Consumer Theory — Practice Set 1

Marginal utility is best defined as:

The law of diminishing marginal utility states that:

A consumer maximizes utility when:

If MUx/Px > MUy/Py, the consumer should:

The budget constraint shows:

If income doubles and all prices double, the budget line:

A fall in the price of good X makes the budget line:

Total utility is maximized (for a single good with no budget limit) when marginal utility:

The paradox of value (water cheap, diamonds dear) is resolved by noting that price reflects:

If the price of X rises, the consumer's real income ___ and the substitution effect leads them to buy ___ X.