ECON 130 CHAPTER 6 CONSUMER CHOICES

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In microeconomic terms, the ability of a good or a service to satisfy wants is called:

utility.

Refer to the budget line shown in the diagram above. At point U, __________.

P1/P2 = MU1/MU2

The most common pattern for marginal utility is ____________________.

diminishing marginal utility

Even with wage increases, the supply curve of labor is most often inelastic for which of the following?

full-time workers

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

An inferior good is a product:

for which demand decreases as income increases.

Which of the following occurs simultaneously with an income effect?

substitution effect

The marginal utility of two goods changes ______________.

with the quantities consumed

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

$50

Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. What is Alex's utility maximizing point?

1 movie, 4 video game rentals

Kim has $24 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximizing point?

1 movie, 5 yoga classes

Terry attends college and works part-time job in a drug store. She can work up to 40 hours each week, and is paid $9 per hour. The table below shows her utility from different levels of leisure and income. If Terry decides to work 20 hours per week, her total utility from both leisure and income would be:

142

Josh's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Josh knows that 2 pizzas and 4 burgers will give him a utility of 8. What is Josh's utility-maximizing point?

2 pizzas, 4 burgers

Janie works for an accounting firm. Her wage increased from $30 per hour to $40 per hour. She can work up to 50 hours each week. The table below shows her utility from different levels of leisure and income. Before her raise, if Janie decreases her hours of work from 30 to 20 hours per week, the marginal utility gain from having more leisure is:

21

For lunch, Maria eats only salads or vegetarian burgers. Her weekly food budget is $36. Each salad costs $6 and each vegetarian burger costs $3. When deciding how much of each good to buy, Maria knows that 2 salads and 4 vegetarian burgers will give her a utility of 8. Maria's utility-maximizing point is:

3 salads, 6 vegetarian burgers

Rick eats only french fries and burgers at his office cafeteria. His weekly lunch budget is $48. Each burger costs $6 and each order of fries costs $3. When deciding how much of each good to buy, Rick knows that 2 burgers and 4 orders of french fries will give him a utility of 8. At his utility-maximizing point, Rick's utility is:

32

Louisa works for a hedge fund company. Her wage increased from $30 per hour to $40 per hour. She can work up to 50 hours each week. The table below shows her utility from different levels of leisure and income. Louisa decided to increase her hours of work from 10 to 20 hours per week after receiving her raise. As a result, her marginal utility gain from having more income will now be:

36

For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48. Each salad costs $6 and each smoothie costs $3. When deciding how much of each good to buy, Wendy knows that 2 salads and 4 smoothies will give her a utility of 8. What is Wendy's utility-maximizing point?

4 salads, 8 smoothies

Jed's weekly budget for lunch is $24. He eats only pizza and burgers. Each pizza costs $6 and each burger costs $3. Jed knows that 2 pizzas and 4 burgers will give him a utility of 8. At his utility-maximizing point, Jed's utility is:

8

Troy has a part-time job in a book store to help pay for his college. He can work up to 30 hours each week at his job, which pays $9 per hour. The table below shows his utility from different levels of leisure and income. Troy currently works 20 hours per week. If he decides to work 30 hours instead, his marginal utility gain from the additional income is ____.

9

How does the U.S. Bureau of Labor Statistics gather information with regard to the typical consumption choices of Americans?

Consumer Expenditure Survey

The term _________________ refers to the additional utility provided by one additional unit of consumption.

Marginal Utility

In terms of microeconomic analysis, what is the function of "utils"?

a measurement of utility

Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes.

a systematic way of thinking; misguided conclusions

Refer to the above diagram. In this instance:

all of the above and the consumer can choose any point on or below the budget constraint line BC.

In the U.S., the amount in savings contributed to IRAs rose from $239 billion in 1992 to $3,667 billion by 2005, while overall savings actually dropped from low to lower. Evidence suggests that, in the economy as a whole, increased savings in these retirement accounts:

are being offset by negative savings or less savings in other kinds of accounts.

Refer to the diagram above. What is the significance of the point at the top of the backward bending of the supply curve marked L3?

as wages increase over this range, the quantity of hours worked actually decreases.

Refer to the diagram above. What is the significance of the point marked L1 at the bottom upward-sloping portion of the individual labor supply (2) curve?

as wages increase over this range, the quantity of hours worked also increases.

Refer to the diagram above. Which of the following is a true statement?

backward-bending supply curves for labor are not typical in the short run

Marginal utility can:

be positive, negative, or zero

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

diminishing marginal utility

Substitution and income effects of a change in price of a good may be used to explain the:

direct relationship between income and demand.

Which of the following is most likely to cause variation in American household spending patterns?

each of the above will cause a variation - differing levels of family income - geographical location of households - each household's personal preferences

The government wants to make medicare benefits available to more people, but to achieve this goal, it needs to make cuts in the existing medicare budget. The two areas where they are considering cuts are non-essential elective surgery and 6-12 month mental health care programs. Applying the concept of diminishing marginal utility, the budget cuts should be made for spending on:

elective surgery due to its lower marginal return rate.

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

The key assumption that accompanies the use of numbers for measuring utility is that:

individuals choose based on their preferences.

Saving money is a(n) ____________________, because it involves less consumption in the present, but the ability to consume more in the future.

intertemporal choice

The _________________ budget constraint shows the tradeoff between present and future consumption.

intertemporal choice

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she:

is maximizing utility.

The step-by-step process of finding the choice with highest total utility involves a comparison of the:

marginal utility gained and lost from different choices along the budget constraint.

A decrease in consumer preference for a product, other things being equal, will cause:

market demand to shift to the left.

The government distributes food stamps that can only be used to acquire food to low-income families. The budget line graph will show food on the horizontal axis and everything else on the vertical axis. After receiving food stamps, Ted's family is able to consume the same amount of food. The new consumption point for Ted's family will be:

on the new budget line, directly above the old consumption point.

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

one-third

Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?

one-third

Mark's annual after tax income earnings are $50,000. His $40,000, 3-year CD is maturing in the near future and he is planning to spend the interest on a 6 week holiday after that. His investments can earn a total of 10% before he starts his trip. If Mark's "present consumption" is the time he spends working and his "future consumption" is his trip, his optimal choice from the table below is to:

pend $10,000 now and consume $44,000 in the future.

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

price ratio and marginal utilities ratio of two goods is equal.

During a severe recession, the government issued food stamps that could only be used to acquire food to a greater number of families. The budget line graph shows food on the horizontal axis and everything else on the vertical axis. The government expects that issuing the food stamps will cause each family's budget constraint line to:

shift to the right.

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

Economists are able to determine total utility by:

summing up the marginal utilities of each unit consumed.

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

The theoretical model of the intertemporal budget constraint for the U.S. economy as a whole suggests that the most common pattern seems to be that:

the quantity of savings doesn't adjust much to changes in the rate of return.

The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises,

total utility rises, but marginal utility falls.


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