chapter 6

The marginal utility of two goods changes ______________.

A. with the quantities consumed

What does the budget constraint framework suggest when income rises?

When income rises, households will demand a higher quantity of normal goods, but a lower quantity of inferior goods.

Briefly discuss the choices typical to households with respect to intertemporal budget constraint.

When making a choice along the intertemporal budget constraint, a household will choose the combination of present consumption, savings, and future consumption that provides the most utility.

Briefly describe the choices a household will choose along a labor-leisure budge constraint and the results of those choices.

When making a choice along the labor-leisure budget constraint, a household will choose the combination of labor, leisure, and income that provides the most utility. The result of a change in wage levels can be higher work effort, the same work effort, or lower work effort.

What does the budget constraint framework suggest when price changes? Include a brief explanation of what the results of price changes will depend on.

When the price of a good rises, households will typically demand less of that good. Also, a higher price for one good can lead to more or less of the other good being demanded. Whether households will demand a much lower quantity or only a slightly lower quantity of that good with an increased price will depend on personal preferences.

Briefly discuss how a higher rate or return or a higher interest rate affects the choices typical to households with respect to intertemporal budget constraint.

A higher rate of return or higher interest rate can cause typical households to choose to contribute a higher quantity of income to saving, retain the same quantity of saving, or to decrease their quantity of saving, depending on preferences about present and future consumption.

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:

A. $50

Rick eats only french fries and burgers at his office cafeteria. His weekly lunch budget is $48. Each burger costs $6 and each order of fries costs $3. When deciding how much of each good to buy, Rick knows that 2 burgers and 4 orders of french fries will give him a utility of 8. At his utility-maximizing point, Rick's utility is:

A. 32

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

A. differing levels of family income B. geographical location of households C. each household's personal preferences D. each of the above will cause a variation

The most common pattern for marginal utility is ____________________.

A. diminishing marginal utility

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

A. diminishing marginal utility

When economists attempt to predict the spending patterns of U.S. households, they will typically view the _____________________ as a primary determining factor that influences the individual consumption choices that each will make.

A. income level of each household

The government distributes food stamps that can only be used to acquire food to low-income families. The budget line graph will show food on the horizontal axis and everything else on the vertical axis. After receiving food stamps, Ted's family is able to consume the same amount of food. The new consumption point for Ted's family will be:

A. on the new budget line, directly above the old consumption point.

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

A. the marginal utility per dollar is the same for both goods

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

A. total utility rises, but marginal utility falls.

Jed's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Jed knows that 2 pizzas and 4 burgers will give him a utility of 8. At his utility-maximizing point, Jed's utility is:

B. 8

Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes.

B. a systematic way of thinking; misguided conclusions

The government wants to make medicare benefits available to more people, but to achieve this goal, it needs to make cuts in the existing medicare budget. The two areas where they are considering cuts are non-essential elective surgery and 6-12 month mental health care programs. Applying the concept of diminishing marginal utility, the budget cuts should be made for spending on:

B. elective surgery due to its lower marginal return rate.

Even with wage increases, the supply curve of labor is most often inelastic for which of the following?

B. full-time workers

Saving money is a(n) ____________________, because it involves less consumption in the present, but the ability to consume more in the future.

B. intertemporal choice

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

B. marginal utility

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

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

A decrease in consumer preference for a product, other things being equal, will cause:

B. market demand to shift to the left.

Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?

B. one-third

As a general rule, utility-maximizing choices between consumption goods occur where the:

B. price ratio and marginal utilities ratio of two goods is equal.

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.

B. substitution effect

The theoretical model of the intertemporal budget constraint for the U.S. economy as a whole suggests that the most common pattern seems to be that:

B. the quantity of savings doesn't adjust much to changes in the rate of return.

Josh's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Josh knows that 2 pizzas and 4 burgers will give him a utility of 8. What is Josh's utility-maximizing point?

C. 2 pizzas; 4 burgers

For lunch, Maria eats only salads or vegetarian burgers. Her weekly food budget is $36. Each salad costs $6 and each vegetarian burger costs $3. When deciding how much of each good to buy, Maria knows that 2 salads and 4 vegetarian burgers will give her a utility of 8. Maria's utility-maximizing point is:

C. 3 salads, 6 vegetarian burgers

How does the U.S. Bureau of Labor Statistics gather information with regard to the typical consumption choices of Americans?

C. Consumer Expenditure Survey

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

C. a measurement of utility

In the U.S., the amount in savings contributed to IRAs rose from $239 billion in 1992 to $3,667 billion by 2005, while overall savings actually dropped from low to lower. Evidence suggests that, in the economy as a whole, increased savings in these retirement accounts:

C. are being offset by negative savings or less savings in other kinds of accounts.

Marginal utility can:

C. be positive, negative, or zero

An inferior good is a product:

C. for which demand decreases as income increases.

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

C. income effect; higher price

The key assumption that accompanies the use of numbers for measuring utility is that:

C. individuals choose based on their preferences.

The _________________ budget constraint shows the tradeoff between present and future consumption.

C. intertemporal choice

For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48. Each salad costs $6 and each smoothie costs $3. When deciding how much of each good to buy, Wendy knows that 2 salads and 4 smoothies will give her a utility of 8. What is Wendy's utility-maximizing point?

D. 4 salads, 8 smoothies

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:

D. 400

Substitution and income effects of a change in price of a good may be used to explain the:

D. direct relationship between income and demand.

During a severe recession, the government issued food stamps that could only be used to acquire food to a greater number of families. The budget line graph shows food on the horizontal axis and everything else on the vertical axis. The government expects that issuing the food stamps will cause each family's budget constraint line to:

D. shift to the right

Which of the following occurs simultaneously with an income effect?

D. substitution effect

Economists are able to determine total utility by:

D. summing up the marginal utilities of each unit consumed.

Briefly explain what the economic analysis of household consumption behavior is based on. Do economists judge household utility?

Economic analysis of household behavior is based on the assumption that people seek the highest level of utility or satisfaction. Individuals are the only judge of their own utility.

Briefly discuss how greater consumption of a good affects utility.

In general, greater consumption of a good brings higher total utility. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.

Briefly explain the relevant portions shown in a backward sloping labor supply curve. How are the various possibilities derived?

The bottom upward-sloping portion of the labor supply curve shows that as wages increase over this range, the quantity of hours worked also increases. The middle, nearly vertical portion of the labor supply curve shows that as wages increase over this range, the quantity of hours worked changes very little. The backward-bending portion of the labor supply curve at the top shows that as wages increase over this range, the quantity of hours worked actually decreases. All three of these possibilities can be derived from the how a change in wages causes movement in the labor-leisure budget constraint, and thus different choices by individuals.

Briefly explain why a graph is used in a budget constraint model between two goods and include a description of how the graph would appear. Explain the significance of the budget constraint line and how the marginal utility of the two goods changes. How would a sensible economizer choose based on marginal comparison between one good and another that costs twice as much?

The budget constraint model uses a graph to illustrate the choice between two goods. The quantity of one good is measured on the horizontal axis and the quantity of the other good was measured on the vertical axis. The budget constraint line shows the various combinations of goods that it is possible to buy given a certain level of income. Along the budget constraint, the prices of the two goods remain the same, so the ratio of the prices doesn't change. However, the marginal utility of the two goods changes with the quantities consumed. A sensible economizer will only pay twice as much for something if, in the marginal comparison, the item confers twice as much utility.

Briefly describe how the utility-maximizing choice on a consumption budget constraint can be found.

The utility-maximizing choice on a consumption budget constraint can be found in several ways. You can add up total utility of each choice on the budget-line and choose the highest total. You can choose a starting point at random and compare the marginal utility gains and losses of moving to neighboring points—and thus eventually seek out the preferred choice. Alternatively, you can compare the ratio of the prices of goods 1 and 2 to the ratio of the marginal utilities of goods 1 and 2 and apply the rule that at the optimal choice, the ratio of prices must equal the ratio of marginal utilities: P1/P2 = MU1/MU2.

In microeconomic terms, the ability of a good or a service to satisfy wants is called:

B. utility

Approximately what portion of annual consumption is typically spent by American households on shelter?

D. one-third