ECO101H1 Lecture 10: Consumer Demand Theory
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1. Economists use ____________ as a measure of the relative level of satisfaction when someone consumes a good or service.
| Ā | consumer happiness |
| Ā | utility |
| Ā | a happiness index |
| Ā | a satisfaction index |
2. Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.
| Ā | sugar sickness |
| Ā | total utility |
| Ā | diminishing marginal utility |
| Ā | increasing marginal utility |
3. When total utility is maximized, the marginal utility will be
| Ā | positive. |
| Ā | zero. |
| Ā | negative. |
| Ā | none of these. |
4. Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?
| Ā | Dirk and Lee both receive 10 utils from eating pizza. |
| Ā | Dirk and Lee both receive the same level of satisfaction from eating pizza. |
| Ā | Dirk gets more twice as much satisfaction as Lee from eating pizza. |
| Ā | It is difficult to determine because the utility is subjective. |
5. For many products, the total utility curve is
| Ā | strictly increasing because of increasing marginal utility. |
| Ā | strictly decreasing because of diminishing marginal utility. |
| Ā | increasing initially because of increasing marginal utility, but eventually decreases. |
| Ā | increasing initially at a decreasing rate because of diminishing marginal utility but eventually decreases. |
6. When consumers get the biggest bang for the buck, we say they
| Ā | used the loudest gun in hunting season. |
| Ā | reached a consumer optimum. |
| Ā | minimized consumer satisfaction. |
| Ā | maximized marginal utility. |
7. By choosing to consume at the consumer optimum, consumers will
| Ā | maximize their total utility. |
| Ā | minimize their total utility. |
| Ā | maximize the amount they spend on each good. |
| Ā |
minimize the amount they spend on each good. |
8. A consumer is in equilibrium when consuming two goods when which of the following holds?
| Ā | MUa/ Pa = MUb/ Pb |
| Ā | MUa/ Ph =MUb/ Pa |
| Ā | Pa/ MUa = Pb/ MUb |
| Ā | MUa x Pa = MUbxPb |
9. If the marginal utility of good 1 is 15 and its price is $3, and the marginal utility of good 2 is 12, and its price is $4, then the consumer
| Ā | has achieved a consumer optimum. |
| Ā | should increase his or her consumption of good 1. |
| Ā | should increase his or her consumption of good 2. |
| Ā | should decrease his or her consumption of good 1. |
10.Suppose the price of an iPod decrease and the price of HD TVs remains the same; what noticeable effect(s) occur(s)?
| Ā | the substitution effect only |
| Ā | the real-income effect only |
| Ā | the substitution effect and real-income effect, if there is a noticeable change in purchasing power |
| Ā | the substitution effect and real-income effect, if there isnĆ¢ĀĀt a noticeable change in purchasing power |
11. The ______________ paradox was described by Adam Smith in 1776.
| Ā | diamond-carbon |
| Ā | diamond-water |
| Ā | diamond-life |
| Ā | water-utility |
12. What is the key to solving the diamond-water paradox?
| Ā | more water and fewer diamonds |
| Ā | marginal utility |
| Ā | total utility |
| Ā | consumer demand |
13. When solving the diamond-water paradox we notice that the marginal utility of
| Ā | diamonds are equal to the marginal utility of water. |
| Ā | diamonds are greater than the marginal utility of water. |
| Ā | diamonds are less than the marginal utility of water. |
| Ā | water is equal to its price, and therefore lower than the marginal utility of diamonds. |
14. The consumer surplus for water is
| Ā | greater than that for diamonds because water is nonessential. |
| Ā | greater than that for diamonds because water is essential. |
| Ā | less than that for diamonds because water is nonessential. |
| Ā | less than that for diamonds because water is essential. |
15. Suppose a consumer consumes only diamonds and water, and the price of diamonds increases. All else being equal, a consumerĆ¢ĀĀs marginal utility for diamonds
| Ā | decreases and the marginal utility for water stays the same. |
| Ā | increases and the marginal utility for water decreases. |
| Ā | decreases and the marginal utility for water increases. |
| Ā | increases and the marginal utility for water stays the same. |
Assume that an individual consumes three goods, X, Y, and Z. The marginal utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X, Y, and Z are, respectively, $1, $3, and $5. The total income of the consumer is $65, and the marginal utility schedule is as follows:
| Units of good | Marginal utility of X (units) | Marginal utility of Y (units) | Marginal utility of Z (units) |
| 1 | 12 | 60 | 70 |
| 2 | 11 | 55 | 60 |
| 3 | 10 | 48 | 50 |
| 4 | 9 | 40 | 40 |
| 5 | 8 | 32 | 30 |
| 6 | 7 | 24 | 25 |
| 7 | 6 | 21 | 18 |
| 8 | 5 | 18 | 10 |
| 9 | 4 | 15 | 3 |
| 10 | 3 | 12 | 1 |
(a)Given a $65 income, how much of each good should the consumer purchase to maximize utility?
(b)Suppose income falls to $43 with the same set of prices; what combination will the consumer choose?
(c)Let income fall to $38; let the price of X rise to $5 while the prices of Y and Z remain at $3 and $5. How does the consumer allocate income now? What would you say if the consumer maintained that X is not purchased because he or she could no longer afford it?