7.2 microeconomics

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What happens to Mary's marginal utility for apples when their price decreases?

It decreases.
It becomes zero.
It increases. (correct)
It remains constant.

At what price does Mary Andrews buy 5 pounds of apples?

$2 per pound (correct)
$1 per pound
$2.50 per pound
$1.50 per pound

If Mary buys fewer oranges as she increases her purchase of apples, what can be inferred about the relationship between these two fruits?

They are substitutes. (correct)
They are complements.
They have no relationship.
They are inferior goods.

What is the total budget Mary spends on apples and oranges after adjusting her consumption to maximize utility?

$20 (B) Signup and view all the answers

According to the marginal decision rule, what must be true for Mary to maximize her utility between apples and oranges?

The ratio of marginal utility to price must be the same for both goods. (B) Signup and view all the answers

How much will Mary spend on apples and oranges after their prices change if she buys 12 pounds of apples and 8 pounds of oranges?

$20 (B) Signup and view all the answers

What was Mary's initial consumption of apples and oranges at the beginning of the situation described?

5 pounds of apples and 10 pounds of oranges (B) Signup and view all the answers

What is the key function of the marginal decision rule in the context of consumer choice?

To maximize a consumer's utility given their budget. (D) Signup and view all the answers

What happens to the consumption of apples when there is a price reduction?

Consumption of apples increases while consumption of oranges decreases. (B) Signup and view all the answers

What is the substitution effect of a price change?

The increase in quantity demanded of a good as its price falls. (C) Signup and view all the answers

What is the impact of an income-compensated price increase on consumer behavior?

Consumers buy less of the good that increased in price. (B) Signup and view all the answers

How much did Ms. Andrews increase her apple consumption due to the substitution effect?

4 pounds (B) Signup and view all the answers

What defines the income effect of a price change?

The implicit change in income due to the price change. (C) Signup and view all the answers

If a good constitutes a small fraction of a consumer's budget, how does a price change affect purchasing power?

It has a negligible effect on purchasing power. (C) Signup and view all the answers

What happens to the marginal utility of goods as Ms. Andrews increases her consumption of apples?

The marginal utility of apples falls and oranges rises. (A) Signup and view all the answers

What is the combined effect of a price reduction on quantity demanded?

It is the sum of the substitution and income effects. (C) Signup and view all the answers

What does a normal good imply regarding changes in income?

Consumption increases with an increase in income. (C) Signup and view all the answers

How does the substitution effect influence price elasticity of demand?

A larger substitution effect leads to greater elasticity. (B) Signup and view all the answers

If Ms. Andrews receives an implicit increase in income of $5, how does she utilize this increase?

She buys 3 more pounds of apples and 2 more pounds of oranges. (D) Signup and view all the answers

What is the result of the substitution effect when the price of apples decreases?

Increased consumption of apples and decreased consumption of oranges. (B) Signup and view all the answers

When the price of a good falls, what immediate consumer reaction occurs?

Increased consumption of that good. (A) Signup and view all the answers

What effect does a price reduction have on the demand for a normal good?

It increases the quantity demanded due to the income effect. (B) Signup and view all the answers

How do the substitution and income effects interact for a normal good when its price increases?

They both reinforce each other. (B) Signup and view all the answers

In the case of an inferior good, what happens when consumer incomes increase?

Consumers substitute better goods for the inferior good. (C) Signup and view all the answers

What is a characteristic of the demand for inferior goods when their prices fall?

The substitution effect increases quantity demanded while the income effect decreases it. (D) Signup and view all the answers

Why do inferior goods tend to have less elastic demand than normal goods?

Because of weaker substitution effects compared to normal goods. (A) Signup and view all the answers

What happens to the quantity demanded of an inferior good when its price increases?

It decreases due to the substitution effect. (B) Signup and view all the answers

What defines the elasticity of demand for a good?

All of the above. (D) Signup and view all the answers

Which statement about the substitution effect is true?

It changes consumption in the opposite direction to the price change. (C) Signup and view all the answers

How does a consumer's purchasing power change when the price of a normal good decreases?

It increases, leading to higher demand. (C) Signup and view all the answers

What describes the effect on consumer behavior when the price of an inferior good decreases?

Consumers may still prefer better alternatives despite a price decrease. (D) Signup and view all the answers

What happens to a consumer's demand for a good when its price decreases?

The consumer's demand for the good typically increases. (D) Signup and view all the answers

How is the market demand curve derived from individual demand curves?

By summing the quantities demanded at each price horizontally. (C) Signup and view all the answers

What is the substitution effect when the price of apples falls?

Consumers buy more apples as they become relatively cheaper than oranges. (A) Signup and view all the answers

What is the expected outcome when marginal utilities of two goods are equal?

Utility might not be maximized if the prices differ. (B) Signup and view all the answers

What does an income-compensated price change assume?

Consumers have no change in purchasing power. (A) Signup and view all the answers

Which of the following factors contributes to a consumer maximizing utility?

Equating the ratios of marginal utility to price. (A) Signup and view all the answers

What is indicated by a downwards-sloping demand curve?

Demand decreases as price increases. (A) Signup and view all the answers

What does the total quantity demanded at a specific price reflect?

The combined consumption of all consumers in the market. (D) Signup and view all the answers

At $2 per pound, how many total pounds were demanded by all consumers in the example?

16 pounds. (B) Signup and view all the answers

How does the income effect alter a consumer's behavior when a price decreases?

Consumers may feel richer and thus can buy more goods overall. (D) Signup and view all the answers

What characterizes the demand curves for apples and oranges when the prices of these fruits are the same?

Marginal utilities of both goods tend to be equal at utility maximization. (A) Signup and view all the answers

What effect does the price reduction of a good have on consumer purchasing power?

It increases the purchasing power. (D) Signup and view all the answers

What is the consequence of the price of apples being different from the price of oranges?

Marginal utilities will generally be unequal for both goods. (D) Signup and view all the answers

Utility-Maximizing Choice

Choices that maximize satisfaction or benefit from available resources.

Marginal Decision Rule

A decision-making principle that focuses on the additional benefit or cost of an action.