Question

1. If product "A" is considered a substitute for product "B" by the consumer, then an increase in the price of "A" will eventually result in:

   	A.	an increase in the quantity of "A" demanded
   	B.	an increase in the price of "B"
   	C.	a decrease in the quantity of "B" demanded
   	D.	a decrease in the price of "B"

2. For a demand relationship, the “substitution effect” refers to the inverse relationship between price and:

	A.	Demand by a consumer because when price goes up, his real income goes down.
	B.	Quantity demanded by a consumer due to the change in the opportunity cost of purchasing a product as a result of a change in its price.
	C.	Quantity demanded by a consumer due to the change in real income.
	D.	The change in demand due to a change in the buyer’s nominal income.

3. Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

	A.	Reallocate spending from magazines to newspapers.
	B.	Reallocate spending from newspapers to magazines.
	C.	Be satisfied because he is already maximizing his total utility.
	D.	None of the above

4. Diminishing marginal utility means that

	A.	Ralph will enjoy his second hamburger less than the first one
	B.	the price of two hamburgers is less than twice the price of one
	C.	the utility from eating two hamburgers will be more than twice the utility from eating the first one
	D.	the utility from one hamburger is greater that the utility from two hamburgers

Answer 1

1. a decrease in the price of "B". In this question, options are confusing. When the price of substitute good "A" increases, its demand falls and the price of the substitute good "B" falls by comparing the price of good A. The demand for good B increases.

2. Quantity demanded by a consumer due to the change in the opportunity cost of purchasing a product as a result of a change in its price.

3. Reallocate spending from magazines to newspapers. He is getting the same utility from magazines and newspaper but spending for magazine is higher than the newspaper.

4. Ralph will enjoy his second hamburger less than the first one. When we consume more and more unit a good, the utility derived from it falss continously.