Econ HW 3

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

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 price

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.

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

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

1/3

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

When economists attempt to predict the spending patterns of U.S. 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

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

the ratio of marginal utility to price is the same for both goods