Marginal utility is the change in total utility from consuming one more unit of a good.
Correct Answer
True
True. Marginal utility measures the extra satisfaction from one additional unit, found by taking the change in total utility and dividing it by the change in quantity.
Category: Diminishing Marginal Utility
Question 2
Under diminishing marginal utility, total utility falls with each additional unit consumed.
Correct Answer
False
False. Diminishing marginal utility means each extra unit adds less than the one before, so total utility usually keeps rising, only more slowly. Total utility falls only if marginal utility turns negative.
Category: Diminishing Marginal Utility
Question 3
A budget constraint shows the combinations of two goods a consumer can afford with a given income and given prices.
Correct Answer
True
True. The budget constraint, or budget line, marks every combination that spends exactly the available income at current prices. Points inside it are affordable with money left over, and points outside it are not affordable.
Category: Budget Constraint
Question 4
The slope of a budget constraint is determined by the consumer's preferences.
Correct Answer
False
False. The slope of a budget constraint is set by the ratio of the two goods' prices, which shows how much of one good must be given up to get one more of the other. Preferences determine which point on the line the consumer picks.
Category: Budget Constraint
Question 5
A budget line meets each axis at the quantity of that good the consumer could buy by spending all income on it.
Correct Answer
True
True. Each intercept is income divided by that good's price. For example, $56 spent entirely on $7 movies buys 8 movies.
Category: Budget Constraint
Question 6
A utility-maximizing consumer spends first on the good that gives the highest total utility.
Correct Answer
False
False. The consumer spends each dollar where it buys the most marginal utility per dollar, comparing the next unit of each good relative to its price. Total utility does not guide which unit to buy next.
Category: Utility Maximization
Question 7
For a normal good, a rise in income increases the quantity a consumer buys when prices stay the same.
Correct Answer
True
True. A normal good is one whose consumption rises when income rises. Most goods are normal goods.
Category: Income and Price Changes
Question 8
Consumption of an inferior good rises when the consumer's income rises.
Correct Answer
False
False. Consumption of an inferior good falls when income rises, because consumers can now afford alternatives they prefer, such as a new car instead of a used one.
Category: Income and Price Changes
Question 9
A rise in the price of one good can change how much a consumer buys of other goods purchased from the same budget.
Correct Answer
True
True. A higher price for one good rotates the budget line and changes the whole utility-maximizing choice, so spending on other goods can rise or fall as well.
Category: Income and Price Changes
Question 10
When the price of a good rises, the substitution effect leads consumers to buy more of it.
Correct Answer
False
False. The substitution effect leads consumers to buy less of a good whose price has risen, because it is now relatively more expensive than other goods.
Category: Substitution and Income Effects
Question 11
For a normal good, the income effect and the substitution effect of a price increase both reduce the quantity demanded.
Correct Answer
True
True. The substitution effect shifts buying toward relatively cheaper goods, and the income effect lowers purchasing power, which reduces purchases of a normal good. Both push in the same direction.
Category: Substitution and Income Effects
Question 12
Most goods are inferior goods.
Correct Answer
False
False. Most goods are normal goods, whose consumption rises as income rises. Inferior goods, whose consumption falls as income rises, are the exception.
Category: Income and Price Changes
Question 13
Behavioral economics draws on psychology to explain choices that standard economic models do not predict.
Correct Answer
True
True. Behavioral economists study how a person's state of mind shapes decisions, which can explain choices that look inconsistent under the traditional model of a fully informed, consistent decision maker.
Category: Behavioral Economics
Question 14
Traditional economic models assume that people have limited self-control.
Correct Answer
False
False. Traditional models assume people have complete self-control and follow through on their plans. Behavioral economists point out that real people often lack self-control and use strategies to manage it.
Category: Behavioral Economics
Question 15
Behavioral economists have found that people often treat money they find differently from money they earn at a job.
Correct Answer
True
True. Through mental accounting, people may spend found money freely as extra money while guarding earned money closely, even though a dollar is worth the same either way.
Category: Behavioral Economics
Question 16
Economists describe money as fungible, meaning that a dollar's value depends on how it was obtained.
Correct Answer
False
False. Fungible means interchangeable: any dollar can be used in place of any other, no matter how it was obtained. Mental accounting is the behavioral finding that people often act as if this were not so.
Category: Behavioral Economics
Question 17
When workers are enrolled in a retirement savings plan automatically and must opt out to stop saving, most of them opt out.
Correct Answer
False
False. When enrollment is automatic, very few workers opt out, so far more people save than when they must sign up on their own. This shows how the default option shapes choices.
Category: Behavioral Economics
Question 18
Buying cigarettes by the pack rather than the cheaper carton in order to smoke less is an example of a self-control strategy.
Correct Answer
True
True. Smokers who want to cut back may pay a higher price per cigarette by buying single packs, limiting how many are on hand. Traditional models, which assume complete self-control, do not predict this choice.
Category: Behavioral Economics
Question 19
If a consumer gets more marginal utility per dollar from good A than from good B, she can raise her total utility by shifting spending from A to B.
Correct Answer
False
False. She should shift spending from B toward A, the good that gives more marginal utility per dollar. She keeps shifting until the marginal utility per dollar is equal for both goods.
Category: Utility Maximization
Question 20
A change in the price of a good, holding other factors constant, moves the consumer to a different point on her demand curve for that good.
Correct Answer
True
True. The demand curve is built from the utility-maximizing quantity at each price, so a price change alone is a movement along the curve, a change in quantity demanded. Changes in income or tastes shift the curve instead.
Category: Substitution and Income Effects