Exam 1

Question 1

The law of diminishing marginal utility implies that as a household consumes more of a product,
its total utility will increase by smaller amounts, assuming that marginal utility remains positive.

Answer 1

TRUE

Question 2

2. The statement that Bundle A is three times as preferred to Bundle B is an ordinal utility measurement.

Answer 2

FALSE

Question 3

Indifference curves show various combinations of two goods, which gives the consumer various levels of utility.

Answer 3

FALSE

Question 4

Indifference curves never intersect so as not to violate convexity of preferences postulate of a
rational individual’s choice.

Answer 4

FALSE

Question 5

If the utility function of an individual is given by U = 2X + 4Y, the psychic rate of trade-off of X for an additional unit of Y is equal to 2.

Answer 5

TRUE

Question 6

If MUx/Px exceeds MUy/Py, then a household can increase its utility by spending less on Y and more on X.

Answer 6

TRUE

Question 7

The budget line will shift outward when the income is increased while the prices of goods X and Y are held constant.

Answer 7

FALSE

Question 8

The Income Consumption Curve refers to the locus of tangency of points of indifference curves
and budget lines to various prices with the income of the consumer and the price of the other good in ceteris paribus.

Answer 8

FALSE

Question 9

A downward sloping Engel curve shows the optimal quantity of an inferior good taken at various income levels.

Answer 9

TRUE

Question 10

Suppose the price of good Y decreases. If Y is an inferior good, then the quantity demanded of Y will certainly rise.

Answer 10

TRUE

Question 11

The Price Consumption Curve for a price change of any unit elastic good is always drawn as a horizontal line.

Answer 11

FALSE

Question 12

The compensated demand curve shows the relationship between the price and quantity demanded, holding income and other prices constant.

Answer 12

FALSE

Question 13

Forcing the individual to stay on the same indifference curve and allocating consumption patterns such that the MRS equals the new price ratio captures the substitution effect of a price change.

Answer 13

TRUE

Question 14

In both cases of price increase and decrease for an inferior good, the income effect magnifies F the substitution effect.

Answer 14

FALSE

Question 15

Marshallian demand curve is always flatter than the Hicksian demand curve because Marshallian includes both the SE and IE, whereas the Hicksian incorporates only the SE.

Answer 15

FALSE

Question 16

When the own price elasticity of demand is elastic, an increase in price will lead to increased consumer spending for the product.

Answer 16

FALSE

Question 17

Two goods are substitutes when the income elasticity of demand is positive.

Answer 17

FALSE

Question 18

Market demand being a horizontal summation of individual demand curves means that given quantity level, prices of individual demand curve will be totalled.

Answer 18

FALSE

Question 19

An allocation is said to be Pareto optimal if there does not exist an alternative allocation wherein one person is made better off and another worse off.

Answer 19

TRUE

Question 20

The contract curve represents all points of economic efficiency in the allocation of goods X and Y for two individuals.

Answer 20

TRUE