If a Good Is Offered to a Rational Individual for Free

question 85

Multiple Choice

If a good is offered to a rational individual for free, she will

• A)accept unlimited quantities of the good each time period
• B)stop consuming it when its marginal utility begins to increase
• C)stop consuming it when its marginal utility begins to diminish
• D)stop consuming it when its marginal utility equals zero
• E)stop consuming it when its total utility equals zero

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Definitions:

Autonomous Investment

Investment in an economy that does not depend on the current level of income or production, often driven by innovation or governmental policy.

Aggregate Expenditure

The total amount of spending in the economy that includes consumption, investment, government purchases, and net exports.

Simple Spending Multiplier

The ratio of a change in real GDP demanded to the initial change in spending that brought it about; the numerical value of the simple spending multiplier is 1/(1 + MPC); called “simple” because only consumption varies with income.

Marginal Propensity

Describes the portion of additional income that an individual is willing to spend on consumption rather than saving.