Utility is the satisfaction or happiness a person gets from the goods and services they consume. The price a person pays for a good is a cost, not a measure of satisfaction. The usefulness of a good as a production input describes a factor of production, not consumer satisfaction. The income a person earns from working sets the budget, but it is not the satisfaction gained from spending it.
Category: Utility Basics
Question 2
Ana says she gets 16 utils from a cup of coffee, and Ben says he gets 8 utils from the same cup. What can an economist conclude from these numbers?
Ana enjoys coffee exactly twice as much as Ben
Nothing about who enjoys it more, since utils are not comparable across people
✓
Ben should give his coffee to Ana
Ana would pay exactly twice as much as Ben for coffee
Correct Answer
Nothing about who enjoys it more, since utils are not comparable across people
Utils are a subjective, personal measure, so one person's utils cannot be compared with another's. Ana enjoys coffee exactly twice as much as Ben treats utils as a shared scale, which they are not. Ben should give his coffee to Ana relies on the same invalid comparison. Ana would pay exactly twice as much as Ben for coffee does not follow, because willingness to pay also depends on income and other options.
Category: Utility Basics
Question 3
A student's total utility from slices of pizza is 10 utils for one slice, 18 utils for two slices and 24 utils for three slices. What is the marginal utility of the third slice?
24 utils
8 utils
6 utils
✓
18 utils
Correct Answer
6 utils
Marginal utility is the change in total utility from one more unit, so the third slice adds 24 - 18 = 6 utils. 24 utils is the total utility of all three slices. 8 utils is the marginal utility of the second slice. 18 utils is the total utility of two slices.
Category: Diminishing Marginal Utility
Question 4
Which statement describes the law of diminishing marginal utility?
Total utility falls with every additional unit consumed
Each additional unit costs more than the one before
Satisfaction rises by the same amount with each unit
Each additional unit adds less satisfaction than the one before
✓
Correct Answer
Each additional unit adds less satisfaction than the one before
The law says that as a person consumes more of a good, each extra unit adds less to total utility than the previous one. Total utility falls with every additional unit consumed is wrong because total utility usually keeps rising, just more slowly. Each additional unit costs more than the one before describes rising cost, not satisfaction. Satisfaction rises by the same amount with each unit describes constant marginal utility.
Category: Diminishing Marginal Utility
Question 5
The first three cups of tea a person drinks give marginal utilities of 10, 8 and 5 utils. What is the total utility of the three cups?
23 utils
✓
5 utils
18 utils
15 utils
Correct Answer
23 utils
Total utility is the sum of the marginal utilities of every unit consumed, so 10 + 8 + 5 = 23 utils. 5 utils is only the marginal utility of the third cup. 18 utils is the total for the first two cups. 15 utils adds the first and third cups and skips the second.
Category: Diminishing Marginal Utility
Question 6
Maya has $60 to spend on two goods. Good A costs $10 and good B costs $5. If she buys 4 units of A and spends all her money, how many units of B does she buy?
8
4
✓
2
12
Correct Answer
4
Four units of A cost 4 x $10 = $40, which leaves $20, and $20 / $5 buys 4 units of B. 8 would cost $40 and push her spending to $80. 2 would leave $10 unspent. 12 is the most B she could buy if she bought no A at all.
Category: Budget Constraint
Question 7
A consumer's budget is spent on T-shirts that cost $14 each and movies that cost $7 each. What is the opportunity cost of one T-shirt?
Half a movie
7 movies
2 movies
✓
14 movies
Correct Answer
2 movies
The money spent on one $14 T-shirt could have bought $14 / $7 = 2 movies, so the T-shirt costs 2 movies. Half a movie inverts the ratio, since it is one movie that costs half a T-shirt. 7 movies confuses the price of a movie with a quantity. 14 movies confuses the price of a T-shirt with a quantity.
Category: Budget Constraint
Question 8
The first slice of pizza gives a student 30 utils and costs $3. The first soda gives 12 utils and costs $2. Which item gives more marginal utility per dollar, and how much?
Soda, at 6 utils per dollar
Pizza, at 30 utils per dollar
Soda, at 24 utils per dollar
Pizza, at 10 utils per dollar
✓
Correct Answer
Pizza, at 10 utils per dollar
Marginal utility per dollar is marginal utility divided by price: pizza gives 30 / 3 = 10 utils per dollar and soda gives 12 / 2 = 6, so pizza gives more. Soda, at 6 utils per dollar has the right figure for soda but it is the lower of the two. Pizza, at 30 utils per dollar ignores the price. Soda, at 24 utils per dollar multiplies by the price instead of dividing.
Category: Utility Maximization
Question 9
At the utility-maximizing choice between two goods with a fixed budget, which condition holds?
Marginal utility per dollar is equal for both goods
✓
Total utility is equal for both goods
Marginal utility is equal for both goods
The same amount is spent on each good
Correct Answer
Marginal utility per dollar is equal for both goods
If one good gave more marginal utility per dollar, shifting spending toward it would raise total utility, so the best choice equalizes marginal utility per dollar. Total utility is equal for both goods is not required at the optimum. Marginal utility is equal for both goods holds only if the two prices are equal. The same amount is spent on each good has no connection to maximizing utility.
Category: Utility Maximization
Question 10
At her utility-maximizing choice, a consumer buys good A at $4 and good B at $2. The last unit of B gives her 10 utils. How many utils does her last unit of A give?
10 utils
20 utils
✓
5 utils
40 utils
Correct Answer
20 utils
At the optimum, MU of A / $4 must equal MU of B / $2 = 10 / 2 = 5 utils per dollar, so the last unit of A gives 5 x 4 = 20 utils. 10 utils assumes marginal utilities are equal, which holds only when prices are equal. 5 utils is the marginal utility per dollar, not the marginal utility. 40 utils multiplies 10 by 4 instead of matching the per-dollar values.
Category: Utility Maximization
Question 11
In the two-good model, why does a utility-maximizing consumer choose a point on the budget line rather than a point inside it?
Points inside the line cannot be afforded
Points inside the line break the law of diminishing marginal utility
Spending the leftover money on either good adds utility
✓
Prices are lower at points on the line
Correct Answer
Spending the leftover money on either good adds utility
A point inside the budget line leaves money unspent, and using it to buy more of either good would add utility, so the consumer moves out to the line. Points inside the line cannot be afforded is wrong because inside points cost less than the budget. Points inside the line break the law of diminishing marginal utility confuses two unrelated ideas. Prices are lower at points on the line is wrong because prices are the same everywhere along a budget line.
Category: Utility Maximization
Question 12
Economists admit that no device can measure utils directly. What does the utility model need in order to work?
A survey that records satisfaction in exact units
Equal satisfaction levels for everyone in a market
Prices that stay fixed over time
Only that people can rank the options they prefer
✓
Correct Answer
Only that people can rank the options they prefer
The model works as long as people can tell which of two choices they prefer, so marginal comparisons can be made without exact numbers. A survey that records satisfaction in exact units is not needed because only the ranking matters. Equal satisfaction levels for everyone in a market is not assumed and cannot be checked. Prices that stay fixed over time is not required, since the model is used precisely to study price changes.
Category: Utility Basics
Question 13
Kimberly spends her budget on concert tickets at $50 and overnight trips at $200. Her yearly budget rises to $2,000 while prices stay the same. Which combination spends the new budget exactly?
20 concerts and 5 trips
✓
16 concerts and 5 trips
24 concerts and 5 trips
20 concerts and 6 trips
Correct Answer
20 concerts and 5 trips
Twenty concerts cost 20 x $50 = $1,000 and five trips cost 5 x $200 = $1,000, for a total of $2,000. 16 concerts and 5 trips costs $1,800 and leaves money unspent. 24 concerts and 5 trips costs $2,200, more than the budget. 20 concerts and 6 trips also costs $2,200.
Category: Income and Price Changes
Question 14
A consumer buys baseball bats, shown on the horizontal axis, and cameras, shown on the vertical axis. The price of bats rises while income and the price of cameras stay the same. What happens to the budget line?
It rotates outward, pivoting on the vertical-axis intercept
It rotates inward, pivoting on the vertical-axis intercept
✓
It shifts inward, parallel to the original line
It rotates inward, pivoting on the horizontal-axis intercept
Correct Answer
It rotates inward, pivoting on the vertical-axis intercept
The most cameras the consumer can buy is unchanged, so the vertical intercept stays put, while the most bats falls, so the line swings inward around the vertical intercept. It rotates outward, pivoting on the vertical-axis intercept would happen if bats became cheaper. It shifts inward, parallel to the original line describes a fall in income. It rotates inward, pivoting on the horizontal-axis intercept would happen if cameras became more expensive.
Category: Income and Price Changes
Question 15
When Lee's income rises, he buys fewer used cars and buys a new car instead. For Lee, what kind of good is a used car?
A normal good
A good with perfectly elastic demand
An inferior good
✓
A good with zero income elasticity
Correct Answer
An inferior good
A good whose consumption falls when income rises is an inferior good, because buyers can now afford alternatives they prefer. A normal good is one whose consumption rises with income. A good with perfectly elastic demand describes the response to price, not income. A good with zero income elasticity would show no change in consumption when income rises.
Category: Income and Price Changes
Question 16
The price of a good rises, and consumers buy less of it partly because it is now more expensive compared with other goods. What is this part of the response called?
The income effect
The endowment effect
The bandwagon effect
The substitution effect
✓
Correct Answer
The substitution effect
The substitution effect is the shift away from a good that has become relatively more expensive and toward goods that are now relatively cheaper. The income effect is the change caused by the loss of purchasing power, not by the change in relative prices. The endowment effect is a behavioral idea about valuing things more once you own them. The bandwagon effect describes buying something because others buy it.
Category: Substitution and Income Effects
Question 17
A higher price for a normal good reduces the buyer's purchasing power even though her paycheck is unchanged. Through this channel, what happens to the quantity of the good she buys?
It falls, because her real income is lower
✓
It rises, because she has more money left over
It stays the same, because her paycheck has not changed
It rises, because the good is now relatively cheaper
Correct Answer
It falls, because her real income is lower
This is the income effect: the higher price means her money buys less, and for a normal good less real income means buying less. It rises, because she has more money left over is wrong because a higher price leaves her less to spend. It stays the same, because her paycheck has not changed ignores the loss of purchasing power. It rises, because the good is now relatively cheaper reverses the change in relative price.
Category: Substitution and Income Effects
Question 18
How does the utility model explain why a demand curve slopes downward?
A higher price raises the marginal utility of every unit of the good
A higher price shrinks the set of affordable choices, so the best choice includes less of the good
✓
A higher price raises income, so buyers switch to other goods
A higher price makes total utility rise faster than spending
Correct Answer
A higher price shrinks the set of affordable choices, so the best choice includes less of the good
Each higher price rotates the budget line inward, and the new utility-maximizing point contains a smaller quantity of the good, so higher prices pair with lower quantities demanded. A higher price raises the marginal utility of every unit of the good is wrong because price does not change the satisfaction a unit gives. A higher price raises income, so buyers switch to other goods is wrong because a higher price lowers purchasing power. A higher price makes total utility rise faster than spending has no basis in the model.
Category: Substitution and Income Effects
Question 19
Most people feel worse about losing $50 than they feel good about finding $50. What do behavioral economists call this pattern?
Mental accounting
Diminishing returns
Loss aversion
✓
Opportunity cost
Correct Answer
Loss aversion
Loss aversion is the tendency for a loss to weigh more heavily than a gain of the same size, a finding associated with Daniel Kahneman and Amos Tversky. Mental accounting is the habit of placing money in separate mental categories. Diminishing returns describes falling extra output from adding more of one input. Opportunity cost is the value of the next best alternative given up.
Category: Behavioral Economics
Question 20
Kim keeps $2,000 in a savings account earning 2 percent interest while carrying $1,000 of credit card debt at 15 percent interest. Which behavioral idea best explains her choice?
The income effect
Diminishing marginal utility
Consumer equilibrium
Mental accounting
✓
Correct Answer
Mental accounting
Mental accounting means treating money in different mental categories as if it were not interchangeable, so Kim protects her savings balance even though paying off the debt would save her far more in interest than the savings earn. The income effect describes a response to a price change. Diminishing marginal utility describes falling extra satisfaction from more of a good. Consumer equilibrium is the utility-maximizing choice of the standard model, which would have her pay off the costly debt.
Category: Behavioral Economics