Theory of Consumer Behaviour. - Question Bank

1. Which of the following best describes the assumption of 'transitivity' in consumer behavior?
A) If a consumer prefers A to B and B to C, then they must prefer A to C.
B) If a consumer prefers A to B, they must also prefer B to A.
C) A consumer always chooses the cheapest option.
D) A consumer's preferences change over time.
2. The concept of consumer behavior explains how individuals make purchasing decisions to maximize their satisfaction given their limited resources. This is a core tenet of:
A) Macroeconomics.
B) Microeconomics.
C) International Economics.
D) Public Finance.
3. If the income elasticity of demand for a good is negative, the good is:
A) A normal good.
B) An inferior good.
C) A luxury good.
D) A necessity good.
4. The shape of the indifference curve reflects the consumer's willingness to trade one good for another while maintaining the same level of satisfaction. This is captured by the:
A) Budget line slope.
B) Marginal Rate of Substitution (MRS).
C) Income elasticity.
D) Price elasticity.
5. Which condition must hold for a consumer to be in equilibrium according to the cardinal utility approach?
A) MRSxy = Px / Py
B) MUx / Px = MUy / Py = ... = MUn / Pn
C) Px * Qx + Py * Qy = Income
D) MRSxy > Px / Py
6. Samuelson's revealed preference theory provides a foundation for ordinal utility by:
A) Assuming cardinal measurability of utility.
B) Deriving indifference curves from observed consumer choices.
C) Ignoring consumer preferences.
D) Focusing solely on income effects.
7. The 'income effect' for an inferior good when its price falls is:
A) Positive, leading to an increase in demand.
B) Negative, leading to a decrease in demand.
C) Zero, having no impact on demand.
D) Ambiguous, depending on other factors.
8. The 'substitution effect' always leads to a decrease in the quantity demanded of a good whose price has fallen because:
A) The good becomes relatively cheaper and consumers substitute towards it.
B) The good becomes relatively more expensive and consumers substitute away from it.
C) Real income increases.
D) Real income decreases.
9. The 'law of demand' is based on the assumption of:
A) Ceteris paribus (all other factors remaining constant).
B) Varying income levels.
C) Changing tastes and preferences.
D) Technological advancements.
10. What does an upward-sloping demand curve typically indicate?
A) A normal good.
B) An inferior good.
C) A Giffen good.
D) A luxury good.
11. The concept of 'consumer surplus' is derived from the difference between:
A) Price paid and marginal utility.
B) Price paid and the maximum price the consumer is willing to pay.
C) Total utility and marginal utility.
D) Income and expenditure.
12. The point where the demand curve intersects the price axis represents a price at which:
A) Quantity demanded is zero.
B) Quantity demanded is maximum.
C) Quantity demanded is one unit.
D) Quantity demanded is infinite.
13. The point where the demand curve intersects the quantity axis represents a quantity demanded of zero at:
A) Zero price.
B) A very low price.
C) A very high price.
D) Infinite price.
14. A perfectly elastic demand curve is:
A) Horizontal.
B) Vertical.
C) Downward sloping.
D) Upward sloping.
15. A perfectly inelastic demand curve is:
A) Horizontal.
B) Vertical.
C) Downward sloping.
D) Upward sloping.
16. The income consumption curve (ICC) shows how consumption of goods changes with:
A) Changes in price.
B) Changes in income.
C) Changes in tastes.
D) Changes in technology.
17. The slope of the price consumption curve (PCC) for a normal good is:
A) Positive.
B) Negative.
C) Zero.
D) Constant.
18. If two indifference curves intersect, it violates the assumption of:
A) Diminishing marginal rate of substitution.
B) Transitivity.
C) Non-satiation.
D) Convexity.
19. The indifference map consists of:
A) A single indifference curve.
B) Multiple indifference curves.
C) Budget lines.
D) Demand curves.
20. Which approach assumes that consumers make choices to maximize their utility subject to their budget constraints?
A) Cardinal Utility Approach
B) Ordinal Utility Approach
C) Revealed Preference Theory
D) All of the above
21. For a necessity good, the income elasticity of demand is:
A) Less than 1
B) Greater than 1
C) Equal to 1
D) Negative
22. For a luxury good, the income elasticity of demand is:
A) Less than 1
B) Greater than 1
C) Equal to 1
D) Zero
23. For a normal good, the Engel curve is:
A) Downward sloping.
B) Upward sloping.
C) Vertical.
D) Horizontal.
24. Engel curves show the relationship between:
A) The price of a good and the quantity demanded.
B) The income of a consumer and the quantity demanded of a good.
C) The quantity demanded of two goods.
D) The marginal utility and the quantity consumed.
25. The Strong Axiom of Revealed Preference (SARP) is a more stringent condition than WARP because it considers:
A) Only direct choices.
B) Indirect choices as well.
C) Only price changes.
D) Only income changes.
26. The Weak Axiom of Revealed Preference (WARP) states that if bundle A is revealed to be preferred to bundle B, then bundle B cannot be revealed to be preferred to bundle A.
A) True
B) False
C) Partially True
D) Depends on income levels
27. The concept of revealed preference theory was introduced by:
A) J.R. Hicks
B) Paul Samuelson
C) Alfred Marshall
D) John Maynard Keynes
28. For an inferior good, the demand curve is typically:
A) Downward sloping.
B) Upward sloping.
C) Vertical.
D) Horizontal.
29. If a good is a normal good, its demand curve is:
A) Downward sloping.
B) Upward sloping.
C) Vertical.
D) Horizontal.
30. According to Slutsky's method of decomposing the price effect, the consumer is compensated for the price change by adjusting their income such that they can still afford the original bundle. This compensation is:
A) Less than what Hicks' method would give.
B) More than what Hicks' method would give.
C) Equal to what Hicks' method would give.
D) Independent of Hicks' method.
31. Hicks' decomposition of the price effect divides it into:
A) Income and substitution effects.
B) Slutsky's income and substitution effects.
C) Movement along and shift of the demand curve.
D) Cardinal and ordinal utility components.
32. The total effect of a price change is the sum of the:
A) Income effect and substitution effect.
B) Income effect and marginal utility.
C) Substitution effect and marginal rate of substitution.
D) Price effect and income effect.
33. What is a Giffen good?
A) A good for which the income effect is positive and larger than the substitution effect.
B) A good for which the substitution effect is negative and larger than the income effect.
C) A good for which the demand decreases as price increases.
D) An inferior good for which the demand increases as price increases.
34. For an inferior good, the income effect is:
A) Positive
B) Negative
C) Zero
D) Constant
35. For a normal good, the income effect is:
A) Negative
B) Positive
C) Zero
D) Ambiguous
36. The change in the consumption of a good due to a change in the real income of the consumer, resulting from a price change, is known as the:
A) Income Effect
B) Substitution Effect
C) Total Effect
D) Price Effect
37. The change in the consumption of a good due to a change in its relative price, while real income is kept constant, is known as the:
A) Income Effect
B) Substitution Effect
C) Total Effect
D) Price Effect
38. If the price of good X decreases while the income and price of good Y remain constant, the budget line will:
A) Shift inwards parallelly.
B) Shift outwards parallelly.
C) Pivot outwards on the Y-axis intercept.
D) Pivot inwards on the X-axis intercept.
39. What happens to the budget line if the income of the consumer increases, while prices of goods remain constant?
A) It shifts inwards parallelly.
B) It shifts outwards parallelly.
C) It pivots outwards.
D) It pivots inwards.
40. The condition for consumer's equilibrium in the ordinal approach is:
A) MRSxy = Px / Py
B) MRSxy > Px / Py
C) MRSxy < Px / Py
D) MUx / Px = MUy / Py
41. Consumer's equilibrium is achieved when:
A) The budget line is tangent to the highest possible indifference curve.
B) The marginal utility of all goods consumed is equal.
C) The price ratio is equal to the marginal rate of substitution.
D) Both A and C are correct.
42. What is the slope of the budget line called?
A) Marginal Rate of Substitution
B) Marginal Utility
C) Price Ratio
D) Income Elasticity
43. The budget line represents:
A) All combinations of two goods that yield the same level of satisfaction.
B) All combinations of two goods that a consumer can afford with a given income and prices.
C) The point where consumer's satisfaction is maximized.
D) The combination of goods that is technologically feasible.
44. Which of the following is NOT a property of indifference curves?
A) Indifference curves slope downwards from left to right.
B) Indifference curves are convex to the origin.
C) Indifference curves can intersect each other.
D) Higher indifference curves represent higher levels of satisfaction.
45. The Marginal Rate of Substitution (MRS) between two goods X and Y tends to diminish as a consumer moves down along an indifference curve because:
A) The consumer prefers more of Y to X.
B) The consumer prefers more of X to Y.
C) The consumer is willing to give up less of good Y to obtain an additional unit of good X.
D) The consumer is willing to give up more of good Y to obtain an additional unit of good X.
46. What does the slope of an indifference curve represent?
A) Price Ratio
B) Marginal Rate of Substitution
C) Income Effect
D) Substitution Effect
47. The indifference curve approach is also known as the:
A) Cardinal Utility Approach
B) Ordinal Utility Approach
C) Revealed Preference Approach
D) Marginal Utility Approach
48. Which economic concept states that as a consumer consumes more and more units of a commodity, the marginal utility derived from each successive unit decreases?
A) Law of Demand
B) Law of Supply
C) Law of Diminishing Marginal Utility
D) Law of Equi-Marginal Utility
49. What is the fundamental assumption of the ordinal approach to consumer behavior regarding utility?
A) Utility can be measured cardinally.
B) Utility is measurable in abstract units.
C) Utility is comparable and rankings are possible.
D) Utility is independent of preferences.
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