Chapter 20

Chapter 20 The campus bookstore sells a CD for $12. When you buy a second CD, however, its price is only $8. How does this relate to marginal utility? A. Increases in total utility from the consumption of CDs become larger the more is consumed. B. As more is consumed, the marginal utility increases. C. Marginal utility is the additional satisfaction from additional units of the good. D. The cost of CDs become cheaper as more are consumed. Fill in the missing cells in the table. Number of Cheeseburgers Total Utility of Cheeseburgers Marginal Utility of Cheeseburgers Bags of? French Fries Total Utility of French Fries Marginal Utility of French Fries 1 20 20 1 8 8 2 36 16 2 14 6 3 48 12 3 18 4 4 56 8 4 20 2 5 60 4 5 20 0 To get total utility add TU in line one with MU in line two (20 + 16 = 48). To get MU, subtract MU in line one with TU in line two (20 – 36 = 16). What is the difference between total utility and marginal utility? A. Marginal utility represents the consumer optimum while total utility gives the total utility per dollar spent on the last unit. B. Marginal utility is subject to the law of diminishing marginal utility while total utility is not. C. Total utility is the total amount of satisfaction derived from consuming a certain amount of a good while marginal utility is the additional satisfaction gained from consuming an additional unit of the good. D. Total utility represents the consumer optimum while marginal utility gives the total utility per dollar spent on the last unit. In consumer theory, utility is A. the want-satisfying power of a good or service. B. the worth of a good as a team member in combination with other goods. C. the relation a good or service has to gas, electric and water services. D. the usefulness of a good or service in performing several different functions. The campus bookstore sells a CD for $12. When you buy a second CD, however, its price is only $8. How does this relate to marginal utility? A. Since marginal utility falls as additional units of the good are consumed, consumers are only willing to purchase more as the price falls. B. As more is consumed, the marginal utility increases so consumers are willing to purchase more at higher prices. C.Increases in total utility from the consumption of CDs become larger as more is consumed so consumers will pay more. D. The cost of a CD becomes cheaper as more are consumed. Total utility A. rises as long as marginal utility is positive. B. is at a maximum when marginal utility is zero. C. falls as long as marginal utility is negative. D. All of the above. As people consume more and more of a particular good or service, we can predict that A. the marginal utility of each additional good consumed will rise and total utility will increase, but more rapidly than before. B. the marginal utility of each additional good consumed will fall and total utility will increase, but more rapidly than before. C. the marginal utility of each additional good consumed will fall and total utility will increase, but more slowly than before. D. the marginal utility of each additional good consumed will rise and total utility will increase, but more slowly than before. If total utility is increasing at a decreasing rate, marginal utility is A. negative and decreasing. B. zero. C. positive and increasing. D. positive and decreasing. Rational economic agents would resist consuming any good where A. the marginal utility of that good was negative since this would make you worse off. B. the marginal utility of that good was positive since this would make you worse off. C. the total utility of that good was falling since this would make you worse off. D. Both A and C. E. Both B and C. The law of diminishing marginal utility insures that A. the total utility curve will eventually increase at a constant rate. B. the total utility curve will eventually increase at a decreasing rate. C. the total utility curve will eventually increase at an increasing rate. D. All of the above. The first slice of pizza yields Jeffrey 18 units of utility and the second slice yields him an additional 12 units of utility. His total utility from three slices of pizza is 36 units of utility. The marginal utility of the third slice of pizza. A. is 9 units of utility. B. cannot be determined from the information given. C. is 6 units of utility. D. is 8 units of utility. Number of Cheeseburgers Total Utility of Cheeseburgers Marginal Utility of Cheeseburgers Bags of French Fries Total Utility of French Fries Marginal Utility of French Fries 0 0 - 0 0 - 1 20 20 1 10 10 2 36 16 2 18 8 3 48 12 3 20 2 4 56 8 4 20 0 5 60 4 5 - - If the price of a cheeseburger is $2, the price of a bag of french fries is $1, and you have $6 to spend (and you spend all of it), what is the utility-maximizing combination of cheeseburgers? 2 and french fries 2. ? Suppose that the price of cheeseburgers falls to $1. What is the utility-maximizing combination of cheeseburgers 4 and french fries 2.? After monitoring your daily consumption patterns, you determine that your daily consumption of soft drinks is 4 and your daily consumption of tacos is 5 when the prices per unit are $1.25 and $1.50, respectively. When the price of soft drinks rises to $1.50, you A. will consume less of both soft drinks and tacos. B. will consume more of both soft drinks and tacos. C. will consume more soft drinks and less tacos.? D. may or may not change your consumption of soft drinks and tacos. E. will consume more tacos and less soft drinks. As the price of soft drinks rises to $1.50, and more tacos and less soft drinks are consumed, the marginal utility of soft drinks _____ and the marginal utility of tacos _____. A. falls, rises. B. falls, falls. C. rises, rises. D. does not change. E. rises, falls. As the price of soft drinks rises to $1.50, and the consumption bundle changes, the ratio of the marginal utility of soft drinks to the price of soft drinks _____ and the ratio of the marginal utility of tacos to the price of tacos _____. A. does not change. B. rises, falls. C. falls, rises. D. rises, rises. E. falls, falls. What is the substitution effect of a price change on the quantity demanded of a good or service? A. A price change induces people to substitute among goods. B. A price change affects the purchasing power of an individual's available income. C. The same as the water-diamond paradox. D.A price change leads to the consumer increasing consumption due to the law of diminishing marginal returns. Suppose the price of apples falls relative to other similar goods, and as a result the quantity of apples demanded increases. This is caused by A. increased demand effect. B. real income effect. C. increased relative demand effect. D. substitution effect. The market price people are willing to pay for a unit of a particular commodity is determined by A. the sum of average and marginal utility. B. average utility. C. marginal utility. D. total utility. Other things remaining equal, as the relative price of a good falls, people consume more of that good because A. that particular good now has greater total utility. B. that particular good now has a lower marginal utility per dollar than other goods. C. that particular good now has a higher marginal utility per dollar than other goods. D. that particular good now has greater average utility. Why is the price of diamonds usually so much higher than the price of water even though people cannot survive long without water? A. Marginal utility, not total utility, determines how much a person is willing to pay for a good. B. There are no good substitutes for diamonds while there are good substitutes for water. C. This is an unsolved mystery. D. A price change affects the purchasing power of an individual's available income. The water-diamond paradox was solved by realizing the price people are willing to pay for a unit of a particular commodity is determined by A. average utility. B. the sum of average and marginal utility. C. marginal utility. D. total utility. Price of? Fudge Bars? =$2 Price of? Popsicles? =$1 Quantity of? Fudge Bars? per Week Marginal Utility of?Fudge Bars Quantity of? Popsicles? per Week Marginal Utility of?Popsicles 1 2,000 1 1,800 2 1,200 2 1,600 3  800 3 1,200 4  500 4 1,000 5  200 5  800 6   50 6  600 Refer to the table above. If the price of fudge bars is $2 each, the price of popsicles is $1 each, and a student has $6 to spend on these two items, at a consumer optimum she will purchase 1 fudge bars and? 4 popsicles.?Consumer utility will be 7,600 utils. Divide columns with price to create new columns. The last matching numbers will be the answer or multiply price w/quantity to match money. Consumer utility is adding the numbers above your answers for total. Quantity of Hot Dogs per Week Total Utility Quantity of Baseball Games per Week Total Utility 1 40 1 400 2 60 2 700 3 76 3 850 4 86 4 950 5 91 5 1,000 6 93 6 1,025 Refer to the above table, and assume that each week this consumer buys only hot dogs and tickets to baseball games. The price of a hot dog is $3, and the price of a baseball game is $60. If the consumer's income is $255 per week, the consumer will purchase 5 hot dog(s) and 4 baseball games. First row number in TU stays the same. Minus the TU with number below in same column to create a new column (40 – 60 = 20), then divide with price (20 / 3 = 6.67). Use the last set of number that is the same for answer. Suppose the consumer's income falls to $66, what will be the new combination of hot dogs and baseball games? hot dogs 2 and baseball games 1.? Naturally if income falls, the first matching numbers will be the answer. At a consumer optimum involving goods X and Y, the marginal utility of good X equals 4 utils. The price of good Y is five times the price of good X. What is the marginal utility of good Y? A. 5. B. 4. C. 20. D. There is not enough information. Multiply 5 x 4 = 20 At a consumer optimum involving goods X and Y, the price of good X is $10 per unit, and the price of good Y is $100 per unit. The marginal utility of good Y is 10 times of the marginal utility of good X. (Enter your response as a whole number.) Divide 100 / 10 = 10 Given the following: Income = $40, Price of a Pizza = $5, Price of a Video = $4, fill in the blanks in the table below (Note: MU/$ = the Marginal Utility per dollar spent). Units Total Utility Pizzas MU/$ Pizzas Units Total Utility Videos MU/$ Videos 1 50 10 1 30 7.5 2 90 8 2 58 7 3 120 6 3 82 6 4 140 4 4 102 5 5 150 2 5 118 4 6 155 1 6 130 3 7 155 0 7 138 2 (Formula for column 2: 90 – 50 = 40 / 5 = 8). If your income is $40 a month, the price of pizza is $5 and the price of a video is $4, how many pizzas will you buy and how many videos will you rent each month? A. 4 pizzas and 5 videos. B. 6 pizzas and 2.5 videos. C. 4 of each. D. 5 pizzas and 4 videos. Given the following table, fill in the blank below. Price of Pizza = $5 Price of Video = $4 Price of Video = $5 Units Total Utility Pizzas MU/$ Pizzas Total Utility Videos MU/$ Videos MU/$ Videos 1 50 10 30 7.5 6 2 90 8 58 7 5.6 3 120 6 82 6 4.8 4 140 4 102 5 4 5 150 2 118 4 3.2 6 155 1 130 3 2.4 7 155 0 138 2 1.6 Price change from $4 to $5. (Formula: 102 – 82 = 20 / 5 = 4). If your income was $40 and the price of pizzas was $5 and the price of videos was $4, what combination of pizzas and videos would maximize your utility? A. 4 pizzas and 5 videos. B. 4 pizzas and 2 videos. C. 3 of each. D. 5 pizzas and 4 videos. Now your income is still?$40?but the price of videos increased from $4 to $5. A. 6 pizzas and 2.5 videos. B. 4 of each. C. 5 pizzas and 4 videos. D. 4 pizzas and 5 videos. The price of a video is $3 and the price of a dinner is $9. From this we know that a consumer who is maximizing utility will A. buy enough of the two goods such that the marginal utility from the last dinner consumed is three times greater than the marginal utility from the last video. B. buy enough of the two goods such that the marginal utility from the last video is three times greater than the marginal utility from the last dinner consumed. C. buy three times as many dinners as videos. D. buy three times as many videos as dinners. Advocates of behavioral economics? A. argue that people don't behave rationally. B. argue that utility theory is explained by applying the assumption of bounded rationality. C. argue that utility theory is explained by facts. D. argue that consumers make decisions that leave them worse off. Which of the following examples are used as evidence favoring the bounded rationality assumption? A. People who live in earthquake- or flood-prone regions commonly purchase insurance against these events. B. When purchasing electric appliances such as refrigerators, people sometimes buy the lowest-priced, energy-inefficient models even though the price savings often fail to compensate for higher future energy costs.? C. When purchasing electric appliances such as refrigerators, people sometimes buy the highest-priced models with expensive and extravagant features. D. All of the above. Most economists A. apply the assumption that people rarely behave as if they act rationally although they do aim to maximize utility. B. apply the assumption that people behave as if they act rationally with an aim to maximize utility. C. rely on seemingly irrational behavior to reject the assumption of rationality. D. None of the above. The use of utility-based consumer choice theory A. has discouraged economists from making predictions about how consumers respond to changes in prices, incomes, and other factors. B. has created serious theoretical divide in the economics profession. C. has allowed economists to make a wide array of predictions about how consumers respond to changes in prices, incomes, and other factors. D. None of the above. Along the indifference curve A. total utility is constant. B. total utility decreases at a decreasing rate. C. marginal utility falls. D. marginal utility is constant. When graphing the indifference curve A. units of one good is on the X axis and price is on the Y axis. B. units of one good is on the X axis and total utility on the Y axis. C. units of one good is on the X axis and marginal utility on the Y axis. D. units of one good is on the X axis and units of another good is on the Y axis. The slope of the indifference curve is A. not enough information. B. positive then negative. C. positive. D. negative. Consider the indifference curve illustrated in the figure on the right. The curve is convex to the origin because? A. the law of diminishing marginal utility always holds. B. the marginal rate of substitution falls as a consumer buys more movie tickets. C. more is preferred to less. D. the consumer must abide by a budget constraint. Which of the following violates the properties of indifference curves? A. Indifference curves are upward-sloping. B. Indifference curves are convex to the origin. C. Indifference curves are downward-sloping. D. None of the above. Indifference curves are A. either convex or concave to the origin. B. no specific shape. C. concave to the origin. D. convex to the origin. The slope of an indifference curve A. could be positive. B. may be negative. C. could be positive or negative. D. must be negative. A, B, C, and D represent combinations of Days Hiking and Days Biking that result in equal satisfaction for a consumer.? Combination Days Hiking Days Biking A 1 11 B 2 7 C 3 4 D 5 2 Using the 4-point curved line drawing tool, plot the points A, B, C, and D to draw the indifference curve for? Days Hiking and Days Biking. Label this curve 'IC'. Carefully follow the instructions above, and only draw the required objects. Click to enlarge graph. The slope of the indifference curve is negative and is always? convex to the origin. The table below represents Sue's preferences for bottled water and soft drinks, the combination of which yields the same level of utility. Combination of? Bottled Water and Soft Drinks Bottled Water? per month Soft? Drinks per month? A 5 11 B 10 7 C 15 4 D 20 2 E 25 1 Sue's marginal rate of substitution of soft drinks for bottled water at B is 0.80.? (Enter your response rounded to two decimal places.) Sue's marginal rate of substitution of soft drinks for bottled water at C is 0.60.? (Enter your response rounded to two decimal places.) Sue's marginal rate of substitution of soft drinks for bottled water at D is 0.40.? (Enter your response rounded to two decimal places.) Sue's marginal rate of substitution of soft drinks for bottled water at E is 0.20.? (Enter your response rounded to two decimal places.) The marginal rate of substitution is measured along A. the total utility curve. B. the demand curve. C. a given indifference curve. D. a given budget line. A, B,C, and D and represent combinations of Days Rock Climbing and Days Skiing that result in equal satisfaction for a consumer.? Combination Y =?Days Rock Climbing X=?Days Skiing A 10 1 B 7 2 C 5 3 D 3 5 The marginal rate of substitution from combination A to combination B is -3.0.? The marginal rate of substitution from combination C to combination D is -1.0. As more of the good on the X-axis is consumed, and less of the good on the Y-axis is consumed, the marginal rate of substitution A. is negative and increasing. B. is negative and decreasing. C. becomes positive. D. None of the above. The fact that the marginal rate of substitution falls (becomes less negative) is sometimes called A. the law of demand. B. the law of comparative advantage. C. the law of diminishing marginal utility. D. the law of substitution. Which of the following statements about the indifference curve is true? A. A finite number of indifference curves can be drawn. B. A higher indifference curve represents the possibility of higher rates of consumption if income increases.? C. The higher an indifference curve is for a consumer, the greater that consumer's marginal level of satisfaction. D. A lower indifference curve is preferred to a higher one because consumers prefer lower prices. Indifference curves that are higher than others necessarily imply that for every given quantity of one good A. more of the other good could possibly be obtained on a higher indifference curve. B. more of that good could possibly be obtained on the same indifference curve. C. more of that good could possibly be obtained on a higher indifference curve. D. more of the other good could possibly be obtained on the same indifference curve. E. A and C F. B and D All of the following are reasons why a higher indifference curve is preferred to a lower one?except A. a higher indifference curve represents the possibility of higher rates of consumption of both goods. B. more is preferred to less. C. the higher an indifference curve is for a consumer, the greater that consumer's total level of satisfaction. D. as more of any good or service is consumed, its extra benefit declines. Which of the following statements about indifference curves is true A. The higher an indifference curve is for a consumer, the greater that consumer's marginal level of satisfaction. B. A higher indifference curve represents the possibility of higher rates of consumption of only one of the goods.? C. The higher an indifference curve is for a consumer, the greater that consumer's total level of satisfaction. D. For every given quantity of one good, the same amount of the other good can be obtained on a higher indifference curve. Sue consumes bottled water and soft drinks. Her monthly budget for bottled water and soft drinks is $20.00. When the price of a bottle of water was $0.80 and the price of a bottle of soft drink was $2.00, Sue's utility-maximizing combination was 20 bottles of water and 2 bottles of soft drinks. With her monthly budget and the price of a bottle of water remaining unchanged at $20.00 and $.0.80 respectively, when the price of a bottle of soft drink fell to $1.00, Sue's utility-maximizing combination changed to 20 bottles of water and 4 bottles of soft drinks.?? Given the above information, we can conclude that Sue's preferences for soft drinks are? A. not consistent with the law of demand because as the price of soft drinks fell, the price of bottled water and monthly budget or income remained unchanged. B. consistent with the law of demand, because as the price of soft drinks fell, with the price of bottled water and monthly budget or income remaining unchanged, the quantity demanded for soft drinks increased. C. consistent with the law of demand because as the price of soft drinks fell, with the price of bottled water and monthly budget or income remaining unchanged, the quantity demanded for bottled water remained unchanged.? D. not consistent with the law of demand because as the price of soft drinks fell, the quantity demanded for bottled water did not change.? An individual's demand curve is negatively sloped because A. marginal utility falls as the price falls. B. of the rule that the marginal utility of the last unit must equal the price. C. the value of the marginal utility falls as the price falls. D. of the law of diminishing marginal utility and the rule of equal marginal utilities per dollar. To derive the demand curve we assume that A. marginal utility is constant. B. tastes are constant. C. real prices are constant. D. prices are constant. To derive the demand curve from the indifference map A. vary income while holding prices constant. B. vary the price of both goods while holding income constant. C. vary the price of one good while holding the price of the other good and income constant. D. vary the price of one good and income while holding the price of the other good constant. ? Chapter 20 Homework Suppose that you observe that total utility rises as more of an item is consumed. You can say for sure that marginal utility is positive.? Marginal utility is also could be rising or falling. Jeanne receives 20 utils from her first slice of pizza, 10 utils from her second slice of pizza, and 5 utils from her third slice of pizza. Jeanne's marginal utility from her third slice of pizza is A. 5 B. 15 C. 35 D. 10 E. Marginal utility cannot be determined from the information given Jeanne receives 40 utils from her first hamburger, 20 utils from her second hamburger, and 10 utils from her third hamburger. Jeanne's marginal utility from her third hamburger is A. 30 B. 20 C. 70 D. 10 E. Marginal utility cannot be determined from the information given Trevor is buying books. He receives 70 utils from his first book, 35 utils from his second book, and 18 utils from his third book. (Round your answers to the nearest integer.) Trevor's marginal utility from his third book is 17. (35 – 18 = 17)? Trevor's total utility from consuming three books is 123. (70 + 35 + 18 = 123)? David buys pizza from the campus pizzeria. He calculates his total utility from pizza as follows: Slices of Pizza /Total Utility 0 0 1 12 2 17 3 20 4 22 All of the following statements regarding David's utility from pizza are true?except A. David's total utility is increasing at a decreasing rate. B. David experiences diminishing marginal utility. C. David experiences increasing marginal utility since his total utility is rising. D. To increase his marginal utility from a slice of pizza, David must consume less. Which of the following statements best explains how utility usually changes with the quantity of a good consumed? A. As the quantity consumed increases, total utility increases but marginal utility decreases. B. As the quantity consumed increases, total utility and marginal utility decrease. C. As the quantity consumed increases, total utility decreases but marginal utility increases. D. As the quantity consumed increases, total utility and marginal utility increase. E. As the quantity consumed increases, total utility increases and marginal utility increases at a decreasing rate. At a consumer optimum involving goods A and B, the marginal utility of good A is three times the marginal utility of good B. The price of good B is $3.00.? The price of good A is? A. $24.00. B. $9.00. C. $3.00. D. There is not enough information. Greg has a weekly budget of $17, to spend on cookies and milk. The price of the cookies is $2, and the price of milk is $3. Calculate marginal utility per dollar for each good, and use it to complete the table below. Cookies? per period Marginal Utility? cookies ??MU/$, cookie Milk per period Marginal Utility? milk MU/$, milk 1 18 9 1 15 5 2 14 7 2 12 4? ???? 3 10 5 3 9 3 4 6 3 4 6 2 5 2 1 5 3 1 If Greg is maximizing utility, he will consume 4 cookies and 3 milk. (Divide MU and price, 18 / 2 = 9) Teri is currently spending all of her weekly income purchasing the two goods that she likes tacos and nachos. She is currently purchasing 10 tacos and 5 plates of nachos. She receives 20 utils from her 10th taco and 10 utils from her 5th plate of nachos.? The price of tacos is $9, and the price of nachos is $3. Is Teri maximizing her utility, and if not, what should she do? A. Teri should buy more tacos and more nachos. B. Teri should buy more tacos and fewer nachos. C. Teri should buy fewer tacos and more nachos. D. Teri should buy fewer tacos and fewer nachos. E. There is not enough information to tell what Teri should do. Alyssa is maximizing her utility buying hamburger and steak. This week, the price of hamburger has increased. Alyssa considers these goods to be close substitutes. Which of the following best describes what Alyssa would be expected to do? A. Alyssa will buy less hamburger and less steak. B. Alyssa will buy less hamburger and more steak. C. Alyssa will buy more hamburger and more steak. D. Alyssa will buy more hamburger and less steak When the price of gasoline increases, Jonathan buys less gasoline and less of all other goods. This information describes? A. the real income effect of a price increase. B. the demand effect of a price increase. C. the consumption effect of a price increase. D. the substitution effect of a price increase. Diamonds, which are unnecessary, command very high prices, while water, which is essential to life, has a very low price. Which of the following statements best explains the diamond-water paradox? A. Consumers do not correctly understand the utility received from water compared to the utility received from diamonds. B. The price of diamonds is artificially inflated by supply conditions, so consumers have to pay whatever the price is. C. The total utility from diamonds is much higher than the total utility obtained from water. D. Prices depend on marginal utility, not total utility, and the marginal utility of water is low because much is consumed. Ryan is deciding between attending Western State University and Eastern State University. He cannot attend both universities simultaneously. Both are fine universities, but the reputation of Western is slightly higher, as is the tuition. Let MUE and MUW be Ryan's marginal utilities from attending Eastern and Western State Universities respectively and PE and PW be the prices of attending Eastern and Western State Universities. Using the rule of consumer optimum, Ryan will decide to? A. attend Eastern State University, if MUE / PE is less than MUW / PW. B. attend Western State University, if PE / MUE < Pw / MUW. C. attend Eastern State University, if MUE / PE exceeds MUW / PW. D. attend Western State University, since it gives him more utility.