Consumer Theory

What is the theory of consumer behavior?

• How rational consumers maximize utility by comparing the marginal utilities per dollar of all products they can buy

• How rational consumers react to changes in the price of different products

• How rational consumers use their dollar votes show producers what they want

• How rational consumers minimize costs by comparing the prices of all products they can buy

What is the marginal utility of the 3rd candy bar?

• 15

• 53

• 18

• 11

What is the utility maximizing rule?

• In order to maximize utility, a consumer should allocate their income so that the last dollar spent on each product yields the same marginal utility 

• In order to maximize utility, a consumer should allocate their income spent on a product until its marginal utility per dollar equals 0

• In order to maximize utility, a consumer should allocate their income spent on a product until its marginal utility per dollar is negative 

• In order to maximize utility, a consumer should allocate their income on the item with the highest marginal utility

What is the law of diminishing marginal utility?

• As consumption of a product increases, each additional unit consumed yields a lower marginal utility. 

• As consumption of a product decreases, each additional unit consumed yields a lower marginal utility. 

• As consumption of a product increases, each additional unit consumed yields a higher marginal utility.

• As consumption of a product increases, each additional unit consumed yields the same marginal utility. 

Assume Soham spends all of his money on 4 apples & 4 candy bars. His MU of the 4th apple is 20 utils, and his MU of the 4th candy bar is 40 utils. If an apple costs $1.00 and a candy bar $0.50, to maximize utility Soham should: 

• Buy fewer apples and more candy bars

• Maintain the current purchase of 4 of each

• Buy more apples and fewer candy bars

• Purchase more of both goods

Which of the following is true if consuming one unit of a good yields 100 utils and consuming the second unit of the good increases satisfaction by 20 utils?

• The marginal utility of the first unit is 20

• The total utility of consuming two units is 120

• The marginal utility of the second unit is 120

• The marginal utility of the second unit is 80 utils

William Yuan is currently spending his entire lunch budget on 3 sodas and 4 hot dogs. At his current level of consumption, his marginal utility for sodas is 5 utils and his marginal utility for hot dogs is 10 utils. In order to maximize his total utility, William should:

• Consume more hot dogs & fewer sodas regardless of prices

• Maintain current consumption if sodas are $2 each and hot dogs are $1 each

• Consume more sodas & fewer hot dogs regardless of prices

• Maintain current consumption if sodas are $1 each and hot dogs are $2 each

Which of the following is a key assumption of consumer choice theory? 

• Consumers try to maximize their utility

• Consumers do not consider the opportunity costs of purchases

• Marginal utility is always increasing

• As income rises, consumers buy more of all goods

Edwin spent his entire income on only two goods: good X and good Y. At his current consumption of the two goods, the marginal utility of X is 8 and the marginal utility of Y is 2. If the price of X is $4.00 and the price of Y is $0.50, then to maximize his total utility, Edwin should have: 

• bought more X and more Y

• maintained his current consumption 

• bought less X and more Y

• bought more X and less Y

According to the law of diminishing marginal utility, which of the following is true?

• When marginal utility is decreasing, total utility is decreasing 

• Total satisfaction decreases as more units of a good are consumed 

• The additional satisfaction received from consuming extra units of a good decreases as consumption of the good increases 

• The additional satisfaction received from consuming extra units of a good decreases as consumption of the good decreases