Chapter 6
13. As an individual consumes slices of pizza, the _____ is the amount of satisfaction that he receives from each additional piece of pizza. marginal utility consumption availability total utility absolute utility
marginal utility
Utility is a hypothetical measure of consumer: wealth. income. time. satisfaction.
satisfaction. Utility is a hypothetical measure of consumer satisfaction.
1. Assume that you have $60 a week to spend on bottled water and chips. A bottle of water costs $2 and a bag of chips costs $3. If you buy 15 bottles of water, how many bags of chips can you purchase? 20 8 9 10
10
Megan decides to quit one of her part-time jobs. Her income decreases by $200 each week. What happens to Megan's budget line? It shifts outward. It pivots outward. It shifts inward. It stays the same.
It shifts inward. The budget line shifts inward as income decreases.
20. Marginal utility: is the same for all units of a commodity consumed. declines with each additional unit consumed. is always positive. is the sum of all the total utilities.
declines with each additional unit consumed.
The increase in total utility from consuming one more unit of a product is _____ marginal utility. greater than half of less than equal to
equal to Marginal utility is the change in total utility from consuming one more unit of the product
Steering voters to one political candidate over another is often done through: framing bias. sunk cost fallacy. price. altruism.
framing bias. Framing bias is one of the five factors.
19. Utility measures: how much satisfaction is gained from the consumption of a good or service. how easy it is for one good to substitute for another. the productive efficiency of a good or service. the market value of a product.
how much satisfaction is gained from the consumption of a good or service
19. The main difference between marginal utility and total utility is that: total utility looks at societal satisfaction, while marginal utility looks at the satisfaction of an individual person. marginal utility looks at the satisfaction of an additional unit, while total utility looks at the satisfaction from the total quantity consumed. marginal utility looks at the satisfaction of the total bundle of goods, and total utility looks at the total quantity consumed. consumers maximize marginal utility only.
marginal utility looks at the satisfaction of an additional unit, while total utility looks at the satisfaction from the total quantity consumed.
11. The slope of the budget line is: negative, since to purchase more of one good means giving up some of the other good. negative, because of the marginal rate of substitution. zero, since both prices and income are assumed to be constant. positive, since income and prices are positively related.
negative, since to purchase more of one good means giving up some of the other good.
ABC Corp. has spent nearly $10 million developing a new adhesive that has proved ineffective in company trials. The product line manager tries to convince the board of directors that the project cannot be abandoned because the company has already spent $10 million on its development. This is an example of: sunk cost fallacy. altruism. framing bias. overvaluing the present relative to the future.
sunk cost fallacy. Sunk cost fallacy occurs when people make decisions based on how much was already spent rather than how the decision might affect their well-being.
Suppose that a consumer has $5 to spend. A candy bar costs $1 and a bag of peanuts costs $0.50. Which combination of candy bars and peanuts would NOT be attainable for this consumer? two candy bars and four bags of peanuts one candy bar and four bags of peanuts three candy bars and six bags of peanuts one candy bar and six bags of peanuts
three candy bars and six bags of peanuts Three candy bars and six bags of peanuts would cost (3 × $1) + (6 × $0.50) = $6. This combination is not attainable.
As a person consumes more of a good or service, the person's _____ will increase. At the same time, this person's _____ will decrease with each additional unit. cost; total utility marginal utility; cost marginal utility; total utility total utility; marginal utility
total utility; marginal utility
Suppose that a consumer has $10 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which combination of candy bars and peanuts would NOT be attainable for this consumer? one candy bar and four bags of peanuts two candy bars and five bags of peanuts two candy bars and one bag of peanuts three candy bars and one bag of peanuts
two candy bars and five bags of peanuts Two candy bars and five bags of peanuts would cost (2 × $2) + (5 × $1.50) = $11.50. This combination is not attainable.
You are given the following information about the demand curve: When the price is $50, consumers will not buy any of the product. However, if the price is $20, consumers will buy four units. What is the consumer surplus if four units are purchased at $20 each? (Assume the demand curve is linear.) $120 $80 $60 $30
$60 Consumer surplus is the difference between what consumers are willing to pay and what they actually pay for a product. In a large market, consumer surplus is represented by the triangular area under the demand curve and above the market price. The area of a triangle is found by 0.5 × (base of the triangle × height of the triangle). In this example, the height of the triangle is $30 ($50 − $20) and its base is 4, so the area is (30 × 4)/2 = 60
A consumer is consuming at a point on her budget line. Her income is $40 a week, and she purchases hamburgers and grilled cheese sandwiches. Both goods cost $2 each, and she consumes five hamburgers. How many grilled cheese sandwiches does she consume? 15 40 35 20
15 (Price of hamburgers × Quantity of hamburgers) + (Price of sandwiches × Quantity of sandwiches) = Income. $40 − ($2 × 5) = $30; $30/$2 = 15 grilled cheese sandwiches
The following table illustrates the utility received for each minute that Janet likes to speak on the phone. What is the total utility for a 7-minute phone call for Janet? Minutes Total Utility 1 3 2 10 3 20 4 28 5 36 6 36 7 34 19 21 23 20
19 The total utility is determined by adding the marginal utility for each minute of the conversation.
The following table illustrates the utility received for each minute that Janet likes to speak on the phone. At which minute does the law of diminishing marginal utility set in? Minutes Total Utility 1 3 2 10 3 20 4 28 5 36 6 36 7 34 6 4 5 7
4
FORMULA
4 Marginal utility per dollar = Marginal utility/Price. The marginal utility per dollar for the third book is 20/$5 = 4.
Megan receives a promotion at work and makes $300 more each week. What happens to Megan's budget line after her promotion? It shifts outward. It pivots outward. It shifts inward. It stays the same.
It shifts outward. The budget line shifts to the right as income increases.
TO calculate Marginal Utility for a chart
Marginal Utility = difference of the Total Utilities from each quantity. (Total Utility at quantity 1) - (Total Utility at quantity 2) = Marginal Utility
8. Suppose the marginal utility for the last pencil you buy is 36 and each costs $1, whereas the marginal utility of the last pad of paper you buy is 300 and costs $2. Are you maximizing utility? No. You need to buy more pencils and less paper. No. You need to buy more paper and fewer pencils. Yes. No. You need to buy less paper and fewer pencils.
NOT No. You need to buy more pencils and less paper. PROBABLY No. You need to buy more paper and fewer pencils.
15. Carla purchased cupcakes and milk until the marginal utility per dollar spent was equal for both goods. If the price of the cupcakes was $3 and the price of milk was $1.50, then: the marginal utility of milk is two times greater than the marginal utility of cupcakes. the marginal utility of cupcakes is two times greater than the marginal utility of milk. milk has a positive marginal utility, and cupcakes have a negative marginal utility. the marginal utility of both goods are equal.
NOT the marginal utility of milk is two times greater than the marginal utility of cupcakes.
16. As a person consumes more of a particular good or service, the total level of utility derived from that consumption will: remain constant. increase at an increasing rate. increase at a constant rate. increase at a decreasing rate.
NOT increase at an increasing rate.
13. If Ty's marginal utility for a cup of coffee is 20 and his marginal utility of a donut is 10, then: the donut should be his next purchase. coffee should be his next purchase. price information is also needed to determine what should be purchased next. they should both be purchased.
NOT coffee should be his next purchase. NOT the donut should be his next purchase.
12. When the economy slides into a recession, budget lines: shift outward. shift inward. pivot outward. pivot inward.
NOT shift outward.
7. According to the law of diminishing marginal utility: total satisfaction always increases. at some point, the rate at which our total satisfaction increases with the consumption of each additional unit will begin to decline. total satisfaction declines as additional units are consumed. as more units are consumed, additional satisfaction rises.
NOT total satisfaction declines as additional units are consumed.
5. Suppose the marginal utility for the last pencil you buy is 36 and each costs $1, whereas the marginal utility of the last pad of paper you buy is 300 and costs $2. Are you maximizing utility? Yes. No. You need to buy less paper and fewer pencils. No. You need to buy more pencils and less paper. No. You need to buy more paper and fewer pencils.
No. You need to buy more paper and fewer pencils.
Suppose a consumer is trying to decide between buying another small pizza and buying another burger. The burger costs $3 more than the pizza, which has a price of $2. However, the consumer decides that the burger gives him twice as many utils as the pizza. Using the utility-maximizing rule, what should he buy? The pizza The answer cannot be determined from the information provided. Either choice is equally good. The burger
The pizza Utility maximization occurs where (Marginal utility for good a/Price of good a) = (Marginal utility for good b/Price of good b). Whatever the number of utils the consumer receives from the burger, it is twice as many as from the pizza, but the burger costs 150% more. Based on marginal utility per dollar, the pizza is the better choice.
Sunk cost is: a cost that has not been paid. a cost that has been paid, cannot be recovered, and should enter into decision making. a cost that has been paid, cannot be recovered, and should not enter into decision making. a cost that has been paid but can be recovered.
a cost that has been paid, cannot be recovered, and should not enter into decision making. Sunk cost is a cost that has been paid, cannot be recovered, and should not enter into decision making.
16. A college professor found that students were much more likely to use proper grammar and spelling on homework assignments if he gave them "extra credit" for doing so instead of taking away points for not using proper grammar and spelling. The professor had adjusted the extra credit points to have the same effect as taking off points. The students' behavior might be explained in terms of: a sunk cost fallacy. altruism. a framing bias. overconfidence.
a framing bias.
6. Bayram had the opportunity to choose between two investments. The first investment was described as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment, because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, however, which implies that Bayram is subject to: overconfidence. a sunk cost fallacy. a framing bias. overvaluing the present relative to the future.
a framing bias.
10. José tried caviar at a restaurant and found he did not like it. However he ate all of it because he had paid such a high price for it. José's behavior can be explained as: a framing bias. overconfidence. altruism. a sunk cost fallacy.
a sunk cost fallacy.
3. José tried caviar at a restaurant and found he did not like it. However he ate all of it because he had paid such a high price for it. José's behavior can be explained as: overconfidence. a framing bias. altruism. a sunk cost fallacy.
a sunk cost fallacy.
18. People contribute to disaster relief even when they do not personally know anyone who has been affected by the disaster. What psychological factor associated with behavioral economics explains this behavior? a sunk cost fallacy altruism overconfidence a framing bias
altruism
2. An action undertaken out of goodwill or generosity is: behavioral economics. altruism. a framing bias. a sunk cost.
altruism.
Dee helps a lost tourist find the locals' favorite restaurant. This is an example of: consumer surplus. sunk cost fallacy. overvaluing the present relative to the future. altruism.
altruism. Altruism includes actions undertaken solely out of goodwill or generosity.
Julie helps a group of campus visitors find the student union. This is an example of: consumer surplus. altruism. sunk cost fallacy. overvaluing the present relative to the future.
altruism. Altruism includes actions undertaken solely out of goodwill or generosity.
Kanye pays for the coffee for the customer behind him in the drive-through lane. This is an example of: sunk cost fallacy. consumer surplus. altruism. overvaluing the present relative to the future.
altruism. Altruism includes actions undertaken solely out of goodwill or generosity.
Stopping to help a stranger change a tire on the side of the road without accepting payment is an example of: altruism. sunk cost fallacy. consumer surplus. overvaluing the present relative to the future.
altruism. Altruism includes actions undertaken solely out of goodwill or generosity.
4. The study of how human psychology enters into economic behavior as a way to explain why individuals sometimes act in predictable ways counter to economic models is known as: marginal utility theory. behavioral economics. indifference curve analysis. utility theory.
behavioral economics.
3. The _____ graphically illustrates the possible combinations of two goods a consumer can purchase with a given income, given the prices of both products. supply curve budget line production possibilities frontier demand curve
budget line
Lucius spends all of his income on movies and music downloads. If his budget line shifts inward, Lucius must: buy more of both goods. stop buying these goods. continue to buy the same amount of these goods. buy less of at least one of these goods.
buy less of at least one of these goods. The budget line shifts inward as income decreases.
1. The prices per pound of apples, pears, and grapes are $1.50, $2, and $2.50, respectively. Clara's marginal utils for the last pound bought of each is: 40 MU for apples, 45 MU for pears, and 50 MU for grapes. If Clara wants to maximize utility out of her limited budget for fruit, she should: buy the same mix of apples, pears, and grapes. buy more apples and fewer grapes. buy more grapes and fewer pears. buy more pears and fewer apples.
buy more apples and fewer grapes.
If the price of one good rises, marginal utility analysis concludes that: consumers will minimize their utility by purchasing more of the product. consumers will maximize their utility by purchasing more of the product. consumers will maximize their utility by purchasing less of the product. consumers will minimize their utility by purchasing less of the product.
consumers will maximize their utility by purchasing less of the product. If the price of a good rises, consumers will maximize their utility by purchasing less of the product.
14. A dehydrated person has two glasses of water. Compared with the person's first glass of water, total utility after the second glass will: increase and marginal utility will decrease. decrease and marginal utility will decrease. decrease and marginal utility will increase. increase and marginal utility will increase.
increase and marginal utility will decrease.
7. A dehydrated person has two glasses of water. Compared with the person's first glass of water, total utility after the second glass will: increase and marginal utility will decrease. increase and marginal utility will increase. decrease and marginal utility will decrease. decrease and marginal utility will increase.
increase and marginal utility will decrease.
The utility-maximizing rule states that utility is maximized when the _____ per dollar is equal for all products. total utility utility marginal utility diminishing marginal utility
marginal utility The utility-maximizing rule states that utility is maximized when the marginal utility per dollar is equal for all products.
Suppose that a consumer has $8 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which of the following combinations lies to the RIGHT of the budget line? two candy bars and one bag of peanuts no candy bars and six bags of peanuts one candy bar and four bags of peanuts three candy bars and one bag of peanuts
no candy bars and six bags of peanuts Six bags of peanuts would cost (6 × $1.50) = $9. This combination is not attainable, so it lies to the right of the budget line.
Suppose that a consumer has $8 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which combination of candy bars and peanuts would NOT be attainable for this consumer? one candy bar and four bags of peanuts three candy bars and one bag of peanuts no candy bars and six bags of peanuts two candy bars and one bag of peanuts
no candy bars and six bags of peanuts Six bags of peanuts would cost (6 × $1.50) = $9. This combination is not attainable.
Constance decides she really wants to buy a couch today rather than save her money and buy one next year. She decides to finance the couch at 27% interest. This is an example of: altruism. framing bias. sunk cost fallacy. overvaluing the present relative to the future.
overvaluing the present relative to the future. Overvaluing the present relative to the future occurs when individuals place too much emphasis on consumption today and fail to plan for the future.
When a consumer chooses among a set of goods or services, utility is maximized when marginal utility: is minimized. equals total utility. per dollar spent is equal for all goods. is greater than total utility.
per dollar spent is equal for all goods.
Which of the following is NOT an important psychological factor influencing economic behavior? sunk cost fallacy framing bias price altruism
price Price is the market price of the good.
Dan purchases nonrefundable ski lift tickets for his kids. His kids want to go to the museum instead. He says they can't go because he has already spent $140 on ski lift tickets. This is an example of: framing bias. sunk cost fallacy. price. overvaluing the present relative to the future.
sunk cost fallacy. Sunk cost fallacy occurs when people make decisions based on how much was already spent rather than how the decision might affect their well-being.
Mark makes a nonrefundable deposit on a cruise. He realizes he has less paid time off than he thought and considers canceling the trip. He decides to go on the cruise because he has already paid the $400 deposit. This is an example of: altruism. framing bias. sunk cost fallacy. overvaluing the present relative to the future.
sunk cost fallacy. Sunk cost fallacy occurs when people make decisions based on how much was already spent rather than how the decision might affect their well-being.
Mark makes a nonrefundable deposit on a loft downtown. He realizes he probably can't afford the loft but decides he should go ahead with the purchase since he already paid the deposit. This is an example of: altruism. framing bias. sunk cost fallacy. overvaluing the present relative to the future.
sunk cost fallacy. Sunk cost fallacy occurs when people make decisions based on how much was already spent rather than how the decision might affect their well-being.
XYZ Pharmaceuticals has spent nearly $90 million developing a new antibiotic that produced severe side effects in clinical trials. The product line manager tries to convince the board of directors that the antibiotic project cannot be abandoned because the company has already spent $90 million on its development. This is an example of: overvaluing the present relative to the future. framing bias sunk cost fallacy. altruism.
sunk cost fallacy. Sunk cost fallacy occurs when people make decisions based on how much was already spent rather than how the decision might affect their well-being.
9. The law of diminishing marginal utility states: average utility increases as more of a product is consumed. total utility increases at an increasing rate as more of a product is consumed. total utility falls as consumption of a good increases. that as a consumer consumes more of a given product, the added utility from consuming an additional unit declines.
that as a consumer consumes more of a given product, the added utility from consuming an additional unit declines.
Jeremy Bentham believed that the purpose of government was to maximize: the wealth of the country. individual wealth. utility. individual income.
utility. Jeremy Bentham believed that the purpose of government is to maximize utility, or, to promote the "greatest happiness for the greatest number."
Suppose that a consumer has $8 to spend. A candy bar costs $2 and a bag of peanuts costs $1.50. Which of the following combinations lies to the LEFT of the budget line? three candy bars and six bags of peanuts one candy bar and nine bags of peanuts four candy bars two candy bars and two bags of peanuts
two candy bars and two bags of peanuts Two candy bars and two bags of peanuts would cost (2 × $2) + (2 × $1.50) = $7. This combination lies to the left of the budget line.
4. Tena has $50 per week to spend on lunches. Egg rolls cost $2 each and a plate of Chow Mein costs $7. Tena wants to buy five plates of Chow Mein and ten egg rolls per week. This combination of Chow Mein and egg rolls each week is: obtainable, but she would be spending every bit of her lunch money. unobtainable. obtainable, but she could buy more Chow Mein. obtainable, but she could buy more egg rolls.
unobtainable.
