University of Lethbridge – Department of Economics

ECON 3030 – Managerial Economics

Instructor: Michael G. Lanyi
Summer 2014

Practice Problem Set

ADDITIONAL HELP

CHAPTER 4
Theory of
Consumer Behavior
ECON3030 Managerial Economics Michael G. Lanyi

1) In economics, the term "utility" is defined as the

A) system of basing the price of a good on its usefulness to society.
B) usefulness of a good.
C) total consumer satisfaction received from consumption of a good.
D) usefulness of a theory to explain price determination.
E) a service such as sewer and water or electricity.

2) Utility
A) is an objective measure of a good's value.
B) measures the common value of a good, independent of the individual.
C) can be measured with the appropriate equipment.
D) is very difficult to observe empirically.
E) is not real as we cannot measure it directly.

3) Economists use the term "marginal utility" to describe the

A) change in total satisfaction caused by consumption of an additional unit of a good.
B) average utility of each unit of a good consumed.
C) inverse of the measure of total utility.
D) total satisfaction received from consumption of a good.
E) price paid for every unit consumed.

4) If total utility is increasing as more units are consumed, then marginal utility must be
A) decreasing at an increasing rate.
B) negative.
C) increasing.
D) increasing at an increasing rate.
E) positive.

5) The idea that the utility a consumer derives from successive units of a good diminishes as total consumption of the good
increases is known as
A) the paradox of value.
B) the utility theory of demand.
C) utility maximization.
D) diminishing marginal utility.
E) diminishing total utility.

6) Marginal utility theory is about

A) the consumer behaviour that underlies the theory of demand.
B) proving that demand curves are always downward sloping.
C) the total satisfaction resulting from the consumption of some good by the consumer.
D) how producers allocate their scarce resources.
E) calculating consumer surplus.

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ECON3030 Managerial Economics Michael G. Lanyi

FIGURE 6-1

7) Refer to Figure 6-1. The marginal utility of the second unit of the good consumed is
A) 10.
B) 20.
C) 30.
D) 40.
E) 50.

8) Refer to Figure 6-1. If this figure represents the utility obtained from consuming units of a good, how many units would
this consumer consume if the good were free?
A) 1
B) 2
C) 3
D) 4
E) at least 5

9) Refer to Figure 6-1. Marginal utility is zero when total utility is

A) equal to zero.
B) is decreasing.
C) is increasing.
D) equal to marginal utility.
E) at its maximum.

10) A basic hypothesis of marginal utility theory is that the utility a consumer derives from successive units of a good
diminishes as total consumption of the good increases. This hypothesis is known as
A) the paradox of value.
B) the utility theory of demand.
C) utility maximization.
D) the law of diminishing marginal utility.
E) the law of diminishing total utility.

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ECON3030 Managerial Economics Michael G. Lanyi

Toffee (bars) Cashews (bags)

Marginal Total Marginal Total
Units Utility Utility Utility Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27

TABLE 6-1

11) Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week, his/her total utility will be
A) 7
B) 23
C) 31
D) 54
E) 57

12) Refer to Table 6-1. The maximum utility that a consumer can obtain from toffee bars and bags of cashews per week is
A) 22
B) 54
C) 56
D) 64
E) 74

13) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $7 per week to
spend on these two snacks, how many of each will he/she purchase to maximize utility?
A) 2 toffee bars and 5 bags of cashews.
B) 3 toffee bars and 4 bags of cashews.
C) 4 toffee bars and 3 bags of cashews.
D) 5 toffee bars and 2 bags of cashews.
E) 6 toffee bars and 1 bag of cashews.

14) A consumer maximizes his or her utility when expenditures are allocated such that
A) the total utility from each good is equal.
B) the total number of dollars spent on each good is equal.
C) the utility received from the last unit of each good is equal.
D) the utility received per dollar spent on the last unit of each good is equal.
E) the marginal utility is zero for each good consumed utility.

15) The condition required for a consumer to be maximizing utility, for any pair of products, X and Y, is
A) PX(MUX) = PY(MUY).
B) MUX = MUY.
C) MUX/PX = MUY/PY.
D) MUX/PY = MUY/PX.
E) PX = PY.

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ECON3030 Managerial Economics Michael G. Lanyi

16) Refer to the figure above. If the price of X is $2 and the price of Y is $1 and the consumer is buying 4 units of X and 2
units of Y, the consumer's total utility is
A) 8.
B) 10.
C) 52.
D) 56.
E) 69.

17) Refer to the figure above. Suppose the price of X is $2, the price of Y is $1, and the consumer's income is $10. The
consumer is currently buying 4 units of good X and 2 units of good Y. In order to maximize his utility, he should
A) make no changes -- he is already maximizing his total utility.
B) buy the same amount of X but less Y.
C) buy more of X but the same amount Y.
D) buy more of X and less Y.
E) buy less of X and more Y.

18) Refer to the figure above. Suppose the price of Y is $1, the consumer's income is $10, and the consumer is currently
buying 3 units of good X and 4 units of good Y. If this consumer is maximizing her utility, then the price of X must be
A) $1.
B) $2.
C) $3.
D) $4.
E) impossible to tell with the given information.

19) Refer to the figure above. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2
and the consumer is buying 3 units of good X and 4 units of good Y. If the price of X then falls to $1, what quantities of X
and Y will he/she now purchase in order to maximize total utility?
A) 2 X and 8 Y.
B) 3 X and 7 Y.
C) 4 X and 6 Y.
D) 5 X and 5 Y.
E) 6 X and 4 Y.

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ECON3030 Managerial Economics Michael G. Lanyi

20) The Smith family is allocating its monthly household expenditure between only two goods, food and clothing.
Suppose that the price of food is $5 per unit, and the price of clothing is $10 per unit and that the marginal utility that the
family is receiving from its consumption of food is currently 25. What is the family's marginal utility from its consumption
of clothing if it is maximizing its utility?
A) 5
B) 10
C) 12.5
D) 25
E) 50

21) Marginal utility analysis predicts a downward-sloping demand curve for good X because
A) as PX falls, the ratio MUX/PX becomes smaller, causing the consumer to purchase more of good X.
B) as PX rises, the consumer increases purchases of X such that MUX/PX is equal to MU/P for all other products.
C) utility-maximizing consumers equate marginal utility received for each product consumed.
D) all demand curves are downward sloping, regardless of the behaviour of consumers.
E) as PX falls, the consumer increases purchases of X such that MUX/PX is equal to MU/P for all other products.

22) Consider a consumer who divides his income between spending on good X and good Y. The opportunity cost of good
X in terms of good Y is reflected by the
A) absolute price of good X.
B) absolute price of good Y.
C) ratio of the price of X to the price of Y.
D) ratio of the price of Y to the price of X.
E) price of good X relative to the prices of all other goods.

23) The substitution effect is the change in quantity demanded that occurs
A) as a result of a change in absolute prices, with real income held constant.
B) as a result of a change in relative prices with money income held constant.
C) as a result of a change in relative prices, with real income held constant.
D) when one good is substituted for another.
E) with a change in the relative prices of two or more goods.

24) If the price of a normal good changes, the income effect of the price change will
A) always be larger than the substitution effect.
B) always be to increase quantity demanded.
C) reinforce the substitution effect.
D) produce a positively sloped demand curve.
E) oppose the substitution effect.

25) The substitution effect of a price change

A) will result in the consumer buying less of a good at a lower price.
B) will result in the consumer buying less of a good at a higher price.
C) outweighs the income effect for Giffen goods.
D) is equal to the income effect for normal goods.
E) is equal to the income effect for inferior goods.

26) The income effect refers to the change in quantity demanded that occurs as a result of a change in
A) money income, with relative prices held constant.
B) real income, with relative prices held constant.
C) relative prices, with real income held constant.
D) marginal utility, with real income held constant.
E) preferences, with real income held constant.
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ECON3030 Managerial Economics Michael G. Lanyi

27) A demand curve for a normal good is downward sloping due to

A) the income effect.
B) the substitution effect.
C) the combination of income and substitution effects.
D) neither the substitution effect nor the income effect.
E) the Giffen effect.

28) Suppose a consumer can purchase only two goods, beef and chicken. If the price of beef falls (with all other variables
held constant), and the consumption of chicken increases, we can conclude that the increased consumption of chicken is
due to
A) neither the income effect nor the substitution effect.
B) both the income effect and the substitution effect.
C) the income effect only.
D) the substitution effect only.
E) a change in the consumer's preference toward chicken.

FIGURE 6-3

29) Refer to Figure 6-3. For both goods, the price falls from P0 to P1. The substitution effect is illustrated by the change in
quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good Y
is certainly a(n) ________ good.
A) normal
B) inferior
C) luxury
D) necessity
E) Giffen

30) Refer to Figure 6-3. For both goods, the price falls from P0 to P1. The substitution effect is illustrated by the change in
quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X
is certainly a(n) ________ good.
A) normal
B) inferior
C) luxury
D) necessity
E) Giffen

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ECON3030 Managerial Economics Michael G. Lanyi

31) Consumer surplus

A) is the sum of the marginal values to the consumer.
B) is the total value that a consumer receives from the purchase of a particular good.
C) is a measure of the gains that a consumer forgoes by buying this product rather than another.
D) is the difference between what the consumer is willing to pay for all the units consumed and what he or she actually
paid.
E) is the consumption of a commodity above and beyond the amount required by the consumer.

32) Consider the pizza market, with a downward-sloping demand curve and an upward-sloping supply curve. Suppose
100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is
A) positive.
B) negative.
C) non-negative.
D) unknown.
E) zero.

33) Given a typical downward-sloping demand curve in a market that has reached its equilibrium, the consumer surplus
A) is measured by the area above the market price and under the demand curve.
B) is measured by the area below the market price and under the demand curve.
C) is measured by the area immediately above the demand curve.
D) is calculated as the product of market price and quantity consumed.
E) cannot be measured given the information.

FIGURE 6-5

34) Refer to Figure 6-5. Suppose the market price is p*. In this case, consumer surplus is outlined by the area
A) ACDE
B) ABDF
C) ACF
D) BCD
E) ADE

35) An indifference curve plotted for two different goods on the axes
A) shifts when real income changes.
B) shows all combinations of the two goods that give the same level of utility.
C) changes its slope as the relative prices of the two goods change.
D) shows the combinations of the two goods that will just use up a consumer's income.
E) shows the different combinations of two goods that the same income can purchase.

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ECON3030 Managerial Economics Michael G. Lanyi

36) The marginal rate of substitution

A) always has a positive algebraic value.
B) is constant as one moves along a particular indifference curve.
C) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total satisfaction
unchanged.
D) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total expenditure
unchanged.
E) is equal to the price ratio on the budget line.

The diagram below shows a set of budget lines facing a household.

37) Refer to the figure above. The movement of the budget line from ab to ac could be caused by
A) an increase in money income.
B) an increase in the price of food.
C) an increase in the price of housing.
D) a decrease in the price of food.
E) a decrease in the price of housing.

38) Refer to the figure above. The movement of the budget line from ab to ef could be caused by
A) a decrease in money income.
B) a decrease in the price of either food or housing.
C) an equal percentage decrease in the price of both food and housing.
D) an equal percentage increase in the price of both food and housing.
E) an increase in the price of either food or housing.

39) Assume the quantity of good X is measured on the horizontal axis and the quantity of good Y on the vertical axis.
Initial prices are Px = $5 and Py= $10. The consumer's income is $100. If Py increases to $20, then
A) the entire budget line shifts to the left with its slope changing from 1/2 to 1/4 (in absolute values).
B) the budget line will rotate to the left across the horizontal axis, slope remaining constant.
C) the budget line will rotate to the left down the vertical axis with the slope changing from 1/2 to 1/4 (in absolute values).
D) the entire budget line will shift to the right.
E) the budget line will rotate to the right down the horizontal axis with the slope changing from 1/4 to 1/2 (in absolute
values).
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ECON3030 Managerial Economics Michael G. Lanyi

40) In indifference curve analysis, the consumer's utility-maximizing point is where

A) each indifference curve has the same slope as the relevant budget line.
B) the indifference curve farthest from the origin intersects with the budget line that is farthest from the origin.
C) the consumer's marginal utility curve is tangent to the relevant budget line.
D) one indifference curve is tangent to the relevant budget line.
E) the price-consumption line is tangent to the budget line.

FIGURE 6-8

41) Refer to Figure 6-8. In part (i), the consumer is able to move from point A to point B because of
A) a decrease in the price of milk.
B) a decrease in the price of bread.
C) a decrease in money income.
D) an increase in real income.
E) a decrease in the price of one good and an increase in money income.

42) Refer to Figure 6-8. In part (ii), the consumer's move from point Z to point Y is caused by
A) a change in the consumer's preferences towards milk.
B) an increase in the price of milk.
C) an increase in the price of bread.
D) an decrease in the price of bread.
E) a decrease in money income.

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ECON3030 Managerial Economics Michael G. Lanyi

The figures below show Chris's consumption of specialty coffee per week.

FIGURE 6-9

43) Refer to Figure 6-9. The two diagrams in Figure 6-9 are showing
A) the change in Chris's preferences toward specialty coffee.
B) that Chris is indifferent between bundles A, B and C.
C) the derivation of Chris's demand curve for specialty coffee.
D) that Chris is indifferent between points D, E and F.
E) the derivation of Chris's indifference curve for specialty coffee.

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ECON3030 Managerial Economics Michael G. Lanyi

FIGURE 6-10

44) Refer to Figure 6-10. Suppose the consumer begins at E1. The income and substitution effects of the reduction in the
price of X are represented as follows:
A) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect.
B) the distance de shows the income effect and the distance cd shows the substitution effect.
C) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect.
D) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect.
E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

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ECON3030 Managerial Economics Michael G. Lanyi
1) C
2) D
3) A
4) E
5) D
6) A
7) B
8) E
9) E
10) D
11) E
12) D
13) B
14) D
15) C
16) E
17) E
18) B
19) E
20) E
21) E
22) C
23) C
24) C
25) B
26) B
27) C
28) C
29) A
30) B
31) D
32) E
33) A
34) D
35) B
36) C
37) D
38) C
39) C
40) D
41) D
42) C
43) C
44) D

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