“· Theory of Consumer Behaviour.” - Question Bank

1. Which of the following is NOT a typical assumption of the standard theory of consumer behavior?
A) Rationality
B) Utility maximization
C) Perfect information
D) Inconsistent preferences
2. The assumption of 'transitivity' in consumer preferences means that if a consumer prefers A to B, and B to C, then they must prefer:
A) C to A
B) A to C
C) B to A
D) They are indifferent between A and C
3. What does the theory of consumer behavior primarily aim to explain?
A) How firms set prices
B) How governments make policy decisions
C) How individuals make purchasing decisions to maximize their satisfaction given constraints
D) How markets reach equilibrium
4. The 'snob effect' is a type of negative network externality where consumers desire a good because:
A) It is popular
B) It is exclusive and not widely adopted
C) It is affordable
D) It is a necessity
5. The 'bandwagon effect' is a type of positive network externality where consumers desire a good because:
A) It is exclusive
B) It is popular and widely adopted
C) It is the cheapest option
D) It offers superior quality
6. A positive network externality, also known as a network effect, leads to:
A) Decreasing demand as more people use the good
B) Increasing demand as more people use the good
C) Constant demand regardless of user numbers
D) Reduced utility for existing users
7. Network externalities occur when the utility a consumer derives from a good depends on:
A) Its price
B) Its quality
C) The number of other consumers using the same good
D) The advertising budget
8. The concept of 'habit formation' in consumer behavior suggests that:
A) Past consumption influences current preferences
B) Consumers always seek novelty
C) Preferences are static over time
D) Habits reduce utility
9. A higher discount rate implies that an individual:
A) Values future consumption more than present consumption
B) Values present consumption more than future consumption
C) Is indifferent between present and future consumption
D) Has a stable preference over time
10. The rate at which individuals are willing to trade consumption today for consumption tomorrow is known as the:
A) Interest Rate
B) Marginal Rate of Time Preference (MRTP)
C) Discount Rate
D) Opportunity Cost
11. The theory of intertemporal choice deals with how individuals make decisions about:
A) Consumption and saving over time
B) Purchasing durable goods
C) The optimal number of goods to buy
D) The impact of advertising on choices
12. The backward-bending labor supply curve illustrates a situation where, beyond a certain wage rate, an increase in wages leads to:
A) More work and less leisure
B) Less work and more leisure
C) No change in work hours
D) Increased demand for labor
13. A consumer's choice between work and leisure is determined by the trade-off between:
A) Utility from leisure and cost of leisure
B) Utility from consumption and disutility from work
C) Wage rate and tax rate
D) Leisure time and working hours
14. According to prospect theory, people are generally:
A) Risk-averse in both gains and losses
B) Risk-seeking in both gains and losses
C) Risk-averse in gains and risk-seeking in losses
D) Risk-seeking in gains and risk-averse in losses
15. The endowment effect, a concept from behavioral economics, describes the tendency for people to:
A) Buy goods they have never owned before
B) Value something more highly simply because they own it
C) Sell goods at a lower price than they bought them
D) Compare prices extensively before purchasing
16. Prospect theory, a key concept in behavioral economics, suggests that individuals evaluate potential outcomes relative to a:
A) Zero baseline
B) Fixed reference point
C) Market average
D) Theoretical maximum
17. Behavioral economics introduces psychological factors into consumer theory, challenging the assumption of perfect rationality. One such factor is:
A) Perfect information
B) Framing effects
C) Constant preferences
D) Utility maximization
18. In the context of quasi-linear utility, demand for the 'numeraire' good (the good in which utility is linear) is:
A) Dependent on its own price
B) Independent of its own price
C) Dependent on income but independent of its own price
D) Independent of income but dependent on its own price
19. The concept of 'quasi-linear utility' implies that a consumer's utility function is linear in one good and non-linear in others. This means:
A) The MRS is constant for all goods
B) The MRS between the non-linear good and any other good is independent of the amount of the linear good consumed
C) The marginal utility of all goods is diminishing
D) The consumer is indifferent between all goods
20. The Strong Axiom of Revealed Preference (SARP) is a more stringent condition than WARP because it considers:
A) Only direct choices
B) Transitive choices over a series of budget sets
C) The prices of all goods in the market
D) The utility derived from each good
21. The Weak Axiom of Revealed Preference (WARP) states that if a consumer chooses bundle A when bundle B is affordable, then they should not choose bundle B when bundle A is affordable.
A) True
B) False
C) Only applicable to inferior goods
D) Only applicable to normal goods
22. According to revealed preference theory, if a consumer chooses bundle A over bundle B, then bundle A is considered:
A) Indifferent to bundle B
B) Less preferred than bundle B
C) Revealed to be preferred to bundle B
D) Unobservable
23. The theory of revealed preferences, developed by Paul Samuelson, aims to:
A) Infer consumer preferences from observed choices
B) Assume preferences are always rational
C) Measure utility directly
D) Ignore the role of income
24. For an inferior good, the Engel curve slopes:
A) Upward
B) Downward
C) Is vertical
D) Is horizontal
25. For a normal good, the Engel curve slopes:
A) Downward
B) Upward
C) Is vertical
D) Is horizontal
26. An Engel curve illustrates the relationship between the quantity of a good consumed and:
A) Its price
B) Income
C) The price of other goods
D) Consumer expectations
27. Which curve is derived from the tangency points of indifference curves and budget lines as income changes?
A) Engel Curve
B) Demand Curve
C) Supply Curve
D) Laffer Curve
28. The concept of 'consumer surplus' is the difference between:
A) The price consumers are willing to pay and the price they actually pay
B) The total revenue earned by producers and the total cost
C) The quantity demanded and the quantity supplied
D) The marginal utility and the average utility
29. The Marshallian demand curve shows the relationship between the price of a good and the quantity demanded, holding:
A) Utility constant
B) Income and the prices of other goods constant
C) Real income constant
D) Total expenditure constant
30. The Hicksian compensated demand curve shows the relationship between the price of a good and the quantity demanded, holding:
A) Income constant
B) Utility constant
C) The price of other goods constant
D) Total expenditure constant
31. The Slutsky equation decomposes the total effect of a price change into:
A) Income and cross-price effects
B) Substitution and income effects
C) Own-price and income effects
D) Substitution and cross-price effects
32. A Giffen good is a special type of inferior good where the:
A) Income effect is positive and larger than the substitution effect
B) Substitution effect is larger than the income effect
C) Income effect is negative and larger than the substitution effect
D) Price effect is always positive
33. For an inferior good, the income effect is:
A) Positive
B) Negative
C) Zero
D) Constant
34. For a normal good, the income effect is:
A) Negative
B) Positive
C) Zero
D) Ambiguous
35. The substitution effect refers to the change in consumption of a good due to a change in:
A) Real income
B) Its relative price compared to other goods
C) Total utility
D) The availability of complementary goods
36. The income effect refers to the change in consumption of a good due to a change in:
A) Its own price
B) The price of a substitute good
C) Real income (purchasing power)
D) Consumer preferences
37. At the point of consumer equilibrium, the Marginal Rate of Substitution (MRS) is equal to the:
A) Marginal Utility of X
B) Ratio of prices of the two goods
C) Total Utility
D) Income Elasticity
38. Consumer equilibrium is achieved when 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
39. The slope of the budget line is determined by:
A) The ratio of marginal utilities
B) The ratio of the prices of the two goods
C) The consumer's income level
D) The total utility derived
40. A budget line shows all the combinations of two goods that a consumer can purchase given:
A) Their preferences
B) Their income and the prices of the goods
C) The availability of substitutes
D) The level of satisfaction desired
41. The Marginal Rate of Substitution (MRS) between two goods, X and Y, indicates:
A) The rate at which the price of X changes relative to Y
B) The rate at which a consumer is willing to give up good Y to get one more unit of good X, while maintaining the same level of satisfaction
C) The rate at which total utility changes with an increase in good X
D) The rate at which income changes relative to the price of goods
42. The slope of an indifference curve at any point is known as the:
A) Price Ratio
B) Marginal Rate of Substitution (MRS)
C) Budget Line Slope
D) Income Effect
43. Indifference curves typically have a shape that is:
A) Convex to the origin
B) Concave to the origin
C) A straight upward-sloping line
D) A straight downward-sloping line
44. The indifference curve represents combinations of two goods that yield:
A) Different levels of satisfaction
B) The same level of satisfaction
C) Increasing satisfaction
D) Decreasing satisfaction
45. A consumer will continue to purchase a good as long as its marginal utility is:
A) Less than the price
B) Equal to the price
C) Greater than the price
D) Zero
46. Marginal utility is defined as the:
A) Total satisfaction from all units consumed
B) Average satisfaction per unit consumed
C) Additional satisfaction gained from consuming one more unit of a good
D) Satisfaction from the first unit consumed
47. The Law of Diminishing Marginal Utility states that as a consumer consumes more units of a good, the additional utility gained from each extra unit:
A) Increases at an increasing rate
B) Remains constant
C) Decreases
D) Becomes negative immediately
48. Ordinal utility theory suggests that consumers can:
A) Assign precise numerical values to their satisfaction
B) Only rank their preferences for different bundles of goods
C) Not compare different combinations of goods
D) Be indifferent to all consumption choices
49. Cardinal utility theory posits that utility can be:
A) Ranked but not measured
B) Measured and quantified numerically
C) Only relatively assessed
D) Indifferent between different levels
50. The concept of utility, in economics, refers to:
A) The cost of producing a good
B) The satisfaction a consumer derives from consuming a good
C) The market price of a good
D) The quantity of a good produced
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