.

7.3 The Individual Demand Curve

3) Robert's demand curve for pizza:

4) Kim's demand curve for sodas:

22) What assumptions are required to draw an individual demand curve?

23) Explain the income and substitution effects.

7.4 Consumer Puzzles: Free Goods and Branding

7.5 Appendix 1: Consumer Constraints and Preferences

1) What does an indifference curve show?

4) As we move downward along a consumer's indifference curve, the consumer's tradeoff

7) An indifference curve represents the set of:

8) What is the slope of an indifference curve called?

9) What is the absolute value of the slope of an indifference curve?

20) Explain why a consumer's indifference curve is negatively sloped.

22) Explain why indifference curves can never cross.

7.6 Appendix 2: Maximizing Utility

4) Which of the following describes the utility-maximizing rule?

5) Increases in utility are represented by moving:

7) A consumer maximizes utility by choosing:

12) Refer to Figure 7.7. Which of the following is true?

36) Explain the utility maximization rule.

9) A demand curve is drawn holding the price of other goods constant.

10) A demand curve is drawn allowing for changes in preferences.

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