Tutorial 6 & 7_ Theory of Consumer Behaviour
Section A: Multiple Choice Questions
Answer all questions below. Choose one correct answer.
1. Utility measures
a. the income a consumer receives from consuming a bundle of goods.
b. the satisfaction a consumer receives from consuming a bundle of goods.
c. the satisfaction a consumer places on their time constraint.
d. All of the above are correct.
2. When economists describe preferences, they often use the concept of
a. markets.
b. income.
c. utility.
d. prices.
3. Which of the following statement is possible?
a. Total utility decreases when marginal utility is zero.
b. Total utility increases when marginal utility is positive.
c. Total utility decreases when marginal utility is positive.
d. Total utility increases when marginal utility is negative.
Figure 1
4. Which graph shows a change in the price of chocolate only?
a. Section X
b. Section Y
c. Section Z
d. None of the above
5. A change of income is demonstrated in
a. Section X
b. Section Y
c. Section Z
d. None of the above
6. An increase in total utility due to a drop in the price of bubble tea is shown by
a. movement from A to B in Section X
b. movement from C to D in Section Y
c. movement from E to F in Section Z
d. None of the above
7. The law of diminishing marginal utility implies that as a person consumes more and more
of a given good, the
a. marginal utility becomes negative
b. total utility will fall and then rise
c. marginal utility will decline
d. total utility will decline
8. When the marginal utility derived from consuming the 4th avocado is -2, the total
utility must be
a. increasing
b. decreasing
c. maximised
d. negative as well
9. The price of X is RM5 and the price of Y is RM4. Which of the following (X, Y) bundles
is affordable, if your income is RM25?
a. (0, 7)
b. (3, 3)
c. (3, 2)
d. (2, 4)
10. If the prices of all goods increase by the same proportion as income, the quantity
demanded for good X will
a. increase
b. decrease
c. remain the same
d. change (by the same proportion)
11. Assuming that an individual's preferences is expressed as (X, Y) = XY, and Px = 5 and
Py = 10
Which of the following (X, Y) bundles will this person purchase, if his/her income is
RM30?
a. (4, 1)
b. (1, 4)
c. (3, 2)
d. (1, 3)
12. The theory of consumer choice provides the foundation for understanding
a. the structure of a firm.
b. the profitability of a firm.
c. product demand and to maximize utility.
d. a firm's product supply.
13. The theory of consumer choice examines
a. the determination of output in competitive markets.
b. the tradeoffs inherent in decisions made by consumers.
c. how consumers select inputs into manufacturing production processes.
d. the determination of prices in competitive markets.
14. If a consumer's income decreases, the budget line for CDs and DVDs will
a. shift outward, parallel to the original budget constraint.
b. shift inward, parallel to the original budget constraint.
c. rotate outward along the CD axis because we can afford more CDs.
d. rotate outward along the DVD axis because we can afford more DVDs.
15. When the price of a shirt falls, the
a. quantity of shirts demanded falls.
b. quantity of shirts demanded rises.
c. quantity of shirts supplied rises.
d. demand for shirts falls.
16. A budget line
a. shows the prices that a consumer chooses to pay for products he consumes.
b. shows the purchases made by consumers.
c. shows the consumption bundles that a consumer can afford.
d. represents the consumption bundles that give a producer can afford.
17. A consumer that doesn't spend all of her income
a. would be at a point outside of her budget constraint.
b. would be at a point inside her budget constraint.
c. must not be consuming positive quantities of all goods.
d. must be consuming at a point where her budget constraint touches one of the axes.
18. An increase in income will cause a consumer's budget constraint to
a. shift outward, parallel to its initial position.
b. shift inward, parallel to its initial position.
c. pivot around the "Y" axis.
d. pivot around the "X" axis.
19. A rational consumer is likely to have maximized his/her
a. preferences.
b. marginal rate of substitution.
c. utility.
d. budget constraint.
20. When a 4th glass of milk does not generate as much satisfaction as the 3rd glass, this
exemplifies
a. consumer equilibrium.
b. diminishing marginal utility.
c. diminishing total utility.
d. marginal rate of substitution.
Figure 2
21. Refer to Figure 2. Which point in the figure showing a consumer’s budget line
represents the consumer's income divided by the price of a CD?
a. Point A
b. Point C
c. Point D
d. Point E
22. Refer to Figure 2. A consumer that chooses to spend all of her income could be at
which point(s) on the budget constraint?
a. A
b. E
c. B, C, or D
d. A, B, C, or D
23. Refer to Figure 2. All of the points identified in the figure represent possible
consumption options with the exception of
a. A
b. E
c. A and E
d. None. All points are possible consumption options.
Figure 3
24. Refer to Figure 3. Which of the graphs in the figure reflects a decrease in the price of
good X only?
a. graph (a)
b. graph (b)
c. graph (c)
d. graph (d)
25. Refer to Figure 3. Which of the graphs in the figure reflects an increase in the price of
good Y only?
a. graph (a)
b. graph (b)
c. graph (c)
d. graph (d)
26. Refer to Figure 3. Which of the graphs in the figure could reflect a decrease in the
prices of both goods?
a. graph (a)
b. graph (b)
c. graph (c)
d. graph (d)
Figure 4
27. Refer to Figure 4. If income is equal to $120, the price of good y is
a. $1
b. $2
c. $3
d. $4
28. Suppose a consumer spends her income on two goods: music CDs and DVDs. If the
consumer has $200 to allocate to these two goods, the price of a CD is $10, and the
price of a DVD is $20, what is the maximum number of CDs the consumer can
purchase?
a. 10
b. 20
c. 40
d. 50
29. Budget constraints exist for consumers because
a. opportunity cost.
b. prices and incomes are inversely related.
c. they have to pay for goods, and they have limited incomes.
d. for nothing.
30. Indifference curves graphically represent
a. an income level in the market.
b. time constraints faced by individuals.
c. an individual's preferences.
d. the relative price of commodities.
31. The slope of an indifference curve is
a. the rate of change of consumer's preferences.
b. the marginal rate of preference.
c. the marginal rate of substitution.
d. always equal to the slope of the budget constraint.
32. The rate at which a consumer is willing to exchange one good for another, and maintain
a constant level of satisfaction, is called the
a. relative expenditure ratio.
b. ratio of marginal product.
c. marginal rate of substitution.
d. relative price ratio.
33. A family on a trip budget $800 for meals and hotel accommodations. Suppose the price
of a meal is $40. In addition, suppose the family could afford a total of 8 nights in a hotel
if they don’t buy any meals. How many meals could the family afford if they gave up two
nights in the hotel?
a. 1
b. 2
c. 5
d. 8
34. A consumer
a. is equally satisfied with any indifference curve.
b. prefers indifference curves with positive slopes.
c. prefers higher indifference curves to lower indifference curves.
d. is generally unable to place all consumption bundles on an indifference curve.
35. Which of the following is a property of indifference curves?
a. Indifference curves cross to explain higher preferences.
b. Indifference curves have positive slopes.
c. Indifference curves are vertical.
d. Indifference curves are bowed in toward the origin.
36. When indifference curves are bowed in toward the origin,
a. a consumer needs to decrease a consumption of good Y to increase the consumption
for good X.
b. a consumer's willingness to trade away money they have in abundance diminishes.
c. an increase in income will not shift the indifference curve away from the origin.
d. a decrease in income will shift the indifference curve to the right.
37. The relationship between the marginal utility that Wendy gets from eating beef burgers
and the number of beef burgers she eats per month is as follows:
Beef burgers 1 2 3 4 5 6
Marginal Utility 20 16 12 8 4 0
Wendy receives 3 units of utility from the last dollar spent on each of the other goods
she consumes. If beef burgers cost $4 each, how many beef burgers will she consume
per month if she maximizes utility?
a. 2
b. 3
c. 4
d. 5
38. What are the two effects of a change in a price that a consumer experiences?
a. the income effect and the budget effect.
b. the complement effect and the substitute effect.
c. the price effect and the preference effect.
d. the income effect and the substitution effect.
39. Assume that a college student purchases only coffee and Snickers. If coffee is an inferior
good and Snickers is a normal good, then the income effect associated with an increase
in the price of a Snickers will result in
a. a decrease in the consumption of Snickers and a decrease in the consumption of
coffee.
b. a decrease in the consumption of Snickers and an increase in the consumption of
coffee.
c. an increase in the consumption of Snickers and an increase in the consumption of
coffee.
d. an increase in the consumption of Snickers and a decrease in the consumption of
coffee.
40. Which effect of a price change moves the consumer along the same indifference curve to
a point with a new marginal rate of substitution?
a. substitution effect.
b. budget effect.
c. preference effect.
d. income effect.
Section B - Short Answer
1. Answer the following questions based on the table. A consumer is able to consume the
following bundles of rice and beans when the price of rice is $2 and the price of beans is
$3.
RICE BEANS
12 0
6 4
0 8
a. How much is this consumer's income?
b. Draw a budget constraint given this information. Label it B.
c. Construct a new budget constraint showing the change if the price of rice falls $1.
Label this C.
d. Given the original prices for rice ($2) and beans ($3), construct a new budget
constraint if this consumer's income increased to $48. Label this D.
2. Draw a budget constraint that is consistent with the following prices and income.
Income = 200
PY = 50
PX = 25
a. Demonstrate how your original budget constraint would change if income increases
to 500.
b. Demonstrate how your original budget constraint would change if PY decreases to
20.
c. Demonstrate how your original budget constraint would change if PX increases to 40.
3. The following table shows Thomas’s utility from consuming two different food-salad
and sausage roll. The price of a bowl is RM3, and the price of a sausage roll is RM2.
Quantity Salad Sausage Roll
(units) Total Marginal Marginal Total Marginal Marginal
Utility Utility Utility Utility Utility Utility
(per RM) (per RM)
1 15 20
2 10 10
3 9 6
4 6 5
5 5 4
6 3.33 1
a. Fill up the above table.
b. List down the possible combinations of both goods.
c. If Thomas has RM10 to spend on salads and sausage rolls, how many units of each
good should he purchase?
d. Thomas’s pocket money now increased from RM10 to RM18. If he spends only on
these two goods, what is the optimal consumption bundle?
4. Azura consumes Good J and Good K. Her consumption yields the following total
utility, as shown in the given table. Azura has RM52 to spend. Suppose that the prices
of goods J and K are RM8 and RM4, respectively.
Quantity (units) Total Utility
Good J Good K
1 56 32
2 104 60
3 136 84
4 160 104
5 170 116
6 176 126
7 178 134
a. Calculate the marginal utility for each good.
b. How many units of goods J and K should Azura buy to maximize her utility with the
income of RM52?
c. What is the total utility received by Azura at equilibrium?
d. If Azura's income decreased to RM28, what quantities of goods J and K should she
purchase to maximize her utility?
e. What is Azura's new total utility at equilibrium?
Section C – Short Essay
1. State and explain between cardinal and ordinal approach. (4 marks)
2. Explain 2 characteristics of indifference curve. (4 marks)
