Quiz 3: Consumer Behavior

Gary Franklin is a movie critic.He invented the Franklin Scale with which he rates movies from 1 to 10 (10 being best).When asked about his scale,Mr.Franklin explained "that it is a subjective measure of movie quality.A movie with a ranking of 10 is not necessarily 10 times better than a movie with a ranking of 1,but it is better.A movie with a ranking of 5 is better than a movie with a ranking of 1,but is not as good a movie with a ranking of 10.That's all it really tells you." Based on Mr.Franklin's description,his scale is: A)ordinal but not cardinal. B)cardinal but not ordinal. C)an objective standard to judge movies. D)neither cardinal nor ordinal.

Which of the following is NOT an assumption regarding people's preferences in the theory of consumer behavior? A)Preferences are complete. B)Preferences are transitive. C)Consumers prefer more of a good to less. D)All of the above are basic assumptions about consumer preferences.

The theory of consumer behavior is based on certain assumptions.The set of four basic assumptions includes: A)completeness. B)transitivity. C)intransitivity. D)Both A and B are correct. E)Both A and C are correct.

The assumption of transitive preferences implies that indifference curves must: A)not cross one another. B)have a positive slope. C)be L-shaped. D)be convex to the origin. E)all of the above

If a market basket is changed by adding more of at least one good,then rational consumers will: A)rank the market basket more highly after the change. B)more likely prefer a different market basket. C)rank the market basket as being just as desirable as before. D)be unable to decide whether the first market basket is preferred to the second or vice versa. E)have indifference curves that cross.

A consumer prefers market basket A to market basket B,and prefers market basket B to market basket C.Therefore,A is preferred to C.The assumption that leads to this conclusion is: A)transitivity. B)completeness. C)all goods are good. D)diminishing MRS. E)assumption of 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.

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. E)none of the above

An upward sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior? A)transitivity. B)preferences are complete. C)more is preferred to less. D)all of the above E)none 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

Zoe is an executive at Dell Computer Company who is in charge of designing the next version of laptop computers.She will consider such features as screen size,weight,processor speed,and CD and DVD drives.Given the fact that it is costly to include more features in new products,why might Zoe be interested in data on how much consumers paid for a range of laptops with different attributes? A)in order to estimate willingness to pay for each feature. B)in order to set an optimal price for the laptops. C)in order to determine the best features to include. D)in order to estimate willingness to trade off one feature for another. E)all of the above

In what ways can economists help auto manufacturers estimate the marginal rate of substitution between features such as vehicle interior size and acceleration? A)Examining production cost data B)Conducting consumer surveys about willingness to pay for auto features C)Solving the standard consumer model D)Statistically analyzing historical data on purchases of different types of autos E)B and D only

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

Suppose that a market basket of two goods is changed by adding more of one of the goods and subtracting one unit of the other.The consumer will: A)rank the market basket more highly after the change. B)rank the market basket more highly before the change. C)rank the market basket just as desirable as before. D)any one of the above statements may be true.

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

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1 -Based on Figure 3.1,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 -Refer to Figure 3.1.Which of the following is true concerning Alvin'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 -Refer to Figure 3.1.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

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.2 -Based on Figure 3.2,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 3.2 -Refer to Figure 3.2.At any consumption bundle with the quantity of good X exceeding the quantity of good Y (that is,a bundle located below the 45 degree line,like point A)diminishing. A),Alvin's marginal rate of substitution of good X for good Y is B)positive. C)constant and positive. D)zero.

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.2 -Refer to Figure 3.2.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

Which of the following is true about the indifference curve where one commodity (such as pollution)is "bad"? A)It has a negative slope. B)It has a positive slope. C)It is horizontal. D)It is vertical.

If indifference curves are concave to the origin,which assumption on preferences is violated? A)Diminishing marginal rates of substitution B)Transitivity of preferences C)More is preferred to less D)Completeness

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 -Refer to Table 3.1.Which of the following cannot be true? A)The consumer could be indifferent between A and B. B)A and C could be on the same indifference curves. C)The consumer could be indifferent between B and C. D)A and C could be on different indifference curves.

Consider the following three market baskets: Table 3.1 -Consider the following three market baskets: If baskets B and C are on the same indifference curve,and if preferences satisfy all four of the basic assumptions,then: A)A is preferred to C. B)A is preferred to B. C)Both A and B answer choices are correct. D)none of the above

Mikey is very picky and insists that his mom make his breakfast with equal parts of cereal and apple juice  any other combination and it ends up on the floor.Cereal costs 4 cents per tablespoon and apple juice costs 6 cents per tablespoon.If Mikey's mom budgets $8 per month for Mikey's breakfast,how much cereal and juice does she buy? A)40 tablespoons each of cereal and juice B)80 tablespoons each of cereal and juice C)40 tablespoons of cereal and 75 tablespoons of juice D)100 tablespoons of cereal and 67 tablespoons of juice

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

Which of the following are examples of situations in which the standard model of the consumer may not be realistic? A)Impulse purchases B)Following fads and fashions instead of one's own preferences C)Addictions or other strong habits in consumption D)all of the above

What is a good argument for using the model of the consumer despite the fact that it requires making many simplifying assumptions? A)It is complex to solve. B)The assumptions are sometimes realistic. C)It explains observed patterns of behavior. D)It is used in many scholarly fields.

Figure 3.3 -Refer to the indifference curve in Figure 3.3.Which of the following statements is correct? A)This individual receives no satisfaction from Good A. B)This individual receives no satisfaction from Good B. C)This individual will only consume A and B in fixed proportions. D)none of the above

Figure 3.3 -Refer to the indifference curve in Figure 3.3.Which of the following statements is correct? A)MU(A)= 0. B)MU(B)= 0. C)MU(A)is negative. D)MU(B)is negative.

Figure 3.3 -Refer to the indifference curve in Figure 3.3.Which of the following is true about the MRS? A)It is negative. B)It is positive. C)It is equal to zero. D)It is undefined.

The magnitude of the slope of an indifference curve is: A)called the marginal rate of substitution. B)equal to the ratio of the total utility of the goods. C)always equal to the ratio of the prices of the goods. D)all of the above E)A and C only

Use the following two statements to answer this question: I.If utility is ordinal,a market basket that provides 30 utils provides twice the satisfaction of a market basket that provides 15 utils. II)When economists first studied utility it was believed that utility was cardinal,but it was later discovered that ordinal preferences are sufficient to explain how most individual decisions are made. A)Both I and II are true. B)I is true,and II is false. C)I is false,and II is true. D)Both I and II are false.

If X and Y are perfect substitutes,which of the following assumptions about indifference curves is not satisfied? A)Completeness B)Transitivity C)More is preferred to less D)Diminishing MRS E)none of the above (All of the above assumptions are satisfied.)

If a consumer is always indifferent between an additional one grapefruit or an additional two oranges,then when oranges are on the horizontal axis the indifference curves: A)will be straight lines with a slope of -1/2. B)will be straight lines with a slope of -1. C)will be straight lines with a slope of +1/2. D)will be right angles whose corners occur on a ray from the origin with a slope of +2. E)none of the above

Consider the following three market baskets: If baskets A and B are on the same indifference curve and if indifference curves exhibit diminishing MRS: A)C is preferred to both A and B. B)A and B are both preferred to C. C)C is on the same indifference curve as A and B. D)There is not enough information to determine preferences for C relative to the other goods.

Use the following two statements to answer this question: I.According to the three basic assumptions regarding people's preferences,a person will always prefer to earn a living through honest work rather than a life of crime. II)When we say that preferences are complete,we mean that if a consumer prefers market basket A to market basket B,and prefers market basket B to market basket C,then the consumer prefers market basket A to market basket C. A)Both I and II are true. B)I is true and II is false. C)I is false and II is true. D)Both I and II are false.

Use the following two statements to answer this question: I.Consumer theory can determine whether giving an individual a more preferred basket of goods doubles her overall level of satisfaction,less than doubles her satisfaction,or more than doubles her satisfaction. II)There is not much empirical evidence to support the assumption that higher incomes result in higher levels of satisfaction. A)Both I and II are true. B)I is true and II is false. C)I is false and II is true. D)Both I and II are false.

Which of the following statements concerning utility as a measure for well being are false? A)There is generally a positive relationship between income and utility. B)It is possible to determine which of two individuals is made happier by consuming a particular market basket. C)Utility is an abstract representation of an individual's degree of happiness. D)Cross country studies suggest that citizens in wealthier countries are happier than citizens in poorer countries.

If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis),Jill would willingly give up: A)2,but no more than 2,units of popcorn for an additional unit of candy. B)2,but no more than 2,units of candy for an additional unit of popcorn. C)1,but no more than 1,unit of candy for an additional 2 units of popcorn. D)2,but no more than 2,units of popcorn for an additional 2 units of candy.

Consider the indifference map in the figure below: Which of the four basic assumptions about consumer preferences are violated by this indifference map? A)More is better than less B)Transitivity C)Diminishing MRS D)A and B are correct. E)A and C are correct.

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.

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

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)-Qa/Qb B)-Qb/Qa C)-Pa/Pb D)-Pb/Pa E)I/Pa or I/Pb

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.

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

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

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 rightward shift D)Parallel 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

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)Px/Py D)Py/Px

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)Px/Py = money income. C)MRSxy = money income. D)MRSxy = Px/Py. 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.

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

Please consider the following figure: 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.

Please consider the following figure: The consumer chooses A on budget line I1 and B on budget line I2.Which of the following rankings describes the consumer's preferences (first is highest ranked and last is lowest ranked)? A)A-B-C-D B)A-D-B-C C)A-B-D-C D)We do not have enough information to rank all four bundles.

Please consider the following figure: 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.

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.

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.

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 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

Match the following descriptions of preferences to the indifference curve diagrams that follow. ________ Ann does not care whether she has more diet soft drinks or fewer diet soft drinks. ________ Peter is very picky about his buttered popcorn.He tops every quart of popped corn with exactly one quarter cup of melted butter. ________ Amy likes M&M's,plain and peanut.For Amy,the marginal rate of substitution between plain and peanut M&M's does not vary with the quantities of plain and peanut M&M's she consumes. ________ George dislikes broccoli and would be willing to pay something to not have to eat it. ________ Natalya likes rap and rock music.Natalya's preferences exhibit a diminishing marginal rate of substitution between the two types of music. ________ Matthew knows his limit.He likes beer up to a point,but if he drinks too much he gets sick.

Each of the following consumers exhibit behavior that violates one of the basic assumptions of consumer preferences.Identify the assumption that is violated for each individual. ∙ Art says that he can watch 2 movies a week but couldn't be paid to watch another movie after that. ∙ Alex says that he prefers going to a movie over hiking.He also indicates that he prefers hiking to swimming.Alex then states that he would rather go swimming than go to a movie. ∙ Alicia says that she prefers hiking to watching a movie but can't determine her preferences for swimming.

An island economy produces only two goods,coconuts and pineapples.There are five people (A,B,C,D,and E)living on the island with these preferences: A has a strong preference for pineapples. B has a strong preference for coconuts. C doesn't care for pineapples (assigns no value to them). D doesn't care for coconuts (assigns no value to them) E will only consume pineapples and coconuts in the fixed proportion of one pineapple to one coconut. For each of these five individuals,construct a representative indifference curve with pineapples on the vertical axis and coconuts on the horizontal axis.Discuss the shape of the indifference curves and relate them to the MRS.

The following combinations of goods X and Y represent various market baskets.Consumption is measured in pounds per month. Market Basket Units of X Units of Y A 4 6 B 16 7 C 15 3 D 3 2 Explain which market basket(s)is(are)preferred to other(s),and if there is any uncertainty over which is preferable,point this out as well.

Consider Gary's utility function: U(X,Y)= 5XY,where X and Y are two goods.If the individual consumed 10 units of X and received 250 units of utility,how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.

In the theory of consumer behavior,several assumptions are made about the nature of preferences.What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

In the theory of consumer behavior,certain axioms about the nature of preferences imply that indifference curves cannot cross.Which axioms imply this? Explain your answer using a diagram and using words.

In the field of financial management it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return. a.Draw a set of indifference curves between risk and return for a person that is risk averse (a person that does not like risk). b.Draw a set of indifference curves for a person that is risk neutral (a person that does not care about risk one way or the other). c.Draw a set of indifference curves for a person that likes risk.

Draw a set of indifference curves for the following pairs of goods: a.Hamburgers and carrots for a vegetarian who neither likes nor dislikes meat.(Vegetarians do not eat meat.) b.Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or jelly sandwiches,but loves peanut butter and jelly sandwiches made with two parts peanut butter and one part jelly. c.Tickets for Knott's Berry Farm (KBF)and Universal Studios (US)for a tourist that believes that KBF and US are perfect substitutes. d.Ice cream and pie if these are goods that you like,but if you consume enough of either,you get sick of them.If you are sick of a good,consuming more of it lowers your utility.

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.

Evelyn Lips' preferences are depicted by the set of indifference curves in the diagram below.Her budget line is also shown in the diagram.Use the information in the diagram to answer the following questions. a.Which of the basic assumptions of consumer preferences are violated by E.Lips' indifference curves? Explain. b.The price of food is $5 per unit.What is E.Lips' income and what is the price of clothing? c.Show the market basket of food and clothing that maximizes E.Lips' satisfaction.When satisfaction is maximized,has E.Lips equated the marginal rate of substitution (of food for clothing)to the ratio of the prices (of food to clothing)? If so,explain why.If not,explain why not.

Lisa's budget line and her satisfaction maximizing market basket,A,are shown in the diagram below. a.Suppose that Lisa is given $50 worth of coupons that must be spent on food.How will the coupons alter Lisa's budget line? b.Suppose that Lisa is given $50 in cash instead of $50 in coupons.How will this alter Lisa's budget line? c.Is Lisa indifferent between the food coupon and cash program,or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

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 U = 3 · XY².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.) (Note: MU_Y = 6XY and MU_X = 3Y².) 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?

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.Ted 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.

Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines.Her utility function is U = 3SC (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,MU_X = and MU_Y = .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.

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 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?

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)