Ch.6 Consumer Choices

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

$50 300/$75 = 4 utils 200/4 = $50

Todd is a cattle rancher. In June and July he spent his clothing budget on jeans and cowboy hats. Each pair of jeans cost $50 and each hat cost $100. At Todd's optimal choice, his marginal utility from the last pair of jeans purchased is 200. This means that his marginal utility from the last cowboy hat purchased is:

400 Todd is getting 200/50 = 4 utils from the last dollar spent on jeans. Todd is maximizing overall utility only if he is getting 4 utils from the last dollar spent on hats. Since hats cost $100, he must be getting 400 utils from the last hat purchased.

marginal rate of transformation (MRT)

Px/Pz; the rate at which you can 'transform' X into Z

Refer to the budget line shown in the diagram above. If point U is the equilibrium, __________. This testbank question uses 'I', not 'Y' for income.

P1/P2 = MU1/MU2

In terms of microeconomic analysis, what is the function of "utils"?

a measurement of utility

Marginal Utility (MU)

change in total utility/change in quantity

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units

Marginal utility can:

be positive, negative, or zero

Suppose the price of X (PX) falls. For a consumer, the eventual effect of that is:

all of the above 'Hinged' at Qz, because income and Pz were not changed. Draw the budget constraints. With increased purchases of X, MUx will decrease; likewise for Z unless it is an inferior good. With Qx increasing, and likely also Qz increasing, Total utility will rise, for both, and together.

The term ___________________ is used to describe the common pattern whereby each additional unit of a consumed good provides less of an addition to total utility than the previous unit.

diminishing marginal utility

Which of the following is most likely to cause variation in American household spending patterns?

each of the above will cause a variation

The term _____________ describes a situation where a ________________ causes a reduction in the buying power of income, even though actual income has not changed.

income effect; higher price

Given these facts about goods X and Z for Joe, Joe: MUX = 144; MUZ = 64; PX = $72; PZ = $32

is in equilibrium; utility maximization has been achieved. The last dollar spent on both goods yields 2 utils (144/72 =2 = 64/32), so we have equilibrium. There is no opportunity to increase overall satisfaction by re-allocating income.

The term _______________ refers to the additional utility provided by one additional unit of consumption.

marginal utility (change in total utility/change in quantity)

The step-by-step process of finding the choice with highest total utility involves a comparison of the:

marginal utility gained and lost from different choices along the budget constraint.

marginal utility per dollar

marginal utility/price

Suppose consumer A's income increases. For A, the eventual effect of that is:

none of the above With income rising, the budget constraint endpoints (Y/Qz, Y/Qx) increase to the same degree. So, there is a parallel shift. Again, draw it. The additional income decreases MU for all normal goods and increases total utility; the opposite of the answer choices.

The typical pattern revealed in a budget constraint model shows that as the quantity of a good consumed rises,

total utility rises, but marginal utility falls.

Which of the following is considered to be a tell-tale signal that income use yielding the highest total utility has been found?

the marginal utility per dollar is the same for both goods

The ________________ arises when a price changes because consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price.

substitution effect

Given these facts about goods X and Z for Joe, Joe: MUX = 96; MUZ = 48; PX = $12; PZ = $4

will decrease purchases of X; increase purchases of Z. The numbers reveal that Joe is not maximizing overall utility. The last dollar spent on Z is yielding 12 utils (48/4). Whereas the last dollar spent on X yields only 8 utils (96/12). The correct response is to increase purchases of Z by decreasing purchases of X.