Consumer Choice Homework

normal good

A good for which changes in income and demand are directly related.

slope of the indifference curve

Equal to​ (minus) the marginal rate of substitution.

What are the two reasons network externalities may result in market failure

Switching costs. When a product becomes​ established, consumers may find it to costly to a new product that contains better technology. Path dependence. Due to switching​ costs, the technology that was first available may have advantages over better technologies that were developed later. The path along which the economy has developed is important.

behavior economics

The study of situations in which people make choices that do not appear to be economically rational.

sunk costs

a cost that has already been paid and cannot be recovered

public consumption

involves consuming goods or services with or around other consumers

economic model of consumer behavior

predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.

What is utility?

the enjoyment or satisfaction people receive from consuming goods and services

budget constraint

the limited amount of income available to consumers to spend on goods and services

inferior good

A good for which changes in income and demand are indirectly related.

Are consumers only interested in making themselves as well off as possible in a material​ sense? Consumers are A. also concerned with fairness as exemplified by donations to charity. B. only concerned with their own utility as exemplified by social influences having no effect on​ decision-making. C. only concerned with their own utility as exemplified by network externalities. D. only concerned with their own financial​ well-being as exemplified by only parting with money when required. E. also concerned with fairness as exemplified by only tipping in restaurants that will be visited again.

A. also concerned with fairness as exemplified by donations to charity. If people were only interested in making themselves as well off as possible in a material​ sense, they would not be concerned with fairness. There is a great deal of evidence that people like to be treated fairly and that they usually attempt to treat others fairly even if doing so makes them worse off financially. Two examples where people willingly part with money when they are not required to do so and receive nothing material in return are donations to charity and tips in restaurants that will never be visited again​ (such as dining while on​ vacation).

Consider a form of public consumption such as attending sporting events. An​ individual's demand for sporting events depends on A. the cost of the sporting event. B. the​ individual's tastes and preferences. C. other consumers' consumption of sporting event. D. both a and b. E. all of the above

E. all of the above Public consumption of goods and​ services: The decision to buy a product depends partly on the characteristics of the product and partly on how many other people are buying the product. ​Therefore, an​ individual's demand for sporting events depends on the cost of the sporting event​, the​ individual's tastes and​ preferences, and social forces such as the popularity of the sporting event and how many other people are attending the sporting event.

slope of the budget constraint

Equal to​ (minus) the price of the good measured on the horizontal axis divided by the price of the good measured on the vertical axis.

The graph illustrates​ Joshua's preferences for hamburgers and fries using indifference curves ​(I1​, I2​, I3​, and I4​). What is​ Joshua's marginal rate of substitution​ (MRS) between bundle A and bundle​ B? ​Joshua's MRS between bundle A and bundle B is __________. ​(Enter your response as a real number rounded to two decimal​ places.) As we move down an indifference​ curve, the MRS ________.

Marginal rate of substitution​ (MRS) The slope of an indifference​ curve, which represents the rate at which a consumer would be willing to trade off one good for another. Between bundle A and bundle​ B, Joshua would be willing to trade 5 orders of fries for 6 hamburgers.​ Therefore, MRS is MRS=5/6=0.833. Indifference curves are typically bowed in or convex. ​Therefore, as we move down an indifference​ curve, the MRS declines/ decreases.

indifference curve

a curve that shows the combinations of consumption bundles that give the consumer the same utility

​Instead, suppose ham is an inferior good. If the price of ham​ increases, then consumers will demand _______ ham due to the income effect and______ ham due to the substitution effect.

more; less A price increase decreases a​ consumer's purchasing​ power, which, if an inferior ​good, causes the quantity demanded to increase due to the income effect. A price increase also raises the opportunity cost of consuming the​ good, which causes the quantity of the good demanded to decrease due to the substitution effect. If ham is an inferior good and the price of ham​ increases, then consumers will demand more ham due to the income effect and less ham due to the substitution effect.

marginal rate of substitution (MRS)

the rate at which a consumer would be willing to trade off one good for another

Can indifference curves ever​ cross? In consumer​ theory, A. indifference curves cannot cross because this would violate the assumption of transitivity. B. indifference curves cannot cross because they are convex. C. indifference curves can cross because consumers are assumed to always prefer more of a good to less. D. indifference curves cannot cross because utility cannot be directly measured in units such as 'utils'. E. indifference curves can cross because consumer preferences are assumed to be consistent.

A. indifference curves cannot cross because this would violate the assumption of transitivity. A characteristic of indifference curves is that preferences are transitive. That​ is, if consumption bundle X is preferred to consumption bundle Y and if consumption bundle Y is preferred to consumption bundle​ Z, then consumption bundle X must be preferred to consumption bundle Z.

​Next, suppose a consumer prefers a taco to a slice of pizza and a slice of pizza to a hamburger. If the​ consumer's preferences are​ transitive, then A. the consumer will prefer a taco to a hamburger. B. the consumer will prefer a hamburger to a taco. C. the consumer will be indifferent between a taco and a hamburger. D. both a and b are possible. E. ​a, b, and c are possible.

A. the consumer will prefer a taco to a hamburger. If a​ consumer's preferences are​ transitive, then they are consistent.​ Therefore, if a consumer prefers a taco to a slice of pizza and a slice of pizza to a hamburger​, then the consumer will prefer a taco to a hamburger.

network externality

a situation in which the usefulness of a product increases with the number of consumers who use it

Characteristics of indifference curves

1. Consumer preferences are ​complete: The consumer prefers bundle A to bundle​ B, bundle B to bundle​ A, or the consumer is indifferent between both bundles. 2. Indifference curves that are further from the origin provide greater utility. 3. Preferences are transitive. That​ is, if consumption bundle X is preferred to consumption bundle Y and if consumption bundle Y is preferred to consumption bundle​ Z, then consumption bundle X must be preferred to consumption bundle Z.

The three common mistakes people make when making decisions...this is studied in behavioral economics

1. They take into account monetary costs but ignore nonmonetary opportunity costs. 2. They fail to ignore sunk costs. 3. They are overly optimistic about their future behavior.

Suppose ham is a normal good. How will consumers adjust their buying decisions if the price of ham​ changes? If the price of ham​ increases, then consumers will demand A. more ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. B. less ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. C. more ham due to the income effect because their purchasing power increases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. D. more ham due to the income effect because the opportunity cost of consuming ham is lower and less ham due to the substitution effect because their purchasing power decreases. E. less ham due to the income effect because the opportunity cost of consuming ham is higher and less ham due to the substitution effect because their purchasing power decreases.

B. less ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. A price increase decreases a​ consumer's purchasing​ power, which, if a normal ​good, causes the quantity demanded to decrease due to the income effect. A price increase also raises the opportunity cost of consuming the​ good, which causes the quantity of the good demanded to decrease due to the substitution effect. If ham is a normal good and the price of ham​ increases, then consumers will demand less ham due to the income effect and less ham due to the substitution effect.

How should sunk costs be used in consumer​ decision-making? In consumer​ decision-making, sunk costs should A. be included in the budget constraint. B. be ignored. C. be treated as opportunity costs. D. be treated as nonmonetary costs. E. be treated as monetary costs.

B. be ignored Once you have paid money and​ can't get it​ back, you should ignore that money in any later decisions you make.

Mattie has ​$72.00 with which to spend on Mountain Dew and Coke. The price of a​ 12-pack of Coke is ​$3.00​, the price of a​ 12-pack of Mountain Dew is ​$4.80​, and​ Mattie's initial budget constraint ​(Budget Constraint1​) is illustrated in the figure. ​Now, suppose​ Mattie's income increases to ​$96.00. Use the line drawing tool to graph​ Mattie's new budget constraint. Label this line ​'Budget Constraint2​'. Carefully follow the instructions​ above, and only draw the required objects. When​ Mattie's income increases​, the quantity of Coke and Mountain Dew that she can consume _______

Budget constraint The limited amount of income available to consumers to spend on goods and services. To determine the​ vertical-axis intercept, consider the amount of that good a consumer could purchased if he or she spent all income on that good. To determine the​ horizontal-axis intercept, consider the amount of that good a consumer could purchased if he or she spent all income on that good. After the change in​ income, Mattie can afford a maximum of 20 ​12-packs of Mountain Dew​ (from income of ​$96.00 divided by the ​$4.80 price of Mountain​ Dew) or a maximum of 32 ​12-packs of Coke​ (from income of ​$96.00 divided by the ​$3.00 price of​ Coke). ​Therefore, Mattie's new budget constraint intersects the​ y-axis at 20 and the​ x-axis at 32. second question: increases When the budget constraint shifts out​, Mattie is able to purchase consumption bundles that were previously unaffordable. ​Therefore, when income increases​, the quantity of Coke and Mountain Dew that Mattie can consume increases.

Nathan has ​$48.00 with which to spend on Mountain Dew and Coke. The price of a​ 12-pack of Coke is ​$3.00​, the price of a​ 12-pack of Mountain Dew is ​$6.00​, and​ Nathan's initial budget constraint (Budget Constraint1​) is illustrated in the figure. ​Now, suppose the price of Coke increases to ​$4.00. Use the line drawing tool to graph​ Nathan's new budget constraint. Label this line ​'Budget Constraint2​'. Carefully follow the instructions​ above, and only draw the required objects When the budget constraint rotates inward​, Nathan is no longer able to purchase consumption bundles that were previously affordable. ​Therefore, when the price of Coke increases​, Nathan will consume ________ ​12-packs of Coke.

Budget constraint The limited amount of income available to consumers to spend on goods and services. It is represented graphically with a line that intersects the vertical axis at the maximum amount of the good measured on the​ y-axis that the consumer can afford to buy and that intersects the horizontal axis at the maximum amount of the good measured on the​ x-axis that the consumer can afford to buy. Nathan can afford a maximum of 8 ​12-packs of Mountain Dew​ (from income of ​$48.00 divided by the ​$6.00 price of Mountain​ Dew, which has not​ changed) or a maximum of 12 ​12-packs of Coke​ (from income of ​$48.00 divided by the new ​$4.00 price of​ Coke). Therefore,​ Nathan's budget constraint intersects the​ y-axis at 8 and the​ x-axis at 12; When the budget constraint rotates inward​, Nathan is no longer able to purchase consumption bundles that were previously affordable. ​Therefore, when the price of Coke increases​, Nathan will consume fewer ​12-packs of Coke.

What effect does a network externality have on the market for a​ product? If a network externality is present for a​ product, then A. producers may be less likely to supply the product because it is less unique. B. consumers may be less likely to buy the product to avoid market failure. C. consumers may be more likely to buy the product because it is more useful. D. consumers may be less likely to buy the product to avoid switching costs.

C. consumers may be more likely to buy the product because it is more useful. Network externality A situation in which the usefulness of a product increases with the number of consumers who use it. For​ example, if you owned the only cell phone in the​ world, it would not be very useful. If a network externality is​ present, then consumers may be more likely to buy the product because it is more useful.​ Unfortunately, network externalities may result in market failure due to two​ reasons: Switching costs. When a product becomes​ established, consumers may find it to costly to a new product that contains better technology. Path dependence. Due to switching​ costs, the technology that was first available may have advantages over better technologies that were developed later. The path along which the economy has developed is important.

Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of​ $5.00 per movie and to purchase 5 CDs per month at a cost of​ $10.00 per CD. Your marginal utility from the fifth movie is 20 and your marginal utility from the fifth CD is 44. What could you do to increase​ utility? You could increase utility by consuming more ______ and fewer ________.

CDs; Movies Optimal decisions are made at the margin. The key to making the best consumption decision is to maximize utility by following the rule of equal marginal utility per dollar spent. In this​ example, the marginal utility per dollar spent renting movies ​(4.00​, from marginal utility of 20 divided by a rental price of​ $5.00) is less than the marginal utility per dollar spent on CDs ​(4.40​, from marginal utility of 44 divided by a price of​ $10.00). You could increase utility by consuming more CDs and fewer movies ​(by spending more of your entertainment budget on CDs and less of your entertainment budget on movies​).

What role does utility play in the economic model of consumer​ behavior? When modeling consumer​ behavior, utility A. identifies the consumer who receives the most satisfaction from consuming a particular set of goods and services. B. identifies the combination of goods and services that is most expensive. C. identifies the combination of goods and services that can be produced most efficiently. D. reflects the satisfaction a consumer receives from consuming a particular set of goods and services. E. provides an objective measure of enjoyment from consuming a particular set of goods and services in units called​ "utils."

D. reflects the satisfaction a consumer receives from consuming a particular set of goods and services. Economists assume the goal of a consumer is to spend available income so as to maximize utility. In this​ context, utility is the enjoyment or satisfaction people receive from consuming goods and services.

Miriam consumes tacos and Coke. Suppose the price of a taco is ​$4.90​, the price of a Coke is ​$2.20​, and that Miriam is currently consuming tacos and Coke such that her marginal utility of tacos is 29 and her marginal utility of Coke is 47. Is Miriam behaving​ optimally? If​ not, then what should she​ do? A. Miriam is maximizing​ utility; she should not change her behavior. B. Miriam is not maximizing​ utility; she should instead consume fewer tacos and less Coke. C. Miriam is not maximizing​ utility; she should instead consume more Coke and more tacos. D. Miriam is not maximizing​ utility; she should instead consume more tacos and less Coke. E. Miriam is not maximizing​ utility; she should instead consume more Coke and fewer tacos.

E. Miriam is not maximizing​ utility; she should instead consume more Coke and fewer tacos. At the point of optimal​ consumption, the slope of the indifference​ curve, which is​ (minus) the marginal rate of substitution​ (MRS), is equal to the slope of the budget​ line, which is​ (minus) the ratio of the prices of the consumption goods​ (the price of​ tacos, PT​, relative to the price of​ Coke, PC​): MRS=PT/PC. The MRS is equal to the ratio of marginal utilities of the consumption goods​ (the marginal utility of​ tacos, MUT​, relative to the marginal utility of​ Coke, MUC​): MRS=MUT/MUC. ​Therefore, when maximizing​ utility, MUT/MUC=PT/PC MUT/PT=MUC/PC. ​However, for​ Miriam, MUT/PT=29/4.90=5.918≠21.364=47/2.20=MUC/ PC. Given the law of diminishing marginal​ utility, Miriam should therefore instead consume more Coke and fewer tacos.

Characterize utility maximization. When consumers maximize​ utility, A. they consume each good up to the point where the marginal utility per dollar spent is the same for each good. B. the marginal rate of substitution equals the price of the good on the horizontal axis divided by the price of the good on the vertical axis at the point of optimization. C. the slope of the indifference curve equals the slope of the budget constraint at the point of optimization. D. both a and b. E. all of the above.

E. all of the above. The marginal rate of substitution​ (MRS): Equal to the ratio of the marginal utility of the good measured on the horizontal axis to the marginal utility of the good measured on the vertical axis. The slope of the indifference​ curve: Equal to​ (minus) the marginal rate of substitution. The slope of the budget​ constraint: Equal to​ (minus) the price of the good measured on the horizontal axis divided by the price of the good measured on the vertical axis. 1. Consumers maximize utility when they consume each good up to the point where the marginal utility per dollar spent is the same for every good. 2.​ Graphically, consumers maximize utility when they are on the highest indifference​ curve, given the budget constraint. 3. The two conditions are equivalent because at the point of optimal​ consumption, the indifference curve and the budget constraint are​ tangent, so they have the same slope. ​Therefore, at the point of optimal​ consumption, the marginal rate of substitution is equal to the ratio of the price of the product on the horizontal axis to the price of the product on the vertical axis.

What affects the desirability of a​ product? Products become more desirable when A. professional athletes use a product because consumers who use the same product may feel more fashionable. B. movie stars use a product because consumers who use the same product may feel closer to famous people. C. celebrities use a product because consumers perceive them to be particularly knowledgeable about it. D. both a and b. E. all of the above.

E. all of the above. In many​ cases, it is not just the number of people who use a product that makes it desirable but the types of people who use it. For​ example, if consumers believe that movie stars or professional athletes use a​ product, demand for the product will often​ increase, partly because consumers believe public figures are particularly knowledgeable about products. Many consumers also feel more fashionable and closer to famous people if they use the same products these people do.

Suppose a consumer is trying to decide how much to spend on transportation and how much to spend on all other ​(non-transportation​) consumption. The economic model of consumer behavior predicts that the consumer will A. consume as much transportation as she can afford without any ​non-transportation consumption. B. consume an infinite amount of transportation and ​non-transportation consumption. C. consume any combination of transportation and ​non-transportation consumption from among the combinations of transportation and ​non-transportation items she can afford. D. consume as much transportation and as much ​non-transportation consumption as she wants. E. choose the combination of transportation and ​non-transportation consumption that makes her as well off as possible from among the combinations of transportation and ​non-transportation items she can afford.

E. choose the combination of transportation and ​non-transportation consumption that makes her as well off as possible from among the combinations of transportation and ​non-transportation items she can afford. Economic model of consumer behavior Predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy. In this​ instance, economists predict that the consumer will choose to buy the combination of transportation and ​non-transportation consumption that makes her as well off as possible from among all the combinations of transportation and ​non-transportation consumption that she can afford.

Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of​ $5.00 per movie and to purchase 5 CDs per month at a cost of​ $10.00 per CD. Your marginal utility from the fifth movie is 20 and your marginal utility from the fifth CD is 44. Are you maximizing​ utility? You are A. maximizing utility because you are spending all of your entertainment budget. B. not maximizing utility because the marginal utility of movies is not equal to the marginal utility of CDs. C. not maximizing utility because the price of movies is not equal to the price of CDs. D. maximizing utility because you are consuming an equal number of movies and CDs. E. not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.

E. not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs. Optimal decisions are made at the margin. The key to making the best consumption decision is to maximize utility by following the rule of equal marginal utility per dollar spent. In this​ example, the marginal utility per dollar spent renting movies is 4.00​, from marginal utility of 20 divided by a rental price of​ $5.00. The marginal utility per dollar spent on CDs is 4.40​, from marginal utility of 44 divided by a price of​ $10.00. Since the marginal utility per dollar spent renting movies is not equal to the marginal utility per dollar spent on​ CDs, you are not maximizing utility.

What explanation might an economist provide why some people overeat when such behavior can lead to health​ consequences? Some people likely overeat because A. their preferences are consistent over time. B. they overvalue the utility to be received in the future from being thin. C. they undervalue the utility from current choices. D. they overestimate the future costs of current choices. E. they overvalue the utility from current choices.

E. they overvalue the utility from current choices. Unrealistic future​ behavior: Economists suggest that when people overeat or smoke​ cigarettes, they are overvaluing the utility from current choices—eating chocolate cake or smoking—and undervaluing the utility to be received in the future from being thin or not getting lung cancer. That​ is, economists argue that many people have preferences that are not consistent over time. In the long​ run, people would like to be thin or give up​ smoking, but each​ day, they make decisions​ (such as to eat too much or​ smoke) that are not consistent with this​ long-run goal. If consumers are unrealistic about their future​ behavior, then they will underestimate the costs of choices—like overeating or smoking—that are made today.

Suppose bundle A contains 5 CDs and 5 DVDs and bundle B contains 8 CDs and 2 DVDs. If a consumer is able to rank different combinations of goods and services in terms of how much utility they​ provide, then A. the consumer will prefer bundle A to bundle B. B. the consumer will prefer bundle B to bundle A. C. the consumer will be indifferent between bundle A and bundle B. D. both a and b are possible. E. ​a, b, and c are possible.

E. ​a, b, and c are possible. Indifference curve A curve that shows the combinations of consumption bundles that give the consumer the same utility. If a consumer is able to rank different combinations of goods and services in terms of how much utility they​ provide, then the consumer is able to determine whether he or she prefers bundle A or bundle B even if the consumer is unsure exactly how much utility he or she would receive from consuming these goods. ​Therefore, if the consumer can rank the​ bundles: 1. Consumer preferences are​ complete: The consumer prefers bundle A to bundle​ B, bundle B to bundle​ A, or the consumer is indifferent between both bundles. 2. Indifference curves that are further from the origin provide greater utility. 3. Preferences are transitive. That​ is, if consumption bundle X is preferred to consumption bundle Y and if consumption bundle Y is preferred to consumption bundle​ Z, then consumption bundle X must be preferred to consumption bundle Z.

unrealistic future behavior

Economists suggest that when people overeat or smoke​ cigarettes, they are overvaluing the utility from current choices—eating chocolate cake or smoking—and undervaluing the utility to be received in the future from being thin or not getting lung cancer. That​ is, economists argue that many people have preferences that are not consistent over time.

The graph illustrates​ Jessica's preferences for pizza and Coke using indifference curves ​(I1​, I2​, I3​, and I4​). Use the point drawing tool to indicate a bundle of pizza and Coke that Jessica would prefer to bundle A​ (Bundle B), a bundle for which Jessica would be indifferent with bundle A​ (Bundle C), and a bundle that would be inferior to bundle A​ (Bundle D). Draw each bundle such that it corresponds to a level of utility represented by one of the indifference curves shown in the graph. Properly label the points.

Indifference curve A curve that shows the combinations of consumption bundles that give the consumer the same utility. Characteristics of indifference​ curves: 1. Consumers are indifferent among all the consumption bundles that are on the same indifference curve. 2. The higher the indifference curve—that ​is, the further to the upper right on the graph—the greater the amounts of both goods that are available to consume and the greater the utility. ​Therefore, bundle B should be on a higher indifference curve than bundle A​ (such as indifference curve I4​), bundle C should be on the same indifference curve as bundle​ A, and bundle D should be on a lower indifference curve than bundle A​ (such as indifference curve I1​).

What is marginal utility

Marginal utility The change in total utility a person receives from consuming one additional unit of a good or service.

The table below shows the relationship between the number of movies seen per month and the total utility received. Fill in marginal utility in the table below. ​(Enter your responses as​ integers.) In this​ example, consuming additional movies _______ the law of diminishing marginal utility. (illustrates or does not illustrate)

Marginal utility The change in total utility a person receives from consuming one additional unit of a good or service. Marginal utility of the first movie per month is 24​, from total utility of 24 from one movie minus total utility of 0 from zero movies. Marginal utility of the second movie is 16​, from total utility of 40 from two movies minus total utility of 24 from one movie. Marginal utility from the third movie is 8. Marginal utility from the fourth movie is 4. Marginal utility for the fifth movie is 2. this example illustrates the law of diminishing marginal utility because each additional movie generates less additional satisfaction

The table below shows the demand for tickets to professional basketball games for​ you, Gina, and Chad. Use the line drawing tool to draw the market demand curve for basketball tickets​ (assuming the market consists of​ you, Gina, and​ Chad). Label this line​ 'Market Demand'.

Market demand​ curve: We obtain the market demand curve by adding horizontally individual demand. For​ example, when the price is​ $10.00 per​ ticket, market demand is 19 tickets​ (from individual demands of 5​, 9​, and 5​). When the price is​ $20.00 per​ ticket, market demand is 15 tickets​ (from individual demands of 4​, 7​, and 4​). ​Continuing, market demand at a price of​ $30.00 is 11 ​tickets, market demand is 7 tickets at a​ $40.00 price, and 3 tickets at​ $50.00.

market demand curve

Marlet demand​ curve: We obtain the market demand curve by adding horizontally individual demand. For​ example, when the price is​ $10.00 per​ ticket, market demand is 19 tickets​ (from individual demands of 5​, 9​, and 5​). When the price is​ $20.00 per​ ticket, market demand is 15 tickets​ (from individual demands of 4​, 7​, and 4​).

The following table shows​ Madison's utility from consuming popcorn and Coke. Suppose that Madison has income of $40.00​, the price of popcorn is $4.00​, and the price of Coke is $6.00. If Madison wants to maximize her​ utility, how much popcorn and Coke should she​ buy? Madison should buy _______ boxes of popcorn and ______ cans of Coke. ​(Enter your responses as​ integers.)

Optimal decisions are made at the margin. That​ is, the key to making the best consumption decision is to maximize utility by following the rule of equal marginal utility per dollar spent such that the amount spent equals the amount available to spend. ​Specifically, we consume a combination of goods such that the marginal utility of the first​ good, divided by its price equals the marginal utility of the second​ good, divided by its price.​ Or, MUxPx=MUyPy. The marginal utility per dollar spent for first box of popcorn is 24.00 ​(from marginal utility of 96 divided by the ​$4.00 ​price). The marginal utility per dollar spent for the second box of popcorn is 18.00 ​(from marginal utility of 72 divided by the ​$4.00 ​price). The marginal utility per dollar spent for the third box of popcorn is 12.00​, 6.00 for the fourth​ box, 3.00 for the​ fifth, and 1.50 for the sixth. ​Similarly, The marginal utility per dollar spent for the first can of Coke is 24.00 ​(from marginal utility of 144 divided by the ​$6.00 ​price). The marginal utility per dollar spent for the second can of Coke is 18.00 ​(from marginal utility of 108 divided by the ​$6.00 ​price). The marginal utility per dollar spent for the third can of Coke is 12.00​, 6.00 for the fourth​ can, 3.00 for the​ fifth, and 1.50 for the sixth. Madison maximizes utility by consuming 4 boxes of popcorn and 4 cans of Coke. This is because marginal utility per dollar spent for popcorn and Coke is equal when Madison consumes 4 boxes of popcorn and 4 cans of Coke and Madison has the income available ​($40.00​) to purchase this combination of popcorn and Coke ​(4 boxes of popcorn multiplied by the ​$4.00 price plus 4 cans of Coke multiplied by the ​$6.00 equals ​$40.00​).

public consumption of goods and services

Public consumption of goods and​ services: The decision to buy a product depends partly on the characteristics of the product and partly on how many other people are buying the product.

the substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other​ goods, holding constant the effect of the price change on consumer purchasing power.

the income effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing​ power, holding all other factors constant.

Mattie has ​$48.00 with which to spend on Mountain Dew and Coke. The price of a​ 12-pack of Coke is ​$6.00​, the price of a​ 12-pack of Mountain Dew is ​$6.00​, and​ Mattie's initial budget constraint ​(Budget Constraint1​) is illustrated in the figure. ​Now, suppose​ Mattie's income decreases to ​$24.00. Use the line drawing tool to graph​ Mattie's new budget constraint. Label this line ​'Budget Constraint2​'.

To determine the​ vertical-axis intercept, consider the amount of that good a consumer could purchased if he or she spent all income on that good. To determine the​ horizontal-axis intercept, consider the amount of that good a consumer could purchased if he or she spent all income on that good. After the change in​ income, Mattie can afford a maximum of 4 ​12-packs of Mountain Dew​ (from income of ​$24.00 divided by the ​$6.00 price of Mountain​ Dew) or a maximum of 4 ​12-packs of Coke​ (from income of ​$24.00 divided by the ​$6.00 price of​ Coke). ​Therefore, Mattie's new budget constraint intersects the​ y-axis at 4 and the​ x-axis at 4.

The graph to the right illustrates​ Isabel's preferences for milk and ice cream using indifference curves ​(I1​, I2​, I3​, and I4​) and her budget constraint. Use the point drawing tool to indicate​ Isabel's utility-maximizing consumption bundle. Label this point​ 'Optimal'. Carefully follow the instructions​ above, and only draw the required objects.

Utility​ maximization: To maximize​ utility, a consumer needs to be on the highest indifference​ curve, given the budget constraint. This occurs at the point where the budget line and the indifference curve meet. That​ is, utility maximization occurs at the point where the slope of the indiffence curve is equal to the slope of the budget line.

utility maximization

Utility​ maximization: To maximize​ utility, a consumer needs to be on the highest indifference​ curve, given the budget constraint. This occurs at the point where the budget line and the indifference curve meet. That​ is, utility maximization occurs at the point where the slope of the indiffence curve is equal to the slope of the budget line.

Mattie has ​$48.00 with which to spend on Mountain Dew and Coke. The price of a​ 12-pack of Coke is ​$6.00​, the price of a​ 12-pack of Mountain Dew is ​$6.00​, and​ Mattie's initial budget constraint ​(Budget Constraint1​) is illustrated in the figure. ​Now, suppose​ Mattie's income decreases to ​$24.00. Use the line drawing tool to graph​ Mattie's new budget constraint. Label this line ​'Budget Constraint2​'. When​ Mattie's income decreases​, the quantity of Coke and Mountain Dew that she can consume

When the budget constraint shifts in​, Mattie is no longer able to purchase consumption bundles that were previously affordable. ​Therefore, when income decreases​, the quantity of Coke and Mountain Dew that Mattie can consume decreases.

Suppose you bought a ticket to an art exhibit. The ticket is nonrefundable​ (and can't be​ resold) and must be used on Saturday.​ Then, a friend calls and invites you to a baseball game on Saturday. You only have time to attend one of the​ events, and your friend offers to pay the cost of going to the baseball game. If you prefer baseball games over art exhibits​, then you should attend the _________.

baseball game Sunk cost A cost that has already been paid and cannot be recovered. Once you have paid money and​ can't get it​ back, you should ignore that money in any later decisions you make. If you prefer baseball games to art exhibits​, then the fact that you have already paid for a ticket to the art exhibit is irrelevant. This is because the cost of the ticket to the art exhibit is a sunk cost.​ Therefore, you should attend the baseball game.

In recent​ years, some economists have begun studying situations in which people do not appear to be making choices that are economically rational. This new area of economics is called __________. Why might consumers not act​ rationally? Consumers might A. be overly optimistic about their future behavior. B. take into account nonmonetary opportunity costs. C. only take actions that are appropriate to reach their goals. D. ​don't take into account monetary costs.

behavioral economics; A. be overly optimistic about their future behavior. The most obvious reason why consumers might not act rationally would be that they do not realize that their actions are inconsistent with their goals. For​ example, consumers commonly commit the following three mistakes when making decisions​: 1. They take into account monetary costs but ignore nonmonetary opportunity costs. 2. They fail to ignore sunk costs. 3. They are overly optimistic about their future behavior.

The figure illustrates​ Pam's preferences for hamburgers and fries. She initially maximizes utility at bundle A.​ Then, the price of hamburgers decreases. The substitution effect of the price decrease in terms of hamburgers is represented by the movement from point ▼______ to point ▼ _____​, and the income effect of the price decrease is represented by the movement from point ▼ ______ to point ▼ ______. According to the​ figure, hamburgers for Pam are ▼______ good.

point A to point B; Point B to point C The income effect The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing​ power, holding all other factors constant. The substitution effect The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other​ goods, holding constant the effect of the price change on consumer purchasing power. Following a decline in the price of​ hamburgers, Pam's optimal consumption of hamburgers increases from point A to point C. This movement from point A to point C takes place in two​ steps: 1. The movement from point A to point B along indifference curve I1 represents the substitution effect. 2. The movement from point B to point C represents the income effect. normal The income effect of a price decline causes consumers to buy more of a normal good and less of an inferior good. Because the income effect causes Pam to increase her consumption of​ hamburgers, hamburgers for her must be a normal good.

Peter has ​$24.00 with which to spend on chips and salsa for a party that he is hosting. The price of a bag of chips is ​$4.00 and the price of a jar of salsa is ​$3.00. Use the line drawing tool to graph​ Peter's budget constraint. Carefully follow the instructions​ above, and only draw the required objects. What is the slope of the budget​ constraint? The budget​ constraint's slope is minus nothing. ​(Enter your response as a real number rounded to two decimal​ places.)

slope of budget constraint: The slope of a budget constraint is equal to the ratio of the price of the good on the horizontal axis divided by the price of the good on the vertical​ axis, multiplied by −1. That​ is, the slope of the budget constraint equals minus the ​$4.00 price of chips divided by the ​$3.00 price of​ salsa: Slope of budget constraint=−4.00/3.00= −1.33. Budget constraint The limited amount of income available to consumers to spend on goods and services. It is represented graphically with a line that intersects the vertical axis at the maximum amount of the good measured on the​ y-axis that the consumer can afford to buy and that intersects the horizontal axis at the maximum amount of the good measured on the​ x-axis that the consumer can afford to buy. Peter can afford a maximum of 8 jars of salsa​ (from income of ​$24.00 divided by the ​$3.00 price of​ salsa) or a maximum of 6 bags of chips​ (from income of ​$24.00 divided by the ​$4.00 price of​ chips). Therefore,​ Peter's budget constraint intersects the​ y-axis at 8 and the​ x-axis at 6.

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a give period of time