Grade 11

Unit one
1. According to ordinal utility theory, which of the following statements is true?
a) Consumers always maximize their total utility
b) Consumers maximize their utility given their budget constraint
c) Consumers' preferences are independent of each other
d) Consumers can rank their preferences, but not assign specific values to them
2. The law of diminishing marginal utility states that:
a) Marginal utility increases as consumption increases
b) Marginal utility decreases as consumption increases
c) Marginal utility remains constant as consumption increases
d) Marginal utility is unrelated to consumption levels
3. Which of the following is NOT an assumption of ordinal utility theory?
a) Consumers have rational preferences
b) Consumers have complete information
c) Consumers can always make consistent choices
d) Consumers always prefer more of a good to less of it
4. The budget line represents:
a) The consumer's maximum utility level
b) The consumer's income constraint
c) The consumer's indifference curves
d) The consumer's marginal utility5.
5. The slope of the budget line represents:
a) The consumer's marginal utility
b) The consumer's income
c) The relative price of the two goods
d) The consumer's total utility
6. The budget line shifts outward when:

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 a) The price of one good decreases
b) The price of one good increases
c) The consumer's income increases
d) The consumer's income decreases
7. The point where the budget line intersects an indifference curve represents:
a) The consumer's optimal consumption bundle
b) The consumer's maximum utility level
c) The consumer's budget constraint
d) The consumer's marginal utility
8. The consumer achieves utility maximization when:
a) The budget line is tangent to the highest possible indifference curve
b) The consumer exhausts their budget
c) The consumer consumes equal amounts of each good
d) The consumer's income is maximized
9. The substitution effect of a price decrease leads to:
a) An increase in the quantity demanded of the good
b) A decrease in the quantity demanded of the good
c) A shift in the budget line
d) No change in the quantity demanded of the good
10. The income effect of a price decrease leads to:
a) An increase in the quantity demanded of the good
b) A decrease in the quantity demanded of the good
c) A shift in the budget line
d) No change in the quantity demanded of the good
11. A consumer will be in equilibrium when:
a) Marginal utility is maximized
b) Total utility is maximized
c) The budget is exhausted

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 d) The budget line is tangent to the indifference curve

12. The concept of marginal rate of substitution (MRS) measures:

a) The rate at which a consumer is willing to substitute one good for another
b) The rate at which a consumer's income increases
c) The rate at which marginal utility decreases
d) The rate at which marginal utility increases
13. If the MRS is 2, it means that the consumer is willing to give up:
a) 2 units of one good to obtain 1 unit of the other good
b) 1 unit of one good to obtain 2 units of the other good
c) 2 units of both goods for 1 unit of another good
d) 1 unit of both goods for 2 units of another good
14. The concept of diminishing marginal rate of substitution (DMRS) states that:
a) The MRS increases as consumption increases
b) The MRS decreases as consumption increases
c) The MRS remains constant as consumption increases
d) The MRS is unrelated to consumption levels
15. The concept of budget constraint refers to:
a) The consumer's preferences over goods
b) The consumer's income and the prices of goods
c) The consumer's marginal utility
d) The consumer's indifference curves
16. The budget constraint equation is given by:
a) Income = Price of Good A + Price of Good B
b) Income = Quantity of Good A + Quantity of Good B
c) Price of Good A = Quantity of Good A + Quantity of Good B
d) Price of Good A = Price of Good B

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17. A budget line with a slope of -2 means that:
a) The price of Good A is two times the price of Good B
b) The price of Good B is two times the price of Good A
c) The quantity of Good A is two times the quantity of Good B
d) The quantity of Good B is two times the quantity of Good A
18. If a consumer's income increases, the budget line will:
a) Shift inward
b) Shift outward
c) Rotate clockwise
d) Rotate counterclockwise
19. If the price of Good A increases while the price of Good B remains constant, the budget line
will:
a) Shift inward
b) Shift outward
c) Rotate clockwise
d) Rotate counterclockwise
20. The concept of consumer equilibrium refers to:
a) A situation where the consumer is indifferent between two goods
b) A situation where the consumer maximizes their total utility
c) A situation where the consumer spends all their income
d) A situation where the consumer exhausts their budget
21. The consumer's equilibrium point occurs when:
a) The budget line is tangent to the highest indifference curve
b) The budget line intersects the highest indifference curve
c) The consumer consumes equal amounts of each good
d) The consumer's income is maximized

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22. If a consumer is not in equilibrium, they will:
a) Have excess income
b) Have excess budget
c) Have unsatisfied preferences
d) Have a flat budget line
23.. The income effect of a price change refers to:
a) The change in the quantity demanded due to a change in relative prices
b) The change in consumer income due to a change in prices
c) The change in consumer preferences due to a change in prices
d) The change in consumer utility due to a change in prices
24. If the price of Good A decreases and the consumer's income remains constant, the
substitution effect will result in:
a) An increase in the quantity demanded of Good A
b) A decrease in the quantity demanded of Good A
c) No change in the quantity demanded of Good A
d) An increase in the quantity demanded of Good B
25. If the price of Good A decreases and the consumer's income remains constant, the income
effect will result in:
a) An increase in the quantity demanded of Good A
b) A decrease in the quantity demanded of Good A
c) No change in the quantity demanded of Good A
d) An increase in the quantity demanded of Good B
26. A consumer will achieve utility maximization when:
a) Marginal utility is maximized
b) Total utility is maximized
c) The budget is exhausted
d) The budget line is tangent to the indifference curve

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27. In economics, the cardinal utility approach assumes that utility can be:
a) Measured numerically
b) Ranked ordinarily
c) Compared across individuals
d) Ignored in decision-making
28. The ordinal utility theory suggests that individuals:
a) Assign numerical values to utility
b) Have stable preferences
c) Make decisions based on cardinal utility
d) Cannot compare different levels of utility
29. Indifference curves represent combinations of goods that:
a) Yield maximum utility
b) Are affordable for the consumer
c) Are equally preferred by the consumer
d) Are impossible to achieve
30. In indifference curve analysis, a higher indifference curve represents:
a) Greater utility
b) Lower utility
c) Higher prices
d) Lower prices
31. The marginal rate of substitution (MRS) measures:
a) The rate at which a consumer is willing to substitute one good for another
b) The rate at which marginal utility decreases
c) The rate at which income increases
d) The rate at which prices change

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32. If the MRS is 2, it means that the consumer is willing to give up:
a) 2 units of one good to obtain 1 unit of the other good
b) 1 unit of one good to obtain 2 units of the other good
c) 2 units of both goods for 1 unit of another good
d) 1 unit of both goods for 2 units of another good
33. Marginal utility refers to:
a) The total satisfaction derived from consuming a good
b) The additional satisfaction derived from consuming one more unit of a good
c) The cost of producing an additional unit of a good
d) The price of a good in the market
34. The budget line represents:
a) All possible combinations of goods the consumer can afford
b) The consumer's preferences for goods
c) The consumer's income and prices of goods
d) The consumer's total utility
35. The slope of the budget line is determined by:
a) The consumer's income
b) The consumer's preferences
c) The prices of goods
d) The consumer's total utility
36. If the price of Good A increases while the price of Good B remains constant, the budget line
will:
a) Shift inward
b) Shift outward
c) Rotate clockwise
d) Rotate counterclockwise

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37. Consumer equilibrium occurs when:
a) The consumer maximizes their total utility
b) The consumer spends all their income
c) The consumer consumes equal amounts of each good
d) The consumer exhausts their budget
38. The consumer's equilibrium point occurs when:
a) The budget line is tangent to the highest indifference curve
b) The budget line intersects the highest indifference curve
c) The consumer's income is maximized
d) The consumer's total utility is maximized
39. If a consumer's income increases, the budget line will:
a) Shift inward
b) Shift outward
c) Rotate clockwise
d) Rotate counterclockwise
40. A consumption point inside the budget line
A) is un- affordable
B) shows that the consumer spends income on only one of the goods.
C) shows that the consumer has chosen to spend all of his or her income on both
products.
D) is affordable and, because it is inside the budget line, means that all the person's
budget has been spent.
E) is possible to afford but has some unspent income
41. The demand curve can be derived from the:
a) Price consumption curve
b) Budget line
c) Indifference curve
d) Marginal rate of substitution

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42. Suppose a consumer has $100 to spend on two goods, shoes and shirts. If the price of a pair
of shoes is $20 per pair and the price of a shirt is $15 each, which of the following combinations
is unaffordable to the consumer?
A) 0 pairs of shoes and 0 shirts
B) 2 pairs of shoes and 4 shirts
C) 5 pairs of shoes and 0 shirts
D) 0 pairs of shoes and 7 shirts
E) 2 pairs of shoes and 3 shirts
43. Misrak 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 Misrak's choices?
A) Misrak is maximizing utility.
B) Misrak is operating on her demand curve for tacos.
C) Misrak is operating on her demand curve for CDs.
D) Only answers A and B are correct
E) Answers A, B, and C are correct.
44. If the price of Good A decreases and the consumer's income remains constant, the
substitution effect will result in:a) An increase in19. If the price of Good A decreases and the
consumer's income remains constant, the substitution effect will result in:
a) An increase in the quantity demanded of Good A
b) A decrease in the quantity demanded of Good A
c) No change in the quantity demanded of Good A
d) An increase in the quantity demanded of Good B
45. The law of diminishing marginal utility states that:
a) The more of a good consumed, the higher the marginal utility
b) The more of a good consumed, the lower the marginal utility
c) The more of a good consumed, the higher the total utility
d) The more of a good consumed, the lower the total utility
46. A typical indifference curve…
A) shows that as a consumer has more of a good he or she is less willing to exchange it
for one unit of another good.
B) shows all combinations of goods that give a consumer the same level of utility.
C) shifts out if income increases.

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 D) both b and c
E) all of the above
47. The rate at which a consumer is ABLE to substitute one good for another is determined by
the…
A) consumer's income.
B) indifference map.
C) ratio of the prices of the goods.
D) marginal rate of substitution.
48. A utility function shows the relation between…
A) the amount of goods consumed and a consumer's utility.
B) income and a consumer's utility.
C) prices and a consumer's utility.
D) maximum utility and the prices and income facing a consumer.
49. Along an indifference curve…
A) the ratio of the marginal utilities is constant.
B) the MRS is constant.
C) the price ratio is constant.
D) both b and c
E) none of the above
50. Which of the following assumptions is (are) NOT made in consumer behavior theory?
A) Consumers can rank all bundles of goods.
B) Consumers have complete information.
C) Consumers can measure the utility they get from all bundles of goods.
D) both b and c
E) None of the above are assumptions made in consumer behavior theory.
51. Marginal utility is the…
A) relative value of two goods when a utility-maximizing decision has been made.
B) change in total utility that results from increasing the amount of a good consumed
by one unit.

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 C) change in the amount of a good consumed that increases total utility by one unit.
D) utility obtained from the consumption of all but the last unit of a good.
E) none of the above
52. If a consumer is choosing the bundle of goods that maximizes utility subject to a budget
constraint, then the
A) rate at which the consumer is willing to substitute between goods is equal to the
market rate of exchange between goods.
B) rate at which income affects the utility-maximizing choice is equal for all goods.
C) ratio of marginal utility to price is equal for all goods.
D) both a and c
E) all of the above
53. Daniel, who consumes only grilled chicken sandwiches and salads with low-fat dressing, has
a weekly income of $100. He is currently consuming 20 grilled chicken sandwiches per week, at
a price of $3 each, and 20 salads per week, at a price of $2 each. If the last sandwich and the last
salad both added 40 units to Daniel's total utility, he
A) is making the utility-maximizing choice.
B) should buy more salads and fewer sandwiches.
C) should buy more sandwiches and fewer salads.
D) obtains more additional utility per dollar from sandwiches than from salads.
E) both b and d
54. Which of the following statements is FALSE?
A) A consumer has only one indifference curve.
B) A consumer possesses a preference map.
C) The marginal rate of substitution is equal to the magnitude of the slope of the
indifference curve.
D) Diminishing marginal rate of substitution means that the marginal rate of
substitution decreases as more of the good is consumed.
E) An indifference curve is a curve that shows the combination of goods among which
a consumer is indifferent.
55) The marginal rate of substitution of one good for another is measured by moving
A) among different indifference curves.
B) along a budget line.
C) among different budget lines.
D) along a demand curve.
E) along an indifference curve.

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56) The magnitude of the slope of an indifference curve is the
A) marginal rate of substitution.
B) rate of increasing opportunity cost.
C) marginal rate of utility of income.
D) rate of relative prices.
E) marginal utility of substitution.
57) Normally shaped indifference curves are bowed towards the origin of the graph. The reason
for this shape is
A) the principle of diminishing marginal rate of relative price.
B) diminishing marginal rate of substitution.
C) that the marginal rate of substitution is constant along an indifference curve.
D) that indifference curves farther away from the origin represent higher levels of utility.
E) the law of demand.
58. If the price of a good decreases, the substitution effect…
A) is positive since the quantity of the good increases.
B) shows the increase in the quantity of the good demanded, holding income
constant.
C) must be greater than the income effect.
D) shows the increase in the quantity of the good demanded, holding utility constant.
E) can increase or decrease the quantity of the good demanded.
59. In an indifference curve/budget line diagram, at the consumer equilibrium the slope of the
budget line
A) is less than the slope of the indifference curve.
B) is greater than the slope of the indifference curve.
C) equals the slope of the indifference curve.
D) may be greater than, equal to, or less than the slope of the indifference curve.
E) has nothing to do with the equilibrium
60. The rate at which a consumer is WILLING to substitute one good for another is measured by
the…
A) slope of the tangent to the indifference curve.
B) slope of the budget line.
C) indifference map.
D) consumer's real income.
61. Which of the following is NOT an assumption of the cardinal utility approach?
(a) Utility can be measured in absolute numbers.

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 (b) Consumers are rational.
(c) The marginal utility of a good is constant.
(d) Consumers have limited money income.
62. The law of diminishing marginal utility states that:
(a) The marginal utility of a good increases as more of it is consumed.
(b) The marginal utility of a good decreases as more of it is consumed.
(c) The marginal utility of a good remains constant as more of it is consumed.
(d) The marginal utility of a good is negative.
63. Which of the following is NOT an assumption of the ordinal utility theory?
(a) Consumers can rank their preferences for different bundles of goods.
(b) Utility can be measured in absolute numbers.
(c) Consumers are rational.
(d) The marginal rate of substitution is diminishing.
64. An indifference curve shows:
(a) Combinations of goods that yield the same level of satisfaction.
(b) Combinations of goods that yield different levels of satisfaction.
(c) Combinations of goods that are equally preferred.
(d) Combinations of goods that are not preferred.
65. The marginal rate of substitution (MRS) is:
(a) The slope of an indifference curve.
(b) The rate at which a consumer is willing to substitute one good for another.
(c) The difference in utility between two goods.
(d) The ratio of the prices of two goods.
66. Which of the following is NOT a property of indifference curves?
(a) They are downward sloping.
(b) They are convex to the origin.
(c) They never intersect.
(d) They represent different levels of satisfaction.

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67. An indifference set is:
(a) A collection of all bundles of goods that yield the same level of satisfaction.
(b) A collection of all bundles of goods that yield different levels of satisfaction.
(c) A single bundle of goods that yields the highest level of satisfaction.
(d) A single bundle of goods that yields the lowest level of satisfaction.

68. An indifference map is:

(a) A collection of all indifference curves for a given consumer.
(b) A collection of all indifference sets for a given consumer.
(c) A single indifference curve for a given consumer.
(d) A single indifference set for a given consumer.
69. Which of the following is NOT a factor that can affect the slope of an indifference curve?
(a) The consumer's preferences.
(b) The prices of the goods.
(c) The consumer's income.
(d) The availability of the goods.
70. The diminishing MRS implies that:
(a) The consumer is willing to substitute more of one good for another at a higher level of
satisfaction.
(b) The consumer is willing to substitute less of one good for another at a higher level of
satisfaction.
(c) The consumer is willing to substitute the same amount of one good for another at any
level of satisfaction.
(d) The consumer is not willing to substitute one good for another at any level of
satisfaction.
71. The MRS is equal to:
(a) The ratio of the marginal utilities of the two goods.
(b) The ratio of the prices of the two goods.

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 (c) The difference in the marginal utilities of the two goods.
(d) The sum of the marginal utilities of the two goods.
72. If the MRS is greater than 1, then:
(a) The consumer is willing to substitute more of one good for another.
(b) The consumer is willing to substitute less of one good for another.
(c) The consumer is willing to substitute the same amount of one good for another.
(d) The consumer is not willing to substitute one good for another.

73. Which of the following is a criticism of the cardinal utility approach?

(a) It is difficult to measure utility in absolute numbers.
(b) It assumes that consumers are rational.
(c) It does not take into account the consumer's budget constraint.
(d) It is only applicable to perfect substitutes.
74. The demand curve for a good is downward sloping because:
(a) The marginal utility of the good decreases as more of it is consumed.
(b) The price of the good increases as more of it is demanded.
(c) The consumer's income decreases as more of the good is purchased.
(d) The availability of the good decreases as more of it is consumed.
75. Which of the following is an advantage of the ordinal utility theory?
(a) It is easier to apply than the cardinal utility approach.
(b) It does not require the assumption of rational consumers.
(c) It can be used to analyze a wider range of consumer behavior.
(d) All of the above.
76. An indifference map can be used to:
(a) Determine the consumer's optimal combination of goods.
(b) Illustrate the consumer's preferences for different bundles of goods.
(c) Calculate the consumer's marginal rate of substitution.
(d) All of the above.

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77. Which of the following is NOT a property of indifference curves?
(a) They are continuous.
(b) They are smooth.
(c) They are always downward sloping.
(d) They can intersect.
78. An indifference set is:
(a) A single point on an indifference map.
(b) A collection of all bundles of goods that yield the same level of satisfaction.
(c) A collection of all bundles of goods that yield different levels of satisfaction.
(d) A collection of all bundles of goods that are equally preferred.
79. The slope of an indifference curve is equal to:
(a) The marginal rate of substitution.
(b) The ratio of the prices of the two goods.
(c) The difference in the marginal utilities of the two goods.
(d) The sum of the marginal utilities of the two goods.
80. The diminishing MRS implies that:
(a) The consumer is willing to substitute more of one good for another at a higher level of
satisfaction.
(b) The consumer is willing to substitute less of one good for another at a higher level of
satisfaction.
(c) The consumer is willing to substitute the same amount of one good for another at any
level of satisfaction.
(d) The consumer is not willing to substitute one good for another at any level of
satisfaction.
81. Which of the following is an assumption of the ordinal utility theory?
(a) Consumers can rank their preferences for different bundles of goods.
(b) Utility can be measured in absolute numbers.
(c) The marginal rate of substitution is constant.
(d) Consumers are always rational.
82. An indifference curve shows:

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 (a) Combinations of goods that yield the same level of satisfaction.
(b) Combinations of goods that yield different levels of satisfaction.
(c) Combinations of goods that are equally preferred.
(d) Combinations of goods that are not preferred.

83. Which of the following is a property of cardinal utility?

(a) It can be measured in absolute numbers.
(b) It is subjective.
(c) It is constant for all consumers.
(d) It is not affected by changes in income.
84. The marginal utility of a good is:
(a) The total utility derived from consuming one additional unit of the good.
(b) The change in total utility divided by the change in consumption.
(c) The difference between the total utility derived from consuming two units of the good
and the total utility derived from consuming one unit of the good.
(d) The ratio of the total utility derived from consuming two units of the good to the total
utility derived from consuming one unit of the good.
85. The law of diminishing marginal utility states that:
(a) The marginal utility of a good increases as more of it is consumed.
(b) The marginal utility of a good decreases as more of it is consumed.
(c) The marginal utility of a good remains constant as more of it is consumed.
(d) The marginal utility of a good is negative.
86. A consumer has a utility function U(x, y) = xy. If the consumer consumes 2 units of good x
and 3 units of good y, what is their total utility?
(A) 5
(B) 6
(C) 9
(D) 12

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87. A consumer has an indifference curve given by the equation U(x, y) = 10. If the consumer
currently consumes 4 units of good x and 2 units of good y, what combination of goods will also
yield the same level of utility?
(A) 2 units of good x and 5 units of good y
(B) 3 units of good x and 3 units of good y
(C) 5 units of good x and 1 unit of good y
(D) 6 units of good x and 0 units of good y

88. A consumer has an income of $100 and the price of good x is $10. If the price of good y is
$5, what is the slope of the consumer's budget line?
(A) -2
(B) -1
(C) 1
(D) 2
89. A consumer's budget line has a slope of -3. If the price of good x is $6, what is the price of
good y?
(A) $2
(B) $3
(C) $4
(D) $5
90. An indifference curve represents combinations of goods that yield:
(A) Equal levels of utility
(B) Different levels of utility
(C) Maximum utility
(D) Minimum utility
91. A consumer will achieve utility maximization when:
(A) The budget line is tangent to the highest possible indifference curve
(B) The consumer exhausts their budget
(C) The consumer consumes equal amounts of each good
(D) The consumer's income is maximized

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92. An indifference curve is convex to the origin, which means that:
(A) The marginal rate of substitution is increasing
(B) The marginal rate of substitution is decreasing
(C) The marginal rate of substitution is constant
(D) The marginal rate of substitution is zero
93. A consumer has a utility function U(x, y) = x^2 + y^2. If the consumer consumes 3 units of
good x and 4 units of good y, what is their total utility?
(A) 5
(B) 10
(C) 25
(D) 50
94. An indifference curve is tangent to the budget line at point (2, 3). If the marginal utility of
good x is 4 and the marginal utility of good y is 6, what is the consumer's marginal rate of
substitution?
(A) 0.67
(B) 1.5
(C) 2
(D) 3
95. The budget line represents:
(A) The combination of goods and services a consumer can afford given their income and
the prices of the goods.
(B) The maximum level of utility a consumer can achieve.
(C) The total expenditure a consumer incurs on different goods and services.
(D) The consumer's preferences and tastes for different goods and services.
96. An indifference curve shifts outward, which means that:
(A) The consumer's preferences have changed
(B) The consumer's income has increased
(C) The price of one of the goods has decreased
(D) The price of both goods has increased

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97. When marginal utility is decreasing but positive, total utility is:
A) increasing at a decreasing rate. C) increasing at an increasing rate.
B) decreasing at a decreasing rate. D) decreasing at an increasing rate.
98. A consumer with a fixed income will maximize utility when each good is purchased
in amounts such that the:
A) total utility is the same for each good.
B) marginal utility of each good is maximized.
C) marginal utility per dollar spent is the same for all goods.
D) marginal utility per dollar spent is maximized for each good.
99. If a rational consumer is in equilibrium, then:
A) the marginal utility obtained from one product is equal to the marginal utility
obtained from any other product.
B) a reallocation of income would increase the consumer's total utility.
C) the marginal utility per last dollar spent is the same for all goods consumed.
D) total utility becomes zero.
100. If you know that the marginal utility per dollar spent on product Alpha is less than the
marginal utility per dollar spent on product Beta, consumers who spend all their income on these
two products can:
A) maximize total utility but not marginal utility.
B) maximize marginal utility but not total utility.
C) increase total utility by buying more of Beta and less of Alpha.
D) increase total utility by buying more of Alpha and less of Beta

Answers
1. Choice: b) Reason: According to ordinal utility theory, consumers aim to maximize their
utility, but they are subject to budget constraints. This means they have limited income and must
allocate it among different goods and services to maximize their overall satisfaction.
2. Choice: b) Reason: The law of diminishing marginal utility states that as a consumer
consumes more of a particular good, the additional satisfaction or utility derived from each
additional unit of the good decreases. In other words, the more you consume of something, the
less additional satisfaction you get from each additional unit.
3. Choice: d) Reason: This assumption is not a part of ordinal utility theory. While it is generally
true that consumers prefer more of a good to less of it, ordinal utility theory does not explicitly
assume this. It focuses on the ranking of preferences rather than specific values.

4. Choice: b) Reason: The budget line represents the consumer's income constraint or budget
constraint. It indicates the different combinations of goods and services that a consumer can
afford with a given level of income and the prevailing prices.
5. Choice: c) Reason: The slope of the budget line represents the relative price of the two goods.
It shows the rate at which one good can be exchanged for the other in the market.

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6. Choice: c) Reason: The budget line shifts outward when the consumer's income increases.
This means that with a higher income, the consumer can afford to purchase more goods and
services at the given prices.
7. Choice: a) Reason: The point where the budget line intersects an indifference curve represents
the consumer's optimal consumption bundle. It is the combination of goods and services that
maximizes the consumer's utility, given the budget constraint.
8. Choice: a) Reason: The consumer achieves utility maximization when the budget line is
tangent to the highest possible indifference curve. This occurs when the consumer allocates their
income in a way that the marginal rate of substitution between the goods equals the relative price
of the goods.
9. Choice: a) Reason: The substitution effect of a price decrease leads to an increase in the
quantity demanded of the good. When the price of a good decreases, it becomes relatively
cheaper compared to other goods, and consumers tend to substitute away from the more
expensive goods toward the now relatively cheaper good.
10. Choice: a) Reason: The income effect of a price decrease leads to an increase in the quantity
demanded of the good. When the price of a good decreases, the consumer's real income
increases, allowing them to afford more of all goods, including the one with the price decrease.
11. Choice: d) Reason: A consumer will be in equilibrium when the budget line is tangent to the
indifference curve. This means that the consumer is maximizing their utility given their budget
constraint, and there is no other affordable combination of goods that can provide higher utility.
12. Choice: a) Reason: The concept of marginal rate of substitution (MRS) measures the rate at
which a consumer is willing to substitute one good for another while keeping the overall
satisfaction or utility constant.
13. Choice: a) Reason: If the MRS is 2, it means that the consumer is willing to give up 2 units
of one good to obtain 1 unit of the other good. This ratio represents the consumer's willingness to
trade between the two goods.
14. Choice: b) Reason: The concept of diminishing marginal rate of substitution (DMRS) states
that the MRS decreases as consumption increases. As a consumer consumes more of a good,
their willingness to substitute it for another good decreases, leading to a diminishing rate of
substitution.

15. Choice: b) Reason: The concept of budget constraint refers to the combination of a
consumer's income and the prices of goods, which determine the affordable combinations of
goods that the consumer can purchase.

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16. Choice: a) Reason: The budget constraint equation is given by Income = Price of Good A +
Price of Good B. It represents the total amount of income available to the consumer, which can
be allocated to the purchase of different goods.
17. Choice: b) Reason: A budget line with a slope of -2 indicates that the price of Good B is two
times the price of Good A. The negative slope indicates the trade-off between the two goods,
where the consumer must give up two units of Good A to obtain one unit of Good B.
18. Choice: c) Reason: The budget line shifts inward when the consumer's income decreases.
This means that with a lower income, the consumer can afford to purchase fewer goods and
services at the given prices.
19. Choice: a) Reason: If the price of Good A increases while the price of Good B remains
constant, the budget line will rotate inward. This is because the consumer's purchasing power for
Good A decreases, and they can afford to purchase less of it for a given level of income.
20. Choice: c) Reason: The budget constraint is affected by changes in the consumer's income
and the prices of goods. An increase in income or a decrease in the prices of goods will shift the
budget constraint outward, while a decrease in income or an increase in the prices of goods will
shift it inward.
21. Choice: b) Reason: If the prices of both goods increase while the consumer's income remains
constant, the budget line will rotate inward. This means that the consumer's purchasing power
decreases, as they can afford to purchase fewer goods and services at the higher prices.
22. Choice: b) Reason: Indifference curves represent the consumer's preferences and the different
combinations of goods that provide the same level of utility or satisfaction. They are used to
analyze consumer behavior and determine the optimal consumption bundle.
23. Choice: c) Reason: Indifference curves are typically drawn in such a way that a higher curve
represents a higher level of utility or satisfaction for the consumer. The consumer prefers points
on higher indifference curves because they offer greater overall satisfaction.
24. Choice: d) Reason: An indifference curve cannot intersect with a budget line because it
would violate the consumer's utility maximization. The point of tangency between the budget
line and an indifference curve represents the optimal consumption bundle, where the consumer
maximizes utility given the budget constraint.
25. Choice: a) Reason: Indifference curves are typically assumed to be convex to the origin,
which implies that the consumer's preferences are consistent with the law of diminishing
marginal rate of substitution. This means that as the consumer consumes more of one good, they
require more of the other good to compensate and maintain the same level of satisfaction.

26. Choice: d) Reason: A consumer achieves utility maximization when the budget line, which
represents all affordable combinations of goods, is tangent to the indifference curve. At this

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point, the consumer is allocating their budget in such a way that they cannot increase their utility
by reallocating their expenditure. It signifies an optimal allocation of resources.
27. Choice: a) Reason: The cardinal utility approach assumes that utility can be measured
numerically. It suggests that utility can be assigned specific numerical values, allowing for
comparisons of utility levels between different goods and individuals.
28. Choice: b) Reason: The ordinal utility theory suggests that individuals have stable
preferences. It focuses on ranking and comparing different bundles of goods based on the
individual's preferences, without assigning specific numerical values to utility.
29. Choice: c) Reason: Indifference curves represent combinations of goods that are equally
preferred by the consumer. Each point on an indifference curve represents a different
combination of goods that yields the same level of utility for the consumer.
30. Choice: a) Reason: In indifference curve analysis, a higher indifference curve represents
greater utility. Indifference curves are usually drawn in a way that higher curves indicate higher
levels of utility for the consumer.
31. Choice: a) Reason: The marginal rate of substitution (MRS) measures the rate at which a
consumer is willing to substitute one good for another while maintaining the same level of utility.
It represents the trade-off a consumer is willing to make between two goods.
32. Choice: a) Reason: If the marginal rate of substitution (MRS) is 2, it means that the consumer
is willing to give up 2 units of one good to obtain 1 unit of the other good. MRS indicates the
relative importance or preference a consumer places on one good compared to another.
33. Choice: b) Reason: Marginal utility refers to the additional satisfaction or utility derived from
consuming one more unit of a good. It measures the change in total utility resulting from a one-
unit change in the quantity consumed.
34. Choice: a) Reason: The budget line represents all possible combinations of goods that a
consumer can afford given their income and the prices of goods. It shows the different trade-offs
the consumer can make between two goods given their budget constraint.
35. Choice: c) Reason: The slope of the budget line is determined by the prices of goods. The
slope represents the rate at which one good can be exchanged for another in terms of their prices.
36. Choice: a) Reason: If the price of Good A increases while the price of Good B remains
constant, the budget line will shift inward. This is because the consumer's purchasing power for
Good A decreases, limiting the feasible combinations of goods they can afford.
37. Choice: a) Reason: Consumer equilibrium occurs when the consumer maximizes their total
utility given their budget constraint and the available choices. It represents the optimal allocation
of resources that maximizes the consumer's satisfaction.

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38. Choice: a) Reason: The consumer's equilibrium point occurs when the budget line is tangent
to the highest indifference curve. At this point, the consumer is allocating their budget in a way
that maximizes their utility, given their preferences and the prices of goods.
39. Choice: b) Reason: If a consumer's income increases, the budget line will shift outward. This
is because the consumer now has a higher purchasing power and can afford more combinations
of goods.
40. Choice: E) Reason: A consumption point inside the budget line is possible to afford but has
some unspent income. It represents a situation where the consumer could purchase more goods
within their budget constraint but chooses not to do so.
41. Choice: c) Reason: The demand curve can be derived from the indifference curve. The
demand curve shows the relationship between the price of a good and the quantity demanded by
the consumer, holding other factors constant.
42. Choice: C) Reason: If the consumer has $100 to spend on two goods, shoes and shirts, and
the price of a pair of shoes is $20 and the price of a shirt is $15, the consumer cannot afford 5
pairs of shoes and 0 shirts as it would require $100 (5 x $20) to be spent on shoes alone.
43. Choice: D) Reason: Based on the given information, we can conclude that only answers A
and B are correct. Answer A states that the consumer's budget constraint has shifted inward,
which is true because the price of Good A has increased. Answer B states that the consumer's
purchasing power for Good A has decreased, which is also true because the price increase
reduces the quantity of Good A that can be purchased with a given budget.
44. Choice: b) Reason: To restore the consumer's original consumption bundle after a price
increase for Good A, the price of Good A needs to be decreased. This would allow the consumer
to purchase the same quantity of Good A as before the price increase, given their budget
constraint.
45. Choice: a) Reason: The consumer's budget constraint is determined by their income and the
prices of goods. Changes in either income or prices can shift or rotate the budget constraint.
46. Choice: c) Reason: The consumer's budget line represents the combinations of goods that can
be purchased with a given income and the prices of goods. Any changes in income or prices will
affect the slope, position, or shape of the budget line.
47. Choice: d) Reason: To induce the consumer to buy more of Good B, its price needs to
decrease. A decrease in the price of Good B would make it relatively more affordable compared
to Good A, leading to an increase in the quantity demanded of Good B.
48. Choice: b) Reason: The shape and characteristics of an indifference curve are determined by
the consumer's preferences for the two goods. Indifference curves can have different shapes, such
as convex, concave, or straight lines, depending on the consumer's preference for substitutability
or complementarity between the goods.

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49. Choice: d) Reason: The shape and slope of an indifference curve reflect the consumer's
preferences for the two goods. A steeper slope indicates a higher marginal rate of substitution
(MRS), meaning the consumer is willing to give up more of one good to obtain more of the
other.
50. Choice: c) Reason: As the consumer moves from one indifference curve to a higher one, it
represents a higher level of utility. Indifference curves are typically drawn in a way that higher
curves indicate higher levels of satisfaction or utility for the consumer.
51. Choice: B) Reason: Marginal utility refers to the change in total utility that occurs when one
more unit of a good is consumed. It represents the additional satisfaction or utility gained from
consuming an additional unit of a good.
52. Choice: D) Reason: When a consumer chooses the bundle of goods that maximizes utility
subject to a budget constraint, the rate at which the consumer is willing to substitute between
goods is equal to the market rate of exchange between goods (a) and the ratio of marginal utility
to price is equal for all goods (c). Both of these statements hold true in this scenario.
53. Choice: E) Reason: If the last sandwich and the last salad both added 40 units to Daniel's
total utility, it means that the marginal utility of the last dollar spent on sandwiches and salads is
the same. In this case, Daniel should buy more salads and fewer sandwiches (b) because the price
of a salad is lower compared to the price of a sandwich. Additionally, he obtains more additional
utility per dollar from sandwiches than from salads (d) because the price of a sandwich is higher
relative to the additional utility gained compared to a salad.
54. Choice: A) Reason: This statement is FALSE. A consumer typically has multiple indifference
curves representing different levels of satisfaction or utility. Each indifference curve shows
different combinations of goods that yield the same level of satisfaction to the consumer.
55. Choice: E) Reason: The marginal rate of substitution (MRS) measures the rate at which a
consumer is willing to substitute one good for another while remaining on the same indifference
curve. Therefore, it is measured by moving along an indifference curve.
56. Choice: A) Reason: The magnitude of the slope of an indifference curve represents the
marginal rate of substitution (MRS). It indicates the amount of one good a consumer is willing to
give up to obtain an additional unit of another good while maintaining the same level of
satisfaction.
57. Choice: B) Reason: The reason for the bowed shape of normally shaped indifference curves
is the diminishing marginal rate of substitution. This means that as a consumer consumes more
of one good, they are willing to give up fewer units of that good to obtain an additional unit of
the other good.
58. Choice: C) Reason: At the consumer equilibrium, the slope of the budget line is equal to the
slope of the indifference curve to ensure that the consumer is maximizing their utility while
staying within their budget constraint.

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59. Choice: A) Reason: The income effect shows the change in the quantity demanded of a good
when its price changes, taking into account the impact of the change in real income. If a good is
normal, the income effect reinforces the substitution effect, meaning that a price increase leads to
a decrease in quantity demanded due to both effects working in the same direction.
60. Choice: A) Reason: The rate at which a consumer is willing to substitute one good for
another is measured by the slope of the tangent to the indifference curve at a given point. It
represents the MRS at that point.
61. Choice: C) Reason: The assumption of the cardinal utility approach is that the marginal
utility of a good is not constant but diminishes as more of it is consumed. This assumption is
consistent with the law of diminishing marginal utility.
62. Choice: B) Reason: The law of diminishing marginal utility states that as more units of a
good are consumed, the additional satisfaction or utility gained from each additional unit
decreases. Therefore, the marginal utility of a good decreases as more of it is consumed.
63. Choice: B) : The ordinal utility theory does not assume that utility can be measured in
absolute numbers. It only assumes that consumers can rank their preferences for different
bundles of goods without assigning specific values to utility.
64. Choice: A) Reason: An indifference curve represents combinations of goods that yield the
same level of satisfaction or utility to a consumer. Different indifference curves represent
different levels of satisfaction.
65. Choice: A) Reason: The marginal rate of substitution (MRS) is measured by the slope of an
indifference curve. It indicates the rate at which a consumer is willing to substitute one good for
another while remaining on the same indifference curve.
66. Choice: C) Reason: Indifference curves can intersect in some cases. However, this is not a
property of indifference curves. The other options are properties of indifference curves: they are
downward sloping, convex to the origin, and represent different levels of satisfaction.
67. Choice: A) Reason: An indifference set refers to a collection of all bundles of goods that
yield the same level of satisfaction to a consumer. It represents different combinations of goods
that provide the consumer with the same level of utility.
68. Choice: A) Reason: An indifference map is a collection of all indifference curves for a given
consumer. It shows the different levels of satisfaction or utility that a consumer can achieve with
different combinations of goods.
69. Choice: D) Reason: The slope of an indifference curve is determined by the consumer's
preferences (taste), the prices of the goods, and the consumer's income. The availability of goods
is not a factor that affects the slope of an indifference curve.
70. Choice: B) Reason: The diminishing marginal rate of substitution implies that as the
consumer attains a higher level of satisfaction, they are willing to substitute less of one good for

26
another. In other words, the consumer becomes less willing to give up units of one good to obtain
additional units of the other good as their satisfaction increases.
71. Choice: C) Reason: The budget constraint represents the combinations of goods that a
consumer can afford given their income and the prices of the goods. It is a line or curve that
shows the various combinations of goods that exhaust the consumer's income.
72. Choice: B) Reason: The consumer's optimal consumption point occurs where the budget
constraint is tangent to the indifference curve. At this point, the consumer achieves the highest
level of satisfaction given their budget constraint.
73. Choice: A) Reason: If a consumer's indifference curve is not tangent to the budget constraint,
it means that the consumer can still increase their utility by adjusting their consumption bundle.
Therefore, the consumer is not maximizing their utility at that point.
74. Choice (a) Reason: The demand curve is downward sloping because as more units of a good
are consumed, the additional satisfaction or utility derived from each additional unit diminishes,
resulting in a decrease in the consumer's willingness to pay for additional units.
75. Choice: (a) Reason: Ordinal utility theory is easier to apply because it focuses on ranking
preferences rather than assigning numerical values to utility. This simplifies the analysis of
consumer behavior and eliminates the need for precise measurement of utility in absolute terms.
76. Choice: (d) Reason: An indifference map can be used to determine the consumer's optimal
combination of goods by identifying the highest attainable utility, illustrate the consumer's
preferences for different bundles of goods by plotting indifference curves, and calculate the
consumer's marginal rate of substitution, which reflects the rate at which the consumer is willing
to trade one good for another while maintaining the same level of satisfaction.
77. Choice: © Reason: Indifference curves do not always have to be downward sloping. In
certain cases, when the goods in question are complements, indifference curves can exhibit
upward slopes or even be L-shaped.
78. Choice: (b) Reason: An indifference set refers to a collection of all bundles of goods that
yield the same level of satisfaction for the consumer. It represents different combinations of
goods that are considered equally preferable.

79. Choice: (a) Reason: The slope of an indifference curve is equal to the marginal rate of
substitution (MRS). The MRS measures the rate at which a consumer is willing to substitute one
good for another while maintaining the same level of satisfaction.
80. Choice: (b) Reason: The concept of diminishing marginal rate of substitution (MRS) states
that as a consumer consumes more of one good while keeping the level of satisfaction constant,
they are willing to substitute less of that good for another. In other words, the consumer becomes
less willing to trade one good for another as they already have a higher level of satisfaction.

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81. Choice: (a) Reason: One of the assumptions of ordinal utility theory is that consumers can
rank their preferences for different bundles of goods. This assumption allows for the
establishment of indifference curves and the analysis of consumer choices based on relative
preferences.
82. Choice: (a) Reason: An indifference curve represents combinations of goods that yield the
same level of satisfaction for the consumer. Each point on the curve represents a different
combination of goods that the consumer considers equally preferable.
83. Choice: (a) Reason: Cardinal utility refers to a measure of utility that can be assigned
numerical values. It allows for the quantification of utility, enabling comparisons between
different levels of utility.
84. Choice: (b) Reason: The marginal utility of a good is the change in total utility divided by the
change in consumption of that good. It measures the additional utility gained from consuming
one more unit of the good.
85. Choice: B) Reason: The law of diminishing marginal utility states that as a consumer
consumes more units of a good, the additional satisfaction or utility derived from each additional
unit of the good decreases. Hence, the marginal utility of a good decreases as more of it is
consumed.
86. Choice: B) Reason: The total utility is calculated by substituting the given values into the
utility function: U(x, y) = xy. In this case, U(2, 3) = 2 * 3 = 6.
87. Choice: B) Reason: The indifference curve represents combinations of goods that yield the
same level of utility. Since the consumer is currently consuming 4 units of good x and 2 units of
good y, any combination that gives the same level of utility of 10 will be on the same
indifference curve. The only option that satisfies this condition is 3 units of good x and 3 units of
good y.
88. Choice: A) Reason: The slope of the budget line is calculated by dividing the price of good x
by the price of good y. In this case, the slope is (-$10)/($5) = -2/1 = -2.
89. Choice: A) Reason: The price of good y is calculated by dividing the price of good x by the
slope of the budget line. In this case, the price of good y is ($6)/(-3) = -$2 = $2 is the price of Y
90. Choice f (B) Reason: An indifference curve represents different combinations of goods that
yield different levels of utility. Each point on the curve represents a specific combination of
goods, and the consumer is indifferent between these combinations in terms of their satisfaction
or utility.
91. Choice (A) Reason: A consumer achieves utility maximization when the budget line is
tangent to the highest possible indifference curve. At this point, the consumer has allocated their
budget in a way that maximizes their satisfaction, given their income and the prices of goods.

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92. Choice (A) Reason: An indifference curve is convex to the origin, which means that the
marginal rate of substitution (MRS) is increasing. As the consumer moves along the curve, the
MRS increases, indicating that the consumer is willing to give up more of one good to obtain
additional units of the other good.
93. Choice (C) Reason: The consumer's utility function is U(x, y) = x^2 + y^2. If the consumer
consumes 3 units of good x and 4 units of good y, the total utility can be calculated as follows:
U(3, 4) = (3^2) + (4^2) = 9 + 16 = 25.
94. Choice for (A) Reason: The marginal rate of substitution (MRS) is equal to the ratio of the
marginal utilities of the two goods. In this case, the MRS = (Marginal Utility of x) / (Marginal
Utility of y) = 4/6 = 0.67.
95. Choice for 95: (A) Reason: The budget line represents the different combinations of goods
and services that a consumer can afford given their income and the prices of the goods. It shows
the trade-off between the two goods and the maximum quantity of one good that can be
purchased for a given quantity of the other good, given the consumer's budget constraint.
96. Choice (B) Reason: When an indifference curve shifts outward, it indicates an increase in
the consumer's overall satisfaction. This can happen when the consumer's income increases,
allowing them to afford higher levels of consumption and reach higher levels of utility.
97. Choice : (A) Reason: When marginal utility is decreasing but positive, total utility is
increasing at a decreasing rate. Each additional unit of the good adds to the total utility, but the
additional utility gained from each unit diminishes as the consumer consumes more.
98. Choice for 98: (D) Reason: A consumer with a fixed income will maximize utility when each
good is purchased in amounts such that the marginal utility per dollar spent is maximized for
each good. This ensures that the consumer is getting the most satisfaction from each dollar spent
on different goods.
99. Choice : (C) Reason: In equilibrium, a rational consumer allocates their spending in a way
that the marginal utility per last dollar spent is the same for all goods consumed. This ensures
that the consumer is getting the maximum satisfaction from the last dollar spent on each good,
indicating an optimal allocation of resources.
100. Choice for 100: Reason: If the marginal utility per dollar spent on product Beta is higher
than that of product Alpha, consumers can increase their total utility by buying more of Beta and
less of Alpha. By reallocating their spending towards the good with higher marginal utility per
dollar spent, they can maximize their overall satisfaction.

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