Deck 6: Household Behavior and Consumer Choice

Question 1

Refer to the information provided in Scenario 3 below to answer the following questions.
SCENARIO 3: Consider the budget allocation decision of a family of four on vacation in a beach resort. The family has $300 budgeted for entertainment for the weekend and two options: Renting bicycles for $10 an hour per bicycle or playing miniature golf for $4 a game per person. Consider each question separately, and place golfing on the vertical axis and bicycling on the horizontal axis. Assume that all four family members must do everything together.
Refer to Scenario 3. Graph the budget constraint.

Answer 1

Question 2

List six factors that influence the quantity of a good or service demanded by a household.

Answer 2

(1.) The price of the product. (2.) The income available to the household. (3.) The household's level of accumulated wealth. (4.) The prices of other products available. (5.) The tastes and preferences of the members of the household. (6.) The household's expectations concerning future income, prices, and wealth.

Question 3

Mike is a college student who works part time and earns $100 per week. He spends his entire income on two goods: pepperoni pizzas and bottles of soda. The price of a pepperoni pizza is $10 and the price of a bottle of soda is $2. Draw Mike's budget constraint.

Answer 3

The budget constraint is drawn below.

Question 4

What are the three basic economic decisions each household must make?

Question 5

Assume that income in year 1 is 1000 and 1200 in year 2 and the individual can against his future income or lend his current income at zero cost. Graph the budget constraint. Measure consumption in year 1 along the horizontal axis and consumption in year 2 along the vertical axis.

Question 6

What does the assumption of perfect knowledge include?

Question 7

Susie receives an allowance from her parents of $10 per week. She spends her entire allowance on two goods: cans of hairspray and bubble gum. The price of a can of hairspray is $2 and the price of a pack of bubble gum is $1. What is the opportunity cost of a can of hairspray? What is the opportunity cost of a pack of bubble gum?

Question 8

Misty spends her entire weekly allowance of $15 on two goods: T-shirts (which cost $10 each) and lipstick (which costs $5). What is the opportunity cost of a T-shirt? If her parents raise her allowance to $20 per week, what happens to the opportunity cost of a T-shirt?

Question 9

Why do firms in perfectly competitive markets have no control over the price of their products?

Question 10

Connor receives a weekly allowance of $20 from his parents that he uses to purchase two goods: Pokemon cards (which cost $5 per pack) and comic books (which cost $4 each). Draw Connor's budget constraint. Show what would happen if Connor's parents lower his allowance to $15 per week. Does the opportunity cost of a comic book change?

Question 11

Justin has a part-time job and earns $50 per week. He spends his entire income on two goods: Hamburgers (which cost $2 each) and movie rentals (which cost $3 each). Draw Justin's budget constraint. Suppose that Justin decides to purchase 10 hamburgers and rent 10 movies this week. Is this choice within Justin's opportunity set? Show this choice on your graph.

Question 12

Mike is a college student who works part time and earns $100 per week. He spends his entire income on two goods: pepperoni pizzas and bottles of soda. The price of a pepperoni pizza is $10 and the price of a bottle of soda is $2. What is the opportunity cost of a pepperoni pizza? What is the opportunity cost of a bottle of soda?

Question 13

What are the three basic decisions that any household must make.

Question 14

Susie receives an allowance from her parents of $10 per week. She spends her entire allowance on two goods: cans of hairspray and bubble gum. The price of a can of hairspray is $2 and the price of a pack of bubble gum is $1. Draw Susie's budget constraint.

Question 15

What is meant by the term homogeneous products? Give an example.

Question 16

List the characteristics of a perfectly competitive market.

Question 17

What role do households play in output markets? What role do households play in factor
markets?

Question 18

What role do firms play in output markets? What role do firms play in factor markets?

Question 19

What is a budget constraint?

Question 20

Joseph earns $200 per week and spends his entire income on cheese (which costs $5 per pound) and crackers (which cost $2 per box). Draw Joseph's budget constraint. If the price of cheese increases to $8 per pound, what will happen to Joseph's budget constraint?

Question 21

Refer to the information provided in Scenario 3 below to answer the following questions.
SCENARIO 3: Consider the budget allocation decision of a family of four on vacation in a beach resort. The family has $300 budgeted for entertainment for the weekend and two options: Renting bicycles for $10 an hour per bicycle or playing miniature golf for $4 a game per person. Consider each question separately, and place golfing on the vertical axis and bicycling on the horizontal axis. Assume that all four family members must do everything together.
Refer to Scenario 3. Graph the effect of a "Rent 3  Get 1 Bicycle Free" promotion.

Question 22

What is the difference between total utility and marginal utility?

Question 23

Below represents a total utility function for someone that goes to the gym. Add a second column in which you calculate the marginal utility of each visit to the gym. Use this information to determine when diminishing marginal utility sets in.

Question 24

Graph the budget constraint for a worker who earns 5 dollars an hour and can, theoretically, work 24 hours a day. Measure units of leisure along the horizontal axis. Now graph the budget constraint for a worker who makes 6 dollars an hour and can, theoretically, work 24 hours a day. Compare the two graphs.

Question 25

Comment on the following statement: "Diminishing marginal utility means that total utility falls when an additional unit of a good is consumed."

Question 26

Kylie spends her income of $150 per week on two goods: movies (which cost $5 each) and books (which cost $10 each). At her current level of consumption, the marginal utility from the last movie consumed is 20 and the marginal utility from the last book consumed is 30. Is Kylie maximizing her utility? Why or why not? If not, what should Kylie do to achieve a higher level of utility?

Question 27

Graph the budget constraint for Px = 2, Py = 3, and I = 1500 with the additional condition that X is free for the first 250 units. Measure units of X along the horizontal axis and units of Y along the vertical axis.

Question 28

Using the consumer equilibrium condition which is expressed in algebraic form below prove that this is the same thing as saying that consumer equilibrium occurs when the ration of the marginal utilities per dollar are equal for both goods.

Question 29

Evaluate the following statement. "As long as I am still enjoying this candy I am going to keep buying and eating more of it".

Question 30

Refer to the information provided in Scenario 3 below to answer the following questions.
SCENARIO 3: Consider the budget allocation decision of a family of four on vacation in a beach resort. The family has $300 budgeted for entertainment for the weekend and two options: Renting bicycles for $10 an hour per bicycle or playing miniature golf for $4 a game per person. Consider each question separately, and place golfing on the vertical axis and bicycling on the horizontal axis. Assume that all four family members must do everything together.
Refer to Scenario 3. Graph the effect of a promotion of two free hours of bicycling for each family of four.

Question 31

Explain how it is possible for marginal utility to fall while total utility is still on the rise?

Question 32

Assume that Paula can buy gum or candy. A pack of gum costs $.30 and a candy bar costs $.50. Paula has $3.00 a day to spend on gum and candy bars. Draw Paula's budget constraint. Shade in Paula's choice set. On the graph show how Paula's budget constraint will be affected if the price of gum increases to $.50.

Question 33

When total utility is rising but at a decreasing rate what must be happening to marginal utility? When will total utility stop rising?

Question 34

What is the law of diminishing marginal utility?

Question 35

What is meant by utility?

Question 36

Observe the difference in vending machines between canned soda and newspapers. Typically, if you insert coins into a newspaper vending machine and open it you will see available all of the copies of the newspaper within one's reach. However, soda machines are very different. They work such that only one can is dispensed at a time. The rest of the canned soda is well out of reach. Explain in terms of marginal utility why the newspaper distributor is relatively unconcerned about the rest of the newspapers being taken without payment while the soda distributor uses a machine that goes to great lengths to insure that only one can of soda is dispensed at a time.

Question 37

Refer to the information provided in Scenario 3 below to answer the following questions.
SCENARIO 3: Consider the budget allocation decision of a family of four on vacation in a beach resort. The family has $300 budgeted for entertainment for the weekend and two options: Renting bicycles for $10 an hour per bicycle or playing miniature golf for $4 a game per person. Consider each question separately, and place golfing on the vertical axis and bicycling on the horizontal axis. Assume that all four family members must do everything together.
Refer to Scenario 3. Graph the effect of a 100% increase in the price of miniature golf.

Question 38

Graph the budget constraint for Px = 2, Py = 3, and I = 1500. Measure units of X along the horizontal axis and units of Y along the vertical axis.

Question 39

The table below shows how the total utility that Zach derives from eating candy bars changes as he consumes more and more candy bars each day:
Fill in the table above. Do the numbers in the table support the law of diminishing marginal utility? Explain.

Question 40

What problems are implicit in the concept of utility?

Question 41

What is the utility-maximizing rule?

Question 42

What does diminishing marginal utility imply about the shape of a person's demand curve? Explain.

Question 43

When the price of corn increases, the quantity of corn demanded falls. Explain this change in terms of income and substitution effects.

Question 44

Colin spends his income of $100 per week on two goods: pizzas (which cost $8 each) and milk (which costs $1 per gallon). At his current level of consumption, the marginal utility from the last pizza consumed is 32 and the marginal utility from the last gallon of milk is 4. Is Colin maximizing his utility? Why or why not? If not, what should Colin do to achieve a higher level of utility?

Question 45

What is the diamond-water paradox?

Question 46

Suppose that Jeanna's income rises. If tomatoes are a normal good, what will happen to the quantity of tomatoes purchased by Jeanna? Is this an income effect, a substitution effect, or both? Explain.

Question 47

The table below shows how the total utility that Alan derives from watching basketball games changes as he watches more and more games each week:
Fill in the table above. Do the numbers in the table support the law of diminishing marginal utility? Explain.

Question 48

Differentiate between an income effect and a substitution effect.

Question 49

Suppose that macaroni and cheese is an inferior good and the price of macaroni and cheese rises. Explain the income and substitution effects of this price change.

Question 50

When the price of raisins falls, the quantity of raisins demanded rises. Explain this change in terms of income and substitution effects.