Question

1. As a household consumes more and more of an identical good,

            a) total utility increases at an increasing rate.

            b) total utility eventually decreases.

            c) marginal utility always increases.

            d) marginal utility always decreases.

            e) both b) and d) are correct

2. Which of the following is not an assumption of consumer theory?

            a) some income is saved after consumption

            b) diminishing marginal utility

            c) nonsatiation

            d) all of the above are assumptions of consumer theory

            e) none of the above is an assumption of consumer theory

3. Whenever the level of consumer income increases,

            a) the budget constraint shifts outward and changes slope.

            b) the budget constraint rotates inward.

            c) the budget constraint rotates outward.

            d) the budget constraint shifts outward and maintains its slope.

            e) both c) and d) are correct

Use the following budget constraint for 4-5:

                                                Yams = -4*Xylophones + 24

4. What is the maximum number of xylophones this person can purchase?

            a) between 0 and 3

            b) between 3 and 5

            c) between 5 and 7

            d) between 7 and 9

            e) greater than 9

5. If the price per unit of xylophones is $12 each, what must be the amount of this                                    consumer’s income?

            a) between $50 and $75

            b) between $75 and $150

            c) between $150 and $225

            d) between $225 and $300

            e) greater than $300

Answer 1

1) E is correct. Following the law of diminishing marginal utility, additions to the total utility goes on falling and eventually turn negative when more and more units of a good are consumed. This suggests that while marginal utility decreases continuously, total utility increases at a decreasing rate before finally falling

2) A is correct. It is not necessary that some income is always saved. For borrowers, income is spent completely and even borrowed for consumption

3) D is correct. Income increase does not change slope because it changes the intercept

4) C is correct

5) A is correct.