Core Economics 3e

Budgets and Utility Maximization

Multiple Choice Questions

After watching the Budgets and Utility Maximization video lecture, consider the question(s) below. Then “submit” your response.

Question

1. A budget line represents the:

aggregate spending by the federal government given product prices.

combinations of goods that an economy can produce utilizing all available resources.

combinations of goods an individual can purchase given product prices and available income.

opportunity costs an economy incurs as more of one good and less of another is produced.

Question

2. Figure 6.1 represents a budget line (also called a budget constraint). Points a, b, c, and d are similar in that they are all:

impossible.

affordable.

trends.

permanent.

Question

3. Refer to Figure 6.1. Combinations of goods that lie between the budget line and the origin are:

affordable, but some income will remain unspent.

unaffordable because income is insufficient.

affordable, but all income will be spent.

affordable only with additional income.

Question

4. Figure 6.3 shows various budget lines. Line b indicates that a(n):

consumer’s income has decreased.

product price has changed.

consumer’s income has increased.

economy’s resource base has increased.

Question

5. Figure 6.3 shows various budget lines. Line c indicates that the:

consumer's income has decreased.

consumer’s income has increased.

price of wall climbing has decreased.

price of pizza has decreased.

Question

6. Figure 6.3 shows various budget lines. Line b indicates that the:

price of wall climbing has increased.

price of pizza and wall climbing have both risen by 50%.

price of pizza and wall climbing have both fallen by 50%.

price of pizza has increased.

Question

7. The term “utility” is used by economists to measure:

consumer well-being.

product vitality.

power company activities.

gains from production.

Question

8. Within the constraints of product prices and income, a consumer’s objective is to maximize total:

consumption.

spending.

utility.

production.

Question

9. Marginal utility is the:

gain in income that enables additional consumption by consumers.

additional well-being gained when consumption of a good is reduced.

average utility from consuming all goods regardless of cost.

additional satisfaction from consuming an additional unit of a product.

Question

10. Consumers maximize total utility when the _____ all goods.

marginal income is spent equally on

marginal utility per dollar is equal for

total utility per dollar is equal for

output per dollar is equal for

True/False Questions

After watching the Budgets and Utility Maximization video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The budget line describes possible combinations of two goods that can be purchased with a given income and product prices.

True

False

Question

2. When income is increased, the budget line moves toward the origin.

True

False

Question

3. The utility maximization rule states that a consumer’s total utility is maximized, given a budget and product prices, when the marginal utility per dollar of the last unit of every good consumed is equal.

True

False

Short Answer/Discussion Questions

After watching the Budgets and Utility Maximization video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Do changes in product prices impact the budget line?

Suggested solution: Yes, changes in product prices do change the budget line even without changes in income. For example, if the price of a good declines, the consumer can now purchase more of the good whose price has declined or possibly more of the good whose price is unchanged. A decrease in a good’s price is shown by moving the budget line’s intercept with the good’s axis out from the origin. This shows that a greater number of choices are now available to the consumer.

Question

2. How does the budget line change if the budget is reduced?

Suggested solution: With a decrease in the budget (the maximum the consumer is willing to spend), the budget line moves to the left (closer to the origin) parallel to the original budget line. This shows that the reduction in budget or income has reduced the combinations of goods the consumer can purchase.

Question

3. What is the utility maximization rule?

Suggested solution: The utility maximization rule states total utility is maximized when the marginal utility per dollar for the last unit of each good consumed is equal. Utility is the satisfaction or well-being a consumer enjoys from consuming a good. Marginal utility is the additional satisfaction from consuming an additional unit of a good. When the utility maximization condition is not met, consumers can improve their total utility by reallocating their spending until the condition is met.