Q.1 What does the term 'utility' mean in economics?
The cost of producing goods
The satisfaction derived from consumption
The price of a product
The demand for services
Explanation - Utility in economics refers to the satisfaction or pleasure a consumer gains from consuming a good or service.
Correct answer is: The satisfaction derived from consumption
Q.2 Which of the following is an assumption of the law of diminishing marginal utility?
All units of the commodity are different
Consumer’s taste changes rapidly
Units of commodity are homogeneous
Utility increases indefinitely
Explanation - The law assumes that each unit consumed is identical in quality and size to ensure fair comparison.
Correct answer is: Units of commodity are homogeneous
Q.3 Total utility is maximum when:
Marginal utility is zero
Marginal utility is maximum
Marginal utility is negative
Marginal utility is constant
Explanation - Total utility reaches its maximum point when the additional satisfaction (marginal utility) from the next unit is zero.
Correct answer is: Marginal utility is zero
Q.4 The concept of 'ordinal utility' was introduced by:
Marshall
Jevons
Pareto
Adam Smith
Explanation - Vilfredo Pareto developed the concept of ordinal utility, where preferences are ranked instead of measured.
Correct answer is: Pareto
Q.5 In indifference curve analysis, a higher indifference curve represents:
Lower satisfaction
Higher satisfaction
No change in satisfaction
Negative satisfaction
Explanation - A higher indifference curve corresponds to a higher level of utility since it represents more preferred bundles.
Correct answer is: Higher satisfaction
Q.6 The slope of the indifference curve is known as:
Price line
Budget constraint
Marginal rate of substitution
Utility function
Explanation - The slope of the indifference curve measures how much of one good a consumer is willing to sacrifice for another while maintaining satisfaction.
Correct answer is: Marginal rate of substitution
Q.7 Which law explains consumer equilibrium under cardinal utility analysis?
Law of Demand
Law of Equi-marginal Utility
Law of Supply
Law of Variable Proportions
Explanation - Consumer equilibrium is explained by the Law of Equi-marginal Utility, which states that consumers allocate expenditure to equalize marginal utility per unit of money.
Correct answer is: Law of Equi-marginal Utility
Q.8 The consumer reaches equilibrium in indifference curve analysis when:
MRS = Price ratio
MRS = 0
MRS is infinite
MRS = Total utility
Explanation - Equilibrium occurs when the marginal rate of substitution equals the ratio of prices of the two goods.
Correct answer is: MRS = Price ratio
Q.9 The assumption of transitivity in consumer behavior implies:
Preferences are random
Preferences are consistent
Utility cannot be measured
Utility decreases with consumption
Explanation - Transitivity assumes that if A is preferred to B and B is preferred to C, then A is preferred to C, ensuring consistency in preferences.
Correct answer is: Preferences are consistent
Q.10 What shape do indifference curves generally have?
Straight lines
Upward sloping
Downward sloping convex to origin
Circular
Explanation - Indifference curves are convex to the origin, reflecting the diminishing marginal rate of substitution.
Correct answer is: Downward sloping convex to origin
Q.11 Utility is maximized when:
MUx/Px = MUy/Py
MUx = MUy
Px = Py
TUx = TUy
Explanation - A consumer maximizes utility when the ratio of marginal utility to price is equal across all goods.
Correct answer is: MUx/Px = MUy/Py
Q.12 Cardinal utility assumes that utility is:
Measurable in numbers
Only comparable
Not quantifiable
Unrelated to consumption
Explanation - Cardinal utility theory assumes that satisfaction can be quantified in units of utility.
Correct answer is: Measurable in numbers
Q.13 Which utility concept suggests ranking preferences instead of measuring them?
Cardinal utility
Ordinal utility
Total utility
Marginal utility
Explanation - Ordinal utility states that consumers rank their preferences without assigning numerical values.
Correct answer is: Ordinal utility
Q.14 If marginal utility is negative, then total utility will:
Decrease
Increase
Remain constant
Be maximum
Explanation - A negative marginal utility means additional consumption reduces total satisfaction.
Correct answer is: Decrease
Q.15 Which economist is associated with the indifference curve approach?
Alfred Marshall
Vilfredo Pareto
J.R. Hicks
Adam Smith
Explanation - J.R. Hicks, along with R.G.D. Allen, developed the indifference curve analysis for consumer behavior.
Correct answer is: J.R. Hicks
Q.16 Budget line shows:
Combinations of goods affordable with given income
Maximum satisfaction level
Total utility levels
Equal marginal utilities
Explanation - The budget line represents all possible combinations of two goods a consumer can purchase with given income and prices.
Correct answer is: Combinations of goods affordable with given income
Q.17 If the budget line shifts outward, it indicates:
Decrease in income
Increase in income
Decrease in price
Increase in supply
Explanation - An outward shift of the budget line suggests more purchasing power, usually due to higher income.
Correct answer is: Increase in income
Q.18 The marginal utility curve is:
Upward sloping
Downward sloping
Horizontal
Vertical
Explanation - Marginal utility falls with each additional unit consumed, giving a downward-sloping curve.
Correct answer is: Downward sloping
Q.19 Which principle explains why demand curves slope downward?
Law of Supply
Law of Diminishing Marginal Utility
Law of Equi-marginal Utility
Law of Increasing Returns
Explanation - As more units are consumed, marginal utility decreases, leading consumers to buy more only at lower prices.
Correct answer is: Law of Diminishing Marginal Utility
Q.20 Consumer equilibrium under indifference curve approach occurs when:
IC tangent to budget line
IC cuts budget line
IC parallel to budget line
IC lies above budget line
Explanation - Equilibrium occurs when the indifference curve is tangent to the budget line, balancing satisfaction and affordability.
Correct answer is: IC tangent to budget line
Q.21 If two indifference curves intersect, it violates the assumption of:
Completeness
Transitivity
Consistency
Non-intersection
Explanation - Indifference curves cannot intersect, as it would imply inconsistent preference rankings.
Correct answer is: Non-intersection
Q.22 Which utility measure focuses on satisfaction in absolute numbers?
Ordinal utility
Cardinal utility
Marginal utility
Indifference utility
Explanation - Cardinal utility measures satisfaction in quantifiable terms, unlike ordinal utility which only ranks preferences.
Correct answer is: Cardinal utility
Q.23 The slope of the budget line depends on:
Consumer’s income
Price ratio of goods
Marginal utility
Indifference curve
Explanation - The budget line slope is determined by the ratio of prices of the two goods.
Correct answer is: Price ratio of goods
Q.24 A rational consumer aims to:
Maximize cost
Maximize utility
Minimize satisfaction
Equalize expenditure
Explanation - Consumer behavior analysis assumes that consumers act rationally to maximize satisfaction within their budget.
Correct answer is: Maximize utility
Q.25 The point where budget line and highest indifference curve touch is called:
Saturation point
Equilibrium point
Marginal point
Neutral point
Explanation - Consumer equilibrium is reached at the tangency between the budget line and the highest attainable indifference curve.
Correct answer is: Equilibrium point