Quiz 3: Consumer Behavior

Select from the following, the issues that consumer theory can help to resolve. A) How consumer allocate their incomes to the purchase of goods and services B) Problems involving corporate policy C) Problems involving public policy D) All of the above

The field of behavioral economics has been built around which of the following assertions? A) Consumers have preferences among the various goods and services available to them. B) Consumers face budget constraints which put limits on what they can buy. C) Consumers may not be as rational and well-informed as economists make them out to be. D) Consumers ignore the information they obtain and tend to make more irrational than rational decisions.

The theory of consumer behavior assumes that consumers can compare and rank all possible market baskets. This assumption is called: A) completeness. B) transitivity. C) nonsatiation (more is preferred to less). D) rationality.

The assumption that preferences are complete: A) means that a consumer will spend her entire income. B) is unnecessary, as long as transitivity is assumed. C) recognizes that there may be pairs of market baskets that cannot be compared. D) means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them.

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called: A) completeness. B) transitivity. C) nonsatiation. D) rationality.

Figure 3.1.1 -Refer to Figure 3.1.1 above. On the assumption that the consumer prefers more to less, which of the following baskets are preferred to market basket A? A) B and D B) B and E C) Only B D) Only E

Figure 3.1.1 -Refer to Figure 3.1.1 above. Relative to market basket A, which market baskets would compensate for the loss of one good with the gain in the other, so that total utility from any of these baskets would be the same? A) B and D B) G and E C) B and E D) Only E

Figure 3.1.1 -A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called: A) a budget line. B) an isoquant. C) an indifference curve. D) a demand curve.

Figure 3.1.2 -Refer to Figure 3.1.2. The shape of an indifference curve like the one in this figure: A) represents more realistically the preferences of a rational consumer. B) implies that consumer preferences are not complete. C) violates the assumption that more is preferred to less. D) has market baskets that represent different levels of utility.

Figure 3.1.2 -When different indifference curves are placed in the Cartesian plane, A) the result is called an indifference map. B) the curves cannot intersect. C) the curves that occupy a place farther away from the origin yield more utility than curves closer to the origin. D) all of the above

The slope of an indifference curve reveals: A) that preferences are complete. B) the marginal rate of substitution of one good for another good. C) the ratio of market prices. D) that preferences are transitive. E) none of the above

Indifference curves are convex to the origin because of: A) transitivity of consumer preferences. B) the assumption of a diminishing marginal rate of substitution. C) the assumption that more is preferred to less. D) the assumption of completeness. E) none of the above

Figure 3.1.3 -Refer to Figure 3.1.3 above. The way in which the indifference curves are drawn in this figure: A) represents a unique case in which two different indifference curves offer the same level of utility. B) compares three market baskets that yield the same level of utility. C) violates the principle of transitivity in the model of consumer behavior. D) represents the usual way in which indifference curves appear on an indifference map.

Figure 3.1.3 -If indifference curves cross, then: A) the assumption of a diminishing marginal rate of substitution is violated. B) the assumption of transitivity is violated. C) the assumption of completeness is violated. D) consumers minimize their satisfaction. E) all of the above

Figure 3.1.4 -Refer to Figure 3.1.4 above. The value of the marginal rate of substitution between points B and D is: A) -4 B) -0.25 C) 10 D) 6

Figure 3.1.4 -Refer to Figure 3.1.4 above. When computing the marginal rate of substitution from point to point as we move downward across the curve, we discover: A) a diminishing marginal rate of substitution. B) an ever increasing marginal rate of substitution. C) a constant marginal rate of substitution. D) no particular trend in the marginal rate of substitution.

Figure 3.1.5 -Based on Figure 3.1.5, it can be inferred that: A) the consumer does not consider orange juice as "good." B) the consumer will never purchase any quantity of apple juice. C) the consumer regards orange juice and apple juice as perfect substitutes. D) the consumer regards orange juice and apple juice as perfect complements.

Figure 3.1.5 -Refer to Figure 3.1.5. Which of the following is true concerning the consumer's marginal rate of substitution? A) It is diminishing. B) It is positive but varies along the indifference curve. C) It is constant. D) It is zero.

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1.6 -Based on Figure 3.1.6 above, it can be inferred that: A) Alvin does not consider good X as "good." B) Alvin will never purchase any of good Y. C) Alvin regards good X and good Y as perfect substitutes. D) Alvin regards good X and good Y as perfect complements. E) none of the above

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1.6 -Refer to Figure 3.1.6. Which assumption concerning preferences do Alvin's indifference curves violate? A) Diminishing marginal rates of substitution B) Transitivity of preferences C) More is preferred to less D) Completeness E) both A and C

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1.6 -Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are: A) vertical lines. B) horizontal lines. C) diagonal straight lines. D) right angles. E) upward sloping.

Consider the following three market baskets:Table 3.1 -Refer to Table 3.1. If preferences satisfy all four of the basic assumptions: A) A is on the same indifference curve as B. B) B is on the same indifference curve as C. C) A is preferred to C. D) B is preferred to A. E) Both A and B answer choices are correct.

Consider the following three market baskets:Table 3.1 -Two goods for which the marginal rate of substitution is zero or infinite are: A) perfect substitutes. B) perfect complements. C) goods considered "bads." D) substitutes and complements at the same time.

Consider the following three market baskets:Table 3.1 -Goods that are considered "bads" have this characteristic: A) their marginal rates of substitution are constant. B) for those goods, less is preferred to more. C) preferences for those goods are not complete. D) those goods have horizontal or vertical indifference curves.

Consider the following three market baskets:Table 3.1 -Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses, she just cannot decide. An economist would say that this is an example of preferences that: A) are not transitive. B) are incomplete. C) violate the assumption that more is preferred to less. D) all of the above

Figure 3.1.7 -Refer to Figure 3.1.7 above. This indifference map shows that: this consumer: A) prefers a car with more acceleration and less space. B) prefers more expensive rather than less expensive cars. C) is indifferent between acceleration and space at all levels of utility. D) all of the above

Figure 3.1.8 -Refer to Figure 3.1.8 above. This indifference map shows that this consumer: A) prefers cars with more space and less acceleration. B) obtains the same additional utility from more space or more acceleration. C) obtains more utility only when acceleration increases, even if space remains about the same. D) takes notice of the fact that, as acceleration increases, space decreases.

A numerical score that represents the satisfaction that a consumer gets from a given market basket is called: A) utility. B) a utility function. C) marginal utility. D) the marginal rate of substitution.

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level? A) 2 units B) 4 units C) 6 units D) 8 units

A utility function that generates a ranking of market baskets in order of most to least preferred is called: A) a cardinal utility function. B) an ordinal utility function. C) either an ordinal or a cardinal function. Both types of functions use this ranking. D) neither an ordinal nor a cardinal function. Neither type uses this ranking.

A utility function describing by how much one market basket is preferred to another is called: A) a cardinal utility function. B) an ordinal utility function. C) either an ordinal or a cardinal function. Both types of functions use this ranking. D) neither an ordinal nor a cardinal function. Neither type uses this ranking.

To understand consumer behavior and how consumer decisions are made, it is necessary and/or sufficient to work with: A) cardinal utility functions only. B) ordinal utility functions only. C) both cardinal and ordinal utility functions. D) either ordinal or cardinal functions, but not both.

To answer the question: Can money buy happiness?, a study of the relationship between GDP per capita and satisfaction with life demonstrates that: A) there is an inverse relationship between money and happiness. People in countries with lower GDP per capita tend to be happier than people in countries with higher GDP per capita. B) there is a direct relationship between money and happiness. People in countries with higher GDP per capita tend to be happier than people in countries with lower GDP per capita. C) there is no apparent relationship between money and happiness, at least not when GDP per capita is compared to a country's corresponding level of satisfaction with life. D) things other than money appear to be more important than GDP per capita in determining the level of satisfaction with life.

A budget line shows the combinations of: A) prices that place a limit on the purchase and consumption of two goods. B) two goods that can be purchased with a given income, and given the prices of the two goods. C) two goods that can be purchase at various levels of income. D) the quantities of two goods that can be purchased at various prices.

Figure 3.2.1 -Refer to Figure 3.2.1 above. The slope of the budget line equals: A) -1 B) -2 C) -0.5 D) -1.5

Figure 3.2.1 -Refer to Figure 3.2.1 above. Let I = income, P_F the price of food, and P_C the price of clothing. The vertical intercept of the budget line equals 40, which is equivalent to: A) I. B) -P_C/P_F. C) I/P_C. D) I/P_F.

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis? A) -7/15 B) -7/100 C) -15/7 D) 7/15

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis, A) the budget line will become steeper. B) the budget line will become flatter. C) the slope of the budget line will not change. D) the slope of the budget line will change, but in an indeterminate way.

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is: A) -Q_A/Q_B. B) -Q_B/Q_A. C) -P_A/P_B. D) -P_B/P_A. E) I/P_A or I/P_B.

The endpoints (horizontal and vertical intercepts) of the budget line: A) measure its slope. B) measure the rate at which one good can be substituted for another. C) measure the rate at which a consumer is willing to trade one good for another. D) represent the quantity of each good that could be purchased if all of the budget were allocated to that good. E) indicate the highest level of satisfaction the consumer can achieve.

An increase in income, holding prices constant, can be represented as: A) a change in the slope of the budget line. B) a parallel outward shift in the budget line. C) an outward shift in the budget line with its slope becoming flatter. D) a parallel inward shift in the budget line.

Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will: A) become flatter. B) become steeper. C) shift outward. D) become steeper or flatter depending on the relationship between prices and income.

Figure 3.2.2 -Refer to Figure 3.2.2 above. Which of the following could have caused the shift of the budget line? A) An increase in income B) An increase in the price of food C) A decrease in the price of clothing D) An increase in the preference for both goods

Figure 3.2.2 -Which of the following will result in a decrease in a consumer's purchasing power? A) A decrease in the consumer's income B) An increase in the price of the good on the vertical axis C) An increase in the price of the good on the horizontal axis D) all of the above

If prices and income in a two-good society double, what will happen to the budget line? A) The intercepts of the budget line will increase. B) The intercepts of the budget line will decrease. C) The slope of the budget line may either increase or decrease. D) Insufficient information is given to determine what effect the change will have on the budget line but we know society is worse-off. E) There will be no effect on the budget line.

The budget constraint for a consumer who only buys apples (A) and bananas (B) is P_AA + P_BB = I where consumer income is I, the price of apples is P_A, and the price of bananas is P_B. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation: A) A = -I/P_A + (P_B/P_A)B B) A = I/P_A - (P_B/P_A)B C) B = -I/P_B + (P_A/P_B)A D) B = I/P_B - (P_A/P_B)A

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of clothing increases and the price of food and income do not change, then the budget line changes by rotating: A) counter-clockwise about the fixed vertical axis intercept. B) clockwise about the fixed vertical axis intercept. C) counter-clockwise about the fixed horizontal axis intercept. D) clockwise about the fixed horizontal axis intercept. E) none of the above

Figure 3.2.3 -Refer to Figure 3.2.3 above. The rotation of the budget line could have been caused by: A) an increase in income. B) an increase in the price of food. C) a decrease in the price of food. D) an increase in the preference for food.

Figure 3.2.3 -Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating: A) counter-clockwise about the fixed vertical axis intercept. B) clockwise about the fixed vertical axis intercept. C) counter-clockwise about the fixed horizontal axis intercept. D) clockwise about the fixed horizontal axis intercept. E) none of the above

Figure 3.2.4 -Refer to Figure 3.2.4. Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line? A) The price of food and the price of clothing increased. B) The price of food increased, and the price of clothing decreased. C) The price of food decreased, and the price of clothing increased. D) The price of food and the price of clothing decreased. E) none of the above

Figure 3.2.4 -To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer? A) Makes the budget line steeper B) Makes the budget line flatter C) Parallel outward (rightward) shift D) Parallel inward (leftward) shift E) none of the above

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. Also, suppose that all states initially impose state sales taxes on all goods (including food), but then the states exempt food from the state sales tax. How does this tax policy change alter the consumer's budget line? A) Makes the budget line steeper B) Makes the budget line flatter C) Parallel rightward shift D) Parallel leftward shift E) none of the above

The price of coffee is always equal to one-half the price of tea. When we plot the budget line for coffee and tea, coffee is plotted on the horizontal axis. What is the slope of this budget line? A) -1/2 B) 1/2 C) -2 D) 2

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (P_F), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case? A) The budget line is a straight line. B) The budget line is now concave to (bows out from) the origin. C) The budget line is now convex to (bows in toward) the origin. D) The budget line will not be a straight line, but it may be concave or convex.

Satisfaction from consumption is maximized when: A) marginal cost equals zero. B) marginal benefit equals zero. C) marginal benefit equals marginal cost. D) marginal benefit is maximum.

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals: A) the magnitude of the slope of the indifference curve through that point. B) one over the magnitude of the slope of the indifference curve through that point. C) P_X/P_Y D) P_Y/P_X

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave? A) Both goods are consumed. B) No goods are consumed. C) Only one of the goods is consumed. D) It occurs at the point of tangency with the budget line.

Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3. Which of the following is true? A) Jack could increase his utility by buying more pens and fewer pencils. B) Jack could increase his utility by buying more pencils and fewer pens. C) Jack could increase his utility by buying more pencils and more pens. D) Jack could increase his utility by buying fewer pencils and fewer pens. E) Jack is at a corner solution and is maximizing his utility.

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket? A) MRSxy is at a maximum. B) P_X/P_Y = money income. C) MRSxy = money income. D) MRSxy = P_X/P_Y. E) all of the above

The fact that Alice spends no money on travel: A) implies that she does not derive any satisfaction from travel. B) implies that she is at a corner solution. C) implies that her MRS does not equal the price ratio. D) Any of the above are possible.

The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be: A) 2 lemonades for each popcorn. B) 1 lemonades for each popcorn. C) 1/2 lemonade for each popcorn. D) indeterminate unless more information on Fred's marginal utilities is provided.

When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that: A) Joe's preferences are incomplete. B) Joe's preferences are irrational. C) Joe is not consuming good X. D) Joe is not consuming good Y.

Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods? A) 4 pounds of apples and 6 pounds of oranges B) 5 pounds of apples and 5 pounds of oranges C) 10 pounds of oranges and no apples D) 15 pounds of apples and no oranges E) none of the above

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. What is her optimal choice under this scenario? A) 8 packages of hot dogs and 6 packages of buns B) 8 packages of hot dogs and 8 packages of buns C) 6 packages of hot dogs and 6 packages of buns D) 6 packages of hot dogs and 8 packages of buns

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package? A) Sue does not change her consumption because these goods are perfect complements. B) She buys the same amount of hot dog buns and buys more hot dogs. C) She buys the same amount of hot dogs and buys two less packages of hot dog buns. D) She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.

You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted P_Y for frozen yogurt and P_IC for ice cream. Under what condition will you only consume frozen yogurt? A) MRS is greater than P_IC/P_Y. B) MRS is less than P_IC/P_Y. C) MRS is less than P_Y/P_IC. D) MRS is infinite.

Which of the following statements is not true? A) If tea and coffee are perfect substitutes in your consumption, then you will only consume the good with the lowest price. B) If tea and coffee are perfect substitutes in your consumption, then you will consume some quantity of both goods if the prices of tea and coffee are equal. C) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. As long as your income and the prices of coffee and donuts are positive, you will not choose a corner solution. D) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. You will consume coffee and donuts at some point along the 45-degree line where your MRS equals the price ratio for the two goods.

The local farmer's market sells corn for 20 cents an ear. At this price, Sam buys 6 ears each Thursday. What would happen to Sam's consumption of corn if the market offered corn at 20 cents an ear for the first 6 ears, but 10 cents an ear for each additional ear? Explain your answer.

George has a fixed income and can afford at most 7 units of X if he spends his entire income on X. Alternatively, if he spends all his income on Y, he can afford at most 6 units of Y. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's?

Hulk goes to the gym 20 times a month. His income is $1,000 per month and his visits to the gym cost $4 per visit. a. Draw Hulk's budget line for visits to the gym and all other goods, show the consumption bundle that maximizes his satisfaction, and draw the indifference curve through that point. b. Recently, a new health club opened which offers identical facilities but which charges a flat fee of $60 per month plus $1 per visit. Draw Hulk's budget line if he were to join this new club. c. Would Hulk continue to work out at the gym or would he join the new health club. Why?

A consumer decides not to buy a VCR when her income is $20,000. However, when her income rises to $30,000, she decides to buy one. In a single diagram, draw the budget lines and indifference curves to illustrate this situation (assume the VCR costs $300 in both time periods). Be sure to label your diagram completely.

Suppose that the government subsidizes housing expenditures of low-income families by providing a dollar-for-dollar subsidy to a family's housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 which can be used for housing or other goods. Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two.

Sheila can watch as many television programs as she wants for free, but she must pay $2 for each video she rents. Draw Sheila's budget line for t.v. shows (T) and videos (V), and identify the set of affordable bundles (be sure to label the axes). At a particular point on Sheila's budget line, her MRS is 1T/2V. Illustrate this situation on your diagram. Has Sheila maximized her satisfaction at this point? If not, identify a change in consumption that will make her better off. Describe her preferences when satisfaction is maximized.

Sally consumes two goods, X and Y. Her utility function is given by the expression The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500. a. Sketch a set of two indifference curves for Sally in her consumption of X and Y. b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

Amy is currently spending her income to maximize her satisfaction. She is renting an apartment for $900 per month as shown in the diagram below (Assume each dollar spent on housing buys 1 unit of housing. H1 represents her $900 per month apartment). a. Suppose that Amy qualifies for a government housing assistance program that will provide her with a $600 per month apartment at no charge. If she accepts the apartment, she cannot augment her expenditure on housing (for example, she cannot add $300 of her income to the $600 per month provided by the government program, and rent the $900 per month apartment), nor can she exchange the apartment for cash or other goods. How does the government program alter Amy's budget line? b. Suppose that Amy is given $600 in cash instead of the $600 per month apartment. How will this alter Amy's budget line? c. Is Amy indifferent between the housing assistance program and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Sally consumes two goods, X and Y. Her utility function is given by the expression The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500. a. Sketch a set of two indifference curves for Sally in her consumption of X and Y. b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

The food stamp program provides low income households with coupons which can be exchanged for some specified dollar value worth of food. Many economists argue that this program is an inefficient means of increasing the well-being of low income families. Proponents of this view argue that an equivalent cash subsidy would bring about a greater increase in the well-being of the low income families receiving aid. Although many economists hold this view, not all policy analysts agree with the advocates of cash payments instead of food stamps. Advocates of the existing program argue that food stamps provide an incentive for low income families to increase the nutritional quality of their diets. a. Carefully analyze the arguments regarding increases in well-being under cash payments and food stamp programs. Use graphical analysis to present your arguments. b. Critically evaluate the pros and cons of the food stamp program. Do food stamps ensure that low income families increase their consumption of food?

Suppose that the price of gasoline has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on gasoline? Diagram the impact of the increase in gas prices in a commodity space diagram, and show the relevant indifference curves. Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less gasoline (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of gasoline with the higher income level or the original price of gas and income?

Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each semester that can only be used to buy books. Diagram Bobby's budget constraint when he has the gift certificate in addition to his $500 income. Is Bobby better-off with the gift certificates?

Larry lives with his parents and enjoys listening to jazz. Because of his living arrangements, his only expense is on jazz music. To earn money to buy new albums, Larry must work. Larry has 16 hours per day he could spend listening to jazz or working. Each hour he works he earns $6. Each album costs him $12. Diagram Larry's budget constraint for new jazz albums and time spent listening to jazz. If Larry's parents require him to spend two hours per day doing chores around the house, what happens to his budget constraint? Does the requirement to do chores make Larry worse off?

Roberta lives alone on a deserted island. She can spend her time gathering coconuts or bananas. She has 16 hours available each day and can gather 4 coconuts in an hour or 8 bananas in an hour. Diagram Roberta's budget constraint. Given that Roberta's Marginal Utility of bananas is always 25 and her Marginal utility of coconuts is always 100, what is her optimal consumption? One day an individual from a neighboring island arrives by boat and offers to exchange any number of fruits at a rate of 1 coconut for 1 banana. Diagram Roberta's budget constraint at this exchange rate assuming she will now spend all her time gathering bananas. Is Roberta better off? What does she consume?

The principle of revealed preference would say that if Xavier chooses market basket A over market basket B then: A) if A is more expensive than B, then Xavier must prefer A over B. B) if A is more expensive than B, then Xavier must prefer B over A. C) if A is less expensive than B, then Xavier must prefer A over B. D) if A is less expensive than B, then Xavier must prefer B over A.

Denise is shopping for lobsters and eclairs. When she faces budget line b₁, she chooses market basket A over market basket B. When she faces budget line b₂, she chooses basket B over basket C. Which assumption of consumer theory helps us determine Denise's preference ordering over basket A and basket C? A) Completeness B) More is better than less C) Transitivity D) Convexity

Figure 3.4.1 -Refer to Figure 3.4.1 above. The consumer chooses A on budget line I₁ and B on budget line I₂. Which of the following statements is NOT true? A) A is preferred to B. B) B is preferred to C. C) C is preferred to D. D) A is preferred to C.

Figure 3.4.1 -Refer to Figure 3.4.1 above. The consumer chooses A on budget line I1 and B on budget line I2. Which of the following statements is NOT true? A) B is preferred to C. B) A is preferred to B. C) C is preferred to A. D) All of the statements are correct.

Figure 3.4.2 -Refer to Figure 3.4.2 above. From an initial position at point A, the positions the consumer chooses as her budget line changes let us conclude that: A) A is preferred to E and G. B) B is preferred to A. C) A is preferred to all market baskets in the top shaded area and all market baskets in the bottom shaded area are preferred to A. D) A is preferred to all market baskets in the bottom shaded area and all market baskets in the top shaded area are preferred to A.

Pedro buys market basket A that includes 10 books at a price of $20 per book and 10 DVDs at a price of $10 per DVD. Market basket B contains 12 books and 12 DVDs. Based on this information, which of the following statements is NOT true? A) Revealed preference analysis implies that Pedro only prefers basket B to basket A if basket A is more expensive. B) Pedro prefers market basket B to basket A. C) Market basket B will cost more than basket A. D) If the prices change and Pedro chooses market basket C, which now costs the same as basket B, then basket C is prefer to basket A.

The revealed preference approach can provide more informative comparisons of market baskets if we also assume that the consumer's indifference curves are: A) concave. B) convex. C) incomplete. D) intransitive.

Tammy and Tad's father has given each of them a debit card and allows each of them to use the card to spend $500 each month. Tammy and Tad use their $500 to buy only CDs and gasoline. In February, the price of a CD was $10 and the price of gasoline was $1 per gallon. At these prices, Tammy purchased 45 CDs and 50 gallons of gas. Tad consumed 20 CDs and 300 gallons of gas. For the month of March, Tammy and Tad's father lost the records indicating who had which debit card. From the bank statement in March, their father learned that the price of a CD was $12 and a gallon of gas cost $0.80. The first debit card was used to purchase 235 gallons of gas and 26 CDs. The second debit card was used to purchase 265 gallons of gas and 24 CDs. Using revealed preference theory, identify which card Tammy must possess.

If a consumer must spend her entire income on some combination of two commodities and chooses to spend it all on just one of the commodities then: A) the other commodity is an economic bad. B) the other commodity must have zero marginal utility. C) the other commodity generates less utility per dollar spent on the good. D) the two commodities must be perfect substitutes.

Marginal utility measures: A) the slope of the indifference curve. B) the additional satisfaction from consuming one more unit of a good. C) the slope of the budget line. D) the marginal rate of substitution. E) none of the above

Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true? A) MRSxy = Px/Py. B) MUx/MUy = Px/Py. C) Px/Py = money income. D) Px/Py = slope of the indifference curve at the optimal choice. E) MUx/Px = MUy/Py.

A study of satisfaction with life across income classes in the United States showed that: A) happiness increases with income, at an increasing rate. B) happiness increases with income, at a decreasing rate. C) happiness decreases with income. D) happiness does not hold a verifiable relationship with income level.

A system of rationing: A) benefits those with higher incomes, who can outbid those with lower incomes to obtain goods that are in scarce supply. B) is a system where everyone has equal chance to purchase a rationed good. C) is a system of allocation commonly found in other countries, but has never been imposed in the United States. D) hurts those who are looking to obtain at least a fraction of the goods in question.

A system of rationing: A) usually leaves everyone better off. B) Leaves some consumers better off and others worse off. C) usually leaves everyone worse off compared to a free market price system. D) is not part of the traditional market system and cannot be evaluated by the traditional (neoclassical) model of consumer behavior.

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: -Refer to Scenario 3.1. What is the total utility that Andy will receive if he consumes 5 units of potato chips (Qp) and no Cola drink (Qc)? A) 4 utils B) 10 utils C) 30 utils D) 40 utils E) none of the above

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: -Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an unlimited income, how many units of potato chips will he consume? A) 5 B) 6 C) 7 D) 8 E) none of the above

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: -Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an income of $14.50, how many units of potato chips will he consume? A) 5 B) 6 C) 7 D) 8 E) none of the above

When a person consumes two goods (A and A) the marginal utility of A equals the marginal utility of B. B) the marginal utility of A times the price of A equals the marginal utility of B times the price of B B), that person's utility is maximized when the budget is allocated such that: C) the ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of A. D) the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.

If Px = Py, then when the consumer maximizes utility, A) X must equal Y. B) MU(X) must equal MU(Y). C) MU(X) may equal MU(Y), but it is not necessarily so. D) X and Y must be substitutes.

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase? A) 0 B) 12 C) 24 D) 48 E) 120

Jane is attempting to maximize utility by selecting a market basket of goods. For each of the goods in the market basket the marginal utility per dollar spent is equal. There are some goods which are affordable but do not appear in the Jane's market basket. If Jane has maximized utility, the marginal utility per dollar spent on each of the goods that does not appear in the market basket is: A) too high. B) too low. C) zero. D) infinite. E) none of the above

Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently consumes, the marginal utility he receives from iced tea is 16 utils, and the marginal utility he receives from lemonade is 8 utils. Instead of consuming this bundle, Alfred should: A) buy more iced tea and less lemonade. B) buy more lemonade and less iced tea. C) buy more iced tea and lemonade. D) buy less iced tea and lemonade. E) None of the above is necessarily correct.

A team of researchers has conducted a study of the well-being of the citizens of the island nation of Zarasa. Using a scale from 1 (least happy) to 10 (most happy), the researchers find that citizens who earn 100 Zarutas per year have a mean happiness of 2.0, those who earn 200 Zarutas per year have a mean happiness of 6.0, and those who earn 300 Zarutas per year have a mean happiness of 7.0. The researchers should make which of the following conclusions? A) The utility of Zarasians increases with income. B) The marginal utility of Zarasians increases with income. C) The marginal utility of Zarasians decreases with income. D) both A and B E) both A and C

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by: A) increasing Pepsi consumption and reducing hamburger consumption. B) increasing hamburger consumption and reducing Pepsi consumption. C) maintaining his current consumption choices. D) We do not have enough information to answer this question.

Bill uses his entire budget to purchase Pepsi and hamburgers, and he currently purchases no Pepsi and 6 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 2, and his marginal utility from hamburgers is 6. Is Bill's current consumption decision optimal? A) No, he should increase Pepsi consumption and reduce hamburger consumption. B) No, he should purchase more of both goods. C) Yes, the corner solution is best because his MRS is less than the price ratio. D) We do not have enough information to answer this question.

Use the following statements to answer this question: I. The equal marginal principle may be used to characterize the maximum utility consumption decision even if the diminishing MRS assumption does not hold. II) The equal marginal principle implies that the MRS at the optimal consumption bundle is always equal to the price ratio. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

You view tea and scones as perfect complements, and the corners of the indifference curves lie on the 45-degree line. Tea is plotted along the horizontal axis of the indifference map. Also, at your current point of consumption, you have not fully exhausted the available budget, and you consume more tea than scones. Based on this information, which of the following statements is NOT true? A) The marginal utility of tea equals zero for your current consumption bundle. B) The marginal utility of scones equals zero for your current consumption bundle. C) To reach the point of optimal consumption, you must increase your scone consumption. D) The equal marginal principle does not have to be satisfied at the optimal consumption point for this problem.

Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true? A) The marginal utility of X may be positive or negative (depending on the quantity of X and Y consumed). B) The marginal utility of X does not depend on the quantity of Y consumed. C) The marginal utility of Y does not depend on the quantity of X consumed. D) All of these statements are not true.

Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines. Her utility function is (where S is the number of soft drinks per week and C the number of bags of chips per week), so her marginal utility of S is 3C and her marginal utility of C is 3S. Soft drinks are priced at $0.50 each, chips $0.25 per bag. a. Write an expression for Jane's marginal rate of substitution between soft drinks and chips. b. Use the expression generated in part (a) to determine Jane's optimal mix of soft drinks and chips. c. If Jane has $5.00 per week to spend on chips and soft drinks, how many of each should she purchase per week?

An individual consumes products X and Y and spends $25 per time period. The prices of the two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility function expressed as: U(X,Y) = .5XY MU_X = .5Y MU_Y = .5X. a. Express the budget equation mathematically. b. Determine the values of X and Y that will maximize utility in the consumption of X and Y. c. Determine the total utility that will be generated per unit of time for this individual.

Janice Doe consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4X^0.5Y^0.5. So, The current prices of X and Y are 25 and 50, respectively. Janice currently has an income of 750 per time period. a. Write an expression for Janice's budget constraint. b. Calculate the optimal quantities of X and Y that Janice should choose, given her budget constraint. Graph your answer. c. Suppose that the government rations purchases of good X such that Janice is limited to 10 units of X per time period. Assuming that Janice chooses to spend her entire income, how much Y will Janice consume? Construct a diagram that shows the impact of the limited availability of X. Is Janice satisfying the usual conditions of consumer equilibrium while the restriction is in effect? d. Calculate the impact of the ration restriction on Janice's utility.

Define the marginal rate of substitution. Using this concept, explain why market basket A is not utility maximizing while market basket B is utility maximizing.

The local mall has a make-your-own sundae shop. They charge customers 35 cents for each fresh fruit topping and 25 cents for each processed topping. Barbara is going to make herself a sundae. The total utility that she receives from each quantity of topping is given by the following table: Fresh Fruit Topping Processed Topping # of Units Total Utility # of Units Total Utility 1 10 1 10 2 18 2 20 3 24 3 10 4 28 4 0 5 30 5 -10 6 28 6 -20 7 24 7 -30 8 18 8 -40 9 10 9 -50 10 -6 10 -60 a. What is the marginal utility of the 6th fresh fruit topping? b. Of the two toppings, which would Barbara purchase first? Explain. c. If Barbara has $1.55 to spend on her sundae, how many fresh fruit toppings and processed toppings will she purchase to maximize utility? d. If money is no object, how many fresh fruit toppings and processed toppings will Barbara purchase to maximize utility? e. Which of the basic assumptions of preferences are violated by preferences shown in the table above?

If MUa/Pa is greater than MUb/Pb, and the consumer is consuming both goods, the consumer is not maximizing utility. True or false? Explain.

John consumes two goods, X and Y. The marginal utility of X and the marginal utility of Y satisfy the following equations: MU_X = Y MU_Y = X. The price of X is $9, and the price of Y is $12. a. Write an expression for John's MRS. b. What is the optimal mix between X and Y in John's market basket? c. John is currently consuming 15 X and 10 Y per time period. Is he consuming an optimal mix of X and Y?

Natasha derives utility from attending rock concerts (r) and from drinking colas (c) as follows: U(c,r) = c^.9r^.1 The marginal utility of cola (MUc) and the marginal utility of rock concerts (MUr) are given as follows: MUc = .9c^-.1r^.1 MUr = .1c^.9r^-.9 a. If the price of cola (Pc) is $1 and the price of concert tickets (Pr) is $30 and Natasha's income is $300, how many colas and tickets should Natasha buy to maximize utility? b. Suppose that the promoters of rock concerts require each fan to buy 4 tickets or none at all. Under this constraint and given the prices and income in (a), how many colas and tickets should Natasha buy to maximize utility? c. Is Natasha better off under the conditions in (a) or (b)? Explain your answer.

The following table presents Alfred's marginal utility for each good while exhausting his income. Fill in the remaining column in the table. If the price of tuna is twice the price of peanut butter, at what consumption bundle in the table is Alfred maximizing his level of satisfaction? Which commodity bundle entails the largest level of tuna fish consumption?

The following table presents Mary's marginal utility for each of the four goods she consumes to exhaust her income. The price of Good 1 is $1, the price of Good 2 is $2, the price of Good 3 is $3 and the price of Good 4 is $4. Indicate the consumption bundle in the table that maximizes Mary's level of utility.

At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a representative budget constraint and indifference curve that that passes through bundle A given Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not? If she is not, what could she do to increase her level of satisfaction?

May enjoys spending her free time with her friends at the mall and solving problems from her microeconomics text. She has 16 hours per week of free time. Diagram May's time constraint. If and where F is her time spent with friends at the mall and P is her time spent working problems, how much time should May spend at each activity?

An ideal cost-of-living index measures: A) the relative cost of maintaining a particular utility level. B) the relative changes in consumer satisfaction that arise from price increases. C) the relative price of those goods that are considered to be necessities in consumption. D) none of the above

The ideal cost-of-living index represents: A) the cost of attaining a given level of utility at current prices. B) the cost of attaining a given level of utility at constant prices relative to the cost of attaining the same utility at current prices. C) the cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base-year prices. D) a cost of living index that leaves everyone better off.

The Laspeyres price index tends to ________ the ideal cost-of-living index. A) be higher than B) be lower than C) be equal to D) zero faster than

The key reason that the Laspeyres price index tends to overstate the impact of price changes on consumers is that it: A) only accounts for price increases and ignore price decreases. B) measures prices two periods after the actual price changes occurred. C) ignores the possibility that consumers alter their consumption as prices change. D) All of the above are correct. E) none of the above

The purpose of a chain-weighted price index is to account for: A) the costs of purchasing wholesale products like chains and industrial goods. B) the changes in the quantities of goods and services purchased over time. C) linkages in price changes among industrialized countries. D) none of the above

Which price index tends to understate the impact of price changes on consumers? A) Chain-weighted index B) Laspeyres index C) Paasche index D) Ideal cost-of-living index

Before the adoption of a chain-weighted price index in the United States, the payments based on changes in the Consumer Price Index (CPI) tended to be: A) too large, because the system used a Paasche index. B) too large, because the system used a Laspeyres index. C) too small, because the system used a Paasche index. D) too small, because the system used a Laspeyres index.

You using a Laspeyres (fixed-weight) price index to compare price changes over time, and the index is based on consumption bundles from 2005 when energy costs were lower and housing costs were higher. Your results are likely to: A) overstate changes in the cost of living because the weight assigned to energy is too small. B) overstate changes in the cost of living because the weight assigned to energy is too large. C) understate changes in the cost of living because the weight assigned to housing is too small. D) understate changes in the cost of living because the weigh assigned to housing is too large.

Which of the following statements about the composition of price indices is NOT true? A) The Paasche index is calculated with current-year prices. B) The Paasche index is calculated with base-year quantities for the bundle. C) The Laspeyres index is calculated with current-year prices. D) The Laspeyres index is calculated with base-year quantities for the bundle.

Suppose the table below lists the price and consumption levels of food and clothing during 1990 and 2000. Calculate a Laspeyres and Paasche index using 1990 as the base year.

Suppose that a consumer's increase in nominal income from the base year exceeds the inflation level given by a Laspeyres cost of living index for their level of purchases : Show that this information implies that the consumer is strictly better-off as compared to the base year. (Hint: Use a revealed preference argument.)

Suppose that a consumer's increase in nominal income from the base year is exceeded by the inflation level given by a Paasche cost of living index for their level of purchases: Show that this information implies that the consumer is strictly worse-off as compared to the base year. (Hint: Use a revealed preference argument.)

Suppose that a consumer's increase in nominal income from the base year exceeds the inflation level given by a Paasche cost of living index for their level of purchases: Is this information enough to imply how the consumer's level of well-being has changed? (Hint: Use a revealed preference argument.)