ECON CH. 10
Suppose the market for ice cream cones is made up of three consumers: Josh, Curt, and Tim. Complete the information in the following table to construct the market demand curve for ice cream cones.
3 9 13 17 21 Graph
Joe has $32.00 to spend on Twinkies and Ho-Hos. Twinkies have a price of $2.00 per pack and Ho-Hos have a price of $4.00 per pack. Use the information in the graphs to the right to determine the number of Twinkies packs and the number of Ho-Hos packs Joe should buy to maximize his utility Joe has $16.00 to spend on Twinkies and Ho-Hos. Twinkies have a price of $1.00 per pack and Ho-Hos have a price of $2.00 per pack. Use the information in the graphs to the right to determine the number of Twinkies packs and the number of Ho-Hos packs Joe should buy to maximize his utility
4 Twinkies 6 Ho-Hos 4 Twinkies 6 Ho-Hos
a. Use the rule for determining optimal purchases to decide how many hours you should study each subject. Treat each point on an exam like 1 unit of utility and assume you are equally interested in doing well in economics and psychology. b. Suppose now that you are a psychology major and that you value each point you earn on a psychology exam as being worth three times as much as each point you earn on an economics exam. Now how many hours will you study each subject?
4 hours for Econ 2 hours for Psych 2 hours for Econ 4 hours for Psych
Joe's marginal utility per dollar spent on apples is ----- units of utility per dollar. Joe's marginal utility per dollar spent on oranges is ----- units of utility per dollar. The total amount of his income Joes spends on apples and oranges is ----- dollars. Is Joe maximizing his utility?
50, 50, 49 Yes, Joe is maximizing his total utility. Marginal utility per dollar spent on each good is equal, and he is spending his entire budget.
A columnist on forbes.com notes that many poor people have diets that are high in carbohydrates, such as potatoes, rice, or bread, with relatively little protein from meat or fish. He notes that as a consumer in this situation, if the price of the carbohydrates in your diet rises: "You'll cut out the more expensive fish, bacon or pork in order to buy more of that basic carbohydrate. And that's what a Giffen Good is." Explain his reasoning that in this situation the carbohydrate is a Giffen good.
Carbohydrates are Giffen goods because they have upward-sloping demand curves.
In deciding between consuming more goods now or saving money, consumers should do which of the following?
Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal.
Utility refers to how much consumers utilize a product or service.
False
Considering only the income effect, if the price of an inferior good increases, would a consumer want to buy a larger quantity or a smaller quantity of the good? Does purchasing a smaller (larger) quantity demanded when price falls (rises) mean that demand curves for inferior goods should slope upward? Considering only the income effect, if the price of a normal good increases, would a consumer want to buy a larger quantity or a smaller quantity of the good? Does purchasing a smaller (larger) quantity demanded when price falls (rises) mean that demand curves for inferior goods should slope upward?
If the price of a good increases, the consumer has less purchasing power, so he would want to purchase more of an inferior good This does not mean that the demand curves for inferior goods should slope upward as we must also take into account the substitution effect. If the price of a good increases, the consumer has less purchasing power, so he would want to purchase less of a normal good This does not mean that the demand curves for inferior goods should slope upward as we must also take into account the substitution effect.
The chapter states that: "When the price of an inferior good falls, the income and substitution effects work in opposite directions." This statement means:
If the price of an inferior good falls, the income effect will decrease quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the opposite directions
When does the law of diminishing marginal utility hold true? In which of the following situations does the law of diminishing marginal utility not hold?
It holds true in most situations involving the consumption of a good. For methamphetamine addicts, the more dosages of the illegal drug, the more euphoric they become.
What is a budget constraint? The optimal combination of pizza and coke you should consume is the one
It is the limited amount of income available to consumers to spend on goods and services. where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.
In a column of forbes.com, Patrick Rishe, an economist at Washington University, notes that in recent years the National Football League has significantly expanded the number of games it broadcasts. As a result, he argues: "The NFL has oversaturated the market with its product.... TV ratings, consequently, have fallen. At least in part, diminishing marginal utility is a likely explanation as to why." Briefly explain his reasoning.
NFL fans experience less additional satisfaction as they watch more NFL games.
Marty and Ann discussed the rule of equal marginal utility per dollar spent, a topic that was recently covered in the economics course they were both taking: Marty: "When I use my calculator to divide the marginal utility of pizza by a price of zero, I don't get an answer. This result must mean that if pizza were being sold for a price of zero the quantity demanded would be infinite." Ann: "Marty, that can't be true. No producer would be willing to sell pizza, or any other product, for a zero price. Quantity demanded cannot be infinite, so zero prices cannot appear on demand curves and demand schedules." Assume that Marty and Ann ask you for advice. Which of their statements is correct?
Neither is correct
According to the U.S. Energy Information Administration, the average price of heating oil fell to under $3.00 a gallon during the winter of 2014-2015, the lowest price in more than four years. About 6.2 million U.S. households in the Northeast rely on the fuel to heat their homes. For the following questions, assume that no factor that affects the demand for heating oil, other than its price, changed during the winter of 2014-2015. If households in the Northeast decreased their consumption of heating oil in the winter of 2014-2015, can we conclude that for these households, heating oil was an inferior good? If households in the Northeast decreased their consumption of heating oil in the winter for 2014-15, we can conclude that for these households heating oil is
No. To conclude that heating oil is an inferior good, we would have to know that less heating oil was consumed as the incomes of Northeast households rose. a Giffen good because when the price fell less was consumed.
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
The change in utility from consuming an additional unit of a good or service. consumers experience diminishing additional satisfaction as they consume more of a good or service. optimal decisions are made at the margin.
What would need to be true for a demand curve to be upward sloping?
The good would have to be an inferior good, and the income effect would have to be larger (in absolute value) than the substitution effect.
LaToya 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 chips is 10, and the marginal utility of the fifth bottle of soda is also 10. Is LaToya maximizing utility?
This cannot be determined because we do not know the price of corn chips and soda and whether or not she fully spent her budget allocated to corn chips and soda.
The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.
True
Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.
When the price of a good rises, the ratio of the marginal utility to price falls, leading consumers to buy less of that good.
The marginal utility per dollar you are spending on iTunes music downloads is less than the marginal utility per dollar you are spending on Red Bull. According to the rule of equal marginal utility per dollar spent, what can you do to increase your total utility from consumption of music downloads and Red Bull?
You can increase your consumption of Red Bull.
The substitution effect is the change in the quantity demanded of a good that results from -----, holding constant the effect of the price change on consumer purchasing power. The income effect causes quantity demanded to ----- when the price of a normal good decreases, and causes quantity demanded to ----- when the price of an inferior good decreases.
a change in price making the good more or less expensive relative to other goods increase; decrease
A market demand curve is derived by
adding horizontally the individual demand curves.
Assume that a consumer buys only two goods-pizza and Coke. He is faced with a budget constraint because he has a limited amount of income to spend on the two goods. All of the following statements regarding the individual's demand curve for pizza are true except that When the price of pizza falls along the demand curve for pizza,
at each point on the demand curve, marginal utility from the consumption of pizza equals marginal utility from the consumption of Coke. the consumer adjusts the consumption of both pizza and Coke following the rule of equal marginal utility per dollar.
Maya spends her $50 budget on two goods, cans of tuna and bottles of ginger ale. Initially, the marginal utility per dollar she spends on tuna is equal to the marginal utility per dollar she spends on ginger ale. Then the price of ginger ale decreases, while her income and the price of tuna does not change. a. Her marginal utility from consuming ginger ale b. The marginal utility per dollar she spends on ginger ale c. Because of the substitution effect, Maya will buy more ginger ale. Can we conclude that ginger ale is a normal good? d. As Maya adjusts to the change in the price of ginger ale, her marginal utility per dollar spent on tuna will
does not change increases No, because normal and inferior good designations are related to the income effect, not the substitution effect. increase because she will buy less tuna.
A budget constraint: The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by
indicates the limited amount of income available to consumers to spend on goods and services. equalizing the marginal utility per dollar spent across goods and services.
When the price of a product changes,
it changes the relative price of the product causing a substitution effect and at the same time it changes the purchasing power of the buyer causing an income effect as well.
According to the law of diminishing marginal utility, as the consumption of a particular good increases, Use the information in the following table to calculate the marginal utility from consuming the second ice cream cone.
marginal utility decreases. 8
In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu "Giffen behavior is most likely to be found among a range of households that are poor (but not too poor or too rich)." a. "Giffen behavior" describes the purchase of b. The poorest of the poor would be less likely to exhibit this behavior than people with slightly higher incomes because c. If a good has an upward-sloping demand curve, then it has to be
more of a good when the price rises the poorest of the poor often cannot purchase more of a good when the price rises. an inferior good, and the income effect would have to be larger than the substitution effect.
What is the economic definition of utility? Utility is Is it measurable?
the enjoyment or satisfaction people receive from consuming goods and services. No
