CSCredit Sprint
Sign upStart free

Credit Sprint / Study guides / Consumer choice

Credit Sprint's Guide to Consumer Choice for CLEP® Principles of Microeconomics

5–10% of the CLEP® exam

CLEP® tests consumer choice as its own content area. Consumers get utility from goods, each extra unit adds less (diminishing marginal utility), and a rational consumer spends their budget so the last dollar spent on every good adds the same utility.

What you need to know

  • Total utility is the overall satisfaction from consumption; marginal utility is the extra satisfaction from one more unit.
  • Diminishing marginal utility means each additional unit adds less satisfaction than the one before.
  • The utility-maximizing rule: MUx ÷ Px = MUy ÷ Py, with the whole budget spent.
  • If MU per dollar is higher for X, buy more X and less Y until they're equal.
  • The substitution effect: when a good's price falls, it becomes relatively cheaper, so people buy more of it.
  • The income effect: when a good's price falls, real income rises, so people can buy more of normal goods.
  • Together, the substitution and income effects explain why demand curves slope downward.
  • Consumer surplus measures the benefit buyers get above what they pay.

Practice questions

1. Marginal utility is
  1. the price a consumer pays for a good
  2. the additional satisfaction from consuming one more unit of a good
  3. the average satisfaction per unit
  4. the satisfaction from the first unit only
  5. the total satisfaction from all units consumed
Show answer

the additional satisfaction from consuming one more unit of a good. "Marginal" means one more unit.

2. The law of diminishing marginal utility states that
  1. total utility falls as more is consumed
  2. each additional unit adds more satisfaction
  3. as a person consumes more of a good, each additional unit adds less satisfaction
  4. consumers buy less when income falls
  5. prices fall as more is produced
Show answer

as a person consumes more of a good, each additional unit adds less satisfaction. The third slice of pizza is less satisfying than the first.

3. Kai's total utility from tacos is 30 utils for one taco, 52 for two, and 66 for three. What is the marginal utility of the third taco?
  1. 66 utils
  2. 14 utils
  3. 22 utils
  4. 22 utils per dollar
  5. 30 utils
Show answer

14 utils. 66 − 52 = 14.

4. Apples cost $1 and oranges cost $2. Lena's last apple gives her 8 utils and her last orange gives her 12 utils. To maximize utility, she should
  1. buy only oranges, since they give more total utility
  2. keep buying the same amounts
  3. spend less money overall
  4. buy more apples and fewer oranges
  5. buy more oranges and fewer apples
Show answer

buy more apples and fewer oranges. Apples give 8 utils per dollar; oranges give 6.

5. A consumer is maximizing utility when
  1. marginal utility of every good is zero
  2. total utility is equal for all goods
  3. the consumer buys the cheapest goods
  4. the marginal utility per dollar is equal for all goods purchased and the budget is spent
  5. marginal utility is equal for all goods
Show answer

the marginal utility per dollar is equal for all goods purchased and the budget is spent. No reallocation can raise total utility.