Question 1

If the consumer purchases only two goods,X and Y,and if (MU_x / P_x) = (MU_y / P_y) then the consumer cannot reallocate her expenditures on X and Y to increase her utility,unless she has more money to spend.

Accepted Answer

The equation implies that the marginal utility per dollar spent on both goods is the same. Therefore, the consumer is already maximizing her utility given her budget constraint. Without more money to spend, she cannot increase her utility by reallocating her expenditures on X and Y.

Question 2

A price change triggers the income effect but not the substitution effect.

Accepted Answer

A price change triggers both the income effect and the substitution effect. The income effect refers to the change in quantity demanded due to the change in purchasing power resulting from the price change. The substitution effect refers to the change in quantity demanded due to the relative price change of the good compared to other goods.

Question 3

According to neuroeconomists,our logical brain knows we should spend as much as possible when we have money.

Accepted Answer

Neuroeconomists suggest that our logical brain doesn't always guide our spending decisions, and we often succumb to emotional impulses instead of rational considerations.

Question 4

Neuroeconomics suggests that the frontal lobe carries out most decision making and strategic thinking takes place in the prefrontal cortex.

Accepted Answer

This statement is true according to current understanding in the field of neuroeconomics. The frontal lobe, particularly the prefrontal cortex, is involved in decision making and strategic thinking.

Question 5

According to neuroeconomists,the limbic portion of the brain called the amygdala is more primitive and deals with emotion.

Accepted Answer

Neuroeconomists agree that the amygdala, a part of the limbic system, is a primitive area that mainly handles emotional processing.

Question 6

The theory of bounded rationality states that it is likely for consumers to have perfect information.

Accepted Answer

The theory of bounded rationality acknowledges that consumers have limitations in the amount of information they can process and use in decision making, therefore perfect information is unlikely.

Question 7

If a good is free,a rational consumer will continue to consume that good,irrespective of its marginal utility.

Accepted Answer

Even if a good is free, a rational consumer will stop consuming it once its marginal utility becomes zero or negative, as consuming more would not increase their satisfaction and could decrease it.

Question 8

If a consumer is buying only goods A and B,then he or she will be in equilibrium only when MU_a = MU_b.

Accepted Answer

A consumer is in equilibrium when the ratio of the marginal utility to the price of goods A and B are equal, i.e., MUa/Pa = MUb/Pb, not just when MUa = MUb.

Question 9

If cherries cost twice as much as dates,and the last cherry consumed provides twice as much utility as the last date consumed,the consumer is maximizing utility.

Accepted Answer

Since cherries cost twice as much as dates, the consumer is likely to consume fewer cherries and more dates. Additionally, since the last cherry consumed provides twice as much utility as the last date consumed, the consumer is likely to consume cherries until the marginal utility of cherries is half the marginal utility of dates. This means that the consumer is maximizing utility by consuming a combination of cherries and dates such that the ratio of their marginal utilities is equal to the ratio of their prices, which is 2:1.

Question 10

Suppose that apples and bananas both cost the same,but the marginal utility of bananas is twice as high as that for apples.This implies the consumer should purchase more apples and fewer bananas in order to maximize utility.

Accepted Answer

If the marginal utility of bananas is twice as high as that for apples, it means that the consumer gets more satisfaction from consuming bananas compared to apples. Therefore, to maximize utility, the consumer should purchase more bananas and fewer apples.

Question 11

The law of diminishing marginal utility does not hold good when the good is free or priced at zero dollars.

Accepted Answer

The law of diminishing marginal utility applies regardless of the price of the good, including when it is free, as it describes the decrease in satisfaction or utility that a consumer derives from each additional unit of consumption, not the cost of the good.

Question 12

As the price of a good declines,a utility-maximizing consumer will respond by purchasing more of that good.

Accepted Answer

This is known as the law of demand, which states that as the price of a good decreases, the quantity demanded increases, assuming all other factors remain constant. This implies that consumers are maximizing their utility by purchasing more of the good at a lower price.

Question 13

As you move along an indifference curve,your total utility increases or decreases depending on whether it's an upward or downward movement.

Accepted Answer

Utility remains constant on an indifference curve. It only changes as you move from one curve to another.

Question 14

Other things equal,if there is a price increase of a good measured on the vertical axis,the budget constraint will shift outward.

Accepted Answer

An increase in the price of a good would lead to a decrease in the quantity of that good that can be purchased with a given budget. This would cause a rotation of the budget constraint, not a shift outward.

Question 15

Consumer equilibrium exists when the marginal utility per dollar of expenditure is the same for all goods and services.

Accepted Answer

Consumer equilibrium is achieved when the consumer allocates their budget in such a way that the marginal utility per dollar spent on all goods and services is equal. This ensures that the consumer is maximizing their satisfaction or utility within their budget constraint.

Question 16

Suppose that apples and bananas both cost the same,but the marginal utility of bananas is twice as high as that for apples.The consumer should purchase more apples and fewer bananas in order to maximize utility.

Accepted Answer

If the marginal utility of bananas is twice as high as that for apples, then the consumer should purchase more bananas and fewer apples in order to maximize utility. This is because the consumer will derive more marginal utility per unit of money spent on bananas compared to apples.

Question 17

As the price of a good increases,the marginal utility per dollar spent on that good will also increase.

Accepted Answer

According to the law of diminishing marginal utility, as the quantity consumed of a good increases, the marginal utility of each additional unit consumed decreases. Therefore, as the price of a good increases, the consumer will receive less marginal utility per dollar spent on that good.

Question 18

If all consumers had identical preferences,then their marginal utility schedules would be the same.

Accepted Answer

If all consumers have identical preferences, it means they derive the same satisfaction or utility from consuming the same goods or services. Therefore, their marginal utility schedules would be the same, as they all would experience the same change in satisfaction from consuming an additional unit of the good.

Question 19

The substitution effect occurs because when the price of one good increases,consumers will buy fewer substitute goods.

Accepted Answer

The substitution effect occurs because when the price of one good increases, consumers will buy more of the substitute goods, not fewer, as they look for cheaper alternatives.

Question 20

One explanation for the status quo bias is an aversion to loss.

Accepted Answer

The aversion to loss means that people prefer to stick with what they already have, rather than risk losing it by making a change. This can lead to a bias towards the status quo.

Quiz 6: Consumer Choice

If the consumer purchases only two goods,X and Y,and if (MUx / Px) = (MUy / Py) then the consumer cannot reallocate her expenditures on X and Y to increase her utility,unless she has more money to spend.