Micro Ch 16 Consumers Choice

Suppose you have $19 to spend. Pepsi costs $1 per can, and pizza costs $2 per slice. Given the marginal utilities shown, what combination of pizza and Pepsi will maximize your satisfaction? Click the number of Pepsis and the number of pizza slices.

4;5 1;9

The real-income effect means Tommy's budget constraint line will shift because he has less purchasing power. As a result, he may choose the regular-size steak instead of the larger "hunter's portion" he prefers. The substitution effect means Tommy may spend some of the money he saved by ordering the smaller steak to order a bigger salad.

real- income budget constraint substitution Tommy's new consumer optimum lies on a new budget constraint line and a new indifference curve.

Which of the following would have an indifference curve drawn as a right angle?

inexpensive picture frame and matching glass right-hand gloves and left-hand gloves

Why are the indifference curves for perfect complements right angles?

An additional unit of one good but not the other has no marginal value to the consumer. A consumer with a pair of gloves may have use for a second pair but has no use for only an extra right-hand glove.

Arsenios says he gets 70 utils per slice from eating pepperoni pizza versus 50 utils from eating cheese pizza. Stavros says he gets 60 utils from eating the same pepperoni pizza. What can we conclude?

Arsenios prefers pepperoni pizza to cheese pizza Since Arsenios assigned pepperoni pizza 20 more utils than cheese pizza, we can conclude that he gets more satisfaction from pepperoni pizza.

What limits the amount of goods a consumer will purchase, and how do economists model the trade-offs that exist when consumers make decisions? Fill in the blanks to complete the passage. Drag word(s) below to fill in the blank(s) in the passage. Consumers won't buy a good if they do not receive - from the purchase. If a consumer receives - from a purchase, he or she will be worse off. To describe the trade-offs that exist when consumers make decisions about which combinations of goods yield the same level of satisfaction, economists use -. The point at which utility is maximized is called the -.

Consumers won't buy a good if they do not receive positive utility from the purchase. If a consumer receives negative utility from a purchase, he or she will be worse off. To describe the trade-offs that exist when consumers make decisions about which combinations of goods yield the same level of satisfaction, economists use indifference curves. The point at which utility is maximized is called the maximization point.

Josef went swimming. Afterward, he was hungry and went out for a big dinner with friends. Assuming Josef is a rational utility maximizer, which of the following must be true about the utility he attained from the decisions he made?

Correct Answer(s) Josef gained more utility from eating dinner than he would have from swimming for another half hour. At the end of dinner Josef received less utility from each bit of food than he did at the beginning. The last 10 minutes of swimming yielded less utility than the first 10 minutes. Due to diminishing marginal utility, the last 10 minutes of swimming yielded Josef less utility than the first. He decided to stop before the economic "good" became an economic "bad." If Josef had continued to swim when he was exhausted or continued to eat when he was full, food and swimming could have become economic "bads." Economists assume consumers are rational and make decisions that provide them the most utility.

When a price changes, it will always trigger both the substitution effect and the real-income effect.

False If the price changes by only a small amount, it may not be enough to trigger the real-income effect. If a price changes and a consumer saves 3 cents, for example, that is unlikely to make a significant difference to the consumer's purchasing power.

Lowering the price of a product is a simple way to increase the product's marginal utility for buyers.

False

Products that are essential for life, such as water or groceries, yield more marginal utility than rare products, such as diamonds or luxury vehicles.

False

Marginal utility never increases with quantity.

False For example, marginal utility will increase when you play sports, as your body warms up. However, after playing for a while, marginal utility will begin to decrease as you get tired.

Jeff has a budget of $2,000/month. He has many purchases to make each month. Which of the following describes how he will make purchasing decisions and achieve consumer equilibrium?

He will buy goods and services that provide the best marginal utility per dollar spent possible. The ratio of marginal utility per dollar spent will be the same for each purchase This illustrates the concept of consumer equilibrium. Since Jeff has many purchases to make each month, he will need to make sure he gets the best marginal utility per dollar spent on each purchase. He will try to gain the same utility from each purchase to make the most of his budget.

The indifference curve below illustrates the trade-off between two goods, pizza and Pepsi. Which of the following statements are true for this particular consumer?

If this consumer starts with 5 slices of pizza and 1 can of Pepsi, he would willingly trade two slices of pizza for an additional Pepsi. The marginal rate of substitution between these two points is -2. Combinations on an indifference curve always have equal utility. By definition, an indifference curve identifies equal-utility combinations. This consumer is indifferent between having 2 Pepsis and 3 pizza slices versus 7 Pepsis and 1 pizza slice. All points on an indifference curve are equally attractive to the consumer.

Which of the following properties helps ensure that indifference curve models remain logically consistent?

Indifference Curves cannot intersect. Indifference curves cannot intersect without violating the assumption that consumers are rational utility maximizers. Indifference curves always illustrate the combinations of two goods that yield the same utility to a consumer.

Jennifer has $30 to spend. She can get 15 utils out of a lunch that costs $18 and 10 utils from watching a movie that costs $12. Alternatively, she can have a steak dinner that costs $30 and is worth 20 utils to her. Fill in the blanks to describe Jennifer's choice situation.

Jennifer can maximize her satisfaction by choosing the lunch and movie. That way she is getting 0.83 utils per dollar, which is better than the 0.67 utils per dollar she would be getting out of the steak dinner. Maximizing utility means spending the fewest dollars per util, or equivalently, getting as many utils per dollar as possible.

Pepsi at $2 per can, because the new budget line has a higher-utility consumer optimum.

Julie usually buys generic cereal because it is cheaper. One day she notices one of the brand-name products falls in price, so she decides to buy it. After subscription prices in the cable TV market fall, customers also purchase higher-speed Internet service. Movie ticket prices plummet to $1, so you cancel your Netflix subscription in favor of attending movies at the theater. In addition, the cheap tickets leave you with extra money for concessions.

Which graph is likely to illustrate the indifference curves when the two goods are Energizer and Duracell AA batteries?

This graph illustrates the indifference curves for goods that are perfect substitutes. Power is power, and these are very comparable brands. The marginal rate of substitution is going to be a constant rate, so the indifference curves are drawn as straight lines.

Pepsi costs $1 per can, while pizza costs $2 per slice. For a consumer with $10 to spend, the consumer optimum lies at (4, 3), as shown. Based on the figure, which would the consumer rather see—a price increase on Pepsi to $2 per can or a price increase on pizza to $3.33 per slice? Why?

Pepsi at $2 per can, because the new budget line has a higher-utility consumer optimum. The new budget constraint line is the steeper of the two dark purple lines. This line intersects with a higher indifference curve than the $3.33-pizza budget line.

he following situations illustrate the real-income effect. Place them in order based on how strong the effect is from strongest to weakest.

The real-income effect is an increase or decrease in a consumer's overall purchasing power. In order from strongest (most expensive item) to weakest (cheapest) Save 5% off the price of a new home.Save 40% off the price of a new barbecue grill.Save 50% off the price of a pair of jeans.Save 20% off the price of a bottle of water.

A util is a unit of satisfaction that quantifies a person's preferences for some goods when compared with others. Total utility represents the sum amount of satisfaction a person receives as a result of consuming a product or service. Marginal utility is the additional satisfaction of consuming one more unit of that product or service.

Utility theory makes it possible to do quantitative analysis, such as optimization calculations, on people's subjective preferences.

Given the two options, this consumer will prefer the combination at the point with four cans of Pepsi and three slices of pizza because it is located on a higher indifference curve. By choosing this option, the consumer will be maximizing his or her utility given the budget. This particular point is known as the consumer optimum.

With more money, the consumer could buy a combination of pizza and Pepsi on a higher indifference curve. With a given budget, the consumer optimum is found where the budget constraint meets the highest indifference curve.

Page 534 Appendix: Indifference curve analysis Four possible combinations of Good 1 and Good 2 are labeled A, B, C, and D on the following indifference curves. Place the combinations in order based on their utility from highest to lowest.

c,d,a,b Since non-satiation is assumed, the indifference curves represent increasing utility as one moves farther away from the point (0, 0) where the axes meet.