Microeconomics Midterm 2 - Lesson 5

What is marginal utility?

the change in total utility that one gets from consuming one more unit of a good

If apples cost $3 per pound, how much utility per dollar is Bill getting with the 4th pound of apples? pounds total utility 0 0 1 18 2 33 3 45 4 54 5 60

3 (54-45)/3

What is the income effect for a normal good on price and quantity?

If price increases qty. decreases is price decreases qty. increases

If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________. A Marginal utility; fall; marginal utiity; rise B Marginal utility; rise; marginal utility; fall C Total utility; fall; marginal utility; rise D Marginal utility; rise; total utility; rise

A

Using the information in the previous question, assume that Jill is not consuming at the utility-maximizing level. The marginal utility of soda is 40 and its price is $2, but the marginal utility of popcorn is now 30, and its price is $1. What should Jill do to maximize her utility? A Consume less soda and more popcorn B Consume more soda and less popcorn C Consume more of both D Consume less of both

A

If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases? The marginal utility will __________. A Increase, because the consumer will decrease her consumption of the good. B Decrease, because the consumer will increase her consumption of the good. C Decrease, because a consumer will decrease her consumption of the good. D Increase, because the consumer will increase her consumption of the good.

A The consumer will decrease her consumption of the good, and as she does, the marginal utility she derives from the last unit consumed will increase.

What is marginal analysis?

A consumer will maximize total well-being if the last dollar spent on each good provides the same marginal (additional) utility as the last dollar spent on every other good.

What is the substitution effect on price and quantity?

If price increases quantity decreases and if price decreases quantity increases

The reason the demand curve slopes downward is that for most goods which of the following is true? A The income effect of a price change is greater than the substitution effect and the income effect always causes reductions in consumption. B The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes reductions in consumption. C The income effect of a price change is greater than the substitution effect and the income effect always causes increases in consumption. D The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes increases in consumption.

B

When Jane's income doubles, she increases her consumption. For all normal goods that Jane consumes, what is true? A Her marginal utility per dollar will increase B Her marginal utility per dollar will decrease C Her marginal utility per dollar will not change D Her total utility will decrease

B

A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods - hamburgers and football games? A Her consumption will increase because the ratio of their marginal utilities to their prices is now greater than the ratio of the marginal utility of movies to the price of a movie. B Her consumption will increase because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie. C Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie. D Her consumption will decrease because the ratio of their marginal utilities to their prices is now greater than the ratio of the marginal utility of movies to the price of a movie.

C

If the price of a good changes, why does an income effect exist? A You need income to purchase the good B Diminishing marginal utility exists C The price change causes a change in real income D People prefer larger incomes

C

Which of the following is an example of the income effect? A When the price of cheese increases, Sue buys less cheese. B When the price of potato chips decreases, Stuart buys more tortilla chips. C When the price of tuition increases, Amy eats fewer restaurant meals. D When the price of his car insurance increases, Tom sells his car.

C

Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 10 and the marginal utility of the last book is 5. The price of a movie is $12 and the price of a book is $4. In order to maximum her utility, what should Anna do? A Increase her consumption of both movies and books B Decrease her consumption of both movies and books C Do nothing—she's maximizing her utility D Decrease her consumption of movies and increase her consumption of books E Increase her consumption of movies and decrease her consumption of books

D

Assuming a fixed budget, when the price of one good increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all goods will _________. A Increase B Decrease C Not change D Decrease, but the marginal utility of the higher priced good will increase. E Increase, but the marginal utility of the higher priced good will decrease.

D

What is the income effect for an inferior good on price and quantity?

If price increases quantity increases, if price decreases quantity decreases

Grace likes eating pizza and going to the movies. If she has $120 to spend in a month, and pizza and movies each cost $10, she decides to eat 5 pizzas and see 7 movies. If the price of movies increases to $12 what is likely to happen? A Both the substitution and income effects would predict that she will consume fewer of pizzas and movies B Both the substitution and income effects would predict that she will consume more of pizzas and movies C The substitution effect would predict that she consumes fewer pizzas and more movies; and the income effect would predict that she would consume more of both D The substitution effect would predict that she consumes more pizzas and less movies; the income effect would predict that she would consume fewer of both

D

Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ratio of his marginal utility of pizza to marginal utility of video games is ¼. If he wants to maximize his utility, what should he do? A Buy more pizzas and fewer video games B Buy more pizzas and more video games C Buy fewer pizzas and video games D Buy fewer pizzas and more video games

D Another video game provides 4 times the amount of satisfaction as a pizza, but only costs 3 times as much - buy more video games and fewer pizzas.

Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes falls from $70 to $50? A $10 B $19 C $29 D $30

D At a price of $70, only Gail will buy the shoes and the consumer surplus is $19 ($89-$70). At a price of $50, both will buy the shoes and total consumer surplus is $39 + $10 = $49. Therefore, the gain in consumer surplus is $49-$19 or $30.

How does the utility maximizing choice affect demand curves?

Demand curves become downward sloping because as the price of a good increases the quantity you are willing to buy will decrease (negative relationship between quantity and price)

Does diminishing marginal utility imply decreasing total utility?

No. As we consume more total utility is still increasing (at a decreasing rate) and marginal utility begins to decrease.

What is the paradox of value?

Price of water is low and there is a large supply so market price is much lower compared to market price of diamonds where price is high and there is a small demand.

What is the equation of a budget constraint?

Qa*Pa + Qb*Pb = Y where Qa is quantity of good A, Pa is price of A, Qb is quantity of good B, Pb is price of B, and Y is total income

What is the utility maximizing rule?

The consumer maximizes utility when choosing between two consumption goods at the point where the marginal utility per dollar of good 1 is equal to the marginal utility per dollar of good 2. MU1/P1 = MU2/P2

What is consumer surplus?

The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.

What is it meant by diminishing marginal utility?

as a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed will diminish

How do you calculate consumer surplus?

price the consumer is willing to pay minus the price the consumer actually has to pay

What is utility?

satisfaction gained from consuming a good or service or participating in an activity

What is the assumption that economists typically make about how consumers make the choices about spending their income and maximizing their utility?

they assume most consumers are rational in spending their incomes, and that they try to maximize their total satisfaction (we buy the good with the greater marginal utility)

What is the budget constraint?

various combinations of two goods that are affordable, given the consumer's income