Theory of Consumer Behaviour - MCQs

Questions:

1. The Law of Diminishing Marginal Utility states that as a person consumes more units of a
good, the marginal utility:
o a) Increases
o b) Decreases
o c) Remains constant
o d) Fluctuates
2. Total utility is maximized when marginal utility is:
o a) Positive
o b) Negative
o c) Zero
o d) Equal to total utility
3. The Law of Equi-Marginal Utility helps in:
o a) Maximizing total utility
o b) Minimizing total utility
o c) Keeping utility constant
o d) Distributing income unequally
4. If a consumer is in equilibrium, the ratio of marginal utility to price is:
o a) Higher for all goods
o b) Lower for all goods
o c) Equal for all goods
o d) Irrelevant
5. Utility refers to:
o a) The cost of a good
o b) The production of a good
o c) The satisfaction from consuming a good
o d) The price of a good
6. Marginal utility can become negative when:
o a) Total utility is increasing
o b) Total utility is at its maximum
o c) Too much of a good is consumed
o d) Total utility is decreasing
7. The concept of consumer surplus is based on:
o a) Utility
o b) Price
o c) Cost
o d) Demand
8. The downward slope of the demand curve is explained by:
o a) The Law of Increasing Marginal Utility
o b) The Law of Diminishing Marginal Utility
o c) The Law of Equi-Marginal Utility
o d) The Law of Supply
9. An indifference curve represents:
o a) Levels of income
o b) Combinations of goods providing the same utility
o c) Different prices of a good
o d) None of the above
10. A budget line represents:
o a) The maximum utility a consumer can achieve
o b) The various combinations of two goods a consumer can afford
o c) The income of a consumer
o d) The preferences of a consumer
11. If the price of a good increases, the budget line:
o a) Shifts to the left
o b) Shifts to the right
o c) Becomes steeper
o d) Becomes flatter
12. When a consumer maximizes utility, they achieve:
o a) Maximum income
o b) Maximum expenditure
o c) Maximum satisfaction
o d) Maximum cost
13. In the short run, the Law of Diminishing Marginal Utility applies because:
o a) Consumers have unlimited income
o b) Goods are available in unlimited quantities
o c) There are constraints on consumption capacity
o d) None of the above
14. Consumer equilibrium can be defined as:
o a) The point where marginal utility is highest
o b) The point where marginal utility per dollar is equal for all goods
o c) The point where total utility is highest
o d) The point where total expenditure is lowest
15. The concept of diminishing marginal utility helps explain:
o a) Increasing returns to scale
o b) The Law of Supply
o c) The Law of Demand
o d) Market equilibrium
16. When total utility is rising, marginal utility is:
o a) Positive
o b) Negative
o c) Zero
o d) Equal to total utility
17. If the marginal utility of apples is 30 and their price is $3, while the marginal utility of
bananas is 40 and their price is $5, the consumer should:
o a) Buy more apples
o b) Buy more bananas
o c) Buy both equally
o d) Buy neither
18. Marginal utility is the:
o a) Total satisfaction from consuming all units of a good
o b) Satisfaction from consuming one additional unit of a good
o c) Difference in utility from consuming different goods
o d) None of the above
19. If a consumer derives the same satisfaction from consuming different combinations of two
goods, they are:
o a) On the budget line
o b) On an indifference curve
 o c) At a point of disequilibrium
o d) None of the above

20. When a consumer moves along an indifference curve, the:

o a) Price of goods changes
o b) Total utility changes
o c) Total utility remains constant
o d) Income changes
21. If two indifference curves intersect, it means:
o a) The consumer's preferences are inconsistent
o b) The consumer's preferences are consistent
o c) The consumer is maximizing utility
o d) None of the above
22. A higher indifference curve represents:
o a) Lower utility
o b) Higher utility
o c) The same utility
o d) A different budget constraint
23. The slope of an indifference curve is known as the:
o a) Marginal Rate of Substitution
o b) Marginal Utility
o c) Budget Line
o d) None of the above
24. If the marginal rate of substitution between two goods is constant, the goods are:
o a) Perfect complements
o b) Perfect substitutes
o c) Normal goods
o d) Inferior goods
25. The point where the budget line is tangent to an indifference curve represents:
o a) Consumer disequilibrium
o b) Maximum utility
o c) Minimum utility
o d) None of the above
26. The budget line will shift outward if:
o a) The price of both goods increases
o b) The consumer's income increases
o c) The consumer's income decreases
o d) The price of one good decreases
27. The principle of diminishing marginal utility helps to explain:
o a) The shape of the supply curve
o b) The shape of the demand curve
o c) Consumer equilibrium
o d) Producer equilibrium
28. The indifference curve analysis assumes that the consumer:
o a) Prefers more goods to fewer goods
o b) Has an unlimited budget
o c) Prefers fewer goods to more goods
o d) Considers price only
29. A consumer's demand curve is derived from:
o a) The total utility curve
 o b) The indifference curve and budget line
o c) The law of supply
o d) None of the above
30. The Marginal Rate of Substitution (MRS) is the rate at which:
o a) Total utility changes
o b) A consumer can substitute one good for another while maintaining the same level
of utility
o c) The price of a good changes d) Income changes
31. When the price of a good falls, the consumer's real income:
o a) Increases
o b) Decreases
o c) Remains the same
o d) None of the above
32. When marginal utility is zero, total utility is:
o a) Increasing
o b) Decreasing
o c) At its maximum
o d) At its minimum
33. The substitution effect of a price change:
o a) Is always positive
o b) Is always negative
o c) Can be positive or negative
o d) Has no impact on consumer behaviour
34. The income effect of a price change:
o a) Always leads to increased consumption
o b) Always leads to decreased consumption
o c) Can lead to increased or decreased consumption
o d) Has no impact on consumption
35. When total utility starts decreasing, marginal utility is:
o a) Positive
o b) Negative
o c) Zero
o d) Maximum
36. If a consumer moves to a higher indifference curve, their level of satisfaction:
o a) Increases
o b) Decreases
o c) Remains constant
o d) Becomes zero
37. The concept of consumer equilibrium is achieved when:
o a) Total utility is maximized
o b) Marginal utility per dollar is equal across all goods
o c) Marginal utility is zero
o d) Marginal utility is maximum
38. The budget line becomes steeper if:
o a) The price of the good on the x-axis decreases
o b) The price of the good on the y-axis decreases
o c) The price of the good on the x-axis increases
o d) The price of the good on the y-axis increases
39. A consumer is in equilibrium when the indifference curve:
o a) Is below the budget line
o b) Is above the budget line
o c) Is tangent to the budget line
 o d) Intersects the budget line
40. If the price of a good falls and the quantity demanded increases, this is an example of:
o a) Law of Demand
o b) Law of Supply
o c) Law of Diminishing Marginal Utility
o d) Law of Equi-Marginal Utility
41. The marginal utility of a good typically:
o a) Increases as consumption increases
o b) Decreases as consumption increases
o c) Remains constant as consumption increases
o d) Increases at a decreasing rate
42. The consumer's choice between goods is constrained by:
o a) Utility
o b) Income
o c) Preferences
o d) All of the above
43. If the marginal utility per dollar spent on Good A is greater than that of Good B, the consumer
should:
o a) Buy more of Good A and less of Good B
o b) Buy more of Good B and less of Good A
o c) Buy more of both goods
o d) Buy less of both goods
44. The area between the demand curve and the price line represents:
o a) Consumer surplus
o b) Producer surplus
o c) Total cost
o d) Total revenue
45. If the price of one good rises, the budget line:
o a) Rotates inward
o b) Rotates outward
o c) Shifts parallel outward
o d) Shifts parallel inward
46. A rightward shift in the demand curve indicates:
o a) An increase in quantity demanded
o b) A decrease in quantity demanded
o c) An increase in demand
o d) A decrease in demand
47. The total utility curve typically:
o a) Rises at a decreasing rate
o b) Falls at an increasing rate
o c) Is a straight line
o d) Is a U-shaped curve
48. When a consumer allocates their income optimally, they achieve:
o a) Maximum expenditure
o b) Minimum expenditure
o c) Maximum satisfaction
o d) Minimum satisfaction
49. An increase in income, with prices of goods constant, will:
o a) Shift the budget line to the left
o b) Shift the budget line to the right
o c) Not affect the budget line
o d) Rotate the budget line
 50. The primary goal of a rational consumer is to:
o a) Minimize total utility
o b) Maximize total utility
o c) Equalize marginal utility of all goods
o d) Minimize expenditure

Theory of consumer Behaviour Answers and Explanations:

1. b) Decreases - As more units of a good are consumed, the additional satisfaction decreases.
2. c) Zero - When marginal utility is zero, total utility is at its maximum.
3. a) Maximizing total utility - It helps in allocating income to maximize satisfaction.
4. c) Equal for all goods - In equilibrium, the ratio of marginal utility to price is equal for all
goods.
5. c) The satisfaction from consuming a good - Utility is the satisfaction or pleasure derived
from consumption.
6. c) Too much of a good is consumed - Negative marginal utility means consumption is
beyond the optimal level.
7. a) Utility - Consumer surplus is based on the utility derived over and above the price paid.
8. b) The Law of Diminishing Marginal Utility - The demand curve slopes downward due to
diminishing marginal utility.
9. b) Combinations of goods providing the same utility - An indifference curve shows
different combinations of goods that give the same satisfaction.
10. b) The various combinations of two goods a consumer can afford - The budget line shows
affordable combinations.
11. c) Becomes steeper - When the price of a good increases, the budget line pivots inward,
becoming steeper.
12. c) Maximum satisfaction - Utility maximization means achieving the highest possible
satisfaction.
13. c) There are constraints on consumption capacity - Diminishing marginal utility applies
due to consumption limits.
14. b) The point where marginal utility per dollar is equal for all goods - Consumer
equilibrium is achieved when MU/P is equal for all goods.
15. c) The Law of Demand - Diminishing marginal utility is a key reason for the downward
slope of the demand curve.
16. a) Positive - Total utility rises when marginal utility is positive.
17. a) Buy more apples - MU per dollar for apples (10) is higher than for bananas (8), so
consume more apples.
18. b) Satisfaction from consuming one additional unit of a good - Marginal utility refers to
the additional satisfaction from one more unit.
19. b) On an indifference curve - Equal satisfaction from different combinations of goods
indicates an indifference curve.
20. c) Total utility remains constant - Movement along an indifference curve maintains the
same utility level.
21. a) The consumer's preferences are inconsistent - Indifference curves cannot intersect if
preferences are consistent.
22. b) Higher utility - Higher indifference curves represent greater satisfaction.
23. a) Marginal Rate of Substitution - The slope of an indifference curve is the MRS.
24. b) Perfect substitutes - Constant MRS indicates perfect substitutes.
25. b) Maximum utility - The tangency point represents the highest utility given the budget
constraint.
26. b) The consumer's income increases - Increased income shifts the budget line outward.
27. b) The shape of the demand curve - Diminishing marginal utility helps explain the
downward slope of the demand curve.
28. a) Prefers more goods to fewer goods - Indifference curve analysis assumes consumers
prefer more to less.
29. b) The indifference curve and budget line - A demand curve is derived from consumer
preferences and budget constraints.
30. b) A consumer can substitute one good for another while maintaining the same level of
utility - MRS is the rate of substitution maintaining utility.
31. a) Increases - A fall in the price of a good increases real income, allowing more
consumption.
32. c) At its maximum - Zero marginal utility means total utility is at its highest point.
33. c) Can be positive or negative - The substitution effect can vary depending on the goods.
34. c) Can lead to increased or decreased consumption - The income effect varies with normal
and inferior goods.
35. b) Negative - When total utility decreases, marginal utility is negative.
36. a) Increases - Moving to a higher indifference curve indicates higher satisfaction.
37. b) Marginal utility per dollar is equal across all goods - Consumer equilibrium is achieved
when MU/P is equal for all goods.
38. c) The price of the good on the x-axis increases - Higher prices on the x-axis make the
budget line steeper.
39. c) Is tangent to the budget line - Tangency indicates consumer equilibrium.
40. a) Law of Demand - A fall in price and increase in quantity demanded exemplifies the Law
of Demand.
41. b) Decreases as consumption increases - Marginal utility typically decreases with more
consumption.
42. d) All of the above - Consumer choice is influenced by utility, income, and preferences.
43. a) Buy more of Good A and less of Good B - Higher MU per dollar spent on Good A
suggests buying more of it.
44. a) Consumer surplus - The area between the demand curve and the price line represents
consumer surplus.
45. a) Rotates inward - An increase in the price of one good rotates the budget line inward.
46. c) An increase in demand - A rightward shift in the demand curve signifies an increase in
demand.
47. a) Rises at a decreasing rate - Total utility typically increases at a decreasing rate.
48. c) Maximum satisfaction - Optimal allocation of income achieves maximum satisfaction.
49. b) Shift the budget line to the right - Increased income shifts the budget line outward.
50. b) Maximize total utility - Rational consumers aim to maximize their total utility.