Worksheet 6: Consumer Choice

Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. What is Alex's utility maximizing point?

1 movie, 4 video game rentals

Kim has $24 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximizing point?

1 movie, 5 yoga classes

Molly attends college and works part-time job as a telemarketer. She can work up to 40 hours each week at her job, which pays $8 per hour. The table below shows her utility from different levels of leisure and income. Molly is currently working 20 hours per week. If she decides to work 30 hours instead, then her marginal utility loss from having less leisure is:

3

Louisa works for a hedge fund company. Her wage increased from $30 per hour to $40 per hour. She can work up to 50 hours each week. The table below shows her utility from different levels of leisure and income. Louisa decided to increase her hours of work from 10 to 20 hours per week after receiving her raise. As a result, her marginal utility gain from having more income will now be:

36

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:

400

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

Consumer Expenditure Survey

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

Diminishing Marginal Utility

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

Income effect; higher

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

Income level of each household

Economists are able to determine total utility by:

Summing up the marginal utilities of each unit consumed

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

Marginal Utility

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

Utility

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

a measurement of utility

Refer to the diagram above. What is the significance of the point at the top of the backward bending of the supply curve marked L3?

as wages increase over this range, the quantity of hours worked actually decreases.

Marginal utility can:

be positive, negative, or zero

Refer to the above diagram. In this instance:

all of the above and the consumer can choose any point on or below the budget constraint line BC.

The most common pattern for marginal utility is .

diminishing marginal utility

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

direct relationship between income and demand.

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

each of the above will cause a variation

An inferior good is a product:

for which demand decreases as income increases.

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

individuals choose based on their preferences.

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

intertemporal choice

The _____ budget constraint shows the tradeoff between present and future consumption

intertemporal choice

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

market demand to shift to the left.

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

total utility rises, but marginal utility falls.

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

one-third

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?

one-third

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:

pivot out along the horizontal axis.

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

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

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

the marginal utility per dollar is the same for both goods

Which of the following occurs simultaneously with an income effect?

substitution effect

Terry attends college and works part-time job in a drug store. She can work up to 40 hours each week, and is paid $9 per hour. The table below shows her utility from different levels of leisure and income. If Terry decides to work 20 hours per week, her total utility from both leisure and income would be:

142

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.

substitution effect

The marginal utility of two goods changes .

with the quantities consumed