THEORY OF CONSUMER BEHAVIOR

Practice Problems
Answer Key

1. Complete the table - See below.

Total
Units Marginal
Utility,
consumed Utility, $
$
0 0 ---
1 10 10
2 18 8
3 25 7
4 30 5
5 33 3
6 34 1

a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing
rate?
Total utility clearly increases as more units are consumed. However, the rate of this increase
is not constant. For instance, the first unit increases total utility by 10, third - by 7, sixth - by
1. The numbers illustrating the rate of increase are in the 'Marginal Utility' column.
The correct answer is: Total utility increases, but at a decreasing rate.

b. "A rational consumer will purchase only one unit of the product represented by these data,
since that amount maximizes marginal utility."
The statement is false. As discussed in class, the goal of consumption is to maximize
consumer surplus (not to maximize marginal utility)!!! One of the ways to arrive at the
maximum of consumer surplus is to apply the optimal purchasing rule by comparing the
marginal utility of each unit to price.
Therefore, the fact that the first unit gives the individual the highest marginal utility does not
mean that the individual will buy only the first unit. Everything will depend on the price of the
good. If, for instance, the price is as low as $6, the individual will buy 3 units (according to
the optimal purchasing rule).

c. "It is possible that a rational consumer will not purchase any units of the product
represented by these data."
Yes, it is possible. The statement is true. The individual will buy no units if the utility from
each unit is smaller than the price. Therefore for any price above $10 a rational consumer
with the given utility schedule will not purchase any units.

2. You are willing and able to pay 50 cents for today's "Washburn Review". The cost of
printing the newspaper is 15 cents per copy, but you get one for free. What is your consumer
surplus from the "Washburn Review"?

According to the definition, consumer surplus a person gets from a single unit equals the
difference between the marginal utility derived from the unit and the selling price, CS = MU -
P. In our case, MU = 50c, P = 0, so CS = 50 - 0 = 50.
The information about printing costs is irrelevant.

3. The table below contains information about the total utility Jerry gains from coffee he buys
from the Corner Shop.

Cups of
1 2 3 4 5
coffee
Total
1.50 2.70 3.60 3.60 2.00
Utility, $

3a. Does this example exhibit the Principle of diminishing marginal utility? Explain.

Yes. The easiest way to see this is to calculate the marginal utility of each cup, or how much
each cup adds to the total utility.

Cups of
1 2 3 4 5
coffee
Total
1.50 2.70 3.60 3.60 2.00
Utility, $
Marginal
1.50 1.20 0.90 0 -1.60
Utility, $

The numbers in the bottom row are steadily decreasing, which means each successive cup is
worth less that the previous one.
This is an indication of diminishing marginal utility.

3b. How many cups of coffee will Jerry buy if the price of each cup is $1? Why?

Marginal approach:
For each cup, answer the question: is it worth $1 to me, or is MU>P? Keep buying while the
answer is 'yes'. Do not buy if the answer is 'no'.
Cup #1: 1.50 > 1 - buy
Cup #2: 1.20 > 1 - buy
Cup #3: 0.90 < 1 - don't buy
Jerry will buy two cups.

Aggregate approach:
Calculate Jerry's total consumer surplus for each number of cups purchased by subtracting
the amount he'd have to spend from his total utility.
Then, choose the option with the maximum total consumer surplus.
One cup: 1.50 - 1.00 = 0.50
Two cups: 2.70 - (2 x 1.00) = 0.70
Three cups: 3.60 - (3 x 1.00) = 0.60
Four cups: 3.60 - (4 x 1.00) = -0.40 (note it is negative!)
Five cups: 2.00 - (5 x 1.00) = -3.00 (negative again)
The best option is to buy two cups and get a total surplus in the amount of 70 cents.

3c. How many cups of coffee will he buy if the price of each cup is 50 cents? Why?
Using the marginal approach,
1.50 > 0.50 - buy
1.20 > 0.50 - buy
0.90 > 0.50 - buy
0 < 0.50 - don't buy
Jerry will buy three cups.

1. Marginal utility:
A. is the change in total utility caused by the consumption of an addition unit of a
good.
B. is equal to total utility divided by total consumption.
C. always decreases as consumption increases.
D. is never negative.
E. all of the above.

2. In a given market, consumers' surplus would, all else equal, be increased by:
A. leftward shifts of the demand and supply curves that leave price unchanged.
B. a decrease in supply.
C. an increase in price.
D. an increase in supply.

3. In a competitive market, diminishing marginal utility implies that:

A. the first units bought will contribute the most to consumer surplus.
B. the last units bought will contribute the most to consumer surplus.
C. the higher the price, the greater will be the consumer surplus, all else equal.
D. each unit bought will contribute an equal amount to consumer surplus.
E. nothing, since consumer surplus and marginal utility are totally unrelated.

4. Consumer surplus is:

A. the area above the market price but below the demand curve.
B. a measure of the net welfare buying a particular good gives to consumers.
C. the difference between the dollar amounts people would willingly pay for specific
quantities of goods and the amounts they pay at market prices.
D. less for goods that are luxuries than for necessities.
E. all of the above.

5. Marginal utilities:
A. reflect subjective preferences that are not easily measured.
B. are easily compared between individuals if measured by money.
C. are determined by society as a whole.
D. increase as total utility falls.
E. include electric and gas companies threatened by bankruptcy.

6. Which of the following seems a contradiction to the law of diminishing marginal utility?
A. Ken enjoys his 30th beer of the evening more than his first.
B. Joan finds that the effort associated with preparing for a date exceeds the
enjoyment gained.
C. Howard has a decreasing desire for more wealth the richer he becomes.
D. Natasha must work increasingly hard to cast extra steel ingots as she attempts to
exceed her production quota.
 E. Morris the cat likes catnip more than canned tuna, and canned tuna more than dry
cat food.

7. The consumer maximizes utility whenever spending patterns cause:

A. it to be possible to realize net increases in total utility by buying differently.
B. the marginal utilities of all goods consumed to be equal.
C. conformance with the principle of equal marginal utilities per dollar.
D. total utility to be at its maximum value.
E. marginal utility to be at its maximum value.

8. According to the law of diminishing marginal utility:

A. marginal utility always falls with the extra consumption of a good.
B. a consumer inevitably reaches a point where the additional satisfaction from
consuming each additional unit of a good rises.
C. a consumer inevitably reaches a point where he or she decreasingly values
additional units of a good.
D. utility is easily measured by dollar values.
E. none of the above.

9. When a household is allocating its expenditure among commodity A and all other
commodities so as to maximize total utility, then a decrease in the price of commodity A will
lead the household to buy more of commodity A:
A. so that the marginal utility of a unit of commodity A will increase.
B. because a dollar spent on commodity A will now yield less utility than before the
decrease in price.
C. because a dollar spent on another commodity would now yield more utility if spent
on commodity A.
D. because the marginal utility of a unit of commodity A has increased.

10. If total utility is increasing, marginal utility:

A. must be increasing.
B. must be decreasing.
C. may either be increasing or decreasing, although it must be greater than zero.
D. must be increasing at an increasing rate.
E. none of the above.

11. Marginal utility is a measure:

A. of the total utility derived from consuming marginally beneficial goods.
B. of the additional utility derived through the consumption of an additional unit of a
good.
C. computed by dividing total utility by the number of units of a good consumed.
D. determined strictly by interactions of supply and demand.
E. none of the above.