Econ 306 Quiz 1

Paul consumes only books and DVDs. At his current consumption​ bundle, his marginal utility from DVDs is 24 and from books is 2. Each DVD costs ​$13​, and each book costs ​$2. Is he maximizing his​ utility? Explain. Let MUB be the marginal utility of​ books, MUD be the marginal utility from​ DVDs, PB be the price of​ books, PD be the price of​ DVDs, and MRS be the marginal rate of substitution. Paul is If he is​ not, how can he increase his utility while keeping his total expenditure​ constant?

not maximizing his utility because MUB/PB<MUD/PD. Paul could increase utility while keeping total expenditures constant by consuming more DVDs and fewer books

Cardinal utility is not needed in order to rank consumer choices because economists

can instead use ordinal utility to show how consumers rank different baskets.

Suppose that an individual allocates his or her entire budget between two​ goods, food and clothing. Can both goods be​ inferior? Explain. Both goods

cannot be inferior because an increase in income must be spent on one of the two goods.

People generally buy clothing in the city in which they live.​ Therefore, there is a clothing market​ in, say, Atlanta that is distinct from the clothing market in Los Angeles. This statement is

false because clothing suppliers can easily move clothing from one part of the country to another. While tastes do vary across the​ country, the differences are likely to be negligible insofar as rendering the clothing market in Atlanta distinct from the clothing market in Los Angeles.

Fast-food chains like​ McDonald's, Burger​ King, and​ Wendy's operate all over the United States.​ Therefore, the market for fast food is a national market. This statement is

false because people do not travel long distances to purchase cheaper fast food. The fact that these firms serve customers nationwide​ (actually, worldwide)​ doesn't in and of itself mean that the market for fast food is therefore a national market. The extent of a market is set largely by the distances buyers will travel as well as by the possibility of arbitrage​ - the practice of buying at a low price in one location and selling at a higher price in another. There are multiple fast food markets across the country.

Some consumers strongly prefer Pepsi and some strongly prefer Coke.​ Therefore, there is no single market for colas. This statement is

false because the different brands of cola are similar enough to constitute one market.

Steel and aluminum are substitutes. If the price of steel​ increases, other things remaining the​same, we would expect the price of aluminum to

increase and the equilibrium quantity of aluminum to increase

Suppose the market for college education in 1970 is illustrated in the figure to the right (3600)

Suppose instead that the annual cost of a college education is ​$3,200. This will result in a shortage ​, which will place upward pressure on the price.

What effect does competition have on market​ price?

The actions of a single firm in a competitive market will not affect the market price.

Debra usually buys a soft drink when she goes to a movie​ theater, where she has a choice of three​ sizes: the​ 8-ounce drink costs $3.00​, the​ 12-ounce drink ​$4.00​, and the​ 16-ounce drink ​$4.50. Describe the budget constraint that Debra faces when deciding how many ounces of the drink to purchase.​ (Assume that Debra can costlessly dispose of any of the soft drink that she does not​ want. Debra's budget constraint

is a series of horizontal lines.

Suppose one of the products​ (good 1) is rationed. Explain why the consumer is likely to be worse off. The consumer is likely to be worse off because if good 1 is​ rationed, then the consumer Suppose that the price of one of the products​ (good 1) is fixed at a level below the current price. As a​ result, the consumer is not able to purchase as much as she would like. Can you tell if the consumer is better off or worse​off?

may have to choose a bundle to the left of A. It is not possible to determine whether the individual would be better or worse off.

What are the four basic assumptions about individual​ preferences? Explain the significance or meaning of each. Consumer theory assumes​ that:

1) preferences are complete which means that consumers are able to rank all possible​ baskets; 2)preferences are transitive which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle​ C, then bundle A is preferred to bundle C ​ more is always preferred to less because all goods are desirable the marginal rate of substitution is constant​, where indifference curves are convex (false)

Which of the following will cause the demand for kerosene heaters to​ increase?

A decrease in the price of kerosene.

Consider the market in the figure to the right. What happens to the market demand curve if consumer income decreases​?

According to the​ graph, for a given​ price, consumers now demand a smaller quantity.

Consider the market in the figure to the right. What happens to the market supply curve if the costs of production increase​?

According to the​ graph, for a given​ price, firms now supply a smaller quantity.

Suppose the figure to the right illustrates the average level of happiness with life across income classes for a particular country. Assume that satisfaction resulting from income can be measured with a cardinal index and that this index is measured on the​ figure's vertical axis.

According to this​ information, happiness increases with income at a diminishing rate If​ so, then this suggests that the marginal utility of spending an extra dollar on a consumption good will decrease

The price elasticity of supply is 0.6​, and price increases by 10 percent.

As a​ result, the quantity supplied will increase by 6 percent.

Given the​ income-consumption curve shown to the right.

Good-X is a normal good and good Y is inferior

Jon is always willing to trade one can of Coke for one can of​ Sprite, or one can of Sprite for one can of Coke. What can you say about​ Jon's marginal rate of​ substitution? What conclusions can you draw about​ Jon's satisfaction-maximizing​ choices?

Jon's marginal rate of substitution is equal to 1 If the ratio of the price of Sprite to the price of Coke is greater than​ one, then Jon will only consume Coke.

Using the concept of marginal rate of​ substitution, explain why the two sets of curves are different from each other. The indifference curves are different because

Jones's marginal rate of substitution is larger than​Smith's.

Suppose the market for copper is illustrated in the figure to the right.

The equilibrium quantity of copper is 5.55.5 million metric tons per year ​(Enter your response rounded to two decimal places.​) and the equilibrium price is ​$2.752.75 per pound. ​(Enter your response rounded to two decimal places.​) If instead the market price were ​$3.25 per​pound, then there would be a surplus of 1.51.5 million metric tons per year. ​(Enter your response rounded to one decimal place.​)

What is the difference between ordinal utility and cardinal​ utility? Ordinal utility refers to

a ranking of market baskets in order of most to least​ preferred, while cardinal utility indicates how much one market basket is preferred to another.

The government rations the amount of gasoline that consumers can purchase. A consumer who would have purchased more than the rationed amount of gasoline will instead

purchase less​ gasoline, more of other​ goods, and be on a lower indifference curve.

Suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. Why will the price of ice cream fall to a new​ market-clearing level? The cold weather will

shift the demand curve to the left​, initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded

When supply​ increases, the supply curve

shifts to the right.

Janet spends her entertainment budget on movies and basketball games. Movie tickets cost ​$9 each and basketball game tickets cost ​$20 each. If Janet saw one more movie​ (holding the number of basketball games​ constant), her total utility would increase by 24. On the other​ hand, if she attended one more basketball game​ (holding the number of movies​ constant), her utility would increase by 55. From this information we can conclude that Janet

should see fewer movies and attend more basketball games.

Suppose you have drawn a​ consumer's budget line for food and clothing with food on the horizontal axis and clothing on the vertical axis. If the prices of food and clothing remain the same and the​ consumer's income​ increases,

the budget line shifts outward in a parallel fashion.

Upon merging with the West German​ economy, East German consumers indicated a preference for​Mercedes-Benz automobiles over Volkswagens.​ However, when they converted their savings into deutsche​ marks, they flocked to Volkswagen dealerships. How can you explain this apparent​ paradox? Assume that a​ Mercedes-Benz costs more than a​ Volkswagen, that East German consumers gain satisfaction from automobiles and all other goods​ (evaluated in deutsche​ marks), and that East Germans have income.

the marginal utility per dollar spent on a Volkswagen was greater than the marginal utility per dollar spent on a​ Mercedes-Benz.

Suppose the price of​ regular-octane gasoline were 10 cents per gallon higher in New York than in Oklahoma. Do you think there would be an opportunity for arbitrage​ (i.e., that firms could buy gas in Oklahoma and then sell it at a profit in New York​)? Why or why​ not?

there would not be an opportunity for arbitrage due to transportation costs.

The equal marginal principle states that

utility is maximized when the ratio of the marginal utility to price is equal across all goods.

If marginal utility is increasing for​ (at least) one​ good, then the consumer

would maximize satisfaction by spending all of his or her income on that good