Question 1

When a price changes there are two effects: the:

Accepted Answer

When a price changes, there are two effects: the real-income effect and the substitution effect. The real-income effect occurs because the change in price affects the consumer's purchasing power, or real-income. The substitution effect occurs because the change in price alters the relative attractiveness of different goods or services, leading consumers to substitute one good or service for another. The other choices are not accurate representations of the effects of price changes.

Question 2

For a consumer, which of the following statements about the real-income effect is true?

Accepted Answer

The real-income effect occurs when a change in price affects the purchasing power of a consumer's income. However, this effect only matters when the price change is significant enough to cause a measurable effect on the consumer's purchasing power. Therefore, statement A is correct while B, C, D, and E are incorrect.

Question 3

The real-income effect:

Accepted Answer

The real-income effect occurs when there is a change in purchasing power as a result of a change in the price of a good. This means that as the price of a good decreases (or increases), a consumer's purchasing power increases (or decreases), which can then lead to an increase (or decrease) in the quantity of the good demanded.

Question 4

If a decrease in price results in only a small amount in savings, the enhanced purchasing power is effectively:

Accepted Answer

If a decrease in price results in only a small amount in savings, then the enhanced purchasing power is effectively close to zero. This means that there is no significant increase in the ability to buy additional goods or services, and therefore the effect is not greater than the substitution effect.

Question 5

If the price of a good increases, the marginal utility per dollar spent __________ and consumers buy __________ of the good.

Accepted Answer

According to the law of demand, as the price of a good increases, consumers tend to buy less of it. This means that the marginal utility per dollar spent decreases. Therefore, the correct choice is D – decreases; less.

Question 6

Joanna is deciding between consuming Good X and Good Y. At her current level of consumption, her marginal utility per dollar for Good X is greater than the marginal utility per dollar for Good Y. To achieve the consumer optimum, Joanna needs to:

Accepted Answer

For consumer optimum, the marginal utility per dollar for Good X and Good Y should be equal. As per the question, at the current level of consumption, the marginal utility per dollar for Good X is greater than that of Good Y. Hence, to achieve the consumer optimum, Joanna needs to reduce consumption of Good Y (option to consume less of Good Y) or increase consumption of Good X (option to consume more of Good X) until the marginal utility per dollar for both goods becomes equal. Thus, only option D fits the situation.

Question 7

When a consumer buys more of a good as a result of a relative price change, economists call it:

Accepted Answer

The substitution effect occurs when consumers react to a change in the price of a good by consuming more of that good and less of a higher-priced alternative, or vice versa, purely because of the change in relative price, holding the real income or purchasing power constant.

Question 8

When there is a change in purchasing power as a result of a change in the price of a good, economists call it:

Accepted Answer

This is because the real-income effect refers to the change in the amount of goods and services that can be purchased as a result of a change in income or price level. In this case, a change in the price of a good affects the real income or purchasing power of the consumer, leading to a change in the quantity demanded.

Question 9

Phillip is deciding between consuming Good X and Good Y. At his current level of consumption, his marginal utility per dollar for Good X is less than the marginal utility per dollar for Good Y. To achieve the consumer optimum, Phillip needs to:

Accepted Answer

To achieve consumer optimum, Phillip needs to equate the marginal utility per dollar of both goods. As per the given information, currently, the marginal utility per dollar of Good Y is greater than Good X. Thus, to equate them, he should consume less of Good X or more of Good Y until the marginal utility per dollar for Good X and Good Y is equal, which is the option B.

Question 10

The substitution effect:

Accepted Answer

The substitution effect occurs when a consumer buys more of a good as a result of a relative price change, such as a decrease in the price of that good or an increase in the price of a substitute good.

Question 11

Refer to the accompanying table to answer the  questions. $\begin{array}{cccc}\text { Cluss } & \text { Marginal } & \text { Soda } & \text { Marginal } \
\text { Consumed } & \text { Utility } & \text { Consumed } & \text { Utility } \
0&-&0&-\
1 & 18 & 1 & 12 \
2 & 15 & 2 & 10 \
3 & 12 & 3 & 8 \
4 & 9 & 4 & 6 \
5 & 6 & 5 & 4 \
6 & 3 & 6 & 2 \
7 & 0 & 7 & 0
\end{array}$
-For 2 chips and 5 sodas to be a combination of goods that maximizes your utility per dollar, the price of chips must be ____________ if the price of soda is $1.00.

Accepted Answer

The answer of Refer to the accompanying table to answer...

Question 12

Lower prices:

Accepted Answer

Lower prices increase the marginal utility per dollar spent, making consumers feel they are getting more value for each dollar, which typically leads to an increase in the quantity of the good purchased.

Question 13

To reach the consumer optimum for two goods, the:

Accepted Answer

The consumer optimum occurs when the consumer allocates their income in such a way that the ratio of the marginal utility of a good to its price is equal for all goods. This is because as the consumer consumes more of a good, its marginal utility decreases, so in order to maximize utility, they will allocate more income to the good with a higher marginal utility per dollar spent. When the ratios are equal for all goods, the consumer is at their optimal consumption point.

Question 14

Refer to the accompanying table to answer the  questions. $\begin{array}{cc}\text { soccer Games }&\text { Total Utility (Utils }\
\text { Attended }&\text { per Game) }\
0 & 0 \
1 & 150 \
2 & 275 \
3 & 375 \
4 & 450 \
5 & 500 \
6 & 525 \
7 & 500\
8&400
\end{array}$
-If the price of attending a soccer game changes from $20 to $25, the marginal utility per dollar spent for the third game changes from:

Accepted Answer

The answer of Refer to the accompanying table to answer...

Question 15

The substitution effect and the real-income effect are two effects that happen when:

Accepted Answer

The substitution effect and the real-income effect occur when there is a change in price (D). The substitution effect happens when the price of a good or service changes, leading consumers to substitute that good or service with a cheaper alternative. The real-income effect happens when the change in price affects a consumer's purchasing power, leading to an increase or decrease in the quantity demanded.

Question 16

Refer to the accompanying table to answer the  questions. $\begin{array}{cc}\text { soccer Games }&\text { Total Utility (Utils }\
\text { Attended }&\text { per Game) }\
0 & 0 \
1 & 150 \
2 & 275 \
3 & 375 \
4 & 450 \
5 & 500 \
6 & 525 \
7 & 500\
8&400
\end{array}$
-If the price of attending a soccer game changes from $25 to $20, the marginal utility per dollar spent for the fifth game changes from:

Accepted Answer

The marginal utility per dollar spent for the fifth game changes from 2.00 to 2.50, which means that there is an increase in the marginal utility per dollar spent. Therefore, it is best to attend the fifth game at the new price of $20.

Question 17

Lower prices increase the marginal utility per dollar spent and cause consumers to buy more of a good. On the other hand, higher prices lower the marginal utility per dollar spent and cause consumers to buy less of a good. This is a way of restating ___________ in terms of marginal utility.

Accepted Answer

The statement is a restatement of the law of demand, which states that as the price of a good increases, the quantity demanded decreases, and as the price of a good decreases, the quantity demanded increases. This is because consumers will choose to consume more of a good if it becomes more affordable in terms of the marginal utility per dollar spent.

Question 18

Higher prices:

Accepted Answer

Higher prices mean that consumers have to spend more money to purchase a particular quantity of a good, which leads to lower marginal utility per dollar spent. As a result, consumers will buy less of that good to maximize their total utility.

Question 19

If the price of a good decreases, the marginal utility per dollar spent ___________ and consumers buy __________ of the good.

Accepted Answer

When the price of a good decreases, the marginal utility per dollar spent increases, meaning consumers will be able to obtain more satisfaction/benefit from each dollar spent. Therefore, consumers are likely to buy more of the good because it provides a greater value for their money.

Question 20

Which of the following statements about the real-income effect and the substitution effect is true?

Accepted Answer

Both the real-income effect and the substitution effect always exist when there is a change in price of a good. The real-income effect refers to the change in purchasing power of consumers' income due to a price change, while the substitution effect refers to the change in the quantity demanded of a good due to a change in its relative price with respect to other goods. Both effects can occur simultaneously and can have an impact on the quantity demanded of a good.

Quiz 16: Consumer Choice