Chapter 3
The demand curve comes from
The demand curve comes from all of the consumer's optimal choices when the price of a good changes.
Suppose that the marginal utility per dollar of apples is greater than the marginal utility per dollar for candy bars as the result of a fall in the price of apples. To achieve consumer equilibrium the consumer reallocates dollars from candy bars to apples. In the process, he
maximizes total utility. acts according to the law of demand. The consumer substitutes the relatively lower priced apples for candy bars, according to the law of demand. In the process, the consumer is maximizing utility by reallocating spending to apples.
Tom receives 30 utils from one candy bar, 45 utils from two candy bars, and 55 utils from three candy bars. The marginal utility of the third candy bar is ____________, and Tom's _________ utility rises as his ______________ utility declines.
10; total; marginal
If the total utility of one golf game is 10 utils, and the total utility of two golf games is 24 utils, the marginal utility of the second game is
14 utils. The marginal utility is the difference in total utility that comes with playing the second game. In this case, marginal utility is the difference between 24 utils and 10 utils.
When a consumer's income decreases, the consumer's budget constraint
shifts inward.
Refer to the graph below. If the price of good X increases from $1 to $2, the consumer is able to purchase a maximum of
2 units of good X.
Suppose you are eating nachos. The total utility after the fourth, fifth, sixth, and seventh nachos are, respectively, 50, 86, 106, and 120. The marginal utility of the sixth nacho is
20 utils. Marginal utility is the difference between the total utility after the sixth nacho, 106 utils, minus the total utility after the fifth nacho, 86 utils.
Assume Joe gets 60 utils from consuming one hamburger and gets 90 utils from consuming two hamburgers. When Joe consumes two hamburgers, the marginal utility from consuming the second hamburger is
30 utils. Marginal utility is the additional utils from consuming the second hamburger.
Assume that the price for peanut butter and bread is $1 each. Dan's marginal utility for peanut butter is 10 utils, and his marginal utility for bread is 20 utils. Given this situation,
Dan gains more utility per dollar from consuming bread than from consuming peanut butter.
Suppose Valerie is consuming one novel per week and one movie per week. Further assume that the marginal utility of novels is 40 utils, and the marginal utility of movies is 50 utils. If each novel and each movie costs $4.00, is Valerie attaining consumer equilibrium?
No. She needs to buy fewer novels and see more movies. The marginal utility per dollar for novels is MU / P = 40 / $4 = 10 / $1; the marginal utility per dollar for movies is MU / P = 50 / $4 = 12.5 / $1. Valerie should see more movies.
Suppose Val is buying chips and beer in quantities such that she is achieving consumer equilibrium. The price of chips then increases. Which of the following is true?
The marginal utility of chips per dollar spent on chips is less than the marginal utility of beer per dollar spent on beer.
In regard to potato chips, marginal utility is the _____________ satisfaction from eating ___________ potato chip(s).
additional; one more "Marginal" means additional. Marginal utility is the additional satisfaction gained from eating one additional, or marginal, potato chip.
Indifference curves are
all kinds of shapes as long as they decrease in slope. unable to cross Indifference curves can never cross because this violates the rule of transitivity. Indifference curves can be in any shape as long as they are downward sloping.
The law of diminishing marginal utility states that at some point, a person's marginal utility from additional consumption
decreases
Suppose Mike has a budget of $6, and he can purchase some combination of tacos or burritos. Tacos are $1.25 each, and burritos are $1.50 each. If Mike's budget increases to $12, his purchasing power for tacos and burritos _________, and his budget constraint shifts __________.
doubles; outward
Heather's indifference curve for frozen cappuccinos and donuts illustrates that the only way she can remain equally satisfied when you take away a frozen cappuccino is to give her some quantity of donuts instead. This implies that the indifference curve is
downward sloping.
Examine the graph below. If the price of good X is $1, and the consumer is using budget constraint 1, the price of good Y must be $2.
false
A rational consumer would be indifferent between point A and B and would choose either one.
false The rational consumer would be indifferent between B and C but would choose neither one. He / she would pick combination A because it lies on a higher indifference curve and is within the consumer's budget.
In a two-good model, if the price of good X falls, the budget line changes in exactly the same way as if the consumer had received an income increase.
false An increase in income would cause the budget constraint to shift parallel to itself. In this example, the budget line would pivot outward on the axis of the good that has not changed.
Economists use budget constraints and indifference curves together to find the producer's optimal choice under the constraint of the budget and prices.
false Economists use budget constraints and indifference curves to find the consumer's optimal choices under the constraint of the budget and prices.
The budget constraint is not affected when a consumer's budget or the price of either of the goods changes.
false The budget constraint will either shift or pivot with a change in the consumer's budget or if the price of either good changes.
An indifference curve that lies tangent to the budget constraint illustrates the combination of goods X and Y that provides the consumer the least satisfaction.
false The point of tangency between the budget constraint and an indifference curve represents the consumer's point of maximum attainable satisfaction.
An indifference curve that lies tangent to the budget constraint illustrates the combination of goods X and Y that provide the consumer the least satisfaction.
false The point of tangency illustrates the combination of two goods that provides the consumer with the most satisfaction subject to his / her budget.
If a person is receiving greater utility per dollar from consuming apples than from consuming oranges, then the person is maximizing her total utility.
false Total utility is maximized when the marginal utilities per dollar spent on each good are equal.
When marginal utility becomes negative, total utility begins to increase.
false When marginal utility becomes negative, total utility starts decreasing.
When the price of good X falls, more of that good will be consumed. To find the highest satisfaction from a combination of goods, the consumer will
find a combination that falls on the new budget line and is tangent to an indifference curve. find a combination of goods that maximizes the consumer's utility within the constraint of his new budget. When the price of a good falls or rises, the consumer will still find a combination of goods that brings the most satisfaction by choosing one that falls at a point of tangency between the budget constraint and the highest indifference curve.
The slope of an indifference curve is all of the following except
increasing
Jack likes to play golf. Although he is experiencing diminishing marginal utility, his marginal utility remains positive. We can say that Jack's total utility is
increasing at a decreasing rate.
The shape of the indifference curves in this graph show that the marginal rate of substitution
is different for each bundle.
Suppose you are eating nachos. The total utility after the fourth, fifth, sixth, and seventh nachos are, respectively, 50, 86, 106, and 120. This situation demonstrates the
law of diminishing marginal utility.
Examine the graph below. The budget for this consumer is
not determinable from the information provided.
Suppose a person is obtaining greater utility per dollar from consuming one good than from another. This person is
not maximizing utility.
If a consumer's income increases, that consumer's budget constraint
shifts outward away from the origin.
When a consumer optimizes his / her satisfaction at a point at which an indifference curve is tangent to the budget constraint,
the consumer can increase his / her satisfaction only by increasing his / her income.
The economic interpretation of an indifference curve is
the rate at which the consumer is willing to trade one good for another to remain equally satisfied.
The slope of the budget constraint tells us
the relative prices for each of the two goods. the market's opportunities for trade. The slope of the budget constraint Px / Py is the relative price of the good on the y-axis in terms of the good on the x-axis. It is the consumer's opportunities for trade because it tells him / her what the market will permit.
The consumer trades until he / she reaches the point of maximum attainable satisfaction. This is the point at which
the slope of the budget constraint is equal to the marginal rate of substitution.
The marginal rate of substitution is
the slope of the consumer's indifference curve.
A linear indifference curve reflects the fact that the two goods are perfect substitutes for each other.
true
The demand curve comes from a consumer's making optimal choices subject to his / her constraints.
true
The slope of a consumer's budget constraint is the opportunity cost of buying one good in terms of how much of the other that he gives up.
true
An indifference curve is a set of points representing combinations of ________ goods that a consumer finds __________ desirable and satisfying.
two; equally