Microeconomics - theory of consumer behaviour - cardinal and ordinal approaches, revealed preference hypothesis, Hicks revision of demand theory, modern utility, choice under risk and uncertainty - Question Bank

1. The concept of 'loss aversion' in Prospect Theory means that:
A) People feel the pain of a loss more strongly than the pleasure of an equivalent gain.
B) People feel the pleasure of a gain more strongly than the pain of an equivalent loss.
C) Gains and losses have equal psychological impact.
D) People are indifferent to losses.
2. Which of the following is a critique of the Cardinal Approach to utility?
A) It assumes preferences are not rankable.
B) It is difficult to measure utility in quantifiable units.
C) It ignores the income effect.
D) It does not allow for substitution between goods.
3. In the context of revealed preference, if a consumer chooses bundle A when bundle B was affordable, it implies:
A) Bundle A is less preferred than Bundle B.
B) Bundle A is revealed to be preferred to Bundle B.
C) The consumer is indifferent between A and B.
D) The consumer is irrational.
4. The 'law of diminishing marginal utility' states that as a consumer consumes more units of a good, the additional satisfaction derived from each extra unit:
A) Increases
B) Remains constant
C) Decreases
D) Becomes negative
5. The indifference curve approach assumes that consumer preferences are:
A) Inconsistent and random
B) Rational, complete, and transitive
C) Based solely on price
D) Unordered and subjective
6. According to the theory of consumer choice, a consumer aims to:
A) Maximize their income.
B) Minimize their expenditure.
C) Maximize their utility subject to their budget constraint.
D) Achieve a specific level of dissatisfaction.
7. The 'probability weighting function' in Prospect Theory suggests that people:
A) Accurately perceive probabilities.
B) Overweight small probabilities and underweight large probabilities.
C) Underweight small probabilities and overweight large probabilities.
D) Are indifferent to probabilities.
8. A risk-neutral individual's utility function is:
A) Concave
B) Convex
C) Linear
D) Constant elasticity
9. Which of the following best describes 'Choice under Uncertainty'?
A) Decisions where the probabilities of different outcomes are known.
B) Decisions where the probabilities of different outcomes are unknown.
C) Decisions where all outcomes are favorable.
D) Decisions involving only one possible choice.
10. The 'certainty effect' in Prospect Theory refers to the observation that people:
A) Are indifferent between a certain outcome and a lottery with the same expected value.
B) Overweight the certainty of an outcome compared to probabilistic outcomes.
C) Underweight the certainty of an outcome.
D) Always choose the option with the highest expected utility.
11. Hicks' revision of demand theory, using revealed preference, led to a more robust explanation of:
A) The Giffen paradox
B) The law of diminishing marginal utility
C) The concept of externalities
D) The theory of production
12. Samuelson's 'Axiom of Revealed Preference' is a formalization of:
A) The concept of marginal utility.
B) The idea that observed choices reflect preferences.
C) The measurement of total utility.
D) The relationship between risk and utility.
13. Which hypothesis aims to derive demand curves without directly using the concept of utility?
A) Cardinal Approach
B) Ordinal Approach
C) Revealed Preference Hypothesis
D) Theory of Games
14. Consumer equilibrium in the Ordinal Approach occurs at the point where:
A) The indifference curve is tangent to the budget line.
B) The marginal utility of both goods is equal.
C) The price ratio equals the sum of marginal utilities.
D) The consumer is on the highest possible indifference curve, regardless of budget.
15. The budget line represents:
A) All combinations of goods that yield the same level of satisfaction.
B) All combinations of goods that a consumer can afford given their income and prices.
C) The consumer's most preferred bundle of goods.
D) The combinations of goods that result in zero utility.
16. Which of the following is a key assumption of the Cardinal Utility Approach?
A) Consumers can only rank preferences.
B) The marginal utility of money is not constant.
C) Utility is measurable and quantifiable.
D) Indifference curves are convex to the origin.
17. The 'framing effect' in decision-making refers to the phenomenon where:
A) Choices are influenced by how options are presented, even if the underlying options are the same.
B) Consumers always make rational choices regardless of presentation.
C) Only the objective characteristics of a choice matter.
D) Preferences are always transitive.
18. What is the 'endowment effect' as described in behavioral economics?
A) People tend to overvalue goods they own compared to similar goods they do not own.
B) People tend to undervalue goods they own.
C) People are indifferent to owning goods.
D) People only value goods based on their market price.
19. The concept of 'reference dependence' in Prospect Theory means that people evaluate outcomes relative to:
A) An absolute standard of wealth
B) A baseline or reference point
C) The average outcome
D) The most extreme outcome
20. The Slutsky equation decomposes the price effect into:
A) Substitution effect and Income effect (based on initial income)
B) Substitution effect and Income effect (based on final income)
C) Substitution effect and Substitution effect
D) Income effect and Complementary effect
21. In the context of consumer behavior, what does a Giffen good represent?
A) A good for which demand increases as price increases
B) A good for which demand decreases as price decreases
C) A normal good with a positive income effect
D) An inferior good with a strong negative income effect
22. Prospect Theory suggests that people are often:
A) Risk-averse in both gains and losses
B) Risk-seeking in both gains and losses
C) Risk-averse for gains and risk-seeking for losses
D) Risk-seeking for gains and risk-averse for losses
23. A key concept in Prospect Theory is the 'value function', which is typically:
A) Linear for both gains and losses
B) Concave for gains and convex for losses
C) Convex for gains and concave for losses
D) Steeper for losses than for gains
24. Daniel Kahneman and Amos Tversky's Prospect Theory challenged Expected Utility Theory by highlighting:
A) The rationality of decision-making under certainty
B) Systematic deviations from rational choice, especially under risk
C) The importance of cardinal utility
D) The irrelevance of subjective probabilities
25. According to Expected Utility Theory, if a person is risk-averse, they will prefer:
A) A lottery with a higher expected value
B) A certain outcome over a lottery with the same expected value
C) A lottery with a higher variance
D) A lottery over a certain outcome
26. The Expected Utility Hypothesis states that a rational decision-maker chooses the option that maximizes:
A) Expected monetary value
B) Expected utility
C) The probability of a positive outcome
D) The minimum possible outcome
27. The concept of Expected Utility Theory was pioneered by:
A) John von Neumann and Oskar Morgenstern
B) Daniel Kahneman and Amos Tversky
C) Milton Friedman and Leonard Savage
D) Paul Samuelson
28. The shape of the utility function associated with risk aversion is:
A) Linear
B) Convex
C) Concave
D) Constant elasticity
29. A person who prefers a certain outcome over a gamble with the same expected value is considered:
A) Risk-neutral
B) Risk-loving
C) Risk-averse
D) Uncertainty-seeking
30. Choice under uncertainty involves situations where:
A) Probabilities of outcomes are known
B) Probabilities of outcomes are unknown
C) All outcomes are equally likely
D) There are no alternative outcomes
31. Choice under risk involves situations where:
A) Probabilities of outcomes are unknown
B) Probabilities of outcomes are known
C) There is no possibility of loss
D) Only one outcome is possible
32. Which of the following is NOT a typical characteristic of modern utility functions in decision theory?
A) They are ordinal in nature.
B) They can incorporate subjective beliefs.
C) They are always linear.
D) They can represent preferences over uncertain outcomes.
33. The 'modern utility' concept, in the context of choice theory, often refers to:
A) A return to cardinal measurement
B) A framework that allows for subjective probabilities and risk aversion
C) The simple ranking of preferences
D) Utility derived solely from objective product attributes
34. In Hicks' decomposition, the substitution effect measures the change in consumption due to:
A) Change in real income
B) Change in relative prices, holding real income constant
C) Change in nominal income
D) Change in consumer preferences
35. John Hicks, in his revision of demand theory, decomposed the price effect into:
A) Substitution effect and Income effect
B) Substitution effect and Substitution effect
C) Income effect and Complementary effect
D) Substitution effect and Cross-price effect
36. The Strong Axiom of Revealed Preference (SARP) is a more stringent condition than WARP. It implies:
A) Transitivity of preferences
B) Consistency of choices over time
C) That if A is chosen over B, and B over C, then A must be chosen over C.
D) All of the above
37. The Weak Axiom of Revealed Preference (WARP) implies that:
A) If bundle A is chosen over B, and A is more expensive than B, then B cannot be chosen over A.
B) If bundle A is chosen over B, then bundle B cannot be revealed as preferred to bundle A.
C) If A is preferred to B, and B is preferred to C, then A must be preferred to C.
D) Consumers always choose the most expensive bundle available.
38. Hicks' revision of demand theory, building on revealed preference, primarily aimed to:
A) Reintroduce cardinal utility
B) Justify the ordinal approach without relying on utility
C) Focus solely on risk and uncertainty
D) Develop a new cardinal utility measure
39. Which axiom states that if a consumer chooses bundle A over bundle B, then bundle B must not be revealed as preferred to bundle A?
A) Transitivity
B) Consistency (or Axiom of Revealed Preference)
C) Non-satiation
D) Convexity
40. The core idea of the Revealed Preference Hypothesis is that consumer choices reveal their preferences:
A) Through hypothetical utility calculations
B) By observing their behavior in the market
C) Based on stated preferences in surveys
D) Through indifference curve mapping
41. The Revealed Preference Hypothesis was proposed by:
A) Alfred Marshall
B) John Hicks
C) Paul Samuelson
D) J.R. Hicks
42. The Marginal Rate of Substitution (MRS) tends to diminish along an indifference curve due to:
A) Increasing availability of both goods
B) Consumer's preference for variety
C) Increasing marginal utility of one good
D) Decreasing marginal utility of the good on the horizontal axis
43. What does the slope of an indifference curve represent?
A) Marginal Rate of Substitution (MRS)
B) Price Ratio
C) Budget Line Slope
D) Income Elasticity
44. The indifference curves are typically:
A) Convex to the origin
B) Concave to the origin
C) Downward sloping and parallel
D) Upward sloping and intersecting
45. Which of the following is a fundamental assumption of the Ordinal Approach to consumer behavior?
A) Utility is measurable in units like 'utils'.
B) Consumers can rank their preferences between different bundles of goods.
C) The marginal utility of money is constant.
D) Diminishing marginal utility applies to money.
46. According to the Cardinal Approach, utility is:
A) Rankable but not quantifiable
B) Quantifiable and measurable
C) Subjective and context-dependent
D) Dependent on income effects only
47. The Indifference Curve analysis is a key component of which approach to consumer behavior?
A) Cardinal Approach
B) Revealed Preference Hypothesis
C) Ordinal Approach
D) Marginal Utility Theory
48. Which approach to consumer behavior assigns numerical values to the satisfaction derived from consuming goods and services?
A) Ordinal Approach
B) Cardinal Approach
C) Revealed Preference Hypothesis
D) Behavioral Economics
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