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1355 Words Apr 14th, 2014 6 Pages
Week 1 Conceptual Exercise:

Consumer Behavior Theory

1) A decrease in the price of a particular good, with all other variables constant, causes

a. a shift to a different demand schedule with higher quantities demanded

b. a shift to a different demand schedule with lower quantities demanded

c. a movement along a given demand curve to a lower quantity demanded

d. a movement along a given demand curve to a higher quantity demanded

e. no movement along a given demand curve unless supply also changes

Answer: d. A movement along a given demand curve to a higher quantity demanded

Explanation: According to law of demand as the price of good decreases the demand will increase.

P P= Price of Good
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purchasing more clothes and less food

Explanation: As the marginal utility to price ratio for clothes is higher than for food

i.e. MUc/Pc > MUF/PF.

This means the consumer will get more satisfaction from buying cloths than from food. To make the ratio in equilibrium Pc must be increase. Hence he should buy more clothes till the marginal utility to price ratio for clothes gets equal to the marginal utility of foods.

6) The law of diminishing returns states that:

a. as a firm uses more of a variable resource, given the quantity of fixed resources, the average product of the firm will increase.

b. as a firm uses more of a variable resource, given the quantity of fixed resources, marginal product of the firm will eventually decrease.

c. in the short run, the average total costs of the firm will eventually diminish.

d. in the long run, the average total costs of the firm will eventually diminish.

Answer: b. as a firm uses more of a variable resource, given the quantity of fixed resource, marginal product of the firm will eventually decrease.

Explanation: The law of diminishing returns states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. To continue to make an investment after a certain point (which varies
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