#1
1. According to the law of diminishing marginal utility, what happens as a consumer consumes more units of a good?
Marginal utility decreases
ExplanationAs consumption increases, the additional satisfaction derived from each additional unit diminishes.
#2
6. What is the main assumption of consumer choice theory regarding consumer preferences?
Consumers always prefer more of a good to less.
ExplanationConsumers consistently seek to maximize their utility by obtaining more goods and services.
#3
11. According to the substitution effect, how does a decrease in the price of one good affect the consumption of another good?
It increases the consumption of the substitute good.
ExplanationConsumers opt for the cheaper substitute when the price of a good decreases, increasing its consumption.
#4
16. In consumer choice theory, what is the 'Diamond-Water Paradox'?
It illustrates the paradoxical nature of the value of goods in the context of total utility.
ExplanationIt highlights how essential goods like water command low prices despite being vital, while non-essential items like diamonds command high prices due to scarcity and social value.
#5
21. What is the 'Law of Demand' in consumer economics?
It asserts that the demand for a good decreases as its price increases.
ExplanationConsumers buy less of a good when its price rises, ceteris paribus.
#6
2. What is the budget line in consumer choice theory?
A line representing the prices of goods and services
ExplanationIt delineates the combinations of goods and services that a consumer can afford given their income and the prices of goods.
#7
3. In utility theory, what does the term 'marginal utility' refer to?
The additional satisfaction from consuming one more unit of a good
ExplanationIt measures the change in total utility resulting from consuming an additional unit of a good.
#8
7. How does a normal good differ from an inferior good in consumer theory?
Normal goods have a positive income elasticity, while inferior goods have a negative income elasticity.
ExplanationNormal goods' demand increases with income, whereas inferior goods' demand decreases as income rises.
#9
8. In the context of utility theory, what does the term 'transitivity' mean?
Consistency in consumer preferences, implying that if A is preferred to B and B is preferred to C, then A must be preferred to C.
ExplanationIt ensures that consumer preferences are logically consistent and follow a predictable pattern.
#10
12. What is the difference between 'total utility' and 'marginal utility'?
Total utility is the satisfaction derived from consuming all units of a good, while marginal utility is the satisfaction from the last unit consumed.
ExplanationTotal utility represents overall satisfaction, whereas marginal utility measures satisfaction from consuming an additional unit.
#11
13. In consumer theory, what is the 'law of equi-marginal utility'?
Consumers maximize utility by equalizing the marginal utility per dollar spent across all goods.
ExplanationConsumers allocate expenditure to maximize utility, ensuring that the marginal utility per dollar is equal across goods.
#12
17. How does the concept of 'elasticity of substitution' relate to consumer preferences?
It indicates how easily a consumer can substitute one good for another.
ExplanationThe elasticity of substitution measures the ease with which consumers replace one good with another as relative prices change.
#13
4. What is the difference between cardinal and ordinal utility?
Cardinal utility measures utility in numerical terms, while ordinal utility ranks preferences without assigning specific values.
ExplanationCardinal utility assigns numerical values to utility, while ordinal utility ranks preferences without precise measurement.
#14
5. What is the concept of 'indifference curve' in consumer choice theory?
A curve showing different combinations of goods that yield the same level of satisfaction to the consumer
ExplanationIt illustrates combinations of goods among which a consumer is indifferent, maintaining the same level of satisfaction.
#15
9. What is the significance of the Engel curve in consumer choice theory?
It illustrates the effect of changes in consumer income on the quantity demanded of a good.
ExplanationIt demonstrates how variations in income influence the quantity of a good or service consumed.
#16
10. Explain the concept of 'revealed preference' in consumer theory.
It is the idea that consumer preferences are only revealed through actual choices and behavior.
ExplanationConsumer choices provide insights into their preferences, revealing what they truly value.
#17
14. How does the concept of 'time preference' relate to consumer choice theory?
It refers to the preference for goods that provide immediate satisfaction over those that provide satisfaction in the future.
ExplanationConsumers often prioritize immediate gratification over delayed benefits when making consumption choices.
#18
15. What role does the 'income effect' play in consumer choice theory?
It explains how changes in consumer income affect the quantity demanded of a good.
ExplanationVariations in income influence purchasing power, impacting the quantity of goods and services consumers can afford.
#19
19. How does the 'Hicksian demand curve' differ from the 'Marshallian demand curve'?
The Hicksian demand curve considers the substitution effect, while the Marshallian demand curve does not.
ExplanationThe Hicksian demand curve shows the effect of price changes on consumption while holding utility constant, whereas the Marshallian demand curve shows the direct relationship between price and quantity demanded.