ECON306 Chapter 3 & 4 MyLab
At the optimal point on an indifference curve and budget line diagram (assuming an interior solution)
All of the above: (1) the marginal rate of substitution between the two goods equals the ratio of their prices. (2) the optimal indifference curve is tangent to the budget line. (3) the consumer spends his or her entire budget on the two goods.
Rasheed's utility function for goods X and Y is U(X,Y) = 2XY + Y. Let PX and PY be the prices for goods X and Y, and let I be Rasheed's income. Rasheed's demand equations for X and Y are: A. X= (2I+PY) / 4PX and Y= (2I+PX) / 4PY. B. X= (2I−PX) / 4PX and Y= (2I+PX) / 4PY. C. X= I / (2PX) and Y= I / (2PY). D. X= (2I+PX) / 4PX and Y= (2I−PX) / 4PY. If Rasheed's income is $103, the price of X is $2 and the price of Y is $4, Rasheed will purchase ________ units of X and ________ units of Y. (Enter your responses as real numbers rounded to one decimal place.)
B. X= (2I−PX) / 4PX and Y= (2I+PX) / 4PY (1) 25.5 (2) 13
The demand for apples in the United States is QUS=800−20P, and foreign demand for apples is QF=1200−40P, where quantity demanded is measured in millions of bushels and price is in dollars per bushel. The world demand for apples is therefore A. Q=400+20P or all prices.. B. Q=2000−20P when P is $30 or less. C. Q=2000−60P when P is $30 or less. D. Q=400−20P when P is $20 or less. The world supply of apples is QS= 200+30P. Therefore, the world equilibrium price for apples is $______ per bushel and the equilibrium quantity of apples is ________ million bushels. (Enter your responses as integers.) At the equilibrium price, ________ million bushels will be sold in the U.S., and _______ million bushels will be sold in foreign markets. (Enter your responses as integers.)
C. Q=2000−60P when P is $30 or less. a. $20 b. 800 c. 400 d. 400
Chanise has the following utility function: U(X,Y)=10X2Y where X is her consumption of Blu-ray disks with a price of $20 and Y is her consumption of DVDs with a price of $5. She has $1500 with which to spend on the two goods. Determine the number of Blu-ray disks and DVDs that will maximize Chanise's utility. Chanise maximizes utility when she consumes ________ Blu-ray disks and _________ DVDs. (Enter your responses using integers.)
a. 80 b. 10
To reduce the bias in the CPI, the U.S. government recently changed the construction of the CPI to
a chain-weighted price index.
Pablo's demand for pizza is inelastic. If the price of pizza increases, we can predict that Pablo will
eat less pizza and spend more on pizza than he did before the price increase.
Pablo's demand for pizza is elastic. If the price of pizza decreases, we can predict that Pablo will
eat more pizza and spend more on pizza than he did before the price decrease.
An indifference curve shows all combinations of two goods that
provide the consumer with the same level of satisfaction.
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 price of food increases,
the budget line becomes steeper.
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.
When the optimal point on an indifference curve and budget line diagram is a corner solution,
the marginal rate of substitution usually does not equal the ratio of prices for the two goods.
When there is a negative network externality for a good, the demand for that good
will be less elastic than it would have been without the negative network externality.
An inferior good
will experience decreases in demand as consumers' incomes increase.
As more people use a social networking site like Facebook, it becomes more attractive for other people to use that site also. This effect is called
a positive network externality.
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.
If he is not, how can he increase his utility while keeping his total expenditure constant? Paul could increase utility while keeping total expenditures constant by consuming more _____ and fewer ____.
(1) DVDs (2) books This is b/c if Paul spends one fewer dollar on books, then his utility will decrease by 0.67 from consuming fewer books; however, if he spends one more dollar on DVDs, then his utility will increase by 3.57 from consuming additional DVDs.
A consumer purchased 10 units of good X and 6 units of good Y in year 1 (the base period) when the price of good X was $8 and the price of good Y was $5. The next year (year 2) the price of X fell to $7 and the price of Y increased to $8. Set the Laspeyres price index in year 1 equal to 100. Then the Laspeyres price index in year 2 is _____. (Enter your response as a real number rounded to one decimal place.) Based on the Laspeyres price index, inflation between year 1 and year 2 was _____ percent. (Enter your response as a real number rounded to one decimal place.) The consumer says that if she could afford to purchase 11 units of X and 4.5 units of Y at the prices in year 2, she would be just as well off as she was in year 1. Based on this information, the ideal cost-of-living index for this consumer is _____. (Enter your response as a real number rounded to one decimal place.)
(a) 107.3 > 100* [10(7)+6(8)] / [10(8)+6(5)] > = 100*118/110 > = 107.27 ans. (b) 7.3% > [107.27-100]/ 100 > = 7.27% ans. (c) 102.7 > 11(7)+4.5(8) = 113 // 10(8)+6(5) = 110 > 113/ 110 = 1.027 *100 > = 102.727 ans.
Suppose Natasha consumes two goods: good 1 and good 2. Last year, the price of good 1 was $2.00 and the price of good 2 was $1.25. Given these prices, Natasha maximized satisfaction consuming bundle A, as indicated in the figure to the right. However, this year, the price of good 1 has increased to $6.00 and the price of good 2 has changed to $2.40. Given these prices, Natasha would be equally well off at consumption bundle B. Calculate a Laspeyres cost-of-living index for Natasha using 100 as the base for last year. In particular, the Laspeyres index for this year is _____. (Enter your response rounded to two decimal places.) The Laspeyres index suggests inflation has been ______ percent over the year. (Enter your response rounded to two decimal places.) The Laspeyres cost-of-living index overstates the rate of inflation because it assumes that consumers do not alter their consumption patterns as prices change. Natasha's true cost-of-living increase has been ______ percent. (Enter your response rounded to two decimal places.)
(a) 246.00 > 100* [25(6)+40(2.4)] / [25(2)+40(1.25)] > = 100*246/100 > = 246.00 ans. (b) 146.00% > (246-100)*100 > = 1.46 or 146% ans. (c) 140.00% Step n. 1 > 100* [20(6)+50(2.4)] / [25(2)+40(1.25)] > = 100*240/100 > = 240 {ideal cost-of-living index} Step n. 2 > 240-100 = 140 {true cost-of-living}
Most economists believe the Consumer Price Index (CPI) overstates inflation because
All of the above: (1) it does not adequately account for changes in consumer purchases in response to price changes (2) it does not adequately account for the growth of discount stores. (3) it does not adequately account for changes in product quality and new products.
George buys 2.5 pounds of hamburger and 2 pounds of chicken per week when hamburger costs $4 per pound and chicken costs $5 per pound, and this bundle of goods costs him $20 per week. What wil1 happen if the price of hamburger drops to $2 per pound and the price of chicken increases to $7.50 per pound? [Note that George's original bundle of hamburger and chicken still costs $20 after these price changes.]
George buys more hamburger and less chicken, and he is better off.
Which of the following is not a method used to obtain information about consumer demand?
Measuring consumer surplus at the current market price.
The diagram to the right shows a consumer's indifference map for goods X and Y plus three budget lines. The consumer's income is $120, and the price of Good Y is $12. Each budget line is based on a different price for Good X. The price of Good X is $12 along budget line L3, $20 along budget line L2 and $________ along L1. (Enter your response as an integer.) The line that goes through points A, B and C is called the ▼ [price-consumption curve, income consumption curve, demand curve for Good X, or demand curve for Good Y]. Based on the slope of the price-consumption curve, goods X and Y are ▼ [independent of each other, substitutes, complements]
a. $40 ▼ price-consumption curve ▼ complements
Consider the market for CD players, illustrated in the figure to the right. Suppose there are network externalities in this market such that the quantity of a good demanded grows in response to the growth of purchases by other individuals (as indicated by the demand curve "Demand" in the figure). Suppose that the price is initially $70 where the quantity demanded is 150 (thousand CD players per month). If the price of CD players falls to $50, demand will increase to __________ thousand CD players per month. (Enter your response using an integer.) Of this increase, _________ thousand units of the 30 thousand-unit increase is the pure price effect and __________ thousand units of the increase is the bandwagon effect. The bandwagon effect causes the demand for CD players to be more ▼ [elastic, or inelastic] than would otherwise be the case (without network externalities).
a. 180 b. 150 c. 20 ▼ elastic
Consumer surplus
is the area under the demand curve and above price.
When the price of good X increases and all goods (including X) are normal goods, the income effect leads consumers to buy
less of all goods.
When the price of good X increases, the substitution effect leads consumers to buy
less of good X and more of substitute goods.
Paul consumes only books and DVDs. At his current consumption bundle, his marginal utility from DVDs is 25 and from books is 2. Each DVD costs $7, and each book costs $3. 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
not maximizing his utility because MUB/PB < MUD/PD. 0.67 < 3.57
Janet spends her entertainment budget on movies and basketball games. Movie tickets cost $9 each and basketball game tickets cost $25 each. If Janet saw one more movie (holding the number of basketball games constant), her total utility would increase by 20. On the other hand, if she attended one more basketball game (holding the number of movies constant), her utility would increase by 50. From this information we can conclude that Janet
should see more movies and attend fewer basketball games. b/c MU[basketball games] / P[basketball games], 5.55, < MU[movies] / P[movies], 0.8 > (50/9) vs (20/25)
In the diagram on the right the consumer's original budget line is L1, and the consumer buys the amount of good X at point A. Then the price of good X decreases dramatically so that the consumer's new budget line shifts to L2. After the price decrease the consumer buys the amount of good X at point C. The substitution effect due to the price change is the movement from point ▼ [A,B, or C] to point ▼ [A,B, or C]. The income effect due to the price change is the movement from point ▼ [A,B, or C] to point ▼ [A,B, or C]. Based on the income effect, good X is ▼ [an inferior, or normal good].
▼ A ▼B ▼B ▼C ▼ an inferior {b/c as prices decrease shifting the budget line outward, consumption decreases}
The current price for a good is $20, and 100 units are demanded at that price. The price elasticity of demand for the good is −1.5. When the price of the good drops by 5 percent to $19, consumer surplus ▼ [increases, or decreases] by $_________. (Enter your response to the nearest penny.)
▼ increases a. $103.75
Andy's utility function for goods X and Y is linear and is given by U(X,Y) = 2X + 3Y. Based on this utility function, we can conclude that goods X and Y are ▼ [substitutes, perfect substitutes, perfect complements, or complements] for Andy. The price of X is $4, the price of Y is $8, and Andy's income is $40. To maximize his utility, Andy should purchase _________ units of X and ___________ units of Y. (Enter your responses as real numbers rounded to one decimal place.)
▼ perfect substitutes a. 10 b. 0
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 ▼ [remains constant, decreases, increases] with income at ▼ [a diminishing, an increasing, a constant] rate. If so, then this suggests that the marginal utility of spending an extra dollar on a consumption good will ▼ [increase, remain constant, decrease]
▼increases ▼ a diminishing ▼ decrease
