Consumer Decision Making
2. If the algebraic expression relating income to expenditure is shown as M = PxX + PyY, show, using simple algebra, that the slope of the budget line is -Px/Py if good X is on the horizontal axis.
2. PyY = M _ PxX; Y = (M/Py) _ (Px/Py)X, which fits the form of a line where (M/Py) is the vertical intercept, _ (Px/Py) is the slope of the budget line, and X is the independent variable.
Is there such a thing as a purely positive economic analysis? Is it possible for people to keep their value judgments out of data gathering and analysis or even the choice of problem to study in the first place?
Probably not, and the gulf between the two types of analysis is slowly being critiqued. Data is increasingly being understood in terms of perception, interpretation, and context.
If all people can have all they want of something at zero price, we say that there is no scarcity of that item. a. Can you think of any such items? a. What about a sunset, air, rain, or friendship? In what sense are these things scarce?
a) Your list is accurate if all who want to enjoy them can do so free. b) Friendships take time to cultivate. To have a sunset or rain, you must give up sunshine.
Now sketch a second indifference curve on the graph that shows Vanessa buys 12 software packages when she realizes the actual price is only $25. What is Vanessa's MRS at her new equilibrium?
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
Which of the following is an external cost of a community rock concert?
The loud music heard by rock haters all over town who did not want to attend the concert Rock lovers get an external benefit while rock haters absorb the cost of fighting off the noise.
If the demand curve for a commodity is P = 10 - 2Q and then it changes to P = 12 - Q while supply remains unchanged, price will
either rise or fall or stay the same depending on the supply curve. The intercept increase will push price up but the increased slope reduces price so the net effect can only be known when the supply curve is specified.
You are an avid baseball fan. You root for Baltimore over the Yankees and the Yankees over Cleveland. If Cleveland and Baltimore play you don't care who wins. Which of these teams would you prefer to see in the World Series?
unable to tell because transitive assumption is violated. If Cleveland and Baltimore are equal then Baltimore can not be preferred to Cleveland as would be the case if transivity were to hold in this example.
7. Put yourself in the place of a presidential advisor on health care. Show President Obama, using indifference curves and budget lines, why some people would recommend an across the board income tax cut instead of a health care subsidy,
. By moving the budget line outward and comparing the outcome to a case where the slope of the budget line is reduced with respect to health care one can see that the consumer is better off with more income then when he gets a health care subsidy of equal value. The vertical line shows the value of the subsidy and the income increase and they are the same. The higher indifference curve is attainable on the cash increase.
3. The MRS of food (vertical axis) for shelter (horizontal axis) measures the amount of food that must be received in order to absorb the loss of 1 unit of shelter without losing utility. If that value is 3, if the price of food is 5, and if the shelter price is 10, then the consumer is not maximizing his utility. Sketch a budget line, assuming the consumer has $100 to spend, and draw in a possible indifference curve that illustrates the situation described here. Then, on the same graph, show with a simple sketch what could be done to correct the problem.
3. The graph below shows all the necessary conditions. The consumer should give up food and buy more shelter
4. You have won a contest where you have a choice between goods worth $1000 and $900 cash. You take the cash. Illustrate this situation graphically starting from the optimal point A presented below. (Hint: First, give the consumer $900 more cash. Then, assume no cash increase but a gift of $1000 worth of merchandise instead. Next, draw indifference curves that show the consumer to be better off with the cash.)
4. The sketch labeled Problem 3-4 below illustrates the answer to this question.
8. Kohls, the store where no one pays list price, has a sale where you pay full price for a pack of men's sox and get a second pack for half off. Sketch the budget line for this sale with dollars on the vertical axis and sox on the horizontal axis.
8. The first package of sox will have a budget line slope equal to the full price for sox and the next pair will have a slope half that of the first. Subsequent pairs will follow the same pattern.
9. Jerry gets pleasure out of going to parties and playing on the intramural softball team. His monthly utility function for these activities is: U = f(P,S) = 22P -P2 + 16S - 2S2 where P = parties and S = softball games. a. Assuming that Jerry's schedule allows him to maximize his pleasure without any constraints, how many parties and softball games will he participate in each month? b. At midterm the grades showed Jerry failing his intermediate microeconomics class, so his professor suggested that he restrict his outside events to a total of 5 each month. If Jerry takes the suggestion seriously, how many parties and softball games will he participate in? (Use either the Lagrangian or substitution method to solve this problem.)
9. Jerry will attend 11 parties and 4 football games each month until his grade report, after which he will go to 4 and 1/3 parties and 2/3 football games. He is so committed to his studies that he will leave before a game or party is over if he has studying to do. The answer to 7a is arrived at by taking the first derivative of the equation with respect to P and S and then setting the derivatives equal to zero. The answer to 7b involves substituting the budget constraint into the utility equation and then maximizing the function with respect to one variable. When either P or S is found in that manner, substitution into the budget equation will get the other value.
Which statement is false?
All of the above are false. The demand, not the quantity demanded change in a and b. In c the demand for gasoline cars shifts right which causes an increase in quantity supplied rather than a shift in supply.
For the graph of the budget line shown below, which statement is true?
All the above are true Do not fall into the trap of thinking that AO is spent to get OD.
Which budget line shows the highest relative price for food?
BC The budget line with the steepest slope toward the food axis is CB.
This year you paid a room and board charge at your school that gives you all you can eat for 20 meals a week. For next year the administration is considering going to a credit card charging system where students swipe their cards through card readers for each item they eat. There is an individual price on each item that reflects its cost. Use the words sunk cost and marginal cost in a paragraph to describe what you think will happen to the quantity of food consumed, and the amount of food wasted.
Because your board payment is a sunk cost, you are inclined to eat until the next unit of food brings you no marginal benefit since the last unit of food is free as far as you are concerned. Therefore you eat more than you would if you paid for each item separately. Because you will be more careful to take only what you will eat, less food is wasted.
Next the main employer in the town outsources a significant part of the business overseas. What will happen to Matt's demand curve, his equilibrium price and the quantity of computers he sells? Assume that the last customer in town will now go without a computer if the price reaches $1,900 but that the customers still decline at the rate of one per $1 price increase.
By lowering the demand intercept to $1900 and setting the supply equal to demand, the new quantity is 800 and the new price is $1,100.
If he estimates that the industry supply function for computers in the town is P = 700 + .5Q, how many computers will be sold at equilibrium and at what price would the producers be selling?
By setting supply equal to demand and solving for Q the quantity sold is 1200. Putting quantity back into the demand equation gives a price of $1,300.
Carl has a car loan of $2000, which costs him $20 per month in interest. Ernie's identical car is paid off. They both live in a house with Curt, who wants to borrow a car for a month at Christmas break. Both Ernie and Carl have a policy of loaning their car to people who are willing to pay the average cost per mile. Ernie charges the same price for his car as Carl does. Curt insists that either Ernie is overcharging or Carl is undercharging. Is Curt correct in his analysis? Explain.
Curt is wrong because he does not understand that both friends have the same cost per mile.
After struggling for four weeks in a calculus course, a student came to my office for advice. I listened to his story and found he was nearly failing but did not want to drop the course. The deciding factor in his mind was that he had put in such hard work, which would be wasted if he dropped the course. If the term were just beginning, he said, he would drop the course even without picking up another to replace it. Given this, what advice should I have given if I felt he was working up to capacity?
Drop the course now. Most likely the marginal benefit of the last effort needed to reach excellence will be small relative to the benefit that might be gained from an equally costly project that didn't exist before, but now is a very good program. Thus the net benefit of programs that are less than excellent usually exceed the net benefits of programs designed to go from a position of near excellence to excellence.
Which of the following is a normative statement?
Economists deserve to have lower life insurance rates than do miners. Deserve is a value judgement. Someone else may not think we deserve lower rates.
If Curt's utility function is U(F,S) = F1/2S, which of the following coordinates is not on the indifference curve that generates 2 units of utility?
F = 10, S = .3 Answers a,b, and d all give a utility of 2 while c provides less utility than 2.
4. Matt offers a two year warrantee for his computers and Megan offers only a one year warrantee. One of Megan's friends learns that when Matt went to a two year warrantee his profits went up even with warrantee costs considered. Megan's friend passes on the information to her and then says: You should extend your warrantee to two years and you would have more profit. (True\False:Explain) The information about Matt's increased profit is a normative statement and the comment that Megan should extend her warrantee is a positive statement.
False, Matt's profit increase is a statement of fact while the comment to Megan suggests she should change her policy. The word "should" implies a value judgment that Megan values profit more than leisure or some other activity.
1. Matt and Megan each have computer assembly companies in a small city. Matt is renting his facility and Megan had her facility given to her by her father. (True\False: Explain) From what we know so far, we would expect Megan to have lower production costs than Matt.
False. Megan has exactly the same costs as Matt because what is an explicit factory cost to Matt is an implicit factory cost to Megan. She could rent her factory for an alternative use and she is sacrificing that income by using the factory herself.
Which of the following could also answer question 14 correctly?
High taxes have driven many beef ranchers out of business. The supply curve of beef shifts left and so the supply of tacos does also.
One of the following statements describes a stock measurement rather than a flow measurement. Which is a stock?
I am a millionaire. It is the only one that does not specify a time period.
Which statement about consumer preferences is inconsistent with rational consumer choice analysis?
I'm addicted to chocolate so the more Hershey Kisses I eat the more I want. Increasing marginal utility is inconsistent with rational choice so addictions are not explained well by the theory without some modification.
Which of the following is a true statement about rational consumer choice?
People constantly seek to improve their position. The more is preferred to less assumption relates to answer b.
Which statement is true of the optimization model presented in this chapter?
If the marginal rate of substitution of X for Y is greater than the ratio of the price of X to the price of Y, Then the consumer should consume more X. This implies that the indifference curve is steeper than the budget line, so a tangency point will move one further down the budget line with more X.
When speed limits were increased from 55 to 65 miles per hour a news item appeared in the Chicago Tribune , which showed that deaths on Illinois highways increased since the speed limits were raised to 65 mph. Assuming that the faster speed caused the deaths, does this prove that cost-benefit analysis was not used in the decision to return to the 65 mph speed limit. What is being implied if we do not go back to the 55 mph limit?
Life is being traded off against time. If we do not go back to 55 it is because we believe that the time saved with 65 mph laws is more valuable than the savings in life that would occur if we had 55 mph laws.
Which of the following statements is false?
Macro tries to explain how entrepreneurs go about profit maximization. Micro, not macro, does this.
Using cost-benefit analysis, try to analyze the effects of a severe recession like the one begun in 2007 on the decision to attend college. Would you be more of less inclined to put off college or begin college now if you are a high school graduate this year?
Many factors might be considered. If you can't find a job now the opportunity cost of going to college is reduced. If you feel the job opportunities will still be scarce after college or if you believe there will be so much change in labor markets that your present interests will be less useful after college, then the benefits of attending college go down. If your family's income is at risk due to the recession and borrowing for education would be necessary, then the cost of college rises. The net effect of all these and other factors make it difficult to predict whether college enrollment will rise or fall in these recession years.
Markets are desirable for all the following features except one. Which is not true of markets?
Markets provide signals that lead toward a society's desired income distribution pattern. Distribution patterns are determined in markets, but desirability is not guaranteed.
2. When Matt adds all his costs and divides them by the number of computers produced, he has an average cost per computer of $800. He offers a computer to his father for $600. His father hesitates because he does not want Matt to pay $200 of his computer. Matt says, "Don't worry dad, I'm not losing money on the computer". Explain how Matt might be telling the truth.
Matt is truthful if the marginal cost of producing the computer is $600 or less even if the average cost is $800. Since the fixed costs of the operation will be paid whether Matt sells a discounted computer to his dad or not Matt is really not sacrificing them as an opportunity cost of his dad's computer.
Which statement is true of the demand curves shown in Chapter 2 of your text?
None of the above are true. The demand curves are market curves which imply effective demand, or ability to pay. Movements along a curve are due to price changes only.
A Washington Post writer claims that new technologies such as robotic industrialization will remake our economy. Firms will produce more and their prices will be lower. Describe how this might happen and show the story graphically.
Robots presumably will be cheaper and more accurate than human labor. This will mean the products they produce will have lower costs shifting the supply curve to the right. This will mean more output at lower cost.
Which of the following is a correct representation of the budget constraint in a world with only food and shelter, where M = income, Pf = price of food, Ps = shelter price, S = the quantity of shelter, and F = the quantity of food.
S = M/Ps - Pf /Ps (F) A correct one is some form of M = Pf (F) + Ps(S).
An economic naturalist might ask all of the following questions except one. Which would not be a typical naturalist question?
Should we legalize some illegal drugs? The drug question requires value judgments indicated by the word should. The other questions relate to objective costs and benefits
Matt has studied the personal computer market in his town and has examined his sales history. He believes an additional computer could be sold in the community for each reduction in price of $1. He also believes that at $2,500 the last customer in town would do without a computer. How would you represent algebraically the demand function for computers in the town?
Since no one buys at $2,500 the vertical intercept is $2,500. The slope is - 1 because for every dollar drop in price the market would sell one more. Therefore the horizontal intercept is also 2,500. Accordingly the demand is P = 2500 - Q.
The economic naturalist finds that rational choice economic theory is helpful in explaining many things in life. I recently observed that $1 bills in the church offering plate are folded up more times that larger bills. Is there a rational choice explanation for this phenomenon? Explain.
Small givers are embarrassed and seek to hide their lack of generosity. It is in their interest to appear more generous than they are so they hide the number on the bill by folding it.
6. Carter is rich and has a consumption basket, which is 90% shelter and 10% food. Jerry is poor and spends half his income on each item. Both end up with the same ratios of marginal utility for each good. Show graphically how this can be true. Also explain in words why this would be expected.
The graph for problem 3-6 is shown below. Since they both face the same relative prices for the commodities they will both be maximizing utilities by bringing the ratio of their marginal utilities equal to the ratio of the prices. Of course, each person has different levels of total utility even though they each get the same utility from the last dollar spent on shelter and food
Finally the software firm changes its plans and now gives 20 software packages of your choice instead of the $500 grant. Show on your graph how this software value of $500 makes Vanessa worse off than when the firm simply gave her the $500 cash.
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
During Matt's recent study of his computer market, he was surprised to learn that nearly every first-time customer thought his software items were priced higher relative to all other goods than the actual price he charged. An example of this was Vanessa, who said she thought each item in the software collection was priced at $50 rather than the actual price of $25. She had budgeted $2,000 for the year for all computer related purchases and had planned to buy 10 software packages at the $50 price. Using the graph on the next page sketch in Vanessa's software budget line as it would have appeared with her misinformation.
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
Now Vanessa buys 15 software packages. Show, by drawing another indifference curve on your graph, how this outcome could happen after the cash award.
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
Next, on the same graph, sketch in an indifference curve that represents Vanessa's preference pattern. Remember that she buys 10 software packages when she thinks the price is $50.
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
In order to maximize the utility function U = f(X,Y) that is constrained by the income limit M = PxX + PyY using the substitution method, all these steps are used except which one?
Take the first derivative of the new utility function and set it equal to 1. Maximization involves setting derivatives equal to 0 rather than 1.
The British redcoats in the American Revolutionary War lost many soldiers because of the rather strange method of lining up in rows wearing a bright color and marching in the open. The colonials hid behind trees and shot at the easy targets. Without economics, one might consider the British rather stupid. With economics, there is a good explanation for their practice if one assumes that the colonials were highly motivated soldiers seeking to gain freedom while the British soldiers were not very excited about the war. Start the analysis with several assumptions: a. The soldier's first objective is to stay alive and the second is to win the war. b. The best way to stay alive is to quietly leave the army. c. The general's first objective is to win the war. d. If soldiers pursue their objective, they will desert. What might the general do to pursue his objective? Write out the general's cost benefit thinking as he plans his attack strategy.
The General reasons that, although the cost in soldiers will be high, he must put them into a formation and have them wear colors that will make desertion very obvious and, therefore, very costly. If the costs of staying with the army are less than the costs of deserting, the General believes he will be able to maintain an army. The inaccuracy of the guns may actually have meant that the cost in soldiers was much less than it appears to the person familiar with modern weapons.
The Obama administration has pushed for increases in vehicle gas mileage per gallon by the year 2016. If we increase the requirement by 30 % would we expect the use of gasoline to fall by 30%? Analyze this question using the market forces discussed in this chapter.
The answer to this question based on market theory is almost certainly no. If the gasoline cos per mile falls due to higher mpg cars, drivers will shift their demand for driving to the right and drive more miles. Also, because the demand for gas will shift left somewhat the price of gas will fall and that will induce even more driving. Thus gasoline consumption will likely fall some but less than 30% and highway congestion will increase. However, there is the possibility that people will become more environmentally and politically conscious realizing that gas consumption is detrimental on both fronts. This change in preferences could actually decrease consumption as bikes and public transport replace driving. If the new laws cause people to be more conservation conscious such market shifts are possible.
If a price is artificially set below equilibrium in a marketplace, which of the following will be true?
The benefit of the last unit sold will exceed the cost of that unit. The low price reduces the quantity supplied and moves the consumer back up the demand curve where the marginal benefit exceeds the cost of the last unit consumed.
Which of the following does not have the same effect on the demand curve as the other three?
The consumer's income rises and the good is a normal good. The other options shift the demand curve left.
The text example suggests that airplane food is inevitably worse than restaurant food. This is because
The cost of preparing exquisite food is greater in airplanes than in restaurants. The quality of food is based on cost-benefit analysis and the cost of kitchen space is much higher in the sky than on the ground because high paying seats would be lost.
Even at her advanced age, Vanessa is still learning. She just finds out that a major software company is planning to give cash grants of $500 to senior citizens with computer skills if they allow their testimonial to be used in advertising. Vanessa wins an award. Show this award on your graph.
The highest indifference curve occurs with the $500 cash and it brings more utility than an equal value of software.
On the graph below, graph the story on the first page of Chapter 2 in your text. Begin from the initial market equilibrium price and quantity shown below. a. Next, illustrate the OPEC embargo by shifting one of the graph's functions. b. Show a price ceiling that is imposed, and illustrate the quantity of gasoline that will exchange in the market. (Assume that the ceiling is set at the original equilibrium price.) c. At this quantity, is the benefit of the last unit of oil consumed greater than or less than the cost of producing that oil? d. In order to show the benefit lost from the price ceiling, shade in the area where the unrealized benefits would have exceeded the costs.
The market supply shifts left, as shown in the sketch labeled Problem 2-1. A price ceiling at (p) will cut production back to point (b). The benefit of the last unit of oil is greater than the cost of producing it by the vertical distance cd. The triangle dca is lost net benefit from the price ceiling.
If an indifference curve is convex from above (bowed outward), which of the following statements would be true?
The more you have of a good, the more intense your desire for more of it. Increasing marginal utility would be present for this case.
A short-run market for tomatoes has a vertical supply curve, as shown below. Then a price floor is imposed above the equilibrium price level. Sketch a price floor on the graph shown. Shade in the area that shows the amount of money the government must spend to keep the price support from collapsing. Explain why this price floor is inefficient.
The price floor is inefficient because the area A is lost consumer value, since these tomatoes are thrown away. Also, area A + B is money redistributed from taxpayers to tomato farmers.
One day in the faculty house a professor was pontificating on how a college should approach new program proposals. He said, "If we can not do something at the highest standards of excellence we should not do it at all." Which of the following evaluations of this statement is correct.
The professor is entitled to his opinion and economics can not make a judgement on his viewpoint.
The following two equations depict a market for wheat: P = 160 - 2Q and P = 10 + 48Q. Which of the following is true of this market?
The quantity at equilibrium is 3. Set the two equations equal to each other and solve for quantity and then price.
The market for oatmeal is in equilibrium at the present time. However, the future is very uncertain and farmer Pete is trying to weigh all the possibilities. Help him out by matching the graphs with the events that might occur. _____ a. A disease hits oat crops throughout the country. _____ b. A disease hits cows and drastically increases the price of milk. _____ c. Oatmeal is found to lower cholesterol. _____ d. Income tax rates fall sharply on consumers and oatmeal is a normal good. _____ e. Fertilizer costs double. _____ f. Cream of Wheat is beginning an all-out advertising blitz. _____ g. Farming as a way of life becomes popular
The relevant letters in sequence are a,b,c,c,a,b,d
5. Using the model in number 4 above, it is possible to show why some people give gifts at Christmas and others give cash. Resketch your graph, drawing the preference pattern in such a way that the merchandise (gift) is preferred to the cash.
The sketch labeled Problem 3-5 below shows how a corner solution will lead to all gifts and no money. The steep indifference curve occurs if someone values the thoughtfulness of gift giving and has a low marginal value of money
3. Megan buys 90 motherboards for her computers each month. They cost $50 each. If she ordered 100 in a month she would qualify for a quantity discount and pay only $49 for each. (True\False:Explain) Megan knows she can not sell more computers, but she knows she can sell the extra motherboards to Matt for $45 so she should buy 100 each month.
True. Even though her average cost per motherboard drops to $49 each and her average benefit from selling to Matt is only $45, she should buy the additional 10. The marginal cost of the extra 10 is only $400. (90x50 = 4,500 compared with 100x49 = 4,900) The marginal revenue from Matt for the extra 10 motherboards is $450. (10x45 = 4,500) Therefore Megan increases her profit by $50. This assumes Matt does not increase his sales and hurt Megan's sales.
I checked out a painting from the library to hang in my home office, but when I got it home it was much too big for my wall. When I took it back the library hung it on a wall in the main reading room and there it looked too small. The explanation of why the same picture can look both too small and too big is the same as the explanation for which story from your text.
Walmart case. The picture is viewed in relationship to the size of the wall on which it hangs. Therefore, the explanation is pitfall 3 in your text where saving at Walmart is viewed in relationship to the amount of money spent.
What is your strategy in taking multiple choice exams where each question has the same amount of points and there is a tight t-me limit? Do you work systematically from question 1 through the end or do you select questions based on some other criteria? Explain your strategy.
Your goal should be to maximize your total score. The best strategy would be to answer the easiest questions first and then proceed to more difficult ones leaving the hardest to last. The cost in time spent on each question will be the lowest if you can answer a question easily while the benefit of each question is the same. Thus if you run out of time you will have maximized your score.
Which of the following should be counted in the charge for lending your car to your roommate if your intention is not to gain benefit from such a rental?
a portion of the regular maintenance charges Maintenance is the only expense that will go up for you as your roommate uses the car.
At an auction of famous paintings in New York the auctioneer starts hearing bids at
a price below equilibrium where excess demand exists. In "Dutch auctions" the price begins above the equilibrium and the first bid takes it. In New York the price begins low and builds up as bidders drop out and the quantity demanded falls.
The auction for a famous painting fits your text's description of
a vertical interpretation of demand. Since quantity is set the auctioneer is trying to find the reservation price of the person most interested in the painting.
The chart below shows the value placed on a particular airplane flight by 10 different individuals. The ticket price was only $40, so all 10 people buy tickets. The plane holds only 7 people. All show up in the order they are listed. Letters a through d below show four methods of solving the seat scarcity problem. Fill in the amount of consumer benefit the plane ride generates. a. A first-come-first-served method provides _________value. b. A random lottery method that picks 1, 3, 4, 5, 7, 9, 10 provides ______value. c. A method that offers a $60 cash rebate to anyone who gives up a seat provides _____value. d. A method in which an airline official interviews the people and excludes numbers 6, 7, and 8, who are flying for nonessential purposes, provides _____ value. e. Which method is preferred from an efficiency standpoint? Explain. f. Are there ever circumstances where method d would be preferred? g. If numbers 5 and 9 knew that a first-come-first-served method would be used, can you explain why they might have come to the airport so late? h. What would happen if either methods a, b, or c were used but the ticket holders were allowed to sell their tickets to someone else? i. Does this suggest that some restrictions on markets need not be inefficient if voluntary exchange is allowed? One important point to keep in mind is that a demand curve shows what consumers are willing and able to pay for a given quantity of goods or services. A low-income person is thought to prefer leisure more than plane rides if he is able to pay only $40 for a plane ticket. Therefore, if there are others who can pay more than $40, it means they value the flight enough to sacrifice leisure and work for the income they need to get a plane ticket. But what if the poor person is blind or inhibited in some other way from working? For example, if number 4 is a handicapped person who cannot earn much income, should she be denied any plane rides? What if the issue is food and not plane rides? Is the market-efficient solution always the best? These questions are for thought and discussion on the issue of efficiency and fairness. Have your instructor discuss them with you in class.
a) 555 b) 630 c) 670 d) 585 e) Method c is preferred because it supplies the most value. f) Yes, but only if society had an agreed upon definition of what is nonessential and if those with essential purposes were unable to express their need due to low income. g) Fliers 5 and 9 may have a very high opportunity cost of time and they are willing to absorb some risk of being bumped, as long as the expected value of the loss is less than their time cost of waiting in line. h) If a market for tickets was allowed, the people with the top seven values would fly because they would buy the top seven places in line from those who would get more benefit from the money than the plane trip. i) If market restrictions are imposed and secondary markets evolve to deal with the inefficiencies, it is accurate to say that efficiency can result if the negotiation costs in the secondary market are not too high.
Which of the following will help to get class started on time with better attendance?
all of the above would work to get class going. Hopefully all the options will either increase the cost of being late or increase the benefits of being on time. Those who answered e may have trouble in the job market after college.
At equilibrium price
all the above are true. The phrase "net social benefit" is important in (a) because a free good provides maximum social benefit since it captures all the welfare under the demand curve.
Adam Smith's invisible hand
allowed for human motivations more complex than homo economicus. Smith had a rich understanding of the interdependence of human preferences and allowed for an impartial spectator as a guide to moral behavior.
An upward sloping indifference curve is logical in rational choice analysis when
any of the above are true. In each case listed more of the competing good is need to keep utility constant so an upward slope results.
The market for tacos has become unstable. The American Heart Association says they contribute to heart disease, the price of cheese has fallen, the population has risen, and the real income of the population has fallen. In spite of all this, the relative price of tacos has risen. This could be explained by
any one of the answers listed above. All of the options shift the demand for tacos to the right.
All points on or below a budget constraint
are attainable with the given income It is impossible to know what is desirable from a simple budget line.
1. The absolute price of food is $10 and the absolute price of shelter is $30. Carson has $150 income to spend on food and shelter. a. Sketch a graph below showing his budget constraint. b. If Carson maximizes his pleasure with this budget constraint and his marginal utility for food turns out to be 5, what will his marginal utility be for shelter? c. Next, the price of food doubles and Carson's income doubles also. Sketch the new budget line, assuming that the price of shelter does not change.
b) Since the slope of the indifference curve must be 1/3, which is the slope of the budget line, and since the slope of the indifference curve is the ratio of the marginal utilities of food and shelter, it follows that the marginal utility of shelter must be 15 or else the ratio will not be 3. c) As seen on the graph above, Carson can now buy twice as much shelter as he could before. His ability to buy food is not changed in absolute terms.
A per unit tax on the seller and a price support have a similar effect on a market because
both raise the price at which the good sells. Only "a" is definitely true of both policies.
On a graph of a preference pattern of food and shelter, food is on the vertical axis. The slope of the indifference curve at the relevant market basket is 3. If food is 4 times more expensive than shelter, the consumer is
consuming too much food and not enough shelter. The slope of the indifference curve is 3 and the slope of the budget line is only 1/4. Thus the two functions intersect at a point where movement to the right toward shelter will bring about a tangency and utility maximization.
The years 2008 and 2009 have not been good years for retailers, many of whom have cut prices significantly. Using our terminology to explain this we could say that
demand has fallen and the quantity supplied has fallen. Consumers have spent less as their asset values have fallen shifting the demand curve left. This causes a movement down along the supply curve.
Rent controls
do all of the above. Items b and c represent the strongest arguments against rent control.
If I offer you a choice between pizza and ice cream and you say, "I don't care which I get so you pick," I can assume that your indifference curve
has a slope of negative 1. Because you are indifferent between the two, they are of equal value and would be traded on a one for one basis which would be a slope of -1.
I once bought an expensive can of varnish for a floor I intended to sand and varnish. I soon realized I could not do as good a job as a professional sander would do. However, because I had already bought the varnish and the contractor would use only his own varnish, I did the job myself. In this case I
failed to ignore a sunk cost and therefore made a bad decision. The varnish was a non-returnable sunk cost. The relevant question was: If I was starting from scratch with what I know now, what would I do? (The truth is I really did call in a floor expert.)
Economic theory can best be judged by
how well it predicts outcomes. Prediction is the main objective according to mainstream theory, but the ability to describe and understand the system is gaining credence as economists start to talk about storytelling and rhetoric as part of the method of doing economics.
Scarcity, as economists use the term,
is a fact of life for both rich and poor. among alternatives would still be necessary.
The marginal rate of substitution between food and shelter for a given point on an indifference curve
is described, in part, by each of the above statements. Refer to the proof of (a) in your text.
In a preference ordering exercise in which two baskets of goods are being considered, it is assumed by indifference theory that the consumer is able to
make no absolute measure of the value of any of the market baskets. Ordinal, not cardinal, measurement is possible in indifference theory. The ability to select one option over another in a pair is all that is needed for indifference theory to work.
Using cost-benefit analysis to evaluate market efficiency, we could say that if the amount sold _______________________ for the last item sold.
none of the above answers is true. Because the demand curve represents the benefit received from the last unit bought and the supply curve shows the extra production cost of the last unit, the marginal benefit equals the marginal cost of that unit. Fewer amounts exchanged have benefits > costs and greater amounts exchanged have costs > benefits. Both of these would involve reduced welfare.
Indifference curves that intersect would be illogical constructs because
of both a and c above Compare the bundle of goods at the intersection with a bundle to the right on each curve.
The law of demand states that
people buy more of a commodity when its price falls. The change in quantity that results from a price change is what this "law" refers to.
Mathematicians can tell you where on the pool table a cue ball will have to be hit in order to make a shot. They do this by calculating the angles involved in the shot. If a champion pool player hits a particularly tough shot, it means that he
practiced enough so that trial-and-error learning makes him as good as if he knew the mathematics. Practitioners get, by trial and error, where theoreticians predict they will go using models. In effect, the practitioner behaves "as if" she worked with the model.
If food is on the vertical axis and shelter is on the horizontal axis, a set of indifference curves that are quite steep with respect to the horizontal axis
reflect a preference pattern that generally values shelter high relative to food. The axis toward which the slope is steepest will be the most valued good.
Which of the following would be true of a person who was totally homo economicus?
she would never vote in elections. the costs of studying candidates and going to the polls almost certainly outweigh the expected benefit of one vote. There can be significant private benefits from the other options.
According to your text, low quality umbrellas in Manhattan sell for $10 on a rainy day and $7 on a sunny day. Starting from a rainy-day market equilibrium price of $10, one can show graphically the most probable explanation for the price drop by
shifting the demand curve of umbrellas to the left. Sunshine shifts the demand left.
The story of oil supply restriction and price controls described on the first page of Chapter 2 in your text can be shown graphically on a simple supply and demand graph by starting from a given supply and demand and
shifting the supply to the left and setting the price below equilibrium The policy acts as a price ceiling.
If the price of a good shown on the vertical axis of a budget graph is cut in half and the price of the good on the horizontal axis is cut by 25%, then the budget constraint
shifts right and becomes steeper. The vertical intercept goes up proportionately farther than the horizontal intercept moves right.
Budget line CD
shows the absolute price of shelter to be more than shelter's absolute price on line ED CD and ED have the same nominal income but shelter is higher priced on CD.
Supply curves tend to be upward sloping in part because
suppliers produce the least costly, easy-to-produce units first. Diminishing returns set in as the variable input becomes heavily used.
If the price of gasoline rises dramatically,
the demand for cars will decrease. Cars are complementary to gasoline and a decrease in quantity demanded of gasoline will cause the demand for cars to shift left.
An auction of a Rembrandt painting is an illustration of a market activity performing
the rationing function. There is no way to allocate more resources toward additional Rembrandts anymore.
The narrow self-interest of Homo economicus may work to his disadvantage more than he realizes because
there are implicit social costs to blatant self-interested behavior. People often detest the egotist and avoid him, thereby limiting his options for utility. In a sense, option b would be an answer except that when the disutility of "no fun" outweighs the utility gained from the activity in question, then the behavior ceases.
When an agricultural price support is put on wheat to boost farmers income
there is less wheat consumed than would be consumed at the equilibrium price if no price support was involved. Because the price is above equilibrium price, the quantity demanded will be reduced.
