Microeconomics - Chapter 7

A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the marginal utility per dollar spent is the same for all goods. marginal utility of each good is maximized. marginal utility per dollar spent is maximized for each good. total utility is the same for each good.

marginal utility per dollar spent is the same for all goods

If total utility is increasing, then marginal utility must be increasing. may either be increasing or decreasing, but it must be greater than zero. must be declining. must be increasing at an increasing rate.

may either be increasing or decreasing, but it must be greater than zero

John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. a. Complete the table below to show John's marginal utility for each Coke. Instructions: Enter your answers as a whole number.

10,15,25

Refer to the data. The value for X is 10. 55. 15. 5.

15

Refer to the diagram. The total utility yielded by 4 units of X is 15. 17. 4. 18.

17

Complete the following table and answer the questions below:

18, 7, 5, 33, 1

Answer the question based on the table below showing the marginal utility schedules for product X and product Y for a hypothetical consumer. The price of product X is $4, and the price of product Y is $3. The income of the consumer is $32. When the consumer purchases the utility-maximizing combination of product X and product Y, total utility will be 28. 192. 164. 112.

192

Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2, respectively, and that the consumer's income is $18. If the price of X decreases to $2, then the utility-maximizing combination of the two products is 4 of X and 5 of Y. 4 of X and 6 of Y. 2 of X and 5 of Y. 6 of X and 3 of Y.

4 of X and 5 of Y

(Consider This) When the federal government started requiring restaurants to print calorie counts next to menu items, some people increased their consumption of higher-calorie items. Which of the following best explains this phenomenon? Restaurants cut portion sizes on all items to reduce calorie counts. Consumers at restaurants are systematically irrational. Consumers are more interested in maximizing calories per dollar than health per dollar. Restaurants lowered the prices of healthier items, signaling to consumers that they are less appealing.

Consumers are more interested in maximizing calories per dollar than health per dollar

The table shows the marginal-utility schedules for goods A and B for a hypothetical consumer. The price of good A is $1, and the price of good B is $2. The income of the consumer is $8. If the price of A decreases, while the price of B and the consumer's income stay the same, we would expect MU/P of A to decrease, and the consumer will thus buy less of B. MU/P of A to decrease, and the consumer will thus buy less of A. MU/P of A to increase, and the consumer will thus buy less of B. MU/P of A to increase, and the consumer will thus buy less of A.

MU/P of A to increase, and the consumer will thus buy less of B

Which of the following statements is correct? Marginal utility is the accumulation or summation of total utility. Total utility is the change in marginal utility as quantity consumed increases. Total utility is the product of multiplying price times marginal utility. Total utility is the accumulation or summation of marginal utility.

Total utility is the accumulation or summation of marginal utility

Diminishing marginal utility explains why the substitution effect exceeds the income effect. the income effect exceeds the substitution effect. supply curves are upsloping. demand curves are downsloping.

demand curves are downsloping

When a consumer shifts purchases from product X to product Y, the marginal utility of X falls and the marginal utility of Y rises. X rises and the marginal utility of Y falls. both X and Y rises. both X and Y falls.

X rises and the marginal utility of Y falls

Demand curves slope downward because, other things equal, an increase in a product's price lowers MU. an increase in a product's price raises MU per dollar and makes consumers wish to purchase more units. a decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units. a decrease in a product's price lowers MU.

a decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units

The theory of consumer behavior accounts for time without consideration for the value of time. differently than it accounts for other resources. because time can be used to earn money. because time is free.

because time can be used to earn money

a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? An increasing rate, because marginal utility is declining. A decreasing rate, because marginal utility is declining. A constant rate, because marginal utility is increasing. b. True or False. "A rational consumer will purchase only 1 unit of the product represented by these data, because that amount maximizes marginal utility." True, because marginal utility falls after consuming the first unit. False, because rational consumers maximize total utility. False, because marginal utility is constant after consuming the first unit. True, because rational consumers maximize marginal utility. c. True or False. "It is possible that a rational consumer will not purchase any units of the product represented by these data." True, because this product's price could be high relative to the first unit's marginal utility. True, because this product's price could be high relative to the first unit's total utility. False, because this product's price could be low relative to the first unit's total utility. False, because this product's price could be low relative to the first unit's marginal utility.

a. A decreasing rate, because marginal utility is declining b. False, because rational consumers maximize total utility c. True, because this product's price could be high relative to the first unit's marginal utility

Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. a. Is she buying the utility-maximizing combination of bread and milk? No, the marginal utility per cent spent on bread is 0.80 and the marginal utility per cent spent on milk is 0.875. No, the marginal utility per cent spent on bread is 0.875 and the marginal utility per cent spent on milk is 0.80. She may or may not be buying the utility-maximizing combination since the amount that she is purchasing is not given. We cannot determine the utility-maximizing combination of bread and milk from the given information. b. If not, how should she reallocate her expenditures between the two goods? She should buy more milk and less bread. She should buy less milk and more bread. She should buy more bread and more milk. She is currently buying the utility-maximizing combination of bread and milk.

a. No, the marginal utility per cent spent on bread is 0.80 and the marginal utility per cent spent on milk is 0.875 b. She should buy more milk and less bread

Explain: a. ''It is irrational for an individual to take the time to be completely rational in economic decision making. ''This statement recognizes that most consumers are not rational. it would take a great deal of time to consider all the factors of every decision. time has less value than money. wise consumers spend a great deal of time in decision making. b. "Telling your spouse the name of the restaurant where you would like to eat for your birthday makes sense in terms of utility maximization." This statement recognizes that the benefit of making the request will likely exceed the cost. it is irrational to make such a request. utility varies among consumers. eating out has its own utility.

a. it would take a great deal of time to consider all the factors of every decision b. the benefit of making the request will likely exceed the cost

Suppose you are consuming two goods, A and B. Your marginal utility from good A is 27 while your marginal utility from good B is 5. In addition, good A costs $10.80 each and good B costs $1.75 each. a. According to the utility-maximizing rule, you are ________ (maximizing your total utility/not maximizing your total utility) b. You should consume (select all that apply) less of good B less of good A more of good A more of good B

a. not maximizing your total utility b. less of good A, more of good B

ADVANCED ANALYSIS A "mathematically fair bet" is one in which the amount won will on average equal the amount bet—for example, when a gambler bets $100 for a 10 percent chance to win $1,000 ($100 = 0.10 × $1,000). a. Assuming diminishing marginal utility of dollars, this is not a fair bet in terms of utility because the amount you can gain exceeds the amount that you bet. the utility of the $100 used to make the bet is less than the $900 that you might gain if you win the bet. the chance of winning the bet is too low. the utility of the $100 used to make the bet is greater than the $900 that you might gain if you win the bet. b. When the "house" takes a cut of each dollar bet, the bet is more fair, because the "house" also makes some money. unchanged in terms of fairness. less fair, because the winnings are reduced. less fair, because the chance of winning is reduced.

a. the utility of the $100 used to make the bet is greater than the $900 that you might gain if you win the bet b. less fair, because the winnings are reduced

b. Does John show diminishing marginal utility for Coke, or does he show increasing marginal utility for Coke? Increasing marginal utility Diminishing marginal utility c. Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend the money to purchase the first can of Coke, would he spend the money to purchase the second can of Coke, too? No Yes d. What about the third can? Yes Correct No e. If John's marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke? Yes No

b. Increasing marginal utility c. Yes d. Yes e. Yes

(Last Word) Theft and burglary are examples of irrational behavior. are less economically rational than crimes of passion and violence. can be viewed as attempts to maximize utility, given certain marginal costs and marginal benefits. are applications of the law of increasing opportunity cost.

can be viewed as attempts to maximize utility, given certain marginal costs and marginal benefits

Assume that Tonya consumes only two products, pizza and potato chips, out of a given budget. If the price of pizza decreases, then Tonya's consumption of pizza will increase due to the law of diminishing marginal utility. decrease due to the income effect. decrease due to the substitution effect. increase due to the income effect.

increase due to the income effect

Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is as though her income _______. decreases. stays the same. increases.

increases

Refer to the diagram. Total utility is maximized at 2 units. increases so long as additional units of Y are purchased. becomes negative at 4 units. increases at a diminishing rate, reaches a maximum, and then declines.

increases at a diminishing rate, reaches a maximum, and then declines

The fact that most medical care purchases are financed through insurance has decreased health care costs and therefore reduced aggregate health care expenditures. increases the amount of health care consumed by reducing the price of additional units of care. has no effect on health care consumption because aggregate costs are the same regardless of payment method. reduces the amount of health care consumed by raising the price of additional units of care.

increases the amount of health care consumed by reducing the price of additional units of care

Assume that a consumer purchases a combination of products Y and Z and that the MUy/Py = 25/5 and MUz/Pz = 40/8. To maximize utility, without spending more money, the consumer should purchase less of Z and more of Y. purchase more of Z and less of Y. purchase more of both Y and Z. make no change in the quantities Y and Z.

make no change in the quantities Y and Z

In introducing the opportunity cost of time into the theory of consumer behavior, we find that, all else equal, the marginal utility derived from each product must be multiplied by consumption time in determining equilibrium. one should consume more of time-intensive goods. one should consume less of time-intensive goods. the consumer's equilibrium position is not altered.

one should consume less of time-intensive goods

The table shows the total utility data for products X and Y. Assume that the prices of X and Y are $3 and $4, respectively, and that consumer income is $18. Which of the following price-quantity schedules would represent the demand for X in the $2 and $3 price range? option D option B option A option C

option C

Frank spends $75 on 10 magazines and 10 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should: reallocate spending from magazines to newspapers. reallocate spending from newspapers to magazines. be satisfied because he is already maximizing his total utility. None of the above.

reallocate spending from magazines to newspapers

Noncash gifts reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences. increase the utility of recipients by introducing them to products they have not consumed before. entail as much utility as do cash gifts. increase the utility of recipients because many people are uncertain of their own preferences.

reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences

Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _______ and Jermaine will _______ cucumbers for lettuce. fall; supply rise; substitute rise; demand fall; substitute

rise; substitute

Assume you are spending your full budget and purchasing such amounts of X and Y that the marginal utility from the last units consumed is 40 and 20 utils, respectively. Assume (a) the prices of X and Y are $8 and $4 respectively; (b) it takes 3 hours to consume a unit of X and 1 hour to consume a unit of Y; and (c) your time is worth $2 per hour. You should substitute X for Y until the marginal utility per hour is the same for both products. should consume less of X and more of Y. are consuming X and Y in the optimal amounts. should consume less of Y and more of X.

should consume less of X and more of Y

A downward-sloping demand curve can be derived for a normal product by increasing its price in the consumer-behavior model and noting the increase in the utility-maximizing quantity of that product demanded. a substitution effect that encourages more consumption of that product. an income effect that encourages more consumption of that product. the decrease in the utility-maximizing quantity of that product demanded.

the decrease in the utility-maximizing quantity of that product demanded

The increase in demand for iPad tablet computers can be explained by an increase in the price of laptop computers, making their MU/P decrease. the enhanced versatility and storage capacity of iPads, making their MU/P increase. an increase in the technology used to produce iPads, making the supply of iPads increase. an increase in the income of buyers, making the demand for iPads increase.

the enhanced versatility and storage capacity of iPads, making their MU/P increase

An increase in the price of product X causes a decrease in the quantity demanded for product X. One basic explanation for this is the law of diminishing marginal utility. the law of increasing opportunity cost. the law of supply. the price-elasticity effect.

the law of diminishing marginal utility

The fact that an ounce of gold is priced higher than an ounce of chocolate suggests that the total utility of gold purchased is greater than the total utility of chocolate consumed. the marginal utility of the last unit of gold consumed or purchased is greater than the marginal utility of the last unit of chocolate consumed. gold is a normal good, while chocolate is an inferior good. there are many substitutes for chocolate but few for gold

the marginal utility of the last unit of gold consumed or purchased is greater than the marginal utility of the last unit of chocolate consumed

In the last decade or so, there has been a dramatic expansion of small retail convenience stores (such as 7-Eleven, Kwik Trip, and Circle K), although their prices are generally much higher than prices in large supermarkets. The success of these convenience stores can be partially explained by the cost savings they can offer due to their smaller size. the high prices they charge. the time consumers save when purchasing goods there. diseconomies of scale.

the time consumers save when purchasing goods there

Consider the following comment: "Want to make millions of dollars? Invent a product that saves Americans lots of time. ''This statement recognizes that time is variable. time can be used to earn money. Americans like to make money. Americans like to spend money.

time can be used to earn money

The goal of a rational consumer is to maximize the quantities of all goods consumed. total utility from all goods consumed. the MU/P of all goods consumed. marginal utility of all goods consumed.

total utility from all goods consumed

Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This system contrasts with the former procedure of having a central meter for the entire complex and dividing up the collective water expense as part of the rent. Where individual meters have been installed, water usage has declined 10 to 40 percent. This decline in water usage would have been expected only if the water use was initially metered. would be expected since people now have to pay according to the amount of water they use. will occur only in the short run, then people will return to their old habits. is the result of higher water rates passed by the city.

would be expected since people now have to pay according to the amount of water they use