Homework 4 (Test 2)

Ann lives in Princeton, New Jersey, and commutes by train each day to her job in New York City (20 round trips per month). When the price of a round trip goes up from $10 to $20, she responds by consuming exactly the same number of trips as before, while spending $200 per month less on restaurant meals. Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer?

No. Even at twice the original price, the marginal benefit of each of the twenty train trips may be higher than the marginal cost of each trip, even when including the implicit costs of a trip, such the best alternative use for the money spent. After all, missing a trip implies missing an entire day's work.

You are having lunch at an all-you-can-eat buffet. If you are rational, what should be your marginal utility from the last morsel of food you swallow?

The marginal cost of an additional morsel of food is zero at an all-you-can-eat buffet. Thus, applying the rational spending rule, a rational person will continue eating until the marginal utility of the last morsel falls to zero.

Suppose the market for shoes consists of three consumers. The accompanying table shows the quantity demanded at various prices for each consumer. What is the market demand for shoes when the price is $50 a pair? a. 11 pairs. b. It will depend on the quantity supplied when the price is $50 a pair. c. 7 pairs. d. 15 pairs.

a. 11 pairs.

Producer surplus equals the: a. amount received by sellers minus the cost to sellers. b. amount received by sellers minus the amount paid by buyers. c. value to buyers minus the amount paid by buyers. d. value to buyers minus the cost to sellers.

a. amount received by sellers minus the cost to sellers.

For Michael, the first cup of coffee he drinks every morning is heavenly. The second one is pretty good, but not as good as the first, and if he drinks a third cup he feels jittery and sick. For Michael, the marginal utility from drinking a cup of coffee is clearly: a. decreasing. b. negative. c. increasing. d. positive.

a. decreasing.

Total surplus is: a. equal to producer surplus plus consumer surplus. b. equal to the total cost to sellers minus the total value to buyers. c. greater than the sum of consumer surplus plus producer surplus. d. equal to consumers' willingness to pay plus producers' cost.

a. equal to producer surplus plus consumer surplus.

The tendency for marginal utility to decline as consumption increases beyond some point is called: a. the law of diminishing marginal utility. b. the law of demand. c. utility maximization. d. the rational spending rule.

a. the law of diminishing marginal utility.

After subsistence levels of food, shelter, and clothing have been provided, economists refer to all other goods and services as: a. "luxuries". b. "wants". c. "inferior goods". d. "needs".

b. "wants".

According to economists, the satisfaction people get from their consumption activities is called: a. a want. b. utility. c. demand. d. a need.

b. utility.

At his current level of consumption, Evan gets twice as much marginal utility from an additional bottle of water as that from an additional bottle of soda. If the price of soda is $1.00 per bottle, then Evan is maximizing utility if the price of a bottle of water is: a. $1.00 b. $1.50 c. $2.00 d. $0.50

c. $2.00

For two goods, A and B, the rational spending rule is expressed as: a. (MUA/PB) = (MUB/PA). b. MUA × MUB = PA × PB. c. (MUA/PA) = (MUB/PB). d. MUA = MUB.

c. (MUA/PA) = (MUB/PB).

Alex wants to maximize his utility. At his current level of consumption, Alex's marginal utility from an additional cup of coffee is 15 utils, and his marginal utility from an additional can of soda is 11 utils. If the price of a cup of coffee is $3 and the price of a can of soda is $2, Alex should: a. reallocate his spending away from soda and towards coffee. b. not change his consumption of either coffee or soda. c. reallocate his spending away from coffee and towards soda. d. decrease his spending on both coffee and soda.

c. reallocate his spending away from coffee and towards soda.

Blair has vast riches and consumes thousands of dollars' worth of consumer goods each week, yet she is never satisfied. Why not? a. Utility is unrelated to the level of consumption. b. The law of diminishing marginal utility shows that consuming too many material goods lowers total utility. c. Blair fails to choose rationally. d. People's wants are unlimited.

d. People's wants are unlimited.

During Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the first three pies you ate. a. stayed the same b. decreased c. first increased then decreased d. increased

d. increased

Consumer surplus measures: a. the increase in a buyer's total utility when the buyer purchases additional units of a good. b. the difference between the quantity demanded and the quantity supplied at a given price. c. the difference between a buyer's marginal utility from consuming a product and the price actually paid. d. the difference between the most a buyer would be willing to pay for a product and the price actually paid.

d. the difference between the most a buyer would be willing to pay for a product and the price actually paid.