Chapter 4: True or False Questions

Chapter 4: True or False Questions

Exercise: Determine whether the following statements are true or false.

1. Marginal utility (MU) tends to increase as consumption level increases.

>> False

• Explanation: Marginal utility (MU) usually decreases as consumption level increases. This is the law of diminishing marginal utility.

2. When total utility (TU) increases, marginal utility (MU) increases.

>> True

• Explanation: Total utility (TU) will increase until MU reaches 0.

3. To achieve maximum total utility with limited income, consumers must balance the marginal utility of all goods they buy.

>> True

• Explanation: Consumers should allocate spending so that the marginal utility per dollar of all goods is equal.

4. To maximize utility, consumers should choose the cheapest goods to consume the most.

>> False

• Explanation: Choosing goods depends on their marginal utility.

5. The slope of the budget line represents the trade-off between two goods.

>> True

• Explanation: The slope of the budget line shows how much of one good needs to be sacrificed to obtain one more unit of the other good.

6. The slope of the indifference curve represents the ratio of the marginal utilities of the two goods.

>> True

• Explanation: The slope of the indifference curve shows the marginal rate of substitution (MRS) between the two goods.

7. The indifference curve shows the sets of goods that are purchased with the same income level.

>> False

• Explanation: The indifference curve shows the sets of goods that provide the same level of satisfaction for the consumer.

8. When the buyer receives “Consumer Surplus”, the seller will suffer.

>> False

• Explanation: Consumer surplus is the additional benefit the buyer receives when buying a good at a lower price than what they are willing to pay.

9. When the price of a good changes while other factors remain constant (ceteris paribus), the budget line will shift outward or inward.

>> False

• Explanation: When the price of a good changes, the budget line will rotate around the intercept of the vertical or horizontal axis, not shift outward or inward.

10. When income changes while other factors remain constant, the budget line will shift.

>> True

• Explanation: When income increases, the budget line will shift outward. When income decreases, the budget line will shift inward.

11. When income doubles, consumers will also use twice the amount of goods compared to before the income increase.

>> False

• Explanation: The amount of goods consumed depends on the needs and preferences of consumers, not necessarily doubling when income doubles.

• Utility is defined as the satisfaction from consuming that good or service.

>> True

• MU = 0 when TUmax

>> True

• The Law of Diminishing Marginal Utility: As the quantity of a good consumed increases, MU decreases.

>> True

• On the marginal utility graph, it is the slope of the total utility curve.

>> True

• To maximize utility with a given income level, the rule is: Marginal utility per dollar spent on all goods is equal.

>> True

• The BL will SHIFT when the price of one good changes (income and the price of the other good are constant).

>> False

• Explanation: The budget line will rotate when the price of one good changes.

• Consumer surplus CS = TU – MU

>> False

• Explanation: Consumer surplus (CS) = MU – P (price of the good).