Test Bank For Principles of Micro Economics 2nd by Openstax

Test Bank for Principles of Micro-Economics 2nd by Openstax
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Chapter 6 Test Bank
Multiple Choice Questions
1. The term _________________ refers to the additional utility provided by one additional unit of
consumption.
A. utility
B. marginal utility
C. added utility
D. Giffen utility
Answer: B Reference:
Explanation:
Type: Multiple Choice Difficulty: Easy Category: Remember
2. The term ___________________ is used to describe the common pattern whereby each
marginal unit of a consumed good provides less of an addition to utility than the previous unit.
A. diminishing marginal utility

B. marginal utility pattern
C. marginal income utility
D. decreasing marginal utility
Answer: A Reference:
Explanation:
3. The ________________ arises when a price changes because consumers have an incentive
to consume less of the good with a relatively higher price and more of the good with a relatively
lower price.
A. income effect
B. substitution effect
C. backward-bending supply curve
D. preferences effect
Explanation:
4. Which of the following occurs simultaneously with an income effect?
A. backward-bending supply curve
This file is copyright 2018, Rice University. All Rights Reserved.

B. Giffen good effect
C. preferences effect
D. substitution effect
Answer: D Reference:
Explanation:
Type: Multiple Choice Difficulty: Easy Category: Understand
5. The term _____________ describes a situation where a ________________ causes a

reduction in the buying power of income, even though actual income has not changed.
A. substitution effect; lower price

B. intertemporal budget; higher price
C. income effect; higher price
D. intertemporal budget; lower price
Answer: C Reference:
Explanation:
Type: Multiple Choice Difficulty: Medium Category: Remember
6. In microeconomic terms, the ability of a good or a service to satisfy wants is called:
A. opportunity cost.
B. utility.
C. utility maximization.
D. profit potential.
Explanation:
7. Marginal utility can:
A. be positive or negative, but not zero

B. decrease, but not become negative
C. be positive, negative, or zero
D. increase positively, but not negatively
Explanation:
Type: Multiple Choice Difficulty: Medium Category: Understand

8. Economists are able to determine total utility by:
A. multiplying the marginal utility of the first unit consumed by the number of units consumed.
B. multiplying the marginal utility of the last unit consumed by the number of units consumed.
C. multiplying the marginal utility of the last unit consumed by the unit price.
D. summing up the marginal utilities of each unit consumed.
Explanation:
9. When economists attempt to predict the spending patterns of U.S. households, they will
typically view the _____________________ as a primary determining factor that influences the
individual consumption choices that each will make.
A. income level of each household

B. national average spending level
C. national average savings level
D. nation's perennial political debate
Explanation:
10. Economic theory offers ____________________ about the full range of possible events and
responses, which can prevent __________________ about how households will respond to
changes in prices or incomes.
A. one budget constraint theory; unrealistic possibilities

B. a systematic way of thinking; misguided conclusions
C. two budget constraint theories; misguided possibilities
D. systematic consumption choices; unrealistic conclusions
Explanation:
11. How does the U.S. Bureau of Labor Statistics gather information with regard to the typical
consumption choices of Americans?
A. Consumer Spending Survey

B. Consumer Income Budget Survey
C. Consumer Expenditure Survey

D. Consumer Income Survey
Explanation:
12. Approximately what portion of annual consumption is typically spent by American households
on shelter?
A. one-fourth
B. one-half
C. one-quarter
D. one-third
Explanation:
13. Jay and Jen are married with two children. They are preparing a household budget for the
coming year. Based on statistical information for American households, approximately what
portion of this family's annual consumption will most likely be budgeted for food and vehicle
expenses?
A. one-fourth
B. one-third
C. one-quarter
D. two-thirds
Explanation:
14. Which of the following is most likely to cause variation in American household spending
patterns?
A. differing levels of family income

B. geographical location of households
C. each household's personal preferences
D. each of the above will cause a variation
Explanation:

Type: Multiple Choice Difficulty: Medium Category: Analyze
15. Refer to the above diagram. In this instance:
A. the BC line is diagonal because the amount spent on both goods is less or equal to income.
B. the consumer will find that every point along the I3 line is outside the budget constraint.
C. the consumer will find the highest utility where x and y just touch the I2 line.
D. all of the above and the consumer can choose any point on or below the budget constraint line
BC.
Explanation:

16. Refer to the budget line shown in the diagram above. At point U, __________.
A. P1/P2 = MU1/MU2
B. pizza is an inferior product
C. P2/P1 = MU2/MU1
D. roses are an inferior product
Explanation:
17. Kim has $24 per week in her entertainment budget. She splits her time between going to the
movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility
from each of these activities is set out in the table below. What is Kim's total utility maximizing
point?
Movies Total Utility Yoga Classes Total Utility

0 0 0 0
1 40 1 30
2 75 2 55
3 105 3 76
4 130 4 92
5 160 5 106
6 114
7 116
8 117
A. 0 movies, 8 yoga classes

B. 1 movie, 5 yoga classes
C. 2 movies, 2 yoga classes
D. 3 movies, 0 yoga classes
Explanation:
Type: Multiple Choice Difficulty: Hard Category: Apply

18. Refer to the diagram above. What is the significance of the point marked L1 at the bottom
upward-sloping portion of the individual labor supply (2) curve?
A. as wages increase over this range, the quantity of hours worked also increases.
B. as wages increase over this range, the quantity of hours worked changes very little.
C. as wages increase over this range, the quantity of hours worked actually decreases.
D. as wages increase of this range, the quantity of hours worked is inelastic.
Explanation:

19. Refer to the diagram above. What is the significance of the point at the top of the backward
bending of the supply curve marked L3?
A. as wages increase over this range, the quantity of hours worked also increases.
B. as wages increase over this range, the quantity of hours worked changes very little.
C. as wages increase of this range, the quantity of hours worked is more inelastic.
D. as wages increase over this range, the quantity of hours worked actually decreases.
Explanation:
20. When Marietta chooses to only purchase a combination of goods that lie within her budget
line, she:
A. is decreasing utility.
B. is maximizing utility.
C. likely has negative savings.
D. must reduce the quantity.
Explanation:
21. In terms of microeconomic analysis, what is the function of "utils"?
A. a form of budget constraint

B. applies to changes in income
C. a measurement of utility
D. relates to a consumers original choice
Explanation:
22. Garth inherited $25,000. He needs to decide now much to spend now and how much to save
for later. If he saves the money, then he can earn 15% interest on the total before he spends it.
Using the information about his marginal utility in the table below, Garth should:
Present Marginal Utility Future Marginal Utility

Consumption from Present Consumption from Future
Consumption Consumption
0 - 0 -
$5,000 500 $5,750 900

$10,000 400 $11,500 800
$15,000 300 $17,250 700
$20,000 200 $23,000 600
A. spend $5,000 now and $22,250 in the future

B. spend nothing now and $28,750 in the future
C. spend $15,000 now and $13,500 in the future
D. spend $10,000 now and $16,750 in the future
Explanation:
23. The most common pattern for marginal utility is ____________________.
A. diminishing marginal utility

B. a budget constraint model
C. a long-term perspective theoretical model
D. substitute consumption
Explanation:
24. Which of the following is considered to be a tell-tale signal that the point with the highest total
utility has been found?
A. the marginal utility per dollar is the same for both goods
B. the marginal utility per dollar is controlled by trade-offs
C. the quantities demanded change so total utility rises
D. the demand curves are flatter reducing quantity
Explanation:
25. As a general rule, utility-maximizing choices between consumption goods occur where the:
A. rise in income has created the greatest utility.

B. price ratio and marginal utilities ratio of two goods is equal.
C. higher-income households have the greatest satisfaction.

D. constraints on budget expenditures has fallen substantially.
Explanation:
26. The marginal utility of two goods changes ______________.
A. with the quantities consumed

B. for the better, if taxes are imposed
C. if they are intertemporal choices
D. if the mother controls the household budget
Explanation:
27. The key assumption that accompanies the use of numbers for measuring utility is that:
A. utility cannot be measured by an outside party.

B. utility can be perfectly measured.
C. individuals choose based on their preferences.
D. people make consumption decisions.
Explanation:
28. The step-by-step process of finding the choice with highest total utility involves a comparison
of the:
A. budget constraint and low-income housing expenses.

B. marginal utility gained and lost from different choices along the budget constraint.
C. household consumption choice budget and the labor-leisure budget using an utilimometer.
D. various categories of economic proverbial wisdom.
Explanation:

29. Bob budgets $12 a week for entertainment. He splits his time between going to the movies
and going to the gym. Each movie costs $3 and each session at the gym also costs $3. The total
utility from each of these activities is shown in the table below. Bob’s utility maximizing point is:
Movies Total Utility Gym Costs Total Utility

0 0 0 0
1 30 1 50
2 55 2 85
3 76 3 115
4 92 4 107
5 103 5 111
6 114
7 115
A. 3 movies; 3 gym workout sessions

B. 4 movies; 0 gym workout sessions
C. 4 movies; 2 gym workout sessions
D. 1 movie; 5 gym workout sessions
Explanation:
30. The government wants to make medicare benefits available to more people, but to achieve
this goal, it needs to make cuts in the existing medicare budget. The two areas where they are
considering cuts are non-essential elective surgery and 6-12 month mental health care programs.
Applying the concept of diminishing marginal utility, the budget cuts should be made for spending
on:
A. mental health therapy due to its higher marginal return rate.

B. elective surgery due to its lower marginal return rate.
C. both programs, which have the same marginal return rate.
D. neither can be compared by measuring marginal utility.
Explanation:
Type: Multiple Choice Difficulty: Hard Category: Analyze
31. Alex has $18 per week in his entertainment budget. He splits his time between going to the
movies and renting video games. Each movie costs $6 while each video game rental costs $3.

The measured total utility of each of his activities is shown in the table below. What is Alex's utility
maximizing point?
Movies Total Utility Video Game Rentals Total Utility

0 0 0 0
1 40 1 30
2 75 2 55
3 105 3 76
4 130 4 92
5 160 5 106
6 114
7 116
A. 2 movies, 2 video game rentals

B. 0 movies, 6 video game rentals
C. 5 movies, 7 video game rentals
D. 1 movie, 4 video game rentals
Explanation:
32. For lunch, Maria eats only salads or vegetarian burgers. Her weekly food budget is $36. Each
salad costs $6 and each vegetarian burger costs $3. When deciding how much of each good to
buy, Maria knows that 2 salads and 4 vegetarian burgers will give her a utility of 8. Maria’s utility-
maximizing point is:
A. 6 salads, 1 vegetarian burger

B. 4 salads, 6 vegetarian burgers
C. 3 salads, 6 vegetarian burgers
D. 2 salads, 8 vegetarian burgers
Explanation:
33. For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48.
Each salad costs $6 and each smoothie costs $3. When deciding how much of each good to buy,
Wendy knows that 2 salads and 4 smoothies will give her a utility of 8. What is Wendy’s utility-
maximizing point?
A. 1 salad, 14 smoothies

B. 6 salads, 4 smoothies
C. 5 salads, 6 smoothies
D. 4 salads, 8 smoothies
Explanation:
34. Rick eats only french fries and burgers at his office cafeteria. His weekly lunch budget is $48.
Each burger costs $6 and each order of fries costs $3. When deciding how much of each good to
buy, Rick knows that 2 burgers and 4 orders of french fries will give him a utility of 8. At his utility-
maximizing point, Rick's utility is:
A. 32
B. 48
C. 40
D. 24
Explanation:
35. Josh's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6
and each burger costs $3. Josh knows that 2 pizzas and 4 burgers will give him a utility of 8.
What is Josh’s utility-maximizing point?
A. 0 pizzas, 8 burgers
B. 3 pizzas, 2 burgers
C. 2 pizzas, 4 burgers
D. 4 pizzas, 1 burger
Explanation:
36. Jed's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6
and each burger costs $3. Jed knows that 2 pizzas and 4 burgers will give him a utility of 8. At his
utility-maximizing point, Jed's utility is:
A. 4
B. 8
C. 6
D. 10

Explanation:
37. In May and June, Tammy spent all her clothing budget on bathing suits and beach bags.
Each bathing suit cost $75. At Tammy’s optimal choice, her marginal utility from the last bathing
suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This
means that each handbag must cost:
A. $50
B. $25
C. $100
D. $150
Explanation:
38. Todd is a cattle rancher. In June and July he spent his clothing budget on jeans and cowboy
hats. Each pair of jeans cost $50 and each hat cost $100. At Todd’s optimal choice, his marginal
utility from the last pair of jeans purchased is 200. This means that his marginal utility from the
last cowboy hat purchased is:
A. 550
B. 500
C. 450
D. 400
Explanation:
39. The typical pattern revealed in a budget constraint model shows that as the quantity
consumed rises,
A. total utility rises, but marginal utility falls.

B. marginal utility increases.
C. total utility decreases, but marginal utility rises.
D. total utility decreases.
Explanation:

40. Refer to the diagram above. Which of the following is a true statement?
A. backward-bending supply curves for labor are typical in the short run
B. workers react to higher wages by working more hours in the long run
C. long run reaction to higher wages is an increase in hours worked to gain more income
D. backward-bending supply curves for labor are not typical in the short run
Explanation:
41. Even with wage increases, the supply curve of labor is most often inelastic for which of the
following?
A. part-time workers
B. full-time workers
C. lawyers
D. massage therapists
Explanation:
42. Substitution and income effects of a change in price of a good may be used to explain the:

A. direct relationship between price and quantity purchased.
B. inverse relationship between price and quantity demanded.
C. direct relationship between price and quantity supplied.
D. direct relationship between income and demand.
Explanation:
43. An inferior good is a product:
A. for which demand increases as income increases.

B. for which there is no demand.
C. for which demand decreases as income increases.
D. that has an upward sloping demand curve.
Explanation:
44. A decrease in consumer preference for a product, other things being equal, will cause:
A. a decrease in supply.
B. market demand to shift to the left.
C. market demand to shift to the right.
D. quantity demanded is not a price function.
Explanation:
45. In the U.S., the amount in savings contributed to IRAs rose from $239 billion in 1992 to
$3,667 billion by 2005, while overall savings actually dropped from low to lower. Evidence
suggests that, in the economy as a whole, increased savings in these retirement accounts:
A. are the negative result of a change in wage levels and a higher work effort.
B. the result of personal preferences and intertemporal budget constraints.
C. are being offset by negative savings or less savings in other kinds of accounts.
D. the result of a higher interest rates and preferences about present consumption.
Explanation:

46. The theoretical model of the intertemporal budget constraint for the U.S. economy as a whole
suggests that the most common pattern seems to be that:
A. the quantity of savings automatically adjusts to changes in the rate of return.

B. the quantity of savings doesn’t adjust much to changes in the rate of return.
C. the result of a higher rate of return is a higher quantity of saving.
D. the result of a lower rate of return is a lower quantity of saving.
Explanation:
47. During a severe recession, the government issued food stamps that could only be used to
acquire food to a greater number of families. The budget line graph shows food on the horizontal
axis and everything else on the vertical axis. The government expects that issuing the food
stamps will cause each family's budget constraint line to:
A. pivot out along the horizontal axis.

B. pivot out along the vertical axis.
C. shift to the left.
D. shift to the right.
Explanation:
48. The government distributes food stamps that can only be used to acquire food to low-income
families. The budget line graph will show food on the horizontal axis and everything else on the
vertical axis. After receiving food stamps, Ted's family is able to consume the same amount of
food. The new consumption point for Ted's family will be:
A. on the new budget line, directly above the old consumption point.
B. on the new budget line, above and to the right of the old consumption point.
C. on the new budget line, directly to the right of the old consumption point.
D. remain precisely the same as the old consumption point.
Explanation:

49. Mark’s annual after tax income earnings are $50,000. His $40,000, 3-year CD is maturing in
the near future and he is planning to spend the interest on a 6 week holiday after that. His
investments can earn a total of 10% before he starts his trip. If Mark's “present consumption” is
the time he spends working and his “future consumption” is his trip, his optimal choice from the
table below is to:
Present Total Utility from Future Total Utility from

Consumption Present Consumption Consumption Future Consumption
0 0 0 0
$10,000 600 $11,000 3,000
$20,000 1,100 $22,000 4,000
$30,000 1,500 $33,000 4,800
$40,000 1,800 $44,000 5,400
$50,000 2,000 $55,000 5,800
$60,000 2,100 $66,000 6,000
$77,000 6,100
A. spend $50,000 now and consume nothing in the future

B. spend nothing now and consume $77,000 in the future.
C. spend $10,000 now and consume $44,000 in the future.
D. spend $20,000 now and consume $33,000 in the future
Explanation:
50. Molly attends college and works part-time job as a telemarketer. She can work up to 40 hours
each week at her job, which pays $8 per hour. The table below shows her utility from different
levels of leisure and income. Molly is currently working 20 hours per week. If she decides to work
30 hours instead, then her marginal utility loss from having less leisure is:
Hours of Leisure Total Utility from Leisure Income Total Utility from Income
0 0 0 0
5 18 40 30
10 34 80 54
15 48 120 72
20 56 160 81
25 60 200 87
30 62 240 90
280 92

A. 18
B. 34
C. 3
D. 6
Explanation:
51. Troy has a part-time job in a book store to help pay for his college. He can work up to 30
hours each week at his job, which pays $9 per hour. The table below shows his utility from
different levels of leisure and income. Troy currently works 20 hours per week. If he decides to
work 30 hours instead, his marginal utility gain from the additional income is ____.
0 0 0 0
5 18 45 30
10 34 90 54
15 48 135 72
20 56 180 81
25 60 225 87
30 62 270 90
315 92
A. 12
B. 6
C. 3
D. 9
Explanation:
52. Terry attends college and works part-time job in a drug store. She can work up to 40 hours
each week, and is paid $9 per hour. The table below shows her utility from different levels of
leisure and income. If Terry decides to work 20 hours per week, her total utility from both leisure
and income would be:
5 18 45 35

10 34 90 59
15 48 135 77
20 56 180 86
25 60 225 92
30 65 270 98
35 69 315 103
40 72 360 107
A. 142
B. 115
C. 110
D. 179
Explanation:
53. Larry attends college and works part-time job in a grocery store. He can work up to 30 hours
each week at his job, which pays $9 per hour. The table below shows his utility from different
levels of leisure and income. Larry’s utility maximizing choice is to work for:
5 18 45 35
10 34 90 59
15 48 135 77
20 56 180 86
25 60 225 92
30 65 270 98
35 69 315 103
40 72 360 107
A. 2.5
B. 15
C. 20
D. 10
Explanation:

54. Louisa works for a hedge fund company. Her wage increased from $30 per hour to $40 per
hour. She can work up to 50 hours each week. The table below shows her utility from different
levels of leisure and income. Louisa decided to increase her hours of work from 10 to 20 hours
per week after receiving her raise. As a result, her marginal utility gain from having more income
will now be:
0 0 0 0
10 27 300 42
20 52 400 74
30 71 600 98
40 84 800 110
50 90 900 118
1200 122
1500 124
1600 126
2000 127
A. 74
B. 36
C. 13
D. 12
Explanation:
55. Bruce works for a large bank. His wage increased from $30 per hour to $40 per hour. He can
work up to 50 hours each week. The table below shows her utility from different levels of leisure
and income. If Bruce decides to increase his weekly hours of work from 10 to 20 hours after his
raise, the marginal utility loss from having less leisure is:
0 0 0 0
10 29 300 40
20 54 400 72
30 73 600 96
40 86 800 108
50 92 900 116
1200 120

1500 122
1600 124
2000 125
A. 8
B. 27
C. 21
D. 15
Explanation:
56. Janie works for an accounting firm. Her wage increased from $30 per hour to $40 per hour.
She can work up to 50 hours each week. The table below shows her utility from different levels of
leisure and income. Before her raise, if Janie decreases her hours of work from 30 to 20 hours
per week, the marginal utility gain from having more leisure is:
0 0 0 0
10 29 300 40
20 54 400 72
30 75 600 96
40 86 800 108
50 92 900 116
1200 120
1500 122
1600 124
2000 125
A. 29
B. 21
C. 13
D. 7
Explanation:

57. Aleah is an electrical engineer. Her wage increased from $30 per hour to $40 per hour. She
can work up to 50 hours each week. The table below shows her utility from different levels of
leisure and income. If Aleah decreased her hours of work from 30 to 20 hours per week before
her raise, the marginal utility loss from having less income is:
0 0 0 0
10 29 300 42
20 54 400 74
30 73 600 96
40 86 800 113
50 92 900 119
1200 122
1500 124
1600 126
2000 127
A. 23
B. 56
C. 19
D. 100
Explanation:
58. Celia works as an articling student with a large law firm. Her wage increased from $30 per
hour to $40 per hour. She can work up to 50 hours each week. The table below shows her utility
from different levels of leisure and income. If Celia continues to work 50 hours per week after her
raise, the raise will increase her utility by:
0 0 0 0
10 29 300 42
20 54 400 74
30 73 600 96
40 86 800 113
50 92 900 119
1200 124
1500 128

1600 129
2000 131
2500 132
A. 3
B. 4
C. 12
D. 32
Explanation:
59. The _________________ budget constraint shows the tradeoff between present and future
consumption.
A. inflation
B. utility-maximizing
C. intertemporal choice
D. time-value of money
Explanation:
60. Saving money is a(n) ____________________, because it involves less consumption in the
present, but the ability to consume more in the future.
A. budget constraint
B. intertemporal choice
C. risk premium
D. opportunity cost
Explanation:
Essay Questions
1. Briefly explain the relevant portions shown in a backward sloping labor supply curve. How are
the various possibilities derived?

Reference:
Explanation: The bottom upward-sloping portion of the labor supply curve shows that as wages
increase over this range, the quantity of hours worked also increases. The middle, nearly vertical
portion of the labor supply curve shows that as wages increase over this range, the quantity of
hours worked changes very little. The backward-bending portion of the labor supply curve at the
top shows that as wages increase over this range, the quantity of hours worked actually
decreases. All three of these possibilities can be derived from the how a change in wages causes
movement in the labor-leisure budget constraint, and thus different choices by individuals.
Type: Essay Difficulty: Hard Category: Understand
2. Briefly explain what the economic analysis of household consumption behavior is based on. Do
economists judge household utility?
Reference:
Explanation: Economic analysis of household behavior is based on the assumption that people
seek the highest level of utility or satisfaction. Individuals are the only judge of their own utility.
Type: Essay Difficulty: Easy Category: Understand
3. Briefly discuss how greater consumption of a good affects utility.
Reference:
Explanation: In general, greater consumption of a good brings higher total utility. However, the
additional utility received from each unit of greater consumption tends to decline in a pattern of
diminishing marginal utility.
Type: Essay Difficulty: Medium Category: Understand
4. Briefly describe how the utility-maximizing choice on a consumption budget constraint can be
found.
Reference:
Explanation: The utility-maximizing choice on a consumption budget constraint can be found in

several ways. You can add up total utility of each choice on the budget-line and choose the
highest total. You can choose a starting point at random and compare the marginal utility gains
and losses of moving to neighboring points—and thus eventually seek out the preferred choice.
Alternatively, you can compare the ratio of the prices of goods 1 and 2 to the ratio of the marginal
utilities of goods 1 and 2 and apply the rule that at the optimal choice, the ratio of prices must
equal the ratio of marginal utilities: P1/P2 = MU1/MU2.
5. What does the budget constraint framework suggest when income rises?

Reference:
Explanation: When income rises, households will demand a higher quantity of normal goods, but
a lower quantity of inferior goods.
6. What does the budget constraint framework suggest when price changes? Include a brief
explanation of what the results of price changes will depend on.
Reference:
Explanation: When the price of a good rises, households will typically demand less of that good.
Also, a higher price for one good can lead to more or less of the other good being demanded.
Whether households will demand a much lower quantity or only a slightly lower quantity of that
good with an increased price will depend on personal preferences.
7. Briefly describe the choices a household will choose along a labor-leisure budge constraint and
the results of those choices.
Reference:
Explanation: When making a choice along the labor-leisure budget constraint, a household will
choose the combination of labor, leisure, and income that provides the most utility. The result of a
change in wage levels can be higher work effort, the same work effort, or lower work effort.
8. Briefly discuss the choices typical to households with respect to intertemporal budget
constraint.
Reference:
Explanation: When making a choice along the intertemporal budget constraint, a household will
choose the combination of present consumption, savings, and future consumption that provides
the most utility.
9. Briefly discuss how a higher rate or return or a higher interest rate affects the choices typical to
households with respect to intertemporal budget constraint.
Reference:
Explanation: A higher rate of return or higher interest rate can cause typical households to
choose to contribute a higher quantity of income to saving, retain the same quantity of saving, or

to decrease their quantity of saving, depending on preferences about present and future
consumption.
10. Briefly explain why a graph is used in a budget constraint model between two goods and
include a description of how the graph would appear. Explain the significance of the budget
constraint line and how the marginal utility of the two goods changes. How would a sensible
economizer choose based on marginal comparison between one good and another that costs
twice as much?
Reference:
Explanation: The budget constraint model uses a graph to illustrate the choice between two
goods. The quantity of one good is measured on the horizontal axis and the quantity of the other
good was measured on the vertical axis. The budget constraint line shows the various
combinations of goods that it is possible to buy given a certain level of income. Along the budget
constraint, the prices of the two goods remain the same, so the ratio of the prices doesn’t change.
However, the marginal utility of the two goods changes with the quantities consumed. A sensible
economizer will only pay twice as much for something if, in the marginal comparison, the item
confers twice as much utility.
Test Bank Statistics Summary
Multiple Choice
Category Stats ...
Analyze: 6
Apply: 21
Evaluate: 0
Remember: 14
Understand: 19
Difficulty Stats ....

Easy: 15 Medium: 23 Hard: 25
Total Multiple Choice Questions: 60
True/False
Total True/False Questions: 0
Essay
Category Stats ...
Apply: 0
Understand: 10


Test Bank for Principles of Micro-Economics 2nd by Openstax
Total Essay Questions: 10
All Questions
Category Stats ...
Analyze: 6
Apply: 21
Evaluate: 0
Remember: 14
Understand: 29

Total Questions in Test Bank: 70
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Test Bank For Principles of Micro Economics 2nd by Openstax

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Multiple Choice Questions

Type: Multiple Choice Difficulty: Easy Category: Remember

A. diminishing marginal utility

Type: Multiple Choice Difficulty: Easy Category: Remember

Type: Multiple Choice Difficulty: Easy Category: Remember

4. Which of the following occurs simultaneously with an income effect?

A. backward-bending supply curve

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Type: Multiple Choice Difficulty: Easy Category: Understand

5. The term _____________ describes a situation where a ________________ causes a

A. substitution effect; lower price

Type: Multiple Choice Difficulty: Medium Category: Remember

6. In microeconomic terms, the ability of a good or a service to satisfy wants is called:

Type: Multiple Choice Difficulty: Easy Category: Remember

7. Marginal utility can:

A. be positive or negative, but not zero

Type: Multiple Choice Difficulty: Medium Category: Understand

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Type: Multiple Choice Difficulty: Medium Category: Understand

A. income level of each household

Type: Multiple Choice Difficulty: Medium Category: Understand

A. one budget constraint theory; unrealistic possibilities

Type: Multiple Choice Difficulty: Medium Category: Remember

A. Consumer Spending Survey

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Type: Multiple Choice Difficulty: Easy Category: Understand

Type: Multiple Choice Difficulty: Easy Category: Remember

Type: Multiple Choice Difficulty: Medium Category: Remember

A. differing levels of family income

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15. Refer to the above diagram. In this instance:

Type: Multiple Choice Difficulty: Medium Category: Understand

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Type: Multiple Choice Difficulty: Medium Category: Understand

Movies Total Utility Yoga Classes Total Utility

A. 0 movies, 8 yoga classes

Type: Multiple Choice Difficulty: Hard Category: Apply

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Type: Multiple Choice Difficulty: Medium Category: Understand

This file is copyright 2018, Rice University. All Rights Reserved.

Type: Multiple Choice Difficulty: Medium Category: Understand

Type: Multiple Choice Difficulty: Easy Category: Understand

21. In terms of microeconomic analysis, what is the function of "utils"?

A. a form of budget constraint

Type: Multiple Choice Difficulty: Easy Category: Understand

Present Marginal Utility Future Marginal Utility

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A. spend $5,000 now and $22,250 in the future

Type: Multiple Choice Difficulty: Hard Category: Apply

23. The most common pattern for marginal utility is ____________________.

A. diminishing marginal utility

Type: Multiple Choice Difficulty: Easy Category: Remember

Type: Multiple Choice Difficulty: Easy Category: Remember

A. rise in income has created the greatest utility.

5. The term _ describes a situation where a ____ causes a