ECON 2302 - 5.1 - Incentives

Assume that a combination of 10 bottles of wine and 2 cartons of milk lies on a consumer's budget constraint. If the price of one bottle of wine is $10 and the price of one carton of milk is $1, what is the consumer's income?

$102

Refer to the figure above. If John decides to spend his entire income on tables and the price of a table is $2, what is John's income?

$80

Assume that a consumer can spend $20 on two goods pens and pencils. If the price of one pen is $5 and the price of one pencil is $2, which of the following combinations of the two goods represents a point on the consumer's budget constraint?

2 pens and 5 pencils

Given your budget constraint $60j + $20s = $300 and the graph above, what is the opportunity cost of a pair of jeans?

3 sweaters

The following figure displays John's budget constraint when he spends his income on tables and chairs. Refer to the figure above. If John spends his entire income on tables, how many tables can he purchase?

40

Refer to the figure above. If John spends his entire income on chairs, how many chairs can he purchase?

8

Which of the following statements is true?

A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.

Which of the following statements is true?

A consumer's tastes and preferences determine the satisfaction she receives from consumption.

In the graph above, which bundles of jeans and sweaters are on your budget constraint?

Bundles A (5 pairs of jeans, 0 sweaters) and C (3 pairs of jeans and 6 sweaters)

In the graph above, which bundles of jeans and sweaters are in your budget set?

Bundles D (2 pairs of jeans and 8 sweaters), A (5 pairs of jeans and no sweaters), and C (3 pairs of jeans and 6 sweaters)

Which of the following statements is true of incentives?

Incentives are designed to change behavior.

Which of the following correctly describes incentives?

Incentives are rewards or penalties that motivate people to behave in a particular way.

The following figure shows the budget constraint of Lesley when she is faced with two goods: burgers and ice cream. Refer to the figure above. If the line represents Lesley's budget constraint, and Lesley has $60 budget to be spent on burgers and ice cream, what is the price of burger and ice cream?

Pburger = $10, and Picecream = $6

Which of the following is NOT a determining factor of consumers' purchase decisions?

The cost of factor inputs

Suppose the prices of a pair of jeans, a shirt, and a tie are $30, $20, and $10, respectively. Which of the following statements is true in this context?

The opportunity cost of buying a shirt is 2 ties.

Refer to the figure above. Which of the following statements is true?

The opportunity cost of buying one chair is 5 tables

Your mom has clipped two coupons from the Sunday paper. The first coupon is for a $5 off of a $10 shampoo, and the second one is for a $5 off of a $50 haircut. Your mom says the first coupon is more valuable.

You disagree, because both coupons entail a $5 saving.

A budget constraint is a straight line because ________.

a consumer faces a fixed price for both goods that does not change with changes in consumption

Scenario: Suppose pairs of jeans (j) cost $60 per pair, sweaters (s) cost $20 each, and you have $300 of income. Assume you purchase only jeans and sweaters with your income. Your budget constraint is: $60 Ã j + $20 Ã s = $300. The graph below shows 4 consumption bundles (combinations of jeans and sweaters). Your budget set contains ________.

all bundles of jeans and sweaters that are affordable with your income

Your budget constraint contains ________.

all bundles of jeans and sweaters that exhaust all your income

A consumer's budget refers to the ________.

amount of money the consumer can spend on various goods and services

The set of all possible bundles of goods and services that can be purchased with a consumer's income is referred to as a ________.

budget set

Now suppose your income returns to its original level, $300, the price of sweaters remains constant at $20, but the price of jeans falls from $60 per pair to $30 per pair, so your new budget constraint is $30j + $20s = $300. This rotation of your budget constraint is shown in the graph below. As a result of the decrease in the price of jeans from $60 per pair to $30 per pair, the opportunity cost of a pair of jeans ________.

falls to 1.5 sweaters

In a perfectly competitive market, all consumers ________.

may buy one or many unit of the good, without the price changing

Given your budget constraint $60j + $20s = $300 and the graph above, what is the opportunity cost of a sweater?

of a pair of jeans

If a consumer purchases any combination of goods on her budget constraint ________.

she will exhaust her entire income

The slope of a consumer's budget constraint equals ________.

the ratio of the price of the good measured along the vertical axis to the price of the good measured along the horizontal axis

Refer to the figure above. If Lesley's budget for burgers and ice creams is cut by half, Lesley's new budget constraint ________.

will cross the vertical axis at 5, and will cross the horizontal axis at 3

Refer to the figure above. If the price of a burger doubled, Lesley's new budget constraint ________.

will start from the same point on the vertical axis, but will cross the horizontal axis at 3