Ordinal measures of utility – With ordinal measures, an individual is observed preferring one choice to another. An ordinal measure of utility ranks the options available to a consumer. Here on MCQs.club we have prepared useful Multiple-Choice Questions (MCQs) on Utility Analysis Economics that fully cover cost utility, marginal utility analysis, ordinal utility analysis, with their definition/examples/meaning. These MCQs are useful for Business management exams, Competitive exams and Professional accountancy exams.

Which of the following is correct for “Utility”?

1. A measure of happiness of satisfaction gained from a good or service.
2. The total amount of satisfaction and fulfilment that an individual receives by way of consuming a specific good or service is termed as total utility.
3. The additional amount of satisfaction and fulfilment that is acquired by utilizing one additional unit of a commodity.
4. All of the above

Which of the following is correct for “Total Utility”?

1. A measure of happiness of satisfaction gained from a good or service.
2. The total amount of satisfaction and fulfilment that an individual receives by way of consuming a specific good or service is termed as total utility.
3. The additional amount of satisfaction and fulfilment that is acquired by utilizing one additional unit of a commodity.
4. All of the above

Which of the following is correct for “Marginal Utility”?

1. The additional amount of satisfaction and fulfilment that is acquired by utilizing one additional unit of a commodity.
2. It could either be positive or negative.
3. Both A&B
4. None

Positive marginal utility is when the marginal utility increases the total utility whereas negative marginal utility is when the consumption of an additional unit reduces the amount of total utility.

1. The above is True
2. The above is False

A __________ is a way of assigning an option someone has with a level of utility.

1. Rationality
2. Cardinal measure
3. Ordinal measures
4. None

Benefits of Cardinal measurement include:

1. One can look in detail at a number of options facing someone
2. Using this someone can evaluate what decision one is likely to make.
3. Both A&B
4. None

Which of the following is correct for “Ordinal measures of utility”?

1. With ordinal measures, an individual is observed preferring one choice to another
2. An ordinal measure of utility ranks the options available to a consumer
3. It is able to better determine the person’s utility.
4. All of the above

The correct mathematical background of Ordinal measures of utility is:

1. 1, 2, 3
2. 1^st, 2^nd, 3^rd
3. I, II, III
4. A, B, C

The Ordinal measures of utility method benefits from comparing bundles of goods which consumers can prefer over others, it is still not possible to compare utility between individuals.

1. True
2. False

Law of diminishing marginal utility –

1. The additional benefit which a person derives from a given increase of his stock of a commodity diminishes with every increase in stock that he already has.
2. This concept allows a rich ability to understand the choices that are made by consumers within a society
3. Both A&B
4. None

Assumptions of the law of diminishing marginal utility include:

1. 1. Consumer is rational
  2. Cardinal measurement – the law assumes that the utility is measurable and could be expressed quantitatively e.g. 1,2,3 etc.
  3. Continuous Consumption – It is assumed that the consumption is a continuous process and there must not come any gaps in between.
  4. Quality – Quality of the product being consumed must remain the same.
  5. Constant income – The consumer’s income should not change while consuming the goods.

1. (I) (II) and (III) only
2. (II) (III) and (IV) only
3. All of the above
4. None

The Law of diminishing marginal utility does not applies to:

1. Collectibles
2. Hobbies
3. Rare items
4. All of the above

Knowledge, art and innovations – The Law of diminishing marginal utility doesn’t hold true for knowledge, art and innovations, as the utility increases with the increased consumption of these.

1. The above statement is incorrect
2. The above statement is correct

Examples of the Practical importance of the law of diminishing marginal utility are:

1. By consuming one additional item of a product the utility decreases.
2. Law of diminishing marginal utility forms the basis of many other laws like law of substitution, law of demand, concept of consumer surplus etc.
3. The law helps in the price determination
4. All of the above

Indifference curve

1. An indifference curve shows different combinations of goods that someone may choose to consume.
2. The key idea with an indifference curve is that by substituting one good for another, one will be able to maintain the same level of utility.
3. Both A&B
4. None

Assumptions of indifference curves include:

1. 1. Consumer is rational: Consumers’ behaviour is consistent
  2. Utility is ordinal: A consumer prefers one basket of goods to another
  3. Diminishing marginal rate of substitution
  4. Consistency of choice: The choice remains constant over time periods
  5. Preferences are not self-contradictory
  6. Goods are substitutable

1. All of the above
2. (I) (III) and (V) only
3. (III) (IV) and (V) only
4. None

Identify the Characteristics of indifference curves.

1. 1. Negatively sloped
  2. Higher indifference curve equals higher level of utility
  3. Convex to the origin
  4. Cannot intersect each other
  5. Curves do not touch horizontal or vertical axis

1. (I) and (II) only
2. (III) (IV) and (V) only
3. All of the above
4. None

What is correct for “Marginal Rate of Substitution (MRS)”?

1. The rate at which a consumer must give up “Good A” in order to obtain one more unit of “Good B” and maintain the same level of utility
2. The MRS shows that at a certain point, what someone would be willing to trade in order to have the same utility.
3. Both A&B
4. None

Consumer equilibrium – The amount of goods and services which is possible for the consumer to buy, given their income and the prices in the market.

1. True
2. False

The consumer is ____________ at a point where the price line is tangent to the highest attainable indifference curve from ___________.

1. Minimized, above
2. In equilibrium, below
3. Maximized, middle
4. None

Budget line – Each consumer will have an income, and with that income he is able to purchase a combination of two goods. At the budget line:

1. All points along it show combinations of goods that are affordable
2. Any point to the right of the budget line is unaffordable
3. Any point to the left of the budget line is affordable, but inefficient.
4. All of the above

The maximum utility available to the consumer is a point on an indifference curve that is tangential to the budget line. This point is called the____________.

1. Equilibrium
2. Optimum
3. Break-even
4. None

At the “Optimum”, the marginal utility per rupee spent on Good X equals the marginal utility per rupee spent on Good Y.

1. True
2. False

Assumptions underlying the law of equi-marginal utility include:

1. 1. The consumer behaves rationally and seeks to maximize his total satisfaction.
  2. Utility is measurable in cardinal terms.
  3. The consumer has a given scale of preference for the goods in consideration.
  4. The consumer has perfect knowledge of utility derived from goods.
  5. Wants and goods are substitutable.
  6. Prices of goods are unchanged.
  7. Consumer income is fixed.
  8. The marginal utility of money is constant.

1. All of the above
2. (I) (III) and (VI) only
3. (III) (IV) and (VI) only
4. None

Limitations of the law of equi-marginal utility include:

1. 1. Consumers do not make conscious calculations
  2. Consumer ignorance – Consumers may be unaware of other available alternatives.
  3. Custom and fashion
  4. Indivisibility of goods

Utility Analysis MCQs | Cost utility analysis

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