HW 5-Chapter 5

Microeconomics: Principles, Applications, and Tools, 9e (O'Sullivan)

Chapter 5: Consumer Choice: Utility Theory and Insights from Neuroscience

1) How is utility defined?

A) ease of use
B) government provided goods like electricity
C) the satisfaction experienced from consuming a good
D) the change in benefit from producing one additional unit of a good

2) Consumers' ability to purchase a good or service is limited by:

A) their income only.
B) the prices for the goods or services only.
C) both the prices for the goods and services and their income.
D) their preferences.

3) Which of the following statements about consumer choice theory is TRUE?

A) Given the limitations dictated by people's incomes and prices, it helps the consumer choose a
commodity bundle of the highest level of utility.
B) It provides insights into how consumers make decisions.
C) It helps us understand changes in consumption patterns.
D) All of the above are true about consumer choice theory.

4) A decrease in a consumer's budget set can be caused by:

A) an increase in prices.
B) a decrease in prices.
C) an increase in income.
D) a change in preferences.

5) A consumer's budget set:

A) is the set of all affordable combinations of two goods.
B) includes only combinations of two goods that leave the consumer with leftover money.
C) includes only combinations of two goods that exhaust the budget.
D) Both A and C are correct answers.

6) What is the consumer budget line?

A) It shows a consumer's tradeoff between two goods.
B) It shows the quantity of a single good that a consumer is willing to buy at different prices.
C) It shows combinations of two or more different consumers' budget set.
D) It includes all combinations of two goods that exhaust the consumer's budget.

7) Which of the following statements about a consumer's budget line is CORRECT?

I. The budget line shows all the combinations of two goods that exhaust the consumer's budget.
II. The slope of the budget line shows the market tradeoff between two goods.
III. The budget line represents the consumer's preferences or tastes.
A) I only
B) I and II only
C) I and III only
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D) II and III only

8) Refer to Figure 7.1. Which of the following includes unaffordable combinations of movies and T-shirts?
A) A, B and C
B) B, C and D
C) C, D and F
D) A, C and E

9) Refer to Figure 7.1. Which of the following includes unaffordable combinations of movies and T-shirts?
A) A, B and C
B) B, C and D
C) C, D and G
D) A, C and E

10) Refer to Figure 7.1. Which of the following are the combinations of movies and T-shirts that would
exhaust the budget?
A) A and C
B) C and E
C) B and G
D) A and B

11) Suppose Jackie can buy either video games or DVDs. If the prices of both goods double, and Jackie's
income also doubles, what will happen to Jackie's budget line?
A) It will shift out.
B) It will shift in.
C) It will not change.
D) It will swivel so that the slope is twice as steep.

12) What set of all possible combinations does the budget line show?
A) the set of all possible combinations that yield the same level of utility to the consumer
B) the set of all possible combinations that maximize a consumer's utility
C) the set of all possible combinations that can be purchased, given the consumer's income and the price
of the goods
D) the set of all possible combinations that are equilibrium points

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13) The budget line will shift parallel to the left if:
A) income increases.
B) income decreases.
C) the price of the good on the vertical axis increases.
D) the price of the good on the vertical axis decreases.

14) A change in the slope of a budget line reflects:

A) a change in the marginal rate of substitution.
B) a change in the consumer's preferences.
C) a change in consumer income.
D) a change in the relative prices of the two goods.

15) Suppose that Helen has $50 to spend. Tacos cost $2 and burritos cost $5. Which of the following
combinations is NOT on her budget line?
A) 0 tacos and 10 burritos
B) 0 burritos and 25 tacos
C) 8 burritos and 5 tacos
D) 10 burritos and 3 tacos

Figure 7.2

16) Refer to Figure 7.2. Assume that Ashley faces budget line AB with her $60 income. Then the
opportunity cost to her of a book is:
A) one hamburger.
B) two hamburgers.
C) three hamburgers.
D) four hamburgers.

17) Refer to Figure 7.2. Assume that Ashley faces budget line AB with her $60 income. Then the
opportunity cost to her of a hamburger is:
A) one book.
B) one half of a book.
C) one third of a book.
D) one fourth of a book.

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18) If Joshua gets 200 utils from consuming three slices of pizza, 220 utils from consuming four slices of
pizza, and 230 utils from consuming five slices of pizza, then Joshua's marginal utility from the fifth slice
of pizza is:
A) 230 utils.
B) 30 utils.
C) 20 utils.
D) 10 utils.

19) If Crystal gets 140 utils from eating one yogurt, 145 utils from eating two yogurts, and 148 utils from
eating three yogurts, then Crystal's total utility is:
A) increasing.
B) decreasing.
C) decreasing at decreasing rate.
D) constant.

20) If the consumer gets 40 utils from consuming four CDs, 45 utils from consuming five CDs, and 48 utils
from consuming six CDs, then the consumer's marginal utility is:
A) increasing.
B) decreasing.
C) constant.
D) increasing at an increasing rate.

21) Diminishing marginal utility implies:

A) as the consumption of a good increases marginal utility decreases.
B) as the consumption of a good increases marginal utility increases.
C) as the consumption of a good increases total utility decreases.
D) as the consumption of a good increases total utility increases.

22) The change in the quantity consumed that is caused by a change in the relative price of a good, with
real income held constant, refers to the:
A) substitution effect.
B) income effect.
C) equimarginal rule.
D) law of diminishing marginal utility.

23) The change in the quantity consumed that is caused by a change in real income, with the relative
prices held constant, refers to the:
A) substitution effect.
B) income effect.
C) equimarginal rule.
D) law of diminishing marginal utility.

24) Robert's demand curve for pizza:

A) shows the quantity of pizza that Robert consumes as his income changes.
B) assumes that the only variables that change are the price of pizza and the quantity of pizza demanded
by Robert.
C) makes no assumptions about Robert's income.
D) assumes that the only variable that changes is Robert's preference for pizza.

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25) Kim's demand curve for sodas:
A) assumes that the only variables that change are the price of sodas and the quantity of sodas demanded
by Kim.
B) shows the quantity of sodas Kim consumes as her preference for sodas change.
C) makes no assumptions about Kim's preference for sodas.
D) assumes that the only variable that changes is Kim's income.

26) If the relative price of plasma TVs (a normal good) decreases and real income increases, the quantity
of plasma TVs increases, which is represented by a ________.
A) movement downward along the demand curve
B) movement upward along the demand curve
C) rightward shift of the demand curve
D) leftward shift of the demand curve

27) For normal goods, the substitution effect and the income effect work in ________, generating a(n)
________-sloped demand curve.
A) opposite directions; downward
B) the same direction; downward
C) opposite directions; upward
D) the same; upward

28) The strength of brain activity involving benefit valuation associated with a particular product is
determined by:
A) past experience.
B) monetary cost.
C) gut reaction.
D) opportunity cost.

29) The greater the conjectured satisfaction a person experiences when buying a product, the:
A) greater the flow of dopamine to the receptors in the brain.
B) greater the number of choices available to the person.
C) greater the activity in the insula.
D) the lower the glucose level in the brain.

30) When conjectures about the pleasure from a product are wrong:
A) dopamine levels increase.
B) gut instinct takes over.
C) the prefrontal cortex shuts down.
D) learning happens.

31) To assess the benefit of a product never consumed, the brain bases its benefit valuation on:
A) chance.
B) past experiences with similar products.
C) the cost of the product.
D) The brain cannot value the benefit of a product never consumed.

32) The best way to make healthy food choices is to shop:

A) when you are hungry.
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B) using gut feelings.
C) when your glucose levels are low.
D) when your brain is fully fueled.

33) Humans do a ________ job imagining the strength of future gut feelings, and do a ________ job
imagining the gut-feeling benefits of future consumption.
A) good; good
B) good; poor
C) poor; good
D) poor; poor

34) With respect to present bias in the case of saving for retirement, the cost ________ and the benefit
________.
A) occurs in the past; occurs in the present
B) occurs in the present; occurs in the future
C) occurs in the present and in the future; does not occur
D) occurs in the future; occurs in the present

35) Some employers allow new employees to delay their investment in a retirement account for a year or
two. This approach puts the cost of saving for retirement in the ________ and the benefit of saving in the
________.
A) present; present
B) present; future
C) future; present
D) future; future
Answer: D

36) When purchasing a product with a credit card, the benefit of the product will be experienced in the
________, and the cost will be experienced in the ________.
A) present; present
B) present; future
C) future; present
D) future; future

37) When purchasing a product with a credit card, our gut-feeling aversion to spending money is
________ and brain activity in the insula is ________.
A) strengthened; strengthened
B) strengthened; weakened
C) weakened; strengthened
D) weakened; weakened

38) The ________ in the present cost of smoking ________ the likelihood that a smoker will quit.
A) increase; increases
B) increase; decreases
C) increase; does not change
D) decrease; increases

39) The decision to smoke cigarettes is subject to present bias because there is a temporal mismatch
between ________ and ________.
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A) the present benefit; the present cost
B) the present benefit; the future cost
C) the future benefit; the present cost
D) the future benefit; the future cost

40) Most people who gamble do so:

A) because the expected reward is positive.
B) despite the expected award being positive.
C) because the expected reward is negative.
D) despite the expected reward being negative.
Table 7.1

Draw Draw Ball Draw

Ball #1 #2 Ball #3 Expected benefit
Monetary benefit ($) 0 0 750
Dopamine benefit (utils) 0 40 50

The Table represents the payoffs for a gambling game. The player blindly draws one of three balls,
marked 1, 2, and 3, from an urn. The cost to play the game is $375 per draw.

41) Refer to Table 7.1. For this game, the expected monetary benefit is:
A) $0.
B) $250.
C) $375.
D) $750.

42) Refer to Table 7.1. For this game, the expected dopamine benefit is:
A) 0 utils.
B) 30 utils.
C) 40 utils.
D) 50 utils.

43) Refer to Table 7.1. For this game, the actual monetary benefit will exceed the expected monetary
benefit:
A) if ball number 2 or number 3 are drawn.
B) only if ball number 3 is drawn.
C) if ball number 1 or number 2 are drawn.
D) The actual monetary benefit will never exceed the expected benefit.

44) Refer to Table 7.1. For this game, the actual dopamine benefit will exceed the expected dopamine
benefit:
A) if ball number 2 or number 3 are drawn.
B) only if ball number 3 is drawn.
C) if ball number 1 or number 2 are drawn.
D) The actual dopamine benefit will never exceed the expected benefit.

True or Flase
1) Utility is the benefit a consumer gets from consuming a good.
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Answer:
2) A consumer's budget line is very similar to a demand curve in that both curves show the possible
combination of two goods.
Answer:

3) All the combinations of two goods on a consumer's budget line must generate different levels of utility.
Answer:

4) A consumer can afford any combinations of two goods on or below the budget line.
Answer:

5) A consumer's budget set includes all affordable combinations of two goods.

Answer:

6) The law of diminishing marginal utility states as the consumption of a particular product increases,
marginal utility decreases.
Answer:

7) Marginal utility of beer is the change in utility when production of beer changes.
Answer:

8) If the consumer gets 30 utils from consuming four DVDs, 50 utils from consuming five DVDs, and 60
utils from consuming six DVDs, then the consumer's marginal utility from the fifth DVD is 10 utils.
Answer:

9) Diminishing marginal utility is when total utility declines as a consumer consumes more of a good.
Answer:

10) The consumer's objective is to minimize the utility generated by a fixed budget.
Answer:

11) Utility is maximized when the chosen bundle of goods satisfies the equimarginal rule and when the
chosen bundle is on the budget line.
Answer:

12) If the marginal benefit per dollar spent on good X is greater than the marginal benefit per dollar spent
on good Y, the consumer should consume more X and less Y.
Answer:

13) A decrease in the price of a product decreases the marginal utility per dollar of that product.
Answer:

14) An increase in the price of a product decreases the marginal utility per dollar of that product.
Answer:

15) An income effect comes about because a price reduction of one product increases a consumer's real
income.
Answer:

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16) A substitution effect comes about because a price reduction of one product gives consumers more
income to spend on other goods.
Answer:

17) If Linda's income goes up, she will consume more of all normal goods.
Answer:

18) If consumer income and prices all are cut in half, then the consumers' real income doubles.
Answer:

19) If consumer income and all prices double, then the budget line does not change.
Answer:

20) The individual demand curve shows the relationship between quantity demanded and the price of a
product.
Answer:

21) Recent work in neuroscience shows that different regions of the brain are involved in the valuation of
the benefits and the costs of possible actions.
Answer:

22) As more satisfaction is expected from the purchase of a product, the flow of dopamine in the brain
increases.
Answer:

23) The benefit valuations generated by the dopamine system are cognitively generated.
Answer:

24) The key regions of the brain responsible for cost valuation are the insula and the amygdala.
Answer:

25) The higher the price of a product, the lower the opportunity cost of the product, and thus the weaker
the activity of the insula.
Answer:

26) The dopamine learning system generates gut feelings which are based on experiences that go back
hours, or even years.
Answer:

27) The prefrontal cortex uses both gut feelings and cognition in the decision-making process.
Answer:

28) The brain gets most of its energy from dopamine.

Answer:

29) The more blood sugar in the brain, the more thoughtful the decision-making process.
Answer:

30) People systematically overestimate the strength of positive and negative gut feelings.

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Answer:
31) Marketers have no incentive to introduce products that are not designed to sell.
Answer:

32) In assessing numerical changes, the brain appears to be naturally inclined to work in absolute terms
rather than percentage terms.
Answer:

Short-answer Questions
1) What does the consumer's budget line show?
Answer:

2) Baseballs cost $5 each and baseball gloves cost $20. Assume you have $100 to spend on these items.
Putting baseballs on the vertical axis, draw the budget line representing this situation. What is the slope
of the budget line?
Answer:

3) Explain what diminishing marginal utility is.

Answer:

4) If the consumer gets 90 utils from consuming four movies, 120 utils from consuming five movies, and
140 utils from consuming six movies, calculate the consumer's marginal utility from the fifth and sixth
movies.
Answer:

5) Explain the marginal principle.

Answer:

6) Explain the equimarginal rule.

Answer:

7) Explain the income and substitution effects.

Answer:

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8) How does the introduction of cognition into a consumer's choice between consumption now and
saving affect marginal utility per dollar, the amount spent on consumption now, and the amount saved?
Assume utility is maximized.
Answer:

Table 7.1

Draw Draw Ball Draw

Ball #1 #2 Ball #3 Expected benefit
Monetary benefit ($) 0 0 750
Dopamine benefit (utils) 0 40 50

The Table represents the payoffs for a gambling game. The player blindly draws one of three balls,
marked 1, 2, and 3, from an urn. The cost to play the game is $375 per draw.

9) Refer to the Table. Calculate the expected monetary benefit and the expected dopamine benefit from
the game represented in the table.
Answer:

10) The text lists 4 types of puzzling consumer behavior which have been identified by economists and
psychologists. What are these 4 types of consumer behavior?
Answer:

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