PS-1

Suppose you have a monthly entertainment budget that you use to rent movies and purchase CD's. Your currently use your income to rent 5 movies per month at a cost of $5 per movie per month and to purchase 5 CD's per month at a cost of $10 per CD. Your marginal utility from the fifth movie is 50 and your marginal utility from the fifth CDS is 105 Are you maximizing utility? You are... What could you do to increase utility?

Movie 50/5=10 CD 104/10=10.4 NOT Maximizing utility because the marginal Utility per Dollar spent on movies is NOT EQUAL the marginal utility per dollar spent on CD. You could increase utility by consuming more CD's and less movies.

Explain why a marginal rate of substitution between two goods must be equal the ratio of prices of the goods the consumer to achieve maximus satisfaction. A consumer achieves maximum satisfaction, when the MRS is equal to the ratio because...

Otherwise the consumer could trade one good for another at market prices to obtain a higher level of satisfaction.

[Related to don't let this happen to you] Mary is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of Soda in her shopping cart. The marginal utility of the fourth bag of corn is 10, and the marginal utility of the fifth soda is also 10. Is Mary maximizing utility?

This cannot be determined because we do not know the price of corn chips and soda and whether or not she fully spend allocated budget.

In the following budget constraint indifference curve graph, Nikki has $280 to spend on blouses and skirts. a) What is the price of a blouse? What is the price of a skirt? b) Is Nikki making the optimum choice if she buys 4 blouses and 2 skirts?

a) 280/5=56 280/10=28 BUDGET DIVIDED BY THE maximum amount that she can buy of each good, which is the first / last point on the budget line! b) Four blouses and two skirts cannot be the optimal point because the indifference curve going through this point IS NOT TANGENT to Nikki's budget constraint.

The following table shows Madison's utility from consuming popcorn and coke. Suppose that Madison has income of $30 and the price of popcorn is .00 and the price of Coke is 4.50. If Madison wants to maximize her utility, how much popcorn and coke should she buy?

4 Boxes of Popcorn 4 Coke (4*3)+(4*4.50)=30 = Budget Excel Sheet 4

And 25 utils from consuming three candy bars, the marginal utility of the third candy bar is...

5 Utils (25-20)=5

Characterize utility maximization. When consumer maximize utility,

ALL OF THE ABOVE

Assume the price of CDs is $14 and of DVD's is $24. At those prices, Isabel consumes 18 CD's and 14 DVD's. Her marginal utility from the last CD is 121 and her marginal Utility from the last DVD consumed is 255. Without changing the amount spent on CD's and DVD's, Isabel can increase her utility by consuming...

FEWER CD's / MORE DVD's

If a consumer receives 20 utils from consuming two candy bars, and 25 utils from consuming three candy bars, the marginal utility of the second candy bar is

unknown

If Valerie purchases ankle socks at $5 and gets 25 units of marginal utility from the last unit, and bandanas at $3 and gets 12 units of marginal utility from the last bandanas purchased, she

wants to consume more ankle socks and fewer bandanas.

Carolyn spends her income on popular magazines and music CD's. If the price of a CD is four times the price of a magazine, then of Carolyn is maximizing her utility, she buys

both goods until the marginal utility of the last CD purchased is four times the marginal utility of the last magazine purchased

If your total satisfaction increases when you consume another unit, your marginal utility must be...

Positive

What happens to the marginal rate of substitution as you move down along a convex indifference curve? (1) Along a convex indifference curve, the marginal rate of substitution [...] What happens to the marginal rate of substitution as you move down along a linear indifference curve? (2) Along a linear indifference curve, the marginal rate of substitution [...]

(1) decreases (2) is constant

[Relatd to solved Problem #1] Joe has $8 to spend on Twinkies and Ho Ho's. Twinkies have price of $0.50 per pack and Ho Ho's have a price of 1.00 per pack. Use the information in the graph to the right to determine the number of Twinkies packs and the number of Ho Ho packs Joe should buy to maximize his utility.

4 Twinkies 6 Ho Ho's (4*0.50)+(6*1.00)=8 (8*0.50)+ (4*1.00)=8 Excel sheet 5

The table below shows the relationship between the number of movies seen per month and the total utility received.Fill in marginal utility in the table below In this example, consuming additional movies [illustrates/ does not illustrate] the law of diminishing MA.

48-0)/(1-0)=48 (80-48)/(2-1)=32 (96-80)/(3-2)=16 (104-96)/(4-3)=8 (108-104)/(5-4)=4 ILLUSTRATE Law of diminishing utility: Consumers experience diminishing additional satisfaction as they consume more of a good.

If a consumer receives 22 utils from consuming the first can of soda, 20 utils from consuming the second, and 15 from the third, the total utility of consuming the three units is...

57 (22+20+15)

Carol consumes tacos and coke. The marginal utility each yields is illustrated in the table below. If the price of tacos is 4.00 per and the price of coke is 4.00 per coke and if Carol has 20.00 to spend, what is her utility maximizing quantity of tacos and coke? Carol maximizes utility by consuming x Tacos and Y coke

MU-T/P-T = 4, 3, 2, 1, 0 MU-C/P-C = 5, 4, 3, 2, 1 2 Tacos 3 Cokes

If Callum is consuming his utility maximizing bundle and the price of one good rises, what happens to the marginal utility per dollar spend on this good (MU/P) and what should Callum do?

MU/P has decreased, and Callum should buy less of this good

The slope of an indifference curve measures

Measures the marginal rate of substitution between the two goods in question

Suppose John is currently at point A on the difference curve to the right. If he moves to point B, then

The level of utility remains constant* because the marginal utility of Pizza decreases and the marginal utility of Pepsi increases

What is the definition of Marginal Utility? The law of diminishing marginal utility suggests that... Marginal utility is more useful than total utility in consumer decision making because

a) The change in utility from consuming an additional unit of a good or service. b) Consumers experience diminishing additional satisfaction as they consume more of a good. c) Optimal decisions are made at the margin

A consumer's utility - maximizing combination of goods given by the bundle that corresponds to the point

an indifference curve that is *tangent* to the budget constraint

Refer to the diagram to the right. The consumer can afford consumption bundles...

s, v, t and u. Either on or below the budget line. W is above budget, thus not affordable.

If a consumer always buys goods rationally then

the marginal utility per dollar spent on all goods will be equal.

The absolute value of the slope of the budget constraint is equal to

the price of good on the horizontal axis divided by the price of the good on the vertical axis