AGRICULTURAL ECONOMICS 9.

How is the budget line defined in consumer

AND MARKETING behavior theory?
THEORY OF CONSUMER BEHAVIOR a) The limit of a consumer's total utility
b) The boundary between affordable and
unaffordable goods
1. What does the theory of consumer behavior aim c) The maximum number of goods a consumer
to determine? can purchase
a) How firms set prices d) The highest possible income a consumer can
b) The factors affecting consumer demand earn
c) Government policies on taxation
d) The level of national output 10. What does the slope of the budget line
represent?
2. Which of the following is NOT a determinant of a) Total utility gained from consumption
demand according to the theory of consumer b) The price ratio of two goods
behavior? c) The consumer’s level of income
a) Income d) The amount of satisfaction
b) Taste
c) Population 11. An indifference curve shows:
d) Profit a) The total cost of a bundle of goods
b) Different combinations of two goods that
3. What is the term used for the satisfaction provide the same level of satisfaction
obtained from the consumption of a good? c) The maximum satisfaction a consumer can
a) Supply achieve
b) Demand d) The income required to purchase a bundle of
c) Utility goods
d) Budget
12. What is the marginal rate of substitution
4. What does marginal utility refer to? (MRS)?
a) The utility gained from consuming all units of a) The rate at which a consumer is willing to
a good substitute one good for another while maintaining
b) The additional utility gained from consuming the same level of satisfaction
one more unit of a good b) The additional utility gained from consuming
c) The total cost of a good one more unit of a good
d) The price at which a good is sold c) The total cost of a bundle of goods
d) The price ratio of two goods
5. Who developed the law of diminishing marginal
utility? 13. What is the shape of an indifference curve?
a) Alfred Marshall a) Upward sloping
b) Adam Smith b) Horizontal
c) John Maynard Keynes c) Convex to the origin
d) David Ricardo d) Vertical

6. According to the law of diminishing marginal 14. The cardinal utility approach assumes that:
utility, what happens as more of a good is a) Utility cannot be measured
consumed? b) Utility can be measured in units such as
a) Total utility increases at an increasing rate "utils"
b) Marginal utility decreases c) Consumers cannot rank their preferences
c) Marginal utility increases d) Indifference curves intersect
d) Total utility decreases
15. According to the ordinal approach, how do
7. What assumption is NOT part of the marginal consumers make decisions?
utility analysis? a) By measuring utility in terms of money
a) Consumers are rational b) By ranking their preferences without
b) Utility is measurable measuring utility
c) Consumers are influenced by other buyers' c) By using the law of supply
actions d) By calculating the marginal utility of income
d) The marginal utility of money is constant
16. What is a key assumption of indifference curve
8. What happens at the saturation point in the law analysis?
of diminishing marginal utility? a) Utility is measurable
a) Total utility becomes negative b) Goods are perfect substitutes
b) Total utility is unchanged c) Consumers are rational and consistent in their
c) Marginal utility increases choices
d) Consumption becomes impossible d) Prices of goods do not matter
17. In the context of consumer behavior, what does 25. If a consumer's income increases, what happens
a higher indifference curve represent? to the set of possible consumption bundles?
a) A lower level of satisfaction a) It shrinks
b) A higher level of satisfaction b) It remains the same
c) A larger budget c) It expands
d) A decrease in total utility d) It disappears

18. Which of the following best describes consumer 26. The budget line will rotate if:
equilibrium? a) Income increases
a) When a consumer spends all income on one b) The price of one good changes while the price
good of the other remains constant
b) When a consumer reaches the highest possible c) The prices of both goods increase
indifference curve given their budget constraint d) The consumer’s preferences change
c) When total utility is zero
d) When marginal utility is negative 27. An indifference curve cannot intersect because:
a) Consumers can have more than one preference
19. What does the budget set represent? b) Higher curves represent lower levels of utility
a) All combinations of goods a consumer can c) It would violate the assumption of consistent
afford preferences
b) Only the most preferred combination of goods d) Utility is not comparable between different
c) Goods outside the consumer’s budget bundles
d) The highest possible utility a consumer can
achieve 28. What is the concept of diminishing marginal
rate of substitution (MRS)?
20. How does an increase in income affect the a) Consumers are willing to give up more of one
budget line? good as they consume more of another good
a) It shifts the budget line inward b) Consumers are willing to give up less of one
b) It causes the budget line to pivot around a good as they consume more of another
fixed point c) Consumers prefer one good over the other at
c) It shifts the budget line outward all times
d) It has no effect on the budget line d) Utility increases as more of a good is
consumed
21. What does a downward-sloping indifference
curve indicate? 29. If a consumer's MRS of good X for good Y is 3,
a) A consumer prefers more of both goods what does this imply?
b) A consumer is willing to give up some of one a) The consumer is willing to give up 3 units of
good to gain more of another X to gain 1 unit of Y
c) The goods are perfect substitutes b) The consumer is willing to give up 3 units of
d) The goods are unrelated Y to gain 1 unit of X
c) The consumer is indifferent to both goods
22. What happens when the marginal rate of d) The consumer prefers good X over good Y
substitution (MRS) equals the price ratio between
two goods? 30. How does a consumer move along the same
a) The consumer's budget is exhausted indifference curve?
b) The consumer has reached equilibrium a) By changing preferences
c) The total utility becomes negative b) By changing their total income
d) The consumer prefers one good over the other c) By substituting one good for another while
keeping the same level of utility
23. If a consumer is at a point where the marginal d) By consuming more of both goods
utility per dollar spent on two goods is equal, what
can be inferred? 31. What is the effect of an increase in the price of
a) The consumer is not maximizing utility good X on the budget line?
b) The consumer should buy more of the good a) The budget line shifts outward
with higher marginal utility b) The budget line shifts inward
c) The consumer is maximizing utility c) The budget line rotates inward, becoming
d) The consumer should buy less of both goods steeper
d) The budget line rotates outward, becoming
24. Which of the following is an assumption flatter
underlying the indifference curve theory?
a) Preferences can be ranked but not measured
b) Consumers always choose goods with the
lowest price
c) Total utility is decreasing
d) Utility is constant across all goods
32. According to the concept of ordinal utility, 39. What condition must be met for a consumer to
what can a consumer do? be in equilibrium?
a) Measure the exact utility derived from goods a) The consumer spends all income on one good
b) Rank preferences without measuring utility b) The MRS between two goods equals the price
c) Obtain infinite utility from any bundle of ratio
goods c) The total utility is maximized at any cost
d) Consume without any constraints d) The consumer’s preferences are inconsistent

33. If the consumer is at a point where the MRS 40. How does an increase in the price of one good
exceeds the price ratio of two goods, what should affect the indifference curve?
they do to maximize utility? a) It shifts the indifference curve outward
a) Consume more of the good with a lower MRS b) It shifts the indifference curve inward
b) Buy less of both goods c) It has no effect on the indifference curve but
c) Consume more of the good with a higher MRS changes the budget constraint
d) Decrease total consumption d) It flattens the indifference curve

34. Which of the following statements is TRUE 41. When the marginal utility per dollar spent on
about the budget set? two goods is not equal, what should a rational
a) The budget set includes only the most consumer do to maximize utility?
preferred consumption bundle a) Increase consumption of the good with higher
b) It includes all consumption bundles that a marginal utility per dollar
consumer can afford given their income and prices b) Increase consumption of both goods equally
c) The budget set is always larger than the c) Decrease consumption of both goods
budget line d) Decrease consumption of the good with higher
d) The budget set cannot change marginal utility per dollar

35. In the context of consumer behavior, what is 42. What does the tangency point between the
the purpose of the indifference map? budget line and the highest possible indifference
a) To show the combinations of goods that a curve represent?
consumer can afford a) The consumer's highest level of dissatisfaction
b) To rank different consumption bundles based b) The optimal consumption bundle and
on levels of satisfaction consumer equilibrium
c) To show the consumer's income level c) The marginal rate of substitution exceeding
d) To measure the exact level of utility obtained the price ratio
from consumption d) The consumer's income limit

36. If two goods are perfect substitutes, the 43. If two goods are perfect complements, the
indifference curve between them is: indifference curves will be:
a) Convex a) Convex to the origin
b) Concave b) Straight lines
c) A straight line c) L-shaped
d) A vertical line d) Upward sloping

37. What happens when a consumer moves to a 44. When is the marginal rate of substitution
higher indifference curve? (MRS) equal to the price ratio of two goods?
a) Their utility decreases a) When a consumer reaches their optimal
b) Their total income increases consumption bundle
c) They achieve a higher level of satisfaction b) When total utility is maximized
d) Their preferences change c) When marginal utility is negative
d) When the budget set exceeds the consumer's
38. A corner solution in consumer theory occurs income
when:
a) A consumer spends all their income on one 45. A consumer’s utility function is U = X + Y,
good where X and Y are two goods. What does this
b) The budget set expands imply about the consumer’s preferences?
c) The MRS equals the price ratio a) The consumer prefers only one good and
d) The indifference curve intersects the budget ignores the other
line b) The consumer views the two goods as perfect
substitutes
c) The consumer views the two goods as perfect
complements
d) The consumer prefers bundles where X is
greater than Y
46. In the context of indifference curve analysis,
what is meant by the term "corner solution"?
a) The consumer achieves maximum utility by
consuming both goods equally
b) The consumer allocates all income to one good
and none to the other
c) The consumer spends equal amounts on both
goods
d) The consumer achieves utility without
consuming any goods

47. What is the impact of an increase in the price

of one good, assuming the price of the other good
and income remain constant?
a) The budget line shifts outward
b) The budget line rotates inward
c) The indifference curve becomes steeper
d) The indifference curve shifts inward

48. What assumption is made about consumer

preferences in the indifference curve theory?
a) Preferences are random
b) Consumers can measure their utility in
numerical terms
c) Preferences are transitive and consistent
d) Consumers always prefer more expensive
goods

49. If a consumer's preferences are represented by

convex indifference curves, what does this imply
about the goods?
a) The goods are perfect complements
b) The goods are perfect substitutes
c) The consumer prefers diversified consumption
bundles
d) The consumer always prefers more of one good
over the other

50. When the price of good X decreases, what is the

likely effect on the consumer's choice?
a) The consumer moves to a lower indifference
curve
b) The consumer buys less of good X and more
of good Y
c) The consumer buys more of good X and moves
to a higher indifference curve
d) The consumer's preferences for good X
decrease
ANSWER KEY AND RATIONALE 12. a) The rate at which a consumer is willing to
substitute one good for another while maintaining
the same level of satisfaction
1. b) The factors affecting consumer demand Rationale: The marginal rate of substitution is
Rationale: The theory of consumer behavior the rate at which a consumer is willing to trade one
studies how consumers make choices given their good for another while staying equally satisfied.
preferences, income, and prices.
13. c) Convex to the origin
2. d) Profit Rationale: Indifference curves are convex to the
Rationale: Profit is not a determinant of demand origin due to the diminishing marginal rate of
in consumer behavior theory; income, taste, and substitution.
population are.
14. b) Utility can be measured in units such as
3. c) Utility "utils"
Rationale: Utility is the satisfaction a consumer Rationale: The cardinal utility approach
derives from consuming goods or services. assumes that utility can be quantified.

4. b) The additional utility gained from consuming 15. b) By ranking their preferences without
one more unit of a good measuring utility
Rationale: Marginal utility refers to the extra Rationale: The ordinal approach assumes
satisfaction obtained from consuming an consumers can rank preferences but cannot
additional unit. measure utility in absolute terms.

5. a) Alfred Marshall 16. c) Consumers are rational and consistent in

Rationale: Alfred Marshall developed the law of their choices
diminishing marginal utility, which explains how Rationale: Indifference curve analysis assumes
satisfaction decreases with each additional unit rational, consistent consumer behavior.
consumed.
17. b) A higher level of satisfaction
6. b) Marginal utility decreases Rationale: Higher indifference curves represent
Rationale: According to the law of diminishing higher levels of satisfaction, as they show
marginal utility, as more of a good is consumed, the combinations of goods that provide greater utility.
additional satisfaction from each unit decreases.
18. b) When a consumer reaches the highest
7. c) Consumers are influenced by other buyers' possible indifference curve given their budget
actions constraint
Rationale: Marginal utility analysis assumes that Rationale: Consumer equilibrium occurs when
consumers make independent, rational choices the consumer maximizes utility by choosing the
based on their own preferences. best possible combination of goods within their
budget.
8. b) Total utility is unchanged
Rationale: At the saturation point, total utility 19. a) All combinations of goods a consumer can
is maximized, and consuming more does not afford
increase satisfaction. Rationale: The budget set represents all the
combinations of goods a consumer can buy given
9. b) The boundary between affordable and their income and prices.
unaffordable goods
Rationale: The budget line shows the 20. c) It shifts the budget line outward
combinations of goods a consumer can afford given Rationale: An increase in income allows the
their income and prices. consumer to afford more goods, shifting the budget
line outward.
10. b) The price ratio of two goods
Rationale: The slope of the budget line 21. b) A consumer is willing to give up some of one
represents the trade-off between two goods based good to gain more of another
on their prices. Rationale: A downward-sloping indifference
curve reflects the trade-offs a consumer is willing
11. b) Different combinations of two goods that to make between two goods while maintaining the
provide the same level of satisfaction same satisfaction.
Rationale: An indifference curve shows the
combinations of two goods that yield the same 22. b) The consumer has reached equilibrium
level of utility. Rationale: When the MRS equals the price ratio,
the consumer is maximizing utility and is in
equilibrium.
23. c) The consumer is maximizing utility 35. b) To rank different consumption bundles
Rationale: When the marginal utility per dollar based on levels of satisfaction
spent on two goods is equal, the consumer is Rationale: The indifference map helps rank
maximizing utility. consumption bundles according to the satisfaction
they provide.
24. a) Preferences can be ranked but not measured
Rationale: Indifference curve theory assumes 36. c) A straight line
that preferences can be ranked ordinally but not Rationale: If two goods are perfect substitutes,
measured cardinally. the indifference curve is a straight line because the
consumer is willing to substitute one for the other
25. c) It expands at a constant rate.
Rationale: An increase in income expands the set
of consumption bundles the consumer can afford. 37. c) They achieve a higher level of satisfaction
Rationale: Moving to a higher indifference curve
26. b) The price of one good changes while the price reflects greater utility and satisfaction.
of the other remains constant
Rationale: A price change in one good rotates 38. a) A consumer spends all their income on one
the budget line, altering the slope while keeping the good
other price constant. Rationale: A corner solution occurs when the
consumer allocates all their resources to one good,
27. c) It would violate the assumption of consistent resulting in no consumption of the other.
preferences
Rationale: Indifference curves cannot intersect 39. b) The MRS between two goods equals the price
because this would imply inconsistent preferences. ratio
Rationale: Consumer equilibrium is achieved
28. b) Consumers are willing to give up less of one when the marginal rate of substitution equals the
good as they consume more of another price ratio.
Rationale: The diminishing marginal rate of
substitution means that as a consumer consumes 40. c) It has no effect on the indifference curve but
more of one good, they are willing to give up less of changes the budget constraint
the other. Rationale: Price changes affect the budget line
but do not shift the indifference curve, which
29. b) The consumer is willing to give up 3 units of represents preferences.
Y to gain 1 unit of X
Rationale: An MRS of 3 means the consumer is
willing to trade 3 units of Y for 1 unit of X. 41. a) Increase consumption of the good with
higher marginal utility per dollar
30. c) By substituting one good for another while Rationale: To maximize utility, the consumer
keeping the same level of utility should consume more of the good that provides
Rationale: Moving along an indifference curve higher utility per dollar spent.
involves substituting goods while maintaining the
same utility level. 42. b) The optimal consumption bundle and
consumer equilibrium
31. c) The budget line rotates inward, becoming Rationale: The tangency point between the
steeper budget line and the highest indifference curve
Rationale: An increase in the price of good X represents the consumer's equilibrium and optimal
reduces the amount of X the consumer can buy, consumption bundle.
steepening the budget line.
43. c) L-shaped
32. b) Rank preferences without measuring utility Rationale: Indifference curves for perfect
Rationale: Ordinal utility allows consumers to complements are L-shaped because the goods are
rank preferences without quantifying utility. consumed together in fixed proportions.

33. c) Consume more of the good with a higher 44. a) When a consumer reaches their optimal
MRS consumption bundle
Rationale: If the MRS exceeds the price ratio, Rationale: Consumer equilibrium occurs when
the consumer should buy more of the good with the the MRS equals the price ratio, meaning the
higher MRS to maximize utility. consumer is maximizing utility.

34. b) It includes all consumption bundles that a 45. b) The consumer views the two goods as perfect
consumer can afford given their income and prices substitutes
Rationale: The budget set includes all affordable Rationale: A utility function like U = X + Y
combinations of goods within the consumer's implies the goods are perfect substitutes, meaning
budget. the consumer is indifferent to consuming one or the
other.
46. b) The consumer allocates all income to one
good and none to the other
Rationale: A corner solution occurs when the
consumer spends all income on one good and none
on the other.

47. b) The budget line rotates inward

Rationale: An increase in the price of one good
reduces the number of units the consumer can buy,
rotating the budget line inward.

48. c) Preferences are transitive and consistent

Rationale: Indifference curve theory assumes
that consumer preferences are transitive and
consistent, meaning that if a consumer prefers A to
B and B to C, they must prefer A to C.

49. c) The consumer prefers diversified

consumption bundles
Rationale: Convex indifference curves suggest
that consumers prefer a balanced consumption of
both goods, rather than extremes.

50. c) The consumer buys more of good X and

moves to a higher indifference curve
Rationale: A decrease in the price of good X
allows the consumer to buy more of it and move to
a higher indifference curve, reflecting greater
satisfaction.