Consumer behavior: utility and indifference curve analysis - Question Bank

1. If the price of a good increases, and it is a normal good, the total effect on consumption will be:
A) Positive, due to positive substitution and income effects.
B) Negative, due to negative substitution and income effects.
C) Ambiguous.
D) Zero.
2. Which of the following is an assumption of the indifference curve analysis?
A) Utility is cardinally measurable.
B) Consumers are irrational.
C) Consumers can rank their preferences.
D) Marginal utility is constant.
3. The indifference curve approach allows for the analysis of consumer behavior without:
A) Assuming ordinal utility.
B) Assuming rational preferences.
C) Measuring marginal utility numerically.
D) Considering budget constraints.
4. In the context of indifference curves, 'transitivity' of preferences means that if a consumer prefers A to B, and B to C, then:
A) They prefer C to A.
B) They prefer A to C.
C) They are indifferent between A and C.
D) Their preference is undetermined.
5. The total effect of a price change for a good is the sum of the:
A) Income and cross-price effects.
B) Substitution and income effects.
C) Marginal and total effects.
D) Price and utility effects.
6. The substitution effect always leads to a consumer buying:
A) More of a good whose price has fallen.
B) Less of a good whose price has fallen.
C) More of a good whose price has risen.
D) Less of a good whose price has risen.
7. The income consumption curve (ICC) for an inferior good is typically:
A) Upward sloping
B) Downward sloping
C) Horizontal
D) Vertical
8. The income consumption curve (ICC) for a normal good is typically:
A) Downward sloping
B) Upward sloping
C) Horizontal
D) Vertical
9. A consumer is indifferent between two bundles of goods if:
A) They provide different levels of utility.
B) They provide the same level of utility.
C) One bundle is clearly superior to the other.
D) They are unattainable.
10. Total Utility (TU) is maximized when:
A) Marginal Utility (MU) is negative.
B) Marginal Utility (MU) is zero.
C) Marginal Utility (MU) is positive.
D) Marginal Utility (MU) is increasing.
11. The concept of 'utility' in economics refers to:
A) The usefulness of a product.
B) The satisfaction or benefit a consumer derives from a good or service.
C) The cost of producing a good.
D) The market value of a good.
12. Which condition must hold for a consumer to be in equilibrium using indifference curve analysis?
A) MRS > Px/Py
B) MRS < Px/Py
C) MRS = Px/Py
D) MRS = 0
13. The consumer surplus is the difference between the total utility a consumer derives from a good and the:
A) Marginal utility of the good.
B) Price paid for the good.
C) Average utility of the good.
D) Total cost of the good.
14. If the prices of both goods and income change proportionally, what happens to the budget line?
A) It shifts outwards parallel.
B) It shifts inwards parallel.
C) It rotates.
D) It remains unchanged.
15. Which of the following scenarios would lead to a rightward shift of the budget line?
A) Increase in the price of good X
B) Decrease in income
C) Increase in income
D) Decrease in the price of good Y
16. The slope of the budget line represents the:
A) Marginal Rate of Substitution
B) Ratio of marginal utilities
C) Opportunity cost of consuming one more unit of a good in terms of the other
D) Total utility of the goods
17. If a consumer spends all their income on two goods, X and Y, and is in equilibrium, then:
A) MUx / MUy = Px / Py
B) MUx / Px = MUy / Py
C) MUx * Px = MUy * Py
D) MUx + MUy = Px + Py
18. The consumer's equilibrium is achieved at the point where the indifference curve is:
A) Above the budget line
B) Below the budget line
C) Tangent to the budget line
D) Intersecting the budget line at two points
19. What does the shape of the indifference curve imply about the trade-off between two goods?
A) The trade-off becomes more favorable for the good being consumed more.
B) The trade-off becomes less favorable for the good being consumed more.
C) The trade-off is constant.
D) There is no trade-off.
20. The indifference curve analysis is superior to the cardinal utility approach because it:
A) Assumes utility is measurable.
B) Assumes ordinal preferences.
C) Requires constant marginal utility.
D) Relies on the law of diminishing marginal utility exclusively.
21. Which of the following is a limitation of the cardinal utility approach?
A) It assumes ordinal preferences.
B) It assumes marginal utility is constant.
C) It assumes utility is measurable and quantifiable.
D) It does not assume rational behavior.
22. If MUx/Px > MUy/Py, a rational consumer should:
A) Buy more of good Y and less of good X.
B) Buy more of good X and less of good Y.
C) Buy equal amounts of both goods.
D) Stop consuming both goods.
23. The equimarginal principle states that a consumer maximizes utility when the marginal utility per dollar spent is:
A) Equal for all goods
B) Greater for one good than another
C) Less for all goods
D) Zero
24. When the price of a normal good falls, the total effect on consumption is:
A) Negative, due to negative substitution and income effects.
B) Positive, due to positive substitution and income effects.
C) Ambiguous.
D) Zero.
25. For an inferior good, the income effect is:
A) Positive
B) Negative
C) Zero
D) Constant
26. For a normal good, the income effect is:
A) Negative
B) Positive
C) Zero
D) Ambiguous
27. The income effect refers to the change in consumption of a good due to a change in:
A) Its price, keeping real income constant.
B) Real income, keeping prices constant.
C) Marginal utility.
D) Total utility.
28. The substitution effect refers to the change in consumption of a good due to a change in its:
A) Price, keeping real income constant.
B) Income, keeping prices constant.
C) Total utility.
D) Marginal utility.
29. A price consumption curve (PCC) shows the optimal consumption bundles as the price of one good changes, while:
A) Income and the other good's price change.
B) Income and the other good's price remain constant.
C) Preferences change.
D) Utility changes.
30. What does the income consumption curve (ICC) trace?
A) The effect of price changes on consumption.
B) The effect of income changes on consumption of two goods, holding prices constant.
C) The effect of changes in preferences on consumption.
D) The effect of changes in tastes on consumption.
31. The indifference curve approach assumes that consumers have:
A) Limited information
B) Perfect information and rational preferences
C) Irrational preferences
D) No preferences
32. According to utility analysis, a rational consumer will continue to consume a good as long as:
A) Marginal utility is negative.
B) Marginal utility is zero.
C) Marginal utility exceeds price.
D) Price exceeds marginal utility.
33. The consumption possibility line (budget line) shows the maximum combinations of two goods a consumer can purchase given income and:
A) Preferences
B) Utility
C) Prices
D) Production possibilities
34. A Giffen good is a special type of inferior good for which the income effect:
A) Is weaker than the substitution effect.
B) Is stronger than the substitution effect and is positive.
C) Is stronger than the substitution effect and is negative.
D) Is equal to the substitution effect.
35. The total utility derived from consuming a good is the sum of:
A) All marginal utilities.
B) The first marginal utility.
C) The last marginal utility.
D) The average marginal utility.
36. What happens to the Marginal Rate of Substitution (MRS) as a consumer moves down along an indifference curve?
A) It increases.
B) It decreases.
C) It remains constant.
D) It becomes zero.
37. The concept of ordinal utility implies that consumers can:
A) Assign numerical values to utility.
B) Rank their preferences but not quantify them precisely.
C) Only understand total utility.
D) Only understand marginal utility.
38. Which of the following is NOT a property of indifference curves?
A) Indifference curves slope downwards.
B) Indifference curves are convex to the origin.
C) Indifference curves intersect each other.
D) Higher indifference curves represent higher levels of utility.
39. The indifference curve approach is also known as the:
A) Cardinal Utility Approach
B) Ordinal Utility Approach
C) Behavioral Economics Approach
D) Classical Economics Approach
40. If the price of a good decreases, while income and the price of the other good remain constant, the budget line will:
A) Shift inwards parallel
B) Shift outwards parallel
C) Rotate outwards
D) Rotate inwards
41. At the point of consumer equilibrium, the Marginal Rate of Substitution (MRS) is equal to the:
A) Ratio of total utilities
B) Ratio of marginal utilities
C) Ratio of prices
D) Ratio of incomes
42. The point where the budget line is tangent to the highest possible indifference curve represents:
A) Consumer's maximum loss
B) Consumer's sub-optimal choice
C) Consumer Equilibrium
D) Market equilibrium
43. A budget line shows all the combinations of two goods that a consumer can afford given their:
A) Preferences
B) Income and prices of the goods
C) Utility level
D) Marginal utility
44. The indifference curves are convex to the origin due to:
A) Increasing Marginal Rate of Substitution
B) Constant Marginal Rate of Substitution
C) Diminishing Marginal Rate of Substitution
D) The Law of Demand
45. What does the Marginal Rate of Substitution (MRS) measure?
A) The rate at which a consumer is willing to give up one good to get more of another, maintaining the same utility.
B) The rate at which a consumer is willing to give up one good to get more of another, increasing utility.
C) The rate at which a consumer is willing to give up one good to get more of another, decreasing utility.
D) The rate at which prices change for two goods.
46. The slope of an indifference curve is known as the:
A) Price Ratio
B) Marginal Rate of Substitution (MRS)
C) Budget Line Slope
D) Income Effect
47. An indifference curve represents combinations of two goods that yield:
A) Varying levels of utility
B) The same level of utility
C) Increasing utility
D) Decreasing utility
48. Which economic concept assumes that consumers aim to maximize their satisfaction?
A) Law of Supply
B) Law of Demand
C) Consumer Equilibrium
D) Producer Surplus
49. What does the Law of Diminishing Marginal Utility state?
A) As consumption of a good increases, total utility decreases.
B) As consumption of a good increases, marginal utility decreases.
C) As consumption of a good increases, marginal utility increases.
D) As consumption of a good increases, total utility remains constant.
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