Tutorial 4 Questions

ECO501 Tutorial 4
Activity 4.1 – The Budget Line

Do the multiple choice and discussion questions below
Part A: Multiple Choice Questions
1) A budget line shows the

A) quantities of goods a buyer can purchase with given income and prices.
B) relationship between price and quantity demanded.
C) total utility a consumer realizes from consuming different quantities of a good.
D) quantities of consumption that maximizes marginal utility.
E) the prices of the two goods a buyer can purchase.
2) A consumption point inside the budget line

A) is unaffordable.
B) is possible to afford but has some unspent income.
C) shows that the consumer has chosen to spend all of his or her income on both products.
D) shows that the consumer spends income on only one of the goods.
E) is affordable and, because it is inside the budget line, means that all the person's budget has been
spent.
3) Which of the following statements is correct?

A) Consumers have the ability to buy everything they desire.
B) A consumer's budget line shows the limits to what a consumer can buy.
C) A consumer's budget line shows the goods with the highest marginal utilities.
D) Rich consumers are unaffected by prices.
E) A budget line changes ONLY IF the person's budget changes.
4) The budget line is the boundary between

A) preferred and nonpreferred consumption combinations.
B) affordable and unaffordable consumption combinations.
C) goods and bads.
D) income and expenditure.
E) income and consumption.
5) Timmy makes $100 per week as a taxidermist. He spends all this income to buy pizza and hair gel.
The price of a pizza is $10 and the price of a bottle of hair gel is $4. If Timmy buys 5 bottles of hair
gel, then he buys ________ pizzas.
A) 10
B) 4
C) 8
D) 20
E) None of the above answers is correct.
6) Timmy makes $100 per week as a taxidermist. He spends all this income to buy pizza and hair gel.
The price of a pizza is $10 and the price of a bottle of hair gel is $4. If Timmy buys 6 pizzas per week,
how many bottles of gel can he purchase?
A) 10
B) 60
C) 20
D) 40
7) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out of
tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each
rose bush costs $10. Sarah will be at what point on her budget line if she spends $200 per week on
sushi?
A) Point a
B) Point b
C) Point c
D) Point d
E) Point f
rose bushes?
A) Point a
B) Point b
C) Point c
D) Point f
E) Point e
rose bushes?
A) Point a
B) Point b
C) Point c
D) Point f
E) Point e
10) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out
of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each
rose bush costs $10. Sarah is NOT able to purchase the combination of
A) 50 roses bushes and 0 pieces of sushi.
B) 20 rose bushes and 200 pieces of sushi.
C) 0 roses bushes and 300 pieces of sushi.
D) 30 roses bushes and 300 pieces of sushi.
E) None of the above answers is correct because Sarah is able to purchase all the listed combinations
of roses and sushi.
11) The figure above shows a consumer's budget line for sodas and DVD rentals. Point a represents
an
A) affordable combination of sodas and DVDs that spends the entire budget.
B) affordable combination of sodas and DVDs that does not spend the entire budget.
C) unaffordable combination of sodas and DVDs.
D) affordable combination of sodas and DVDs but whether it spends the entire budget cannot be
determined from the figure.
12) The figure above shows a consumer's budget line between sodas and DVD rentals. Point b
represents an
D) affordable combination of sodas and DVDs but whether it spends the entire budget cannot be
13) The figure above shows a consumer's budget line between sodas and DVD rentals. Point c
represents an
D) affordable combination of sodas and DVDs, but whether it spends the entire budget cannot be
14) The figure above shows a consumer's budget line between sodas and DVD rentals. Point d
represents an
D) affordable combination of sodas and DVDs, but whether it spends the entire budget cannot be
15) Bobby buys cat food for his cat, Pearl. If the price of cat food falls, then Bobby's budget line will
A) rotate outward and its slope will change.
B) rotate inward and its slope will change.
C) shift outward and its slope will not change.
D) shift inward and its slope will not change.
E) either rotate or shift outward depending on whether cat food has positive or negative marginal
utility.
16) An increase in the price of a good

A) rotates the budget line inward and changes its slope.
B) rotates the budget line outward and changes its slope.
C) results in a movement downward along the budget line.
D) results in a movement upward along the budget line.
E) shifts the budget line inward and does not change its slope.
17) Nadir and Nina consume the same goods. If Nadir has more income than Nina, then Nina's budget
line will
A) lie to the left of Nadir's budget line.
B) be steeper than Nadir's budget line.
C) lie to the right of Nadir's budget line.
D) be flatter than Nadir's budget line.
E) More information is needed to determine how Nina's and Nadir's budget lines compare.
18) Which of the following describes what happens to a consumer's budget line if that consumer's
budget increases?
A) The budget line becomes steeper.
B) The budget line becomes more horizontal.
C) The budget line shifts farther away from the origin of the graph.
D) The budget line shifts closer to the origin of the graph.
E) The budget line does not change.
19) When a consumer's budget increases, the budget line

A) becomes steeper.
B) becomes flatter.
C) shifts outward.
D) shifts inward.
E) does not change.
20) An increase in a consumer's budget

A) changes the relative prices of the goods.
B) changes the slope of the budget line.
C) decreases consumption possibilities.
D) increases consumption possibilities.
E) has no effect on the consumer's budget line.
Part B – Discussion Questions
1. How is a budget line similar to a production possibilities frontier? How do they differ?
2. The table above has different combinations of hamburgers and hot dogs that Alex can buy.
After labeling the axes, graph Alex's budget line in the figure, putting hot dogs on the x-axis.
a. Alex's income is $8 per day. What is the price of a hot dog? Of a hamburger?
b. What is the slope of the budget line?
3. Sherry is on vacation and wants to bring souvenirs home to family and friends. Her souvenir budget
is $100, and she can choose between T-shirts, which cost $20 each, and key chains, which cost $5
each.
a. Draw a graph of Sherry's budget line in the figure below.
b. What is the slope of Sherry's budget line? How does that slope represent an
opportunity cost? Suppose that Sherry now finds a store where T-shirts are on sale for
$10 each. (Key chains still cost $5 each).
c. Draw the new budget line in the figure.
d. What is the slope of the new budget line? How has the opportunity cost changed?
Activity 4.2 – Marginal Utility and Consumer Demand

Part A - Multiple Choice Questions

1) Utility is the
A) benefit or satisfaction that a person gets from the consumption of a good or service.
B) measure of how useful a resource is in the production process.
C) measure of productivity associated with a good or service.
D) economic term for consumption possibilities.
E) economic term for how changes in price affect a consumer's purchases.
2) The benefit that John gets from eating an additional grape is called the ________ the grape.
A) net gain from
B) demand for
C) quantity demanded of
D) total utility from
E) marginal utility from
3) As more of a good is consumed, TOTAL utility

A) increases.
B) decreases.
C) remains the same.
D) becomes negative and then turns positive.
E) might change but whether or not it changes depends on why more of the good is consumed.
4) If a consumer obtains 20 units of utility for the first unit consumed, 10 for the second, and 5 for the
third, what is the total utility of consuming three units?
A) 20 units
B) 30 units
C) 35 units
D) 5 units
5) For Jack, the total utility from three shirts is 50 units and the marginal utility of one more shirt is 5.
The total utility of four shirts is
A) 45.
B) 55.
C) 55/4.
D) 55/5.
6) If the total utility of 2 bags of chips is 25, the total utility of 3 bags is 33, and the total utility of 4
bags is 40 units, then the marginal utility of the 3rd and 4th bags are
A) 8 and 7, respectively.
B) 12.5 and 11, respectively.
C) 11 and 10, respectively.
D) 58 and 73, respectively.
E) 33 and 40, respectively.
7) If Joan consumes 1 dinner roll, she has total utility of 15; if she consumes 2, she has total utility of
27; if she consumes 3, she has total utility of 37; and if she consumes 4, she has total utility of 45.
What is the marginal utility of the fourth dinner roll consumed?
A) 124 units of utility
B) 45 units of utility
C) 11.25 units of utility
D) 8 units of utility
E) 37 units of utility
8) If Sarah gets 40 units of utility from her first piece of toast for breakfast and a total of 70 units from
two pieces of toast, then the marginal utility of the first piece is ________ units and the marginal
utility of the second piece is ________ units.
A) 40; 70
B) 40; 110
C) 40; 30
D) 40; 35
E) 70; 40
Quantity of Total utility from

ice cream ice cream
(quarts)
0 0
1 80
2 150
3 210
4 260
9) Given the data in the above table, what is the marginal utility of the third quart of ice cream?
A) 80
B) 70
C) 60
D) 230
E) 210
10) Given the data in the above table, what is the marginal utility of the second quart of ice cream?
A) 80
B) 70
C) 60
D) 75
E) 150
11) Given the data in the above table, what is the marginal utility of the fourth quart of ice cream?
A) 210
B) 50
C) 60
D) 65
E) 260
12) If a consumer's total utility increases when another unit of a good is consumed, which of the
following is TRUE? Marginal utility must be
A) negative.
B) equal to one.
C) positive.
D) increasing.
E) some amount, but more information is needed to determine if marginal utility is positive, negative,
or equal to zero.
Quantity Total
(bananas) utility
0 0
1 35
2 60
3 80
4 100
5 115
6 127
7 137
8 145
13) Sam's total utility for bananas is in the table above. Sam's marginal utility from the fourth banana
is
A) 100.
B) 25.
C) 20.
D) 15.
E) It cannot be determined from the given information.
14) Sam's total utility for bananas is in the table above. Sam's total utility shows that the law of
diminishing marginal utility
A) holds because his marginal utility from bananas decreases as Sam eats more bananas.
B) does not hold because Sam's total utility does not reach its maximum.
C) does not hold because Sam's marginal utility does not decrease to zero.
D) holds because Sam's total utility from bananas increases as Sam eats more bananas.
E) None of the above answers is correct because there are no data for marginal utility with which to
answer the question.
15) In order to maximize his or her utility, a consumer must allocate his or her entire budget and
A) buy the combination of goods that makes the marginal utility per dollar from all goods as small as
possible.
B) buy the combination of goods that equalizes the total utility per dollar from all goods.
C) do nothing else because when the entire budget is allocated, utility is maximized.
D) buy the combination of goods that equalizes the marginal utility per dollar from all goods.
E) buy the combination of goods that makes the marginal utility per dollar from all goods as large as
possible.
16) The utility-maximizing rule says that consumers must

A) only allocate the entire available budget.
B) only make the marginal utility per dollar the same for all goods.
C) allocate the entire available budget AND make the marginal utility per dollar the same for all
goods.
D) either allocate the entire available budget or make the marginal utility per dollar the same for all
goods, but not both.
17) If Raul's marginal utility per dollar from bread is 25 and the marginal utility per dollar from butter
is 30
A) Raul should purchase more butter and less bread to increase his total utility.
B) Raul's marginal utility from butter will fall if he buys more butter.
C) Raul's marginal utility from bread will rise if he buys less bread.
D) Only answers B and C are correct.
E) Answers A, B, and C are correct.
18) Assume you are in a store looking at a shirt you want. You expect to buy the shirt until you look
at the price, then you decide the shirt is not a good buy. How can your decision be viewed in
economic terms?
A) The shirt's marginal utility divided by price was too low compared to other goods.
B) The shirt has zero marginal utility for you.
C) The opportunity cost of the shirt was too low.
D) The shirt's marginal utility divided by price was too high compared to other goods.
19) Suppose the price of a pair of jeans is $25 and the price of a T-shirt is $15. The consumer's budget
is entirely allocated. If the marginal utility from a pair of jeans is 100 units and the marginal utility
from a T-shirt is 75 units, the consumer is
A) in equilibrium because his or her utility is maximized.
B) not in equilibrium and should purchase fewer jeans and more T-shirts.
C) not in equilibrium and should purchase fewer T-shirts and more jeans.
D) not in equilibrium but should maintain the current level of purchases.
E) not in equilibrium and should purchase more T-shirts and more jeans.
20) Mary is currently buying apples and oranges such that the last unit of apples has 30 units of utility
and the last unit of oranges has 40 units of utility. She has allocated her entire budget. If the price of
an apple is 10 cents and the price of an orange is 20 cents, to maximize her utility, what should Mary
do?
A) buy more apples and fewer oranges
B) buy more oranges and fewer apples
C) continue to buy the same amounts of both goods
D) buy fewer apples and fewer oranges
21) Suppose that Jen receives 400 units of utility from her last soda and 200 units of utility from her
last slice of pizza. What can we conclude about Jen's choices if the price of a soda is $2 and the price
of a slice of pizza is $4?
A) Jen is maximizing utility because she buys more of the good providing the most utility.
B) Jen should buy more soda to maximize her utility.
C) Jen should buy more pizza to maximize her utility.
D) Jen needs to buy less soda and less pizza to maximize her utility.
Bottles of Soda Slices of Pizza
22) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The
price of pizza is $2 per slice and the price of soda is $1 per bottle. His marginal utility from the 4th
slice of pizza is
A) 7.
B) 3.50.
C) 34.
D) 17.50.
E) 27.
price of pizza is $2 per slice and the price of soda is $1 per bottle. His marginal utility from the 4th
bottle of soda is
A) 21.
B) 3.
C) 3 units for soda ÷ 7 units for pizza.
D) 34.
E) 5.25.
price of pizza is $2 per slice and the price of soda is $1 per bottle. Ali has $14 in his budget. When Ali
maximizes his utility, how many bottles of soda does he buy?
A) fewer than 3
B) 3
C) 4
D) 5
E) more than 5
maximizes his utility, how many slices of pizza does he buy?
A) fewer than 2
B) 2
C) 3
D) 4
E) more than 4
maximizes his utility he buys ________ bottles of soda and ________ slices of pizza.
A) 4; 5
B) 6; 4
C) 2; 6
D) 6; 6
maximizes his utility, his total utility equals
A) 6.
B) 9.
C) 69.
D) 61.
28) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza.
Suppose the price of a slice of pizza increases. As a result, Ali's
A) marginal utility per dollar from pizza decreases.
B) total utility increases.
C) purchases of pizza might increase.
D) marginal utility from all the slices of pizza he consumes decreases.
E) marginal utility per dollar from soda increases.
29) If the price of steak rises, a consumer who had been maximizing his or her utility before will buy
less steak because its
A) total utility falls.
B) ratio of marginal utility to price is now less than that for other goods.
C) marginal utility has fallen.
D) ratio of marginal utility to total utility falls.
E) ratio of marginal utility to price is now larger than that for other goods.
30) Moving downward along a demand curve, so that the price falls and the quantity demanded
increases, the marginal utility of each additional unit of the good consumed
A) always increases.
B) always decreases.
C) stays the same.
D) could increase, decrease, or stay the same.
E) at first increases and then decreases.

1. What is the utility-maximizing rule?
2. To maximize utility, why does a consumer consume the combination of goods that equates
marginal utility per dollar from the different goods rather than just equating the marginal
utility of the different goods?
3. The table above gives Sam's marginal utility schedule for bananas and apples. Sam's fruit budget is
$10.
a. If bananas cost $1 per pound and apples cost $2 per bag, what is Sam's marginal
utility per dollar for all quantities of both goods?
b. What is the utility maximizing combination of bananas and apples for Sam?
c. If the price of bananas increases to $2 per pound, how does Sam's marginal utility per
dollar for bananas change?
d. At the banana price of $2 per pound, what is the new utility maximizing combination
of bananas and apples for Sam?
e. List two points on Sam's demand curve for bananas.
Activity 4.3 – Paradox of Value

Part A - Multiple Choice Questions
1) The maximum price a consumer is willing to pay for an extra unit of a good or service when total
utility is maximized is known as
A) demand.
B) marginal benefit.
C) quantity demanded.
D) total utility.
E) marginal utility.
2) Jen consumes 5 CDs and 2 tacos. She receives 500 units of utility from her 5th CD and 200 units of
utility from her 2nd taco. The price of a CD is $10, the price of a taco is $4, and she is spending her
entire budget. Which of the following is TRUE regarding Jen's choices?
A) Jen is consuming on her demand curve for tacos.
B) Jen is maximizing utility.
C) Jen is consuming on her demand curve for CDs.
D) Only answers A and B are correct
E) Answers A, B, and C are correct.
3) The fact that diamonds have a much higher price than water
A) violates the rules of utility maximization because water is necessary for life.
B) does not violate the rules of utility maximization because globally, fresh water is actually very
rare.
C) does not violate the rules of utility maximization because water's marginal utility is low.
D) violates the rules of utility maximization because diamonds are not necessities.
E) violates the rules of utility maximization because the consumer actually consumes a large amount
of water.
4) Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys only jeans and
boots and purchases 3 pairs of jeans and 2 pairs of boots each year
A) Charles may be maximizing his utility, but only if his budget is $500.
B) Charles may be maximizing his utility, but only if the marginal utility from jeans and boots are
equal.
C) Charles' total utility will increase if his budget increases.
D) Charles can only maximize utility if he buys equal amounts of jeans and boots.
E) A, B and C are correct.
5) Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys 3 pairs of jeans
and 2 pairs of boots each year and maximizing utility, which of the following are TRUE?
i. Charles is on his demand curve for jeans.
ii. Charles is on his demand curve for boots.
iii. Charles is using his resources efficiently.
A) i, ii and iii
B) i and ii only
C) i and iii only
D) iii only
E) ii and iii only
6) Which of the following is the best statement of the paradox of value?

A) Why does the amount people are willing to pay for a good vary with the amount consumed?
B) Why do some goods like water, which is necessary for life, have a low price while other goods like
diamonds have a high price?
C) What is the logical relationship between value and price?
D) Why is efficiency so valuable for a society?
E) None of the above states the paradox of value.
7) To resolve the paradox of value, you must

A) compare price elasticities of demand across goods.
B) distinguish between marginal and total utility.
C) sacrifice efficiency.
D) minimize consumer surplus.
E) distinguish between marginal utility and price.
8) The solution to the paradox of value is found by looking at which of the following?
A) total usefulness of different goods
B) the difference between marginal utility and total utility
C) relative prices and total utility
D) the difference between marginal utility and price
E) None of the above helps solve the paradox of value.
9) One reason why the price of diamonds is so high is because the

A) marginal utility of diamonds is zero.
B) marginal utility of diamonds is high.
C) marginal utility of diamonds is low.
D) total utility of diamonds is low.
E) total utility of diamonds is high.
10) Why does the paradox of value between diamonds and water arise?
A) because water has a low price and a low total utility, while diamonds have a high price and a high
total utility
B) because water has a low price and a low marginal utility, while diamonds have a high price and a
high marginal utility
C) because necessities like water are higher priced than luxuries like diamonds
D) because diamonds have a higher value to people even though water is essential to life
E) because water has a low price and a low total utility, while diamonds have a high price but also a
low total utility
11) Related to the paradox of value, which of the following statements is correct?
A) The marginal utility of water is enormous but the total utility is small.
B) We consume so much water so its marginal utility is enormous.
C) The marginal utility of water is small but the total utility is enormous.
D) The consumer surplus from water is small.
E) The total utility of water is equal to the marginal utility of water.
12) The paradox of value with respect to water and diamonds can be explained using consumer
surplus because
A) water is cheap but provides a large consumer surplus, while diamonds are expensive with a small
consumer surplus.
B) diamonds are in large supply relative to their demand, while water is scarce in supply relative to its
demand.
C) water is cheap but provides a small consumer surplus, while diamonds are expensive but provide a
large consumer surplus.
D) the total consumer surplus from diamonds is greater than the total consumer surplus from water.
13) At all points on a demand curve, the

i. consumer's budget has been allocated to maximize total utility.
ii. quantity is the quantity demanded at each price when total utility is maximized.
iii. price represents the marginal benefit the consumer gets from an extra unit of a good.
A) i only
B) ii only
C) i and ii
D) i and iii
E) i, ii, and iii
14) As more of a good is consumed, the marginal utility of an additional unit ________, so consumers
are willing to pay ________ for an additional unit.
A) decreases; less
B) increases; less
C) decreases; more
D) increases; more
E) does not change; less
15) The paradox of value refers to the

A) utility maximizing rule.
B) fact that water is vital but cheap while diamonds are relatively useless but expensive.
C) fact that consumers have different preferences and utility schedules.
D) law of demand.
E) issue of why the consumer surplus from water equals the consumer surplus from diamonds.
16) One reason why water is cheap compared to diamonds is because the
A) marginal utility of water is enormous.
B) marginal utility of water is small.
C) total utility of water is enormous.
D) total utility of water is small.
E) total utility of water and diamonds must be equal, but the marginal utility of water is much lower
than the marginal utility of diamonds.
17) In the paradox of value between expensive diamonds and inexpensive water, we see that
A) the consumer surpluses are very high for both goods.
B) diamonds have a low consumer surplus while water has a high consumer surplus.
C) diamonds have a high consumer surplus while water has a low consumer surplus.
D) the consumer surpluses are very low for both goods.
E) the consumer surpluses for the two goods cannot be compared.
18) Goods that are valuable will have a ________ consumer surplus because ________ units of the
good are consumed at a ________ price.
A) large; more; lower
B) large; less; higher
C) smaller; more; lower
D) smaller; fewer; lower
E) larger; fewer; lower

1) "Water is very inexpensive. Thus the marginal and total utility of water is small." Analyze the
previous statements.
2) Does the fact that diamonds, which we do not need to survive, are more expensive than water,
which is a necessity, constitute a violation of utility maximization?
3) Why does gold, which is a relatively nonessential item, have a higher price than water, which
is essential to life?
4) Kevin allocates his budget according to rules of utility maximization. What are the rules of
utility maximization and how do they explain the paradox of value, which is that diamonds
are expensive but useless, while water is inexpensive but essential?
5) "Because the price of a diamond is much greater than the price of a gallon of water, the
consumer surplus from diamonds is greater than the consumer surplus from water." Is the
previous analysis correct? Explain your answer.

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ECO501 Tutorial 4

Activity 4.1 – The Budget Line

Part A: Multiple Choice Questions

1) A budget line shows the

2) A consumption point inside the budget line

3) Which of the following statements is correct?

4) The budget line is the boundary between

16) An increase in the price of a good

19) When a consumer's budget increases, the budget line

20) An increase in a consumer's budget

Part B – Discussion Questions

Activity 4.2 – Marginal Utility and Consumer Demand

Part A - Multiple Choice Questions

3) As more of a good is consumed, TOTAL utility

Quantity of Total utility from

16) The utility-maximizing rule says that consumers must

Bottles of Soda Slices of Pizza

Part B – Discussion Questions

Activity 4.3 – Paradox of Value

Part A - Multiple Choice Questions

6) Which of the following is the best statement of the paradox of value?

7) To resolve the paradox of value, you must

9) One reason why the price of diamonds is so high is because the

13) At all points on a demand curve, the

15) The paradox of value refers to the

Part B – Discussion Questions

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