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  1. Chapter Five: Consumer Choice: Indifference Theory

Chapter Five: Consumer Choice: Indifference Theory

1
Question 1

Which one of the following situations would result in a demand curve being positively sloped:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) A fall in the price of the product leads to a rise in quantity demanded through the substitution effect. The product is an inferior good, and the income effect leads to a fall in demand, which is bigger than the substitution effect.Your answer has been saved.
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2
Question 2

A "Giffen good" is defined as one for which:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) The demand curve is positively sloped.Your answer has been saved.
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3
Question 3

When the law of diminishing marginal utility holds for all products and all consumers, an income-constrained consumer will maximize utility when the ratio of marginal utilities of all products is equal to their price ratios. Which of the following is an implication of this being true for all consumers?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Consumers will buy less of any product whose price rises and more of any product whose price falls.Your answer has been saved.
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4
Question 4

The paradox of value was resolved by which of the following insights?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) Market value depends only on the marginal utility of a product.Your answer has been saved.
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5
Question 5

Which of the following statements about indifference curves is not correct?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) Two different indifference curves can intersect but only once.Your answer has been saved.
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6
Question 6

Which of the following is a correct statement about the substitution effect?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) The substitution effect is always negative.Your answer has been saved.
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7
Question 7

Which of the following is a correct statement about the income effect?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) The income effect isolates the impact on demand for a product of the real income change associated with any price change, while removing the substitution effect of that price change.Your answer has been saved.
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8
Question 8

Using the example of drinking glasses of water, explain what you understand by the terms 'marginal utility', 'total utility' and the 'law of diminishing marginal utility'.

Hint: re-read the section 'Marginal and total utility' p87.Hint

9
Question 9

For many people, going to the dentist causes pain and distress. Nonetheless, they go to the dentist on a regular basis. Assuming that pain and distress generates negative utility, explain in utility terms why going to the dentist is still rational behaviour.

Hint: re-read the section 'Marginal and total utility' p87.Hint

10
Question 10

For two commodities x and y, explain how a utility maximising individual should react if the ratio of marginal utility divided by price for x is currently greater than the corresponding ratio for y.

Hint re-read the section 'Maximising utility' pp88-89.Hint

11
Question 11

Explain what you understand by the 'paradox of value' (sometimes known as the 'diamond-water paradox'). Under what circumstances might a bottle of water generate more utility to an individual than a pouch of cut diamonds?

Hint: Direct reference to the paradox of value can be found in the work of Adam Smith in his famous work 'An Inquiry into the Nature and Causes of the Wealth of Nations' (1776). You will probably find it easier to consult Box 5.1 (The paradox of value') on pp89-90.Hint

12
Question 12

If all goods were traded through a process of auctioning, would this mean that consumers would not receive any consumer surplus?

Hint: re-read the section 'Implication of marginal utility theory for demand curves' and Box 5.2 on pp90-91. In answering this question you should remind yourself that Ebay auctions are conducted for a seemingly infinite number of low and high value products. Hint

13
Question 13

In the context of an indifference curve depicting an individual's preferences for clothing and food per week, what is meant by the term 'diminishing marginal rate of substitution'?

Hint: re-read the section 'Diminishing marginal rate of substitution' pp94-95.Hint

14
Question 14

Why can't indifference curves cross on an indifference map?

Hint: re-read the section 'The indifference map' on p95. You may also wish to remind yourself of the definition of an indifference curve given on p94.Hint

15
Question 15

Under what circumstances might an indifference curve slope upwards from left to right?

Hint: re-read Box 5.3 (p96) which shows how the nature and our need for a commodity can impact upon the shape of indifference curves. Think about consumption activities that might actually give negative utility.Hint

16
Question 16

What is the relationship between the income-consumption line and the Engel Curve?

Hint: re-read the section 'Parallel shifts in the budget line' pp99-100 and if you need to, re-acquaint yourself with the section 'Income elasticity' (including Figure 4.9) pp73-74.Hint

17
Question 17

Why do you think it might be difficult to establish a link between quantity demanded and income?

Hint: you might want to think about how you would go about getting the data.Hint

18
Question 18

The impact of a price change can be broken down into two effects: an 'income effect' and a substitution effect'.

(a) Explain precisely what the two terms mean.
(b) What are the relative directions of the income and substitution effects following a rise in price of a normal good?
(c) What are the relative directions of the income and substitution effects following a rise in price of an inferior good?

Hint: re-read the section 'Income and substitution effects' pp102-104, together with Box 5.5 (p103) and Figure 5.11 (p104).Hint