What is the best definition of the 'marginal rate of substitution' (MRS)?
The rate at which a consumer must pay to substitute one good for another.
The rate at which a consumer is willing to give up good Y to obtain one more unit of good X, maintaining utility.
The total utility gained from consuming a bundle of goods.
The slope of the budget line.
A consumer's budget line has shifted outwards in a parallel fashion. What is the most likely cause?
The price of good X has fallen.
The price of good Y has risen.
The consumer's money income has increased.
The consumer's preferences have changed.
The law of diminishing marginal utility states that...
Total utility will always increase as consumption increases.
Marginal utility will eventually become negative as consumption increases.
The additional utility from consuming extra units will eventually decline.
Utility cannot be measured objectively.
The price of pizza falls. The substitution effect for a rational consumer would be...
to consume less pizza because their real income has increased.
to consume more pizza because its opportunity cost has risen.
to consume less pizza because of diminishing marginal utility.
to consume more pizza because it is now relatively cheaper.
What does the point of tangency between an indifference curve and a budget line represent?
The point where total utility is maximised.
The point where the consumer is spending all income and maximising utility.
The point where marginal utility is zero for both goods.
The point where the consumer can just afford the market basket.
A consumer has £10. Apples cost £1 each and bananas cost £0.50 each. What is the maximum number of bananas they can buy if they spend all their income?
20
15
5
10
An 'inferior good' is one which has a perfectly inelastic demand.
According to the 'equi-marginal principle', consumer equilibrium is achieved when:
MUₓ = MUᵧ
TUₓ = TUᵧ
MUₓ / Pₓ = MUᵧ / Pᵧ
Pₓ = Pᵧ
What is a key limitation of using indifference curve analysis?
It cannot explain the law of demand.
It is only applicable to normal goods.
It cannot be used to derive a demand curve.
It assumes consumers can always rank their preferences, which may not be realistic.
The price of an inferior good falls. Which statement is definitely true about the income effect?
It will encourage the consumer to buy more of the good.
It will encourage the consumer to buy less of the good.
It will be exactly offset by the substitution effect.
Its direction cannot be determined.
A Giffen good must always be an inferior good, but an inferior good is not always a Giffen good.
At a consumer's equilibrium, the marginal utility of good X is 20 and its price is £5. The price of good Y is £2. What is the marginal utility of good Y?
10
5
8
80
A rational consumer will always choose a consumption bundle that is:
on the highest possible indifference curve.
at the midpoint of the budget line.
where the marginal utility of all goods is equal.
on the highest possible indifference curve that is just affordable.
If two goods are perfect complements (e.g., left shoes and right shoes), a consumer's indifference curves are:
downward-sloping straight lines.
L-shaped (right-angled).
convex to the origin.
upward-sloping.
A consumer's demand curve for a normal good is downward sloping primarily because of:
the diminishing marginal utility of the good.
the income effect always being stronger than the substitution effect.
the good having few substitutes.
a change in consumer tastes and preferences.