Question 1

Measurable utility is the postulate of:
A)Neo-Classical school
B)Ordinalist school
C)Behaviourist school
D)Keneysians

Accepted Answer

The Neo-Classical school of economics postulates the concept of measurable utility, which assumes that the satisfaction or utility that consumers derive from goods or services can be measured quantitatively. This contrasts with the Ordinalist school, which suggests that utility can only be ranked in order of preference rather than measured numerically.

Question 2

Which of the following is Gossen's first law:
A)Law of Diminishing Marginal Utility
B)Law of Equi Marginal Utility
C)Law of substitution
D)Law of Diminishing Returns

Accepted Answer

Gossen's first law is the Law of Diminishing Marginal Utility, which states that as a person consumes more units of a good, the utility (satisfaction) gained from consuming each additional unit decreases.

Question 3

In the case of a free good, the consumer will be in equilibrium when:
A)MU = P
B)MU = 0
C)TU = 0
D)TU =1

Accepted Answer

In the case of a free good, the consumer will be in equilibrium when the marginal utility (MU) falls to zero. This is because, with no cost associated with consumption, the consumer will continue to consume until no additional utility is derived from consuming one more unit of the good.

Question 4

Change in demand due to a change in the price of related good :
A)Cross demand
B)Price demand
C)Income demand
D)None of these

Accepted Answer

Cross demand refers to the change in demand for a good due to a change in the price of another related good, such as substitutes or complements.

Question 5

The Price and quantity relationship for an inferior good is:
A)Direct
B)Inverse
C)Positive
D)Indirect

Accepted Answer

For an inferior good, as the price decreases, the quantity demanded increases, showing an inverse relationship.

Question 6

In the case of normal goods, the quantity demanded varies inversely with:
A)Price of good
B)Income of the consumer
C)Fashion of the good
D)Savings

Accepted Answer

For normal goods, as the price of the good increases, the quantity demanded decreases, and vice versa, indicating an inverse relationship between price and quantity demanded.

Question 7

Which of the following is a cardinalist approach to demand analysis:
A)Marshallian utility analysis
B)Indifference Curve Analysis
C)Revealed Preference Theory
D)None of these

Accepted Answer

Marshallian utility analysis is a cardinalist approach because it assumes that utility can be measured and quantified.

Question 8

The convexity of an indifference curve shows:
A)Diminishing MRS
B)Increasing MRS
C)Constant MRS
D)None

Accepted Answer

The convexity of an indifference curve to the origin represents diminishing marginal rates of substitution (MRS), indicating that as a consumer substitutes one good for another, the amount of the good being given up decreases.

Question 9

A movement from one point to another along an indifference curve makes the satisfaction:
A)Increasing
B)Decreasing
C)Unaltered
D)None

Accepted Answer

An indifference curve represents a series of combinations of goods among which a consumer is indifferent, meaning that the level of satisfaction or utility remains constant as the consumer moves along the curve.

Question 10

In the case of an indifference curve
A)dU/dX>dU/dY
B)dU/dX = dU/dY
C)dU/dX<dU/dY
D)dU/dX?dU/Dy

Accepted Answer

On an indifference curve, the marginal rate of substitution between two goods (X and Y) is equal, which means the change in utility from consuming a little more of one good is exactly offset by consuming a little less of the other, hence dU/dX = dU/dY.

Question 11

An Indifference Curve to the right of another represents combinations which are:
A)Indifferent
B)Preferable
C)Inferior
D)Superior

Accepted Answer

Indifference curves represent combinations of goods between which a consumer is indifferent. A curve to the right represents combinations of goods where the consumer can have more of at least one good without having less of the other, implying these combinations are preferable to those on a curve to the left.

Question 12

As moving from left to right through an indifference curve, the MRS of X for Y
A)Increases
B)Remains the same
C)Decreases
D)Both A and C

Accepted Answer

The Marginal Rate of Substitution (MRS) typically decreases as you move down along an indifference curve due to the diminishing marginal rate of substitution, reflecting a consumer's willingness to give up less of good Y to gain an additional unit of good X.

Question 13

The slope of an indifference curve represents:
A)Price ratio of good X and Y
B)MRTS L,K
C)MRSx,y
D)MRS

Accepted Answer

The slope of an indifference curve represents the marginal rate of substitution (MRS) between two goods, indicating how much of one good a consumer is willing to give up for an additional unit of another good while maintaining the same level of utility.

Question 14

In the case of perfect complementaries, the MRS between goods is:
A)Zero
B)Positive
C)Negative
D)None

Accepted Answer

In the case of perfect complementaries, the MRS between goods is zero because consumers always demand the goods in a fixed ratio.

Question 15

In a combination of X and Y, if price of Y alone changes, the X intercept will :
A)Rotate upwards
B)Rotate downwards
C)Not be changed
D)Parallel

Accepted Answer

The X intercept represents the quantity of X when the quantity of Y is zero, which is determined by the budget and the price of X, not the price of Y. Therefore, a change in the price of Y alone does not affect the X intercept.

Question 16

At the point of tangency of an indifference curve with a budget line:
A)MRSxy =Px/Py
B)MRSxy>Px/PY
C)MRSxy<Px/PY
D)MRSxy?Px/PY

Accepted Answer

At the point of tangency of an indifference curve with a budget line, the marginal rate of substitution (MRS) between two goods (x and y) is equal to the ratio of their prices (Px/Py). This condition ensures that the consumer is maximizing utility given their budget constraint.

Question 17

Commodities bought in larger quantities when income rises are called:
A)Normal goods
B)Inferior goods
C)Giffen goods
D)None

Accepted Answer

Normal goods are those for which demand increases as the income of the consumer increases. This is because people tend to buy more of these goods when they have more disposable income.

Question 18

Change in demand due to change in relative price alone is called:
A)Income effect
B)Substitution effect
C)Price effect
D)Ratchet effect

Accepted Answer

The substitution effect occurs when consumers react to a change in the price of a good by substituting it with another good, keeping their utility level constant. This effect isolates the impact of relative price changes on demand, separate from the income effect, which involves changes in consumption patterns due to changes in purchasing power.

Question 19

Substitution Effect is:
A)Always negative
B)Always positive
C)Seldom negative
D)Zero

Accepted Answer

The Substitution Effect is always negative because it describes how consumers will substitute cheaper goods for more expensive ones when prices change, holding utility constant.

Question 20

If income effect works in the same direction to that of substitution effect, the good is a:
A)Normal good
B)Inferior good
C)Giffen good
D)Superior Good

Accepted Answer

When both the income effect and the substitution effect work in the same direction, it indicates a normal good. This means that as income increases, the demand for the good also increases, and vice versa.

Quiz 5: Demand Analysis and Utility Theory in Economics

Measurable utility is the postulate of:

Which of the following is Gossen's first law:

In the case of a free good, the consumer will be in equilibrium when:

Change in demand due to a change in the price of related good :

The Price and quantity relationship for an inferior good is:

In the case of normal goods, the quantity demanded varies inversely with:

Which of the following is a cardinalist approach to demand analysis:

The convexity of an indifference curve shows:

A movement from one point to another along an indifference curve makes the satisfaction:

In the case of an indifference curve

An Indifference Curve to the right of another represents combinations which are:

As moving from left to right through an indifference curve, the MRS of X for Y

The slope of an indifference curve represents:

In the case of perfect complementaries, the MRS between goods is:

In a combination of X and Y, if price of Y alone changes, the X intercept will :

At the point of tangency of an indifference curve with a budget line:

Commodities bought in larger quantities when income rises are called:

Change in demand due to change in relative price alone is called:

Substitution Effect is:

If income effect works in the same direction to that of substitution effect, the good is a: