Total utility can be objectively measured in numbers

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Total utility can be objectively measured in numbers

Name______________________________________

True/False 30%
Indicate whether the
statement is true or false.

____ 1. Total utility can be objectively measured in
numbers that indicate usefulness or benefit to the consumer.

____ 2. As a rule, the more of a commodity a consumer
acquires, the smaller will be her total utility from that good.

____ 3. An optimal purchase is one that maximizes
total utility.

____ 4. If the marginal net utility of beer is a
positive number, the consumer should buy more beer in order to maximize
utility.

____ 5. Consumer surplus is the difference between
the worth of a commodity to the consumer and the price the consumer pays for
the commodity.

____ 6. The resolution of Adam Smith’s diamond-water
puzzle is based on the distinction between marginal and total utility.

____ 7. Scarcity raises both price and marginal
utility but generally reduces total utility.

____ 8. Quantity demanded is not only affected by
price but by variables such as income and the prices of other goods.

____ 9. The market demand curve is the horizontal
summation of all individual demand curves.

____ 10. A change in the price of one good results in
a rotation of the budget line, so that it is steeper or flatter.

____ 11. A decrease in the price of one good results
in a parallel shift in the budget line.

____ 12. The budget line and the indifference curve
are geometric devices used to provide a closer look at consumer choice.

____ 13. An increase in income shifts indifference
curves outward.

____ 14. A consumer will consume the combination of
goods at the point of tangency between the budget line and the indifference
curve.

____ 15. A consumer will consume the combination of
goods at the crossing point of a budget line and indifference curve.

____ 16. A vertical demand curve has an elasticity of
demand equal to zero.

____ 17. A horizontal demand curve is perfectly
elastic because a change in price will not induce a change in quantity
demanded.

____ 18. A horizontal demand curve is perfectly elastic
because a change in price will induce an infinite change in quantity demanded.

____ 19. A straight-line demand schedule has the same
elasticity throughout its length.

____ 20. The unit-elastic demand curve is a
rectangular hyperbola.

____ 21. If price goes up 20 percent and quantity
demanded declines by 10 percent, total revenue will rise.

____ 22. If a demand curve is unit elastic, then P
times Q will remain constant when P changes.

____ 23. A demand curve with unit elasticity can never
touch either the vertical or horizontal axes.

____ 24. A price increase will always cause a firm’s
revenue to fall, because they will sell less of the good.

____ 25. Necessities such as food and shelter have
inelastic demand.

____ 26. If there are many close substitutes available
for a good, its elasticity of demand will be higher.

____ 27. Since an individual spends a small share of
her income on salt, the elasticity of demand is likely to be low.

____ 28. Cross-elasticity of demand could be used to
measure the responsiveness of the quantity demanded of swimming pools to a
change in the price of picnic tables.

____ 29. Demand curves often do not remain stationary;
they shift because of changes in other variables.

____ 30. A decrease in the price of a good will cause
a movement along the demand schedule to a higher quantity demanded.

Multiple Choice 30%
Identify the choice
that best completes the statement or answers the question.

____ 31. Lana spent \$5 to see a movie. We know

a.

the movie was worth 500 utils.

b.

Lana’s total utility from movies was
\$5.

c.

the movie was worth at least \$5 worth
of other goods.

d.

the movie increased marginal utility.

____ 32. High price and low total utility indicate

a.

low marginal utility.

b.

large quantities are sold.

c.

high marginal utility.

d.

a high price/marginal utility ratio.

____ 33. For most goods and most people, marginal
utility probably

a.

continues to increase as larger
quantities are purchased.

b.

plummets after the first few units but
soon begins to rise.

c.

declines as consumption increases.

d.

is negative after the first unit of a
good is purchased.

e.

is positive and rising for most goods.

____ 34. Elaine values the utility of her first cup of
coffee at \$1; a second cup, \$.75; and a third cup, \$.50. If Elaine drinks three
cups of coffee for breakfast, her total utility is equal to

a.

\$.50, the value of her last cup of
coffee.

b.

\$1.00, the value of her first cup of
coffee.

c.

marginal utility.

d.

\$2.25.

e.

\$1.50.

____ 35. As a general rule, consumers have

a.

limited income.

b.

unlimited desires for goods.

c.

many choices of goods facing them.

d.

All of the above are correct.

e.

None of the above are correct.

____ 36. Marginal utility has a negative slope. This
is because of the

a.

optimal purchase rule.

b.

law of increasing costs.

c.

law of diminishing marginal utility.

d.

marginal rate of substitution.

____ 37. Which of the following scenarios could be an
example of increasing marginal utility?

a.

A father buying three game CDs for his
son.

b.

A shopkeeper selling the tenth unit of
hamburger.

c.

stamp for collection.

d.

of apple.

of a bicycle for the same price

a.

means that opportunity cost is zero
since both cost the same amount.

b.

would not have involved trade-off and
opportunity cost if Gwen had decided to put the money in a bank CD instead.

c.

would not imply a trade-off because of
scarcity if Gwen were a multimillionaire.

d.

means that the opportunity cost to
Gwen is the bicycle that she has given up.

____ 39. Suppose that Joan, the only consumer of pork,
has a downward-sloping demand curve for pork and faces an upward-sloping supply
curve. If her demand curve shifts out because she develops a craving for pork,
then at the new equilibrium (everything else equal),

a.

the price of pork relative to other
goods will be higher than before.

b.

Joan’s marginal utility from every
unit of pork she eats will be higher than before.

c.

Joan’s real income will be lower than
before.

d.

All of the above are correct.

____ 40. For a(n) ____, if incomes rise and prices do
not change, quantity demanded will increase.

a.

normal good

b.

inferior good

c.

Giffen good

d.

substitute good

____ 41. The Wall Street Journal reports that
“hard times aid poultry companies as people eat cheaper fowl.” In the
language of economists, this means

a.

chicken is an inferior good.

b.

chicken has a negative substitution
effect.

c.

chicken has a positive substitution
effect.

d.

people’s tastes change during
recessions.

e.

chicken has a positive income effect.

Figure 5-6

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____ 42. In Figure 5-6, a shift in the budget line
from AC to AB indicates

a.

the price of wine coolers has risen.

b.

income has increased.

c.

the price of beer has fallen.

d.

the price of wine coolers has fallen.

e.

All of the above are correct.

____ 43. Which of the following observations is not
true of a budget line?

a.

It indicates what choices are
available to the consumer.

b.

It is a curve of constant expenditure.

c.

Its slope reports the market terms on
which the consumer can trade one good for another.

d.

It helps examine the consumerâs
preferences.

____ 44. Which of the following is characteristic of
indifference curves?

a.

They are negatively sloped.

b.

They never intersect.

c.

They are convex toward the origin.

d.

All of the above are correct.

Figure 5-11

.jpg”>

____ 45. In Figure 5-11, a consumer is initially at
point A. There is a price change and she moves to B. It follows that

a.

the demand for beer follows the law of
demand.

b.

the demand for beer does not follow
the law of demand.

c.

wine is an inferior good.

d.

the consumer is confused.

____ 46. For a consumer to maximize utility, he will
choose the

a.

point where the slope of the budget
line equals the slope of the indifference curve.

b.

any point where the budget line and
indifference curve intersect.

c.

point where he gets the most of the
good he prefers most.

d.

point where the marginal rate of
substitution is greatest.

e.

the point where marginal utility is
zero for both goods

Figure 5-17

.jpg”>

____ 47. Which of the following statements about
Figure 5-17 must be correct?

a.

The consumer pays a higher dollar
price per unit for good Y at A than at D.

b.

The consumer pays the same dollar
price per unit for good Y at A and at B.

c.

The consumer pays a higher dollar
price per unit for good X at D than at A.

d.

The consumer pays a higher dollar
price per unit for good X at A than at C.

Figure 5-19

.jpg”>

____ 48. In Figure 5-19, the consumer experiences at
point C

a.

greater total utility than at point D.

b.

greater total utility than at point E.

c.

less total utility than at point D.

d.

total utility equal to that
experienced at point D.

____ 49. The price elasticity of a vertical demand
curve is always

a.

infinitely large.

b.

zero.

c.

one.

d.

increasing as price increases.

____ 50. Total expenditure by a buyer is equal to the

a.

slope at any point along the demand
curve.

b.

price times quantity demanded at any
point along the demand curve.

c.

elasticity times price at any point
along the demand curve.

d.

elasticity times quantity demanded at
any point along the demand curve.

____ 51. To avoid an increase in the local property
tax, Sullivan County, New York, proposed a 2 percent hotel tax, which
presumably would be passed on to tourists. The hotel industry argued that the
tax would hurt hotel business. They are really arguing that

a.

tourist and convention demand is
inelastic, so hotel bookings will decline.

b.

tourist and convention demand is very
elastic, so hotel bookings will decline.

c.

they would prefer a property tax

d.

it is unfair to tax people who do not
live in the area.

____ 52. Suppose that the supply of insulin is
perfectly elastic and the demand for insulin perfectly inelastic. Then the real
burden of an excise tax on insulin will be

a.

sellers.

b.

borne entirely by sellers.

c.

d.

borne by sellers on units sold up to

____ 53. Would a profit-maximizing firm sell where
demand is inelastic?

a.

No, this would not follow the rule of
MC = MR.

b.

No, the firm could not profitably
raise price.

c.

Yes, the firm could profitably lower
price to attract sales.

d.

Yes, in this case there are few
substitutes for the good.

____ 54. The price elasticity of demand for widgets at
any particular price is determined by

a.

whether widgets are luxuries or
necessities.

b.

how much of their budgets consumers
spend on widgets.

c.

whether there are any good substitutes
for widgets.

d.

All of the above are correct.

____ 55. A 10 percent increase in the cost of
restaurant meals, which are a luxury, will most likely

a.

increase the purchase of meals by 10
percent.

b.

increase the purchase of meals by less
than 10 percent.

c.

decrease the purchase of meals by more
than 10 percent.

d.

decrease the purchase of meals by less
than 10 percent.

____ 56. The price elasticity of new automobile
purchases is about 1.2. This implies that an increase of \$1,000 on a \$10,000
automobile will

a.

reduce the number of autos sold by 1.2
percent.

b.

increase the consumer expenditures on
autos by 1.2 percent.

c.

reduce the number of autos sold by 12
percent.

d.

increase consumer expenditures on
autos by 12 percent.

____ 57. A study of New York City (NYC) tax rates
concluded that taxes on the nonmanufacturing sector should be higher since that
sector has fewer alternatives. Manufacturers are more mobile and may move to
avoid higher taxes. This means that

a.

nonmanufacturing firms have a more
elastic demand for NYC locations.

b.

manufacturing firms have an inelastic
demand for the NYC locations.

c.

nonmanufacturing firms have relatively
inelastic demand for the NYC locations.

d.

nonmanufacturing demand for NYC
locations is perfectly elastic.

____ 58. The elasticity measure which has been
employed by the courts to assess the degree of market competition is

a.

price elasticity of demand.

b.

income elasticity of demand.

c.

cross elasticity of demand.

d.

inverse elasticity of demand.

____ 59. The definition of cross elasticity of demand
for two products X and Y is

a.

percentage change in quantity of X
demanded/percentage change in quantity of Y demanded.

b.

percentage change in price of
Y/percentage change in quantity of X demanded.

c.

percentage change in price of
Y/percentage change in price of X.

d.

percentage change in quantity of X
demanded/percentage change in price of Y.

____ 60. If the demand for gasoline becomes more
elastic over time,

a.

the demand curve will shift out.

b.

the demand curve will become flatter.

c.

other things being equal, the
equilibrium price of gasoline must fall.

d.

other things being equal, the
equilibrium quantity of gasoline must fall.

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