QUIZ 4:Consumer Theory (HW 4)

Sheryl is maximizing her utility. Her marginal utility from the last package of bubble gum consumed is greater than her marginal utility from the last package of mints consumed. This result means that the _____.

Price of a package of gum is greater than the price of a package of mints.

A budget line shows the _____.

Quantities of goods a buyer can purchase with given income and prices.

The point where the budget line intersects the y-axis represents a combination of goods that contains _____.

Only the good measured on the y-axis.

Total utility _____ as a person consumes more of one good and marginal utility _____.

Increases; decreases. (The standard case with positive but diminishing marginal utility.)

Which of the following is shown by a budget line? i. The combinations of goods a person can afford. ii. The production possibilities for a person. iii. The combinations of goods a person prefers.

i only: The combinations of goods a person can afford.

Assume there are two goods, x and y, measured on their respective axes. If the price of good y rises, what happens to the budget line?

The y-axis intercept decreases, the x-axis intercept does not change, and the slope changes. (Both C and D in the screenshot.)

If the slope of the budget line changes, there must have been _____.

A change in the price of at least one good.

Assume you are in a store looking at a shirt you want. You expect to buy the shirt until you look at the price, then you decide the shirt is not a good buy. How can your decision be viewed in economic terms?

The shirt's marginal utility divided by price was too low compared to other goods.

Liz consumes candy bars and potato chips. Her budget is $4 per day. A candy bar costs $1.00 and a bag of chips costs $0.50. Table for quantities 0, 1, 2, 3, 4, 5: total utility from candy bars = 0, 10, 16, 18, 19, 20; total utility from chips = 0, 8, 14, 18, 21, 23. How much marginal utility per dollar does the 3rd bag of potato chips give Liz?

8 units per dollar: (18 - 14) / $0.50 = 8.

Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys 3 pairs of jeans and 2 pairs of boots each year, what does the homework conclude?

Charles receives the same marginal utility from the 3rd pair of jeans as from the 2nd pair of boots. (Marked answer C; this assumes Charles is maximizing utility under the standard equal-MU-per-dollar rule.)

Samantha has an income of $40 and buys beef jerky and fried pork rinds. Her income does not change and the price of both goods increases. What results?

Samantha's consumption possibilities decrease and her budget line shifts inward. (Both A and B in the screenshot.)

Chase has a budget of $14 for steak ($10 per serving) and cranberry juice ($2 per serving). For quantities 1, 2, 3, 4, steak marginal utilities are 150, 120, 80, 30 and marginal utilities per dollar are 15, 12, 8, 3. Juice marginal utilities are 36, 30, 22, 12 and marginal utilities per dollar are 18, 15, 11, 6. Which listed bundle maximizes utility? A. 1 steak only. B. 2 steak and 2 juice. C. 2 steak and 4 juice. D. 4 steak and 4 juice. E. 1 steak and 2 juice.

1 serving of steak and 2 servings of cranberry juice. Cost = $14; total utility = 150 + 36 + 30 = 216.

You consume only pizza ($4 per slice) and Diet Pepsi ($2 each), with income of $20. For quantities 0, 1, 2, 3, 4, 5, 6, 7, total utility from pizza = 0, 24, 44, 60, 72, 76, 79, 80; total utility from Diet Pepsi = 0, 14, 26, 36, 44, 50, 54, 56. Which combination will you choose? A. 2 pizza and 6 Pepsi. B. 3 pizza and 4 Pepsi. C. 4 pizza and 2 Pepsi. D. 5 pizza and no Pepsi. E. None of these.

3 slices of pizza and 4 Diet Pepsis. Cost = $20; total utility = 60 + 44 = 104.

Timmy makes $100 per week as a taxidermist. He spends all this income on pizza and hair gel. A pizza costs $10 and a bottle of hair gel costs $4. If Timmy buys 5 bottles of hair gel, how many pizzas does he buy?

8 pizzas: [$100 - (5 x $4)] / $10 = 8.

In order to maximize his or her utility, a consumer must _____.

Allocate the entire available budget to buy the combination of goods that equalizes marginal utility per dollar from all goods. (Standard interior optimum with divisible goods and positive marginal utility.)

Linda has $10 a month for ice cream cones ($2 each) and chocolate bars ($1 each). Which is a point on Linda's budget line? A. 0 cones and 0 bars. B. 4 cones and 0 bars. C. 3 cones and 1 bar. D. 1 cone and 8 bars. E. 5 cones and 10 bars.

1 cone and 8 chocolate bars: (1 x $2) + (8 x $1) = $10.

For a consumer to maximize utility, in part the consumer must _____.

Allocate the entire available budget. (The homework assumes more consumption is desirable.)

The utility-maximizing rule says that consumers must _____.

Allocate the entire available budget and make marginal utility per dollar the same for all goods. (Standard interior optimum with divisible goods and positive marginal utility.)

Suppose Alice spends her budget on books and CDs. If her budget does not change and the price of a book stays the same but the price of a CD falls, her budget line _____.

Rotates outward and its slope changes.

Ali's total utility table for quantities 0, 1, 2, 3, 4, 5, 6: soda total utility = 0, 8, 14, 18, 21, 23, 24; pizza total utility = 0, 10, 19, 27, 34, 40, 45. Pizza costs $2 per slice and soda costs $1 per bottle. What is his marginal utility from the 4th slice of pizza?

7: total utility rises from 27 to 34, so 34 - 27 = 7.