Chapter 4 Beco - The Theory of Individual Behavior (exam 2)

Perfect compliments

goods must be consumed together at the same ratio to increase utility

Tradeoffs

if the quantity of one good increases, the quantity of the other good must decrease for the consumer to be equally happy

Budget Line Shifts

- change in income - change in price

Indifferent curve properties

- higher curves are preferred to lower ones - slope downward -indifference curves can't intersect - indifference curves are bowed inward

Perfect substitutes

- in the case of perfect substitutes the indifference curve will be a straight liner line - constant MRS

marginal rate of substitution (MRS)

- indifference curves describe tradeoffs - the slope of the curve captures this tradeoff - we can this slope MRS

Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by measuring the quantity of CDs purchased on the vertical axis and the quantity of DVDs on the horizontal axis, what is the slope of the budget constraint?

-2.5

Suppose a certain firm is able to produce 125 units of output per day when 19 workers are hired. The firm is able to produce 137 units of output per day when 20 workers are hired, holding other inputs fixed. The marginal product of the 20th worker is

12

Refer to Figure 1. If the consumer's income is $221, then what is the price of a CD? (Please insert your solution without a dollar sign)

13

Refer to Table 3. Assume the Wooden Chair Factory currently employs 5 workers. What is the marginal product of labor when the factory adds a 6th worker?

15 chairs per hour

Refer to Figure 6. What is the consumer's marginal rate of substitution as she moves from A to B? (Please insert your solution as a positive number)

2

Refer to Table 2. At which number of workers does diminishing marginal product begin?

2

Refer to Table 1. What is total output when 1 worker is hired?

30

Refer to Table 2. What is the marginal product of the first worker?

300

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is

8

Refer to Figure 4. You have $36 to spend on good X and good Y. If good X costs $6 and good Y costs $12, your budget constraint is

DE

Refer to Figure 1. A consumer who chooses to spend all of her income could be at which point(s) on the figure?

E,A,or B only

Refer to Figure 3. Which of the graphs in the figure could reflect an increase in income?

Graph B

Refer to Figure 2. Which of the graphs in the figure reflects a decrease in the price of good X only?

Graph b

Refer to Figure 3. Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of good Y?

Graph d

Refer to Figure 2. Which of the graphs in the figure could reflect a simultaneous decrease in the prices of both goods?

None of the graphs in the figure can reflect this

Income effect

Now that Pepsi is cheaper, my income has greater purchasing power. I am now richer than before, so I can buy more of both.

Substitution effect

Now that the price of Pepsi has fallen, I get more liters of Pepsi, for every pizza I give up. Pizza is now relatively more expensive, I should buy less pizza and more pepsi.

On a 250-acre farm, a farmer is able to produce 4,500 bushels of wheat when he hires 2 workers. He is able to produce 6,300 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

The farmer is able to produce 7,560 bushels of wheat when he hires 4 workers.

Indifference curve

curve that shows all the combinations of goods or services that provide the same level of utility

Refer to Figure 6. As the consumer moves from A to B to C, the marginal rate of substitution

decreases

If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost.

diminishing marginal product

When comparing bundle C to bundle A, the consumer

is indifferent between the two bundles.

A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The substitution effect, by itself, suggest that the consumer will consume

more popcorn and less Pepsi

utility

pleasure or satisfaction that people get from their economic activity - a measure of happiness or well-being

Budget constraint

restricts consumer behavior by forcing the consumer to select a bundle of goods that is affordable

Consumer equilibrium (utility maximization)

the objective of the consumer is to choose the consumption bundle with the highest utility (highest indifference curve) while still being within their budget (budget line)