ECON 101 Chapter 6

Marginal analysis

A consumer will maximize his or her total well-being if the last dollar spent on each good provide the same marginal (additional) utility

Law of diminishing marginal utility

As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish

Real income

Income adjusted for price changes; a measure of the amount of goods and services one can purchase

Marginal utility

The change in total utility or satisfaction resulting from consuming one or more unit of a good or service

Consumer surplus

The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good

Utility

The satisfaction gained from consuming a good or service

Total utility

The total amount of satisfaction enjoyed from consuming a specific amount of a good or service

Assume that Jill always consumes at the utility-maximizing point. If the utility from the last soda she consumes is 40 and its price is $2, and the utility from the last bucket of popcorn is 20, then we know that the price of the bucket of popcorn is ____. a. $1 b. $2 c. $4 d. $5

a. $1

If the price of a hot dog is $2 and your willingness to pay is $3, then your consumer surplus is ________. a. $1 b. $2 c. $3 d. $5

a. $1

Assuming a good is a normal good, a decrease in price will lead to a substitution effect that does what? a. Along with the income effect, increases quantity b. Increases quantity while the income effect decreases quantity c. Decreases quantity while the income effect increases quantity d. Along with the income effect, decrease quantity

a. ALong with the income effect, increases quantity

Assume that Jill is not consuming at the utility-maximizing level. The marginal utility of soda is 40 and its price $2, but the marginal utility of popcorn is now 30, and its price is $1. What should Jill do to maximize her utility? a. Consume less soda and more popcorn b. Consume more soda and less popcorn c. Consume more of both d. Consume less of both

a. Consume less soda and more popcorn

Assume you spend all of your income on two goods: peanuts and chips. Also assume that you are consuming the combination of peanuts and chips that maximize your utility. Which of the following statements is true? a. If the price of peanuts is equal to the price of chips, then the marginal utilities must also be equal b. If the price of peanuts is more than the price of chips, then the marginal utility of peanuts is less than the marginal utility of chips c. If the price of peanuts is less than the price of chips, then the marginal utility of peanuts is more than the marginal utility of chips d. The marginal utilities of the two goods and their prices are not related

a. If the price of peanuts is equal to the price of chips, then the marginal utilities must also be equal

If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases? The marginal utility will ____________. a. Increase, because the consumer will decrease her consumption of the good b. Decrease, because the consumer will increase her consumption of the good c. Decrease, because a consumer will decrease her consumption of the good d. Increase, because the consumer will increase her consumption of the good

a. Increase, because the consumer will decrease her consumption of the good

If the price of a normal good decreases, the substitution effect _________________ the quantity of that good. a. Increases b. Decreases

a. Increases

If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________. a. Marginal utility; fall; marginal utility; rise b. Marginal utility; rise; marginal utility; fall c. Total utility; fall; marginal utility; rise d. Marginal utility; rise; total utility; rise

a. Marginal utility; fall; marginal utility; rise

Which of the following would cause an increase in consumer surplus in the market for cars? a. The price of steel decreases b. Automakers must pay autoworkers more as the result of renegotiated contracts c. Consumer want to buy bigger cars d. New regulations are imposed on the auto industry

a. The price of steel decreases

Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. Using the information above for Frank, what is his consumer surplus? a. $250 b. $350 c. $400 d. $650

b. $350

Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. If the price of a class is $750, how many classes will he take? a. 1 b. 2 c. 3 d. 4

b. 2

If the price of a good falls and, because of the income effect, consumption of the good also decreases, we know that the good is ________________. a. A normal good b. An inferior good c. Popular d. A luxury good

b. An inferior good

If the price of a normal good increases, the income effect ________________ the quantity of that good. a. Increases b. Decreases

b. Decreases

When the price of a good increases, consumer surplus ________. a. Increases b. Decreases c. Doesn't change d. Cannot be determined unless the size of the price increases is known

b. Decreases

When Jane's income doubles, she increases her consumption. For all normal goods that Jane consumes, what is true? a. Her marginal utility per dollar will increase b. Her marginal utility per dollar will decrease c. Her marginal utility per dollar will not change d. Her total utility will decrease

b. Her marginal utility per dollar will decrease

The reason the demand curve slopes downward is that for most goods which of the following is true? a. The income effect of a price change is greater than the substitution effect and the income effect always causes reductions in consumption b. The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes reductions in consumption c. The income effect of a price change is greater than the substitution effect and the income effect always causes increases in consumption d. The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes increases in consumption

b. The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes reductions in consumption.

A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods - hamburgers and football games? a. Her consumption will increase because the ratio of their marginal utilities to their prices is now greater than the ratio of the marginal utility of movies to the price of a movie b. Her consumption will increase because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie c. Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie d. Her consumption will decrease because the ratio of their marginal utilities to their prices is now greater than the ratio of the marginal utility of movies to the price of a movie

c. Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie

Fred just ate a hamburger and received total utility of 15 from consuming it. If he eats another one, which of the following will be true? a. His total utility will likely stay at 15 b. His total utility will likely decrease c. His total utility will likely increase

c. His total utility will likely increase

The marginal utility from drinking one more glass of water is likely to be ______________ the marginal utility from going to one more movie. a. The same as b. Greater than c. Less than d. Declining until it is just greater than

c. Less than

If a good is provided for free, it is likely to have a marginal utility that is relatively ______________ and be ______________ the marginal utility that could be gained from producing some other good. a. High; less than b. High; greater than c. Low; less than d. Low; greater than e. Unknown; equal to

c. Low; less than

If the price of a good changes, why does income effect exist? a. You need income to purchase the good b. Diminishing marginal utility exists c. The price change causes a change in real income d. People prefer larger incomes

c. The price change causes a chage in real income

Which of the following is an example of the income effect? a. When the price of cheese increases, Sue buys less cheese b. When the price of potato chips decreases, Stuart buys more tortilla chips c. When the price of tuition increases, Amy eats fewer restaurant meals d. When the price of his car insurance increases, Tom sells his car

c. When the price of tuition increases, Amy eats fewer restaurant meals

Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes fall from $70 to $50? a. $10 b. $19 c. $29 d. $30

d. $30

Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ratio of his marginal utility of pizza to marginal utility of video games is ¼. If he wants to maximize his utility, what should he do? a. Buy more pizzas and fewer video games b. Buy more pizzas and more video games c. Buy fewer pizzas and video games d. Buy fewer pizzas and more video games

d. Buy fewer pizzas and more video games

Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 10 and the marginal utility of the last book is 5. The price of a movie is $12 and the price of a book is $4. In order to maximum her utility, what should Anna do? a. Increase her consumption of both movies and books b. Decrease her consumption of both movies and books c. Do nothing--she's maximizing her utility d. Decrease her consumption of movies and increase her consumption of books e. Increase her consumption of movies and decrease her consumption of books

d. Decrease her consumption of movies and increase her consumption of books

Assuming a fixed budget, when the price of one good increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all goods will _________. a. Increase b. Decrease c. Not change d. Decrease, but the marginal utility of the higher priced good will increase e. Increase, but the marginal utility of the higher priced good will decrease

d. Decrease, but the marginal utility of the higher priced good will increase

Grace likes eating pizza and going to the movies. If she has $120 to spend in a month, and pizza and movies each cost $10, she decides to eat 5 pizzas and see 7 movies. If the price of movies increases to $12 what is likely to happen? a. Both the substitution and income effects would predict that she will consume fewer of pizzas and movies b. Both the substitution and income effects would predict that she will consume more of pizzas and movies c. The substitution effect would predict that she consumes fewer pizzas and more movies; and the income effect would predict that she would consume more of both d. The substitution effect would predict that she consumes more pizzas and less movies; the income effect would predict that she would consume fewer of both

d. The substitution effect would predict that she consumes more pizzas and less movies; the income effect would predict that she would consume fewer of both