Economics (McConnell), AP Edition, 20th Edition Chapter (5).docx

Chapter 7: Utility Maximization Multiple-Choice Questions 1. As DeShawn eats his Halloween treats, he gains less and less satisfaction with each additional treat he eats. This situation can be explained by the (A) Law of Supply (B) Law of Diminishing Returns (C) Law of Diminishing Marginal Utility (D) Law of Increasing Opportunity Costs (E) Law of Comparative Advantage (C) The marginal utility falls with each product consumed. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Law of Diminishing Marginal Utility 2. Which of the following statements correctly describes the relationship between marginal utility and total utility? (A) Total utility rises only when marginal utility is greater than total utility. (B) When total utility is greater than marginal utility, marginal utility rises. (C) Marginal utility rises with each unit purchased, while total utility falls with each unit purchased. (D) Marginal utility falls with each unit purchased, while total utility first rises but begins to fall when marginal utility becomes negative. (E) Marginal utility and total utility consistently rise and fall together. (D) As long as marginal utility is positive, it adds to total utility. If marginal utility is negative, it subtracts from total utility. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 3. When Lauren consumes her third bowl of fried rice, her total utility falls. This can only occur if (A) the fried rice is an inferior good (B) the third bowl of fried rice is free (C) Lauren's demand for fried rice is inelastic (D) the marginal utility of her second bowl of fried rice was zero (E) the marginal utility of the third bowl of fried rice is negative (E) A negative marginal utility lowers the total utility from consuming goods. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 4. Because of the Law of Diminishing Marginal Utility (A) firms must lower prices to sell more products (B) prices must rise to entice firms to produce more products (C) government must impose mandatory taxes to avoid the free-rider problem (D) wages must rise to entice more workers to enter the labor force (E) consumers tend to buy more inferior goods when wages rise (A) Because the consumer gains less utility from each additional unit of a product, he will only pay a lower price to obtain that next unit. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Marginal Utility and Demand 5. The Law of Diminishing Marginal Utility explains why (A) the supply curve is upward-sloping (B) the demand curve is downward-sloping (C) a perfectly inelastic demand curve is vertical (D) the production possibilities curve is downward-sloping (E) a perfectly elastic demand curve is horizontal (B) Because marginal utility falls, the price must fall for consumers to be willing to buy more. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Marginal Utility and Demand 6. When Kim owns 3 candles, she has 20 units of total utility. After she purchases another candle, she has 24 units of total utility. What is the marginal utility of the fourth candle? (A) 1/6 of a unit of utility (B) 4 units of utility (C) 11 units of utility (D) 20 units of utility (E) 44 units of utility (B) Total utility increased by 4 units, which is the marginal utility. Difficulty: Easy Style: Applied AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 7. For Products A and B, utility-maximizing equilibrium for the consumer occurs when all income is allocated and when the marginal utility per dollar spent for Product A equals (A) the marginal utility for consuming that quantity of Product A (B) the total utility from consuming units of Product A (C) zero (D) the marginal utility per dollar spent for Product B (E) the total utility from the combined units of Products A and B consumed (D) When all income is allocated, MU/P for Product A = MU/P for Product B. This condition defines consumer equilibrium. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Utility Maximization: Equalizing Marginal Utility per Dollar Book Section: Utility-Maximizing Rule 8. Justin gained 12 units of marginal utility from the last cola he purchased at a price of $2. He gained 10 units of marginal utility from the last bottle of water he purchased for $1. Which statement most accurately describes Justin's situation? (A) Justin has achieved consumer equilibrium. (B) Justin gains more marginal utility from cola than from water, so he should have purchased more cola and less water. (C) Justin gains more marginal utility per dollar from water than from cola, so he should have purchased more water and less cola. (D) Justin gains more marginal utility from cola than from water, so he should only purchase cola. (E) Water is less expensive than cola, so he should only purchase water. (C) Because Justin's MU/P for water is greater than his MU/P for cola, he should have consumed more water and less cola. Both the marginal utility and the price per product must be used to compare products. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Utility Maximization: Equalizing Marginal Utility per Dollar Book Section: Utility-Maximizing Rule 9. When total utility is rising, (A) marginal utility is also rising and is positive (B) marginal utility is also rising but is negative (C) marginal utility is falling but is positive (D) marginal utility is falling and is negative (E) marginal utility is greater than total utility (C) As long as marginal utility (MU) is positive, each successive unit will add to total utility (TU) and total utility will rise. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 10. When marginal utility (MU) for Good A is negative, successive units of Good A will cause (A) total utility to increase at a decreasing rate (B) total utility to decrease at a decreasing rate (C) total utility to increase at an increasing rate (D) total utility to decrease at an increasing rate (E) total utility to neither increase nor decrease (D) The Law of Diminishing Marginal Utility states that each additional until will add less and less to total utility until marginal utility is zero. Thereafter, because each additional unit will subtract from total utility more than the one before, total utility will decrease at an increasing rate. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 11. Assume that an individual has allocated all income between the only two available goods, A and B, and is in consumer equilibrium. Suddenly, the price of Good A increases while the price of Good B and consumer income remain constant. What must this individual do to in order to regain consumer equilibrium? (A) Buy more of Good A to decrease the marginal utility of Good A (B) Buy more of Good B to increase the marginal utility of Good B (C) Buy less of both Good A and Good B (D) Buy more of both Good A and Good B (E) Buy less of Good A and more of Good B (E) To regain consumer equilibrium, this individual needs to buy less of Good A, thus increasing the marginal utility per dollar of Good A, and buy more of good B, thereby decreasing the marginal utility per dollar of good B. By doing so, this individual will return to a new utility-maximizing position. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Utility Maximization: Equalizing Marginal Utility per Dollar Book Section: Utility-Maximizing Rule 12. Both the income and the substitution effects help to determine I. the quantity demanded of a good or service II. the relative expensiveness of a good or service III. the downward-sloping nature of the demand curve (A) I only (B) II only (C) I and III only (D) II and III only (E) I, II, and III (E) Both the income and the substitution effects are factors that help to determine not only the quantity demanded of a good or service and the relative expensiveness of a good or service, but also explain the downward-sloping nature of the demand curve. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Income and Substitution Effects 13. Seeking to maximize the benefits of consumer choice, an individual will consider which of the following? I. The marginal utility derived from each unit of each good or service purchased II. The opportunity cost associated with each additional good or service purchased III. The cost of the time consumed when an additional unit of a good or service is chosen IV. The income of others who might consume an additional unit of a good or service (A) I only (B) II only (C) I, III, and IV only (D) I, II, and III only (E) I, II, III, and IV (D) Seeking to maximize the benefits of consumer choice, an individual will consider the marginal utility derived from each unit of each good or service purchased, the opportunity cost associated with each additional good or service purchased, and the cost of the time consumed when an additional unit of a good or service is chosen. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: Theory of Consumer Behavior 14. The price of an emerald is far higher than the price of a unit of water because (A) the emerald is essential and water is not (B) the emerald is important and water is not (C) the emerald is a necessity and water is not (D) the emerald is relatively more scarce than water (E) the emerald has greater usefulness than water (D) Because emeralds are relatively more scarce than water, an emerald is priced at a level far higher than a unit of water. Scarcity, not necessity, determines the relative prices of goods and services. This relationship is often called the paradox of value. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: The Diamond-Water Paradox 15. If an individual’s income increases while the prices of all goods and services and their marginal utilities remain the same, that individual (A) will buy more goods and services and the quantity demanded for each will increase (B) will buy more normal goods and services and the quantity demanded for each will increase (C) will buy more goods and services and the elasticity of demand for each will decrease (D) will buy more normal goods and services and the demand for each will increase (E) will buy more inferior goods and services and the demand for each will increase (D) If an individual’s income increases while the prices of all goods and services remain the same, that individual will buy more of each normal good or service, and the demand curve for each will shift rightward. This occurs because normal goods and services by definition are those goods and services whose demand will increase when income increases. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: Theory of Consumer Behavior 16. All of the following are characteristics of a consumer’s utility of a good or service except I. subjectivity II. usefulness III. personal (A) I only (B) II only (C) I and III only (D) II and III only (E) I, II, and III (B) Utility and usefulness are not synonymous. An emerald would be of great value to a jeweler but of little usefulness to a cook preparing a meal. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: Terminology 17. Assuming other factors remain the same, if an individual changes the quantity consumed of a good and finds that the marginal utility is positive and increasing, then that individual must be (A) consuming less of that good and total utility is increasing (B) consuming more of that good and total utility is decreasing (C) consuming less of that good and total utility is decreasing (D) consuming more of that good and total utility is increasing (E) consuming less of that good and total utility could be increasing or decreasing (C) If a consumer finds that the marginal utility is increasing, that individual is consuming less of that good and the total utility for that good is decreasing. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 18. If the marginal utility for a good is zero, then (A) total utility can be increased by buying less of that good (B) total utility can be increased by buying more of that good (C) marginal utility can be increased by buying more of that good (D) marginal utility can be decreased by buying less of that good (E) marginal utility can be increased by buying less of that good (E) If marginal utility is zero, total utility is maximized. Any change in the quantity purchased will cause total utility to decrease. However, by buying less of that good, the consumer can increase the marginal utility of that good even through the total utility will fall. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 19. If an individual’s total utility for a good is falling, then (A) marginal utility must also be falling but positive (B) marginal utility could be rising or falling (C) marginal utility could be falling but positive (D) marginal utility must be falling and negative (E) marginal utility must be greater than total utility (D) For total utility to be falling, marginal utility must be negative and falling. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 20. The theory of consumer choice is based on I. rational behavior II. limited income III. unlimited wants IV. scarcity of goods and services (A) I only (B) II only (C) I and III only (D) II and III only (E) I, II, III, and IV (E) The theory of consumer choice is characterized by rational behavior given limited income, unlimited wants, and scarcity of goods and services. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: Consumer Choice and the Budget Constraint 21. The Law of Diminishing Marginal Utility explains why (A) producers must increase wages in order to attract workers into the labor market (B) consumers continue to buy products with perfectly inelastic demand, even when the price increases (C) producers charge higher prices for products that are more scarce (D) consumers derive additional utility from each additional unit of a product they buy (E) producers must lower their prices to sell additional units of a product to a consumer (E) Because consumers derive a lower amount of marginal utility with each additional unit of a product they buy, producers must lower the price of each successive unit to give consumers an incentive to buy it. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Marginal Utility and Demand Use the table below to answer questions 22-25. Assume the price of one cup of tea is $2 and the price of one cup of coffee is $4. Quantity of Tea Total Utility of Tea Quantity of Coffee Total Utility of Coffee 0 0 0 0 1 12 1 20 2 22 2 36 3 30 3 48 4 36 4 56 5 40 5 60 22. Assume the table above reflects the utility Marnisha receives from consuming tea and coffee. How much marginal utility does Marnisha gain from consuming the fourth cup of tea? (A) 2 units (B) 6 units (C) 9 units (D) 36 units (E) 144 units (B) The total utility of tea increases from 30 to 36 utils, an increase in marginal utility of 36 units. Difficulty: Easy Style: Application AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Total Utility and Marginal Utility 23. Assume that Marnisha has $4 available to spend. Marnisha would maximize her total utility by purchasing (A) one cup of tea because the price of tea is lower than the price of coffee (B) one cup of coffee because the total utility of one coffee is greater than the total utility of one tea (C) two cups of tea because the total utility of two teas is greater than the total utility of one coffee (D) one cup of tea and one cup of coffee because the total utility is greater than for two teas (E) no tea and no coffee because marginal utility decreases after the first cup for both products (C) Two teas bring 22 units of total utility, while one coffee brings only 15 units of total utility. While Marnisha would gain more utility from one coffee and one tea, her budget constraint does not allow her to spend $6 to buy them. Difficulty: Medium Style: Application AP Economics Curricular Requirement Microeconomics: Total Utility and Marginal Utility Book Section: Theory of Consumer Behavior 24. Assume that Marnisha has purchased two cups of tea and no coffee. Marnisha would maximize her utility by next purchasing (A) a third cup of tea because the total utility of 30 gained from tea is greater than the 20 gained from the first coffee (B) a third cup of tea because the marginal utility of 10 is less than the marginal utility of 20 gained from the first coffee (C) the first cup of coffee because the marginal utility of 20 is greater than the marginal utility of 10 gained from the third tea (D) the first cup of coffee because the marginal utility per dollar of the first coffee is greater than the marginal utility per dollar of the third tea (E) the first cup of coffee because coffee is more expensive than tea, so it brings additional utility (D) The marginal utility per dollar of the first coffee is 5, while the marginal utility per dollar of the third tea is 4, so Marnisha would maximize her utility by purchasing the coffee next. Difficulty: Hard Style: Application AP Economics Curricular Requirement Microeconomics: Utility Maximization: Equalizing Marginal Utility per Dollar Book Section: Theory of Consumer Behavior 25. Which of the following combinations of purchases would demonstrate that Marnisha has achieved consumer equilibrium? (A) Three teas and two coffees (B) Three teas and four coffees (C) Four teas and two coffees (D) Two teas and two coffees (E) Five teas and five coffees (B) The marginal utility per dollar spent for tea (8 / $2 = 4) equals the marginal utility per dollar spent for coffee (16 / $4 = 4), which defines consumer equilibrium. Difficulty: Hard Style: Application AP Economics Curricular Requirement Microeconomics: Utility Maximization: Equalizing Marginal Utility per Dollar Book Section: Theory of Consumer Behavior Free-Response Question The table below shows the total utility Janet gains from consuming cookies and cupcakes. Assume the price of a cookie is $1 and the price of a cupcake is $2. Janet will spend her entire income of $8 on cookies and cupcakes. (a) Determine the marginal utility of the third cookie. (b) Using the marginal utility per dollar spent for cookies and cupcakes, identify the utility-maximizing quantity of cookies and cupcakes Janet will purchase. (i) Use the mathematical equation for utility maximization to show Janet has maximized her utility by purchasing that combination of goods, (ii) Identify the total utility Janet gains from this purchase. (c) If Janet's income increases by $2, will she purchase one more cupcake or two more cookies to maximize her utility? Explain your reasoning. Free-Response Explanation Calculations of marginal utility and MU/P necessary to answer the free response: 6 points (1 + 3 + 2) (a) 1 point: 1 point is earned for stating that the marginal utility of the third cookie is 6 utils. (b) 3 points: 1 point is earned for stating that Janet will maximize her utility by buying 2 cookies and 3 cupcakes. 1 point is earned for showing the mathematical formula 8/1 = 16/2. 1 point is earned for stating that Janet's total utility from this purchase is 80 utils. (c) 2 points: 1 point is earned for stating that Janet will buy 2 more cookies. 1 point is earned for stating that Janet's total utility will increase by 8 utils if she buys the cookies but only 4 utils if she buys the cupcake. Difficulty: Hard Style: Applied AP Economics Curricular Requirement Microeconomics: Theory of Consumer Choice Book Section: Theory of Consumer Behavior