Besanko & Braeutigam – Microeconomics, 4th ed.

Chapter 3 Quiz

File: ch03, Chapter 3: Consumer Preferences and the Concept of Utility

Multiple Choice

1. Which of the following statements is true?

a) More is Better implies that indifference curves have a negative slope.
b) Transitivity implies that indifference curves have a negative slope.
c) Completeness implies that indifference curves cannot cross.
d) Transitivity implies that indifference curves must be convex to the origin.

Ans: a
Response. b, c and d are false. More is Better implies that indifference curves have a
negative slope because any basket, A, lying to the northeast of another basket, B, must be on
a higher indifference curve. Any basket, C, lying to the southwest of basket B, must be on a
lower indifference curve if more is better holds (since points to the southwest of B contain
less of both goods). Hence, the only points that are indifferent to point B must lie to the
northwest or the southeast of B. This means that the indifference curve must have a negative
slope.
Section: 3.2 Utility Functions

2. Suppose that a consumer has utility function U = .1h + f. Which of the following is true?
a) The marginal utility of h is .1
b) The marginal utility of h is decreasing.
c) The marginal rate of substitution between h and f is .1.

Ans: a and c
Response: The marginal utility of x is the change in utility for a change in x. When we
increase h by one unit, utility goes up by .1. Hence, the marginal utility is .1.
MRSx,y = MUx/MUy.
Section: 3.2 Utility Functions

3. A utility function written as U = Axy, where x and y are goods and  and  are
constants represents:
a) quasilinear preferences.
b) Perfect complements.
c) Perfect substitutes.
d) Cobb-Douglas preferences.

Ans: d
Response: Cobb-Douglas preferences can be written in the form given in the question.
Perfect substitutes have preferences written U = x + Ay. Perfect complements are

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Besanko & Braeutigam – Microeconomics, 4th ed. Chapter 3 Quiz

represented by U = min(x,y/A), where A is a positive constant. Quasilinear preferences are

written U = v(x) + Ay, where v(x) is an increasing function and A is a positive constant.
Section: 3.3 Special Preferences

4. Which of the following does not represent the same preferences as U = xy?
a) U = x2y2
b) U = 10 + xy
c) U = lnx + lny
d) U = 25x + xy
e) U = xy – 10

Ans: d
Response: These utility functions represent the same preferences as U = xy if they can be
obtained as an increasing transformation of U = xy. This is because an increasing
transformation will leave the ranking of any pair of bundles unchanged. U = x2y2 is obtained
by taking the square of xy, which is an increasing transformation. U = 10 + xy and U = xy –
10 are obtained by adding (or subtracting) a constant to U = xy…which clearly does not
affect the ranking of the utility numbers associated with any two combinations of x and y. U
= ln x + ln y is obtained by taking the logarithm of U = xy. Since logarithm is an increasing
function, the two utility functions represent the same preferences. On the other hand, U =
25x + xy does not represent the same preferences as U = xy. To verify this, notice that U =
xy would rank (3,6) ahead of (4,3) while U = 25x + xy would yield the reverse ranking with
utility levels equal to 93 and 112 respectively.
Section: 3.2 Utility Functions

5. Which characteristics of preferences are violated by the following indifference map?

[Image: Fig03005.gif]
a) Completeness
b) Transitivity
c) Monotonicity (More is Better)
d) “averages are better than extremes”

Ans: d
Response: Completeness is satisfied as each point lies on an indifference curve. Transitivity
is satisfied since a utility number is assigned to each point and ranking numbers is a transitive
operation. Monotonicity is satisfied, as more is preferred to less. Finally, for indifference
curves in the lower part of the graph, extremes are preferred to averages.
Section: 3.2 Utility Functions

6. Cardinal utility rankings__________________________.

a) only give us information about the order in which a consumer ranks baskets.
b) Give us information about the order in which a consumer ranks baskets and the intensity
of those preferences.
c) Are necessary to understand consumer preferences.

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Besanko & Braeutigam – Microeconomics, 4th ed. Chapter 3 Quiz

d) May order baskets differently from an ordinal ranking.

Ans: b
Response: A cardinal ranking allows us to not only say that one basket is better than the
other, but to say "by how much" the basket is better. This is analogous to a marking system
for exams where points are awarded on an absolute scale rather than where points are
awarded on a curve. The curve corresponds to an ordinal ranking (so that the ranking of
students is the salient element of the system), whereas the absolute scale corresponds to a
cardinal ranking (so that "100" really means a perfect paper, and not simply the best paper in
the course).
Section: 3.2 Utility Functions

7. The principle of diminishing marginal utility implies:

a) Indifference curves are convex.
b) Indifference curves are straight lines.
c) As your consumption level increases, the marginal utility received from consumption of
an additional unit increases.

Ans: a
Response: Let consumption of y be measured on the vertical axis and x on the horizontal
axis. If marginal utility diminishes as consumption of x increases, then the marginal rate of
substitution must diminish as we move out the horizontal axis. This means that the
indifference curve gets flatter. Similarly, the marginal utility of y diminishes as consumption
of y increases, so that the marginal rate of substitution increases. This means that the
indifference curve gets steeper as we move up the vertical axis. Hence, the indifference
curves are convex to the origin (or bowed-in).
Section: 3.2 Utility Functions

8. Suppose that MRSx,y is constant for all levels of x and y. Goods x and y are:
a) perfect substitutes
b) perfect complements
c) normal goods.
d) inferior goods.

Ans: a
Response: If the marginal rate of substitution is constant, there is a constant "exchange" that
the consumer is willing to make between the two goods. For example two x's may always
yield the same level of utility as 3 y's. In this sense, the goods are perfect substitutes: the
consumer is completely indifferent between receiving two units of x and receiving 3 units of
y.
Section: 3.3 Special Preferences

9. Consider the utility function U = min(5x,10y). Which of the following changes increase
utility by at least one unit?

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Besanko & Braeutigam – Microeconomics, 4th ed. Chapter 3 Quiz

a) An additional unit of x only

b) 1/5 unit of x only.
c) 1/5 unit of x and 1/10 unit of y.
d) 5 units of x and 10 units of y.
e) all of the above.

Ans: e
Response: All may be correct under the right circumstances. Suppose that 5x is much less
than 10y. Hence, utility is equal to 5x. If x is increased by one unit, then utility increases by
5 as long as 5x is still less than 10y. (b) is correct only if there was already excess y. The
notation "min(Ax,By) means that a one unit increase in utility may be attained by increasing
y by 1/B units and x by 1/A units. If either one of these changes occurs on its own, utility
does not increase, as utility increases with the lesser of Ax and By. Hence, if an additional
1/5 unit of x is added, utility does not increase unless there was excess y before (so that 5x
was much less than y, for example). If 1/5 unit of x and 1/10 unit of y are added together,
then utility certainly increases by 1, even if y was the lesser of the two quantities. If 5 units
of x and 10 units of y are added, then utility certainly increases by 1.
Section: 3.2 Utility Functions

10. Which of the following statements is correct?

a) The indifference curves of U = min(x,y) are L-shaped.
b) The indifference curves of U = Ax + By are straight lines.
c) The indifference curves of U = min(x,y) are vertical.
d) The indifference curves of U = Ax + By are horizontal.

Ans: a, b
Response: (d) may be correct if y is on the vertical axis, x is measured on the horizontal axis
and A = 0 (so that x is irrelevant to utility: utility increases as y increases and is constant for
any given level of y).
Section: 3.2 Utility Functions

11. Let MUx = x and MUy = 1/y.

a) The assumption that more is better is satisfied for both goods.
b) The marginal rate of substitution of x for y is xy.
c) The utility function exhibits diminishing marginal utility of y.
d) The utility function exhibits diminishing marginal utility of x.

Ans: a,b,c
Response: Since the marginal utilities are positive, (a) is correct. The marginal rate of
substitution is MUx/MUy = x/(1/y) = xy. The marginal utility of y decreases as y increases,
since y is in the denominator. (d) is incorrect, as the marginal utility of x is x and so it
increases as x increases.
Section: 3.2 Utility Functions

Short Answer

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Besanko & Braeutigam – Microeconomics, 4th ed. Chapter 3 Quiz

12. For the following indifference curves (increasing to the northeast), compute the marginal
rate of substitution between x and y. [Image: Fig03012.gif]

Ans: MRSx,y = 1/3. In other words, it is the negative of the slope of the indifference curves.
Response: MRSx,y = -Y/X (for a constant level of preference). You can also recall that the
marginal rate of substitution is the negative of the slope of the indifference curve.
Section: 3.2 Utility Functions

13. Jodi prefers basket A to basket B, she prefers basket A to basket C and she prefers basket
C to basket B. Based on this information, can you say whether Jodi's preferences are
complete? Transitive? Monotonic (More is Better)?

Ans: Jodi's preferences are complete because she can rank all baskets. She appears to have
transitive preferences, since this would require her to prefer A to C (she does), C to B (she
does) and A to B (she does). We cannot say, without knowing what is in the baskets, whether
her preferences are monotonic.
Response: Completeness requires that, for any two baskets, the consumer can say whether
she prefers basket A to B, B to A or is indifferent. Transitivity requires that, if a consumer
prefers A to B and B to C, she must also prefer A to C, for any baskets A, B, and C. More is
Better means that a consumer will always prefer a basket that contains at least as much of
every good and strictly more of at least one good. Completeness only requires that Jodi be
able to say something about her ranking of any two baskets. Transitivity requires more: it
requires that her preferences do not rank bundles in a "circular" manner (A preferred to B, B
preferred to C, C preferred to A, and so on). Here, notice that transitivity is satisfied, even
though the normal labels are changes: We have A preferred to C, C preferred to B and A
preferred to B. If transitivity were to be violated, we would require that A be preferred to C,
C preferred to B and B preferred to A (circular). More is Better requires us to know what is
in the baskets because it requires us to know that the preferred baskets contain more of the
goods.
Section: 3.2 Utility Functions

14. Suppose that U = xy + x. For this function, MUx = y + 1 and MUy = x. Is the marginal
rate of substitution between x and y decreasing?

Ans: The marginal rate of substitution is equal to MUx/MUy = (y+1)/x, which decreases as
one ‘moves down’ a given indifference curve (i.e. as x increases and y decreases).
Response: To see if marginal utility is increasing or decreasing, see if MUx increases as x
takes higher values and see if MUy increases as y takes higher values. To see if the MRSx,y
decreases, observe whether it decreases as x takes higher values. Recall that MRSx,y =
MUx/MUy.
Section: 3.2 Utility Functions

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Besanko & Braeutigam – Microeconomics, 4th ed. Chapter 3 Quiz

15. Suppose for a utility function the marginal utility for good x and y are given by MU x = y2
– 1/x2 and MUy = 2xy + 1. Based on this information, is monotonicity (more is better)
satisfied for this utility function?

Ans: For this utility function, the marginal utility of y is positive for positive, so more y is
better. This is not true for x, however, as more x decreases this function. Hence,
monotonicity is not satisfied for good x.
Response: Monotonicity means that more is better. If the marginal utility of a good is
positive, then more units of that good increase utility.
Section: 3.2 Utility Functions

Copyright © 2011 John Wiley & Sons, Inc. 3-6