Deck 3: Consumer Behavior

Question 1

Alvin's preferences for good X and good Y are shown in the diagram below.
Figure 3.1.6
Based on Figure 3.1.6 above, it can be inferred that:

A) Alvin does not consider good X as "good."
B) Alvin will never purchase any of good Y.
C) Alvin regards good X and good Y as perfect substitutes.
D) Alvin regards good X and good Y as perfect complements.
E) none of the above

Answer 1

Alvin regards good X and good Y as perfect complements.

Question 2

The assumption that preferences are complete:

A) means that a consumer will spend her entire income.
B) is unnecessary, as long as transitivity is assumed.
C) recognizes that there may be pairs of market baskets that cannot be compared.
D) means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them.

Answer 2

means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them.

Question 3

Indifference curves are convex to the origin because of:

A) transitivity of consumer preferences.
B) the assumption of a diminishing marginal rate of substitution.
C) the assumption that more is preferred to less.
D) the assumption of completeness.
E) none of the above

Answer 3

the assumption of a diminishing marginal rate of substitution.

Question 4

Alvin's preferences for good X and good Y are shown in the diagram below.
Figure 3.1.6
Refer to Figure 3.1.6. Which assumption concerning preferences do Alvin's indifference curves violate?

A) Diminishing marginal rates of substitution
B) Transitivity of preferences
C) More is preferred to less
D) Completeness
E) both A and C

Question 5

Figure 3.1.5
Refer to Figure 3.1.5. Which of the following is true concerning the consumer's marginal rate of substitution?

A) It is diminishing.
B) It is positive but varies along the indifference curve.
C) It is constant.
D) It is zero.

Question 6

The field of behavioral economics has been built around which of the following assertions?

A) Consumers have preferences among the various goods and services available to them.
B) Consumers face budget constraints which put limits on what they can buy.
C) Consumers may not be as rational and well-informed as economists make them out to be.
D) Consumers ignore the information they obtain and tend to make more irrational than rational decisions.

Question 7

Figure 3.1.3
If indifference curves cross, then:

A) the assumption of a diminishing marginal rate of substitution is violated.
B) the assumption of transitivity is violated.
C) the assumption of completeness is violated.
D) consumers minimize their satisfaction.
E) all of the above

Question 8

Figure 3.1.1
A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called:

A) a budget line.
B) an isoquant.
C) an indifference curve.
D) a demand curve.

Question 9

Select from the following, the issues that consumer theory can help to resolve.

A) How consumer allocate their incomes to the purchase of goods and services
B) Problems involving corporate policy
C) Problems involving public policy
D) All of the above

Question 10

Figure 3.1.2
When different indifference curves are placed in the Cartesian plane,

A) the result is called an indifference map.
B) the curves cannot intersect.
C) the curves that occupy a place farther away from the origin yield more utility than curves closer to the origin.
D) all of the above

Question 11

The theory of consumer behavior assumes that consumers can compare and rank all possible market baskets. This assumption is called:

A) completeness.
B) transitivity.
C) nonsatiation (more is preferred to less).
D) rationality.

Question 12

Figure 3.1.1
Refer to Figure 3.1.1 above. On the assumption that the consumer prefers more to less, which of the following baskets are preferred to market basket A?

A) B and D
B) B and E
C) Only B
D) Only E

Question 13

Figure 3.1.5
Based on Figure 3.1.5, it can be inferred that:

A) the consumer does not consider orange juice as "good."
B) the consumer will never purchase any quantity of apple juice.
C) the consumer regards orange juice and apple juice as perfect substitutes.
D) the consumer regards orange juice and apple juice as perfect complements.

Question 14

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

A) completeness.
B) transitivity.
C) nonsatiation.
D) rationality.

Question 15

The slope of an indifference curve reveals:

A) that preferences are complete.
B) the marginal rate of substitution of one good for another good.
C) the ratio of market prices.
D) that preferences are transitive.
E) none of the above

Question 16

Figure 3.1.1
Refer to Figure 3.1.1 above. Relative to market basket A, which market baskets would compensate for the loss of one good with the gain in the other, so that total utility from any of these baskets would be the same?

A) B and D
B) G and E
C) B and E
D) Only E

Question 17

Figure 3.1.2
Refer to Figure 3.1.2. The shape of an indifference curve like the one in this figure:

A) represents more realistically the preferences of a rational consumer.
B) implies that consumer preferences are not complete.
C) violates the assumption that more is preferred to less.
D) has market baskets that represent different levels of utility.

Question 18

Figure 3.1.3
Refer to Figure 3.1.3 above. The way in which the indifference curves are drawn in this figure:

A) represents a unique case in which two different indifference curves offer the same level of utility.
B) compares three market baskets that yield the same level of utility.
C) violates the principle of transitivity in the model of consumer behavior.
D) represents the usual way in which indifference curves appear on an indifference map.

Question 19

Figure 3.1.4
Refer to Figure 3.1.4 above. When computing the marginal rate of substitution from point to point as we move downward across the curve, we discover:

A) a diminishing marginal rate of substitution.
B) an ever increasing marginal rate of substitution.
C) a constant marginal rate of substitution.
D) no particular trend in the marginal rate of substitution.

Question 20

Figure 3.1.4
Refer to Figure 3.1.4 above. The value of the marginal rate of substitution between points B and D is:

A) -4
B) -0.25
C) 10
D) 6

Question 21

A numerical score that represents the satisfaction that a consumer gets from a given market basket is called:

A) utility.
B) a utility function.
C) marginal utility.
D) the marginal rate of substitution.

Question 22

Figure 3.1.8
Refer to Figure 3.1.8 above. This indifference map shows that this consumer:

A) prefers cars with more space and less acceleration.
B) obtains the same additional utility from more space or more acceleration.
C) obtains more utility only when acceleration increases, even if space remains about the same.
D) takes notice of the fact that, as acceleration increases, space decreases.

Question 23

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

A) 2 units
B) 4 units
C) 6 units
D) 8 units

Question 24

A budget line shows the combinations of:

A) prices that place a limit on the purchase and consumption of two goods.
B) two goods that can be purchased with a given income, and given the prices of the two goods.
C) two goods that can be purchase at various levels of income.
D) the quantities of two goods that can be purchased at various prices.

Question 25

A utility function that generates a ranking of market baskets in order of most to least preferred is called:

A) a cardinal utility function.
B) an ordinal utility function.
C) either an ordinal or a cardinal function. Both types of functions use this ranking.
D) neither an ordinal nor a cardinal function. Neither type uses this ranking.

Question 26

To answer the question: Can money buy happiness?, a study of the relationship between GDP per capita and satisfaction with life demonstrates that:

A) there is an inverse relationship between money and happiness. People in countries with lower GDP per capita tend to be happier than people in countries with higher GDP per capita.
B) there is a direct relationship between money and happiness. People in countries with higher GDP per capita tend to be happier than people in countries with lower GDP per capita.
C) there is no apparent relationship between money and happiness, at least not when GDP per capita is compared to a country's corresponding level of satisfaction with life.
D) things other than money appear to be more important than GDP per capita in determining the level of satisfaction with life.

Question 27

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

A) the budget line will become steeper.
B) the budget line will become flatter.
C) the slope of the budget line will not change.
D) the slope of the budget line will change, but in an indeterminate way.

Question 28

The endpoints (horizontal and vertical intercepts) of the budget line:

A) measure its slope.
B) measure the rate at which one good can be substituted for another.
C) measure the rate at which a consumer is willing to trade one good for another.
D) represent the quantity of each good that could be purchased if all of the budget were allocated to that good.
E) indicate the highest level of satisfaction the consumer can achieve.

Question 29

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is:

A) -Q_A/Q_B.
B) -Q_B/Q_A.
C) -P_A/P_B.
D) -P_B/P_A.
E) I/P_A or I/P_B.

Question 30

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

A) -7/15
B) -7/100
C) -15/7
D) 7/15

Question 31

Figure 3.2.1
Refer to Figure 3.2.1 above. Let I = income, P_F the price of food, and P_C the price of clothing. The vertical intercept of the budget line equals 40, which is equivalent to:

A) I.
B) -P_C/P_F.
C) I/P_C.
D) I/P_F.

Question 32

A utility function describing by how much one market basket is preferred to another is called:

A) a cardinal utility function.
B) an ordinal utility function.
C) either an ordinal or a cardinal function. Both types of functions use this ranking.
D) neither an ordinal nor a cardinal function. Neither type uses this ranking.

Question 33

Figure 3.2.1
Refer to Figure 3.2.1 above. The slope of the budget line equals:

A) -1
B) -2
C) -0.5
D) -1.5

Question 34

Consider the following three market baskets:Table 3.1

Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses, she just cannot decide. An economist would say that this is an example of preferences that:

A) are not transitive.
B) are incomplete.
C) violate the assumption that more is preferred to less.
D) all of the above

Question 35

Consider the following three market baskets:Table 3.1

Two goods for which the marginal rate of substitution is zero or infinite are:

A) perfect substitutes.
B) perfect complements.
C) goods considered "bads."
D) substitutes and complements at the same time.

Question 36

To understand consumer behavior and how consumer decisions are made, it is necessary and/or sufficient to work with:

A) cardinal utility functions only.
B) ordinal utility functions only.
C) both cardinal and ordinal utility functions.
D) either ordinal or cardinal functions, but not both.

Question 37

Consider the following three market baskets:Table 3.1

Refer to Table 3.1. If preferences satisfy all four of the basic assumptions:

A) A is on the same indifference curve as B.
B) B is on the same indifference curve as C.
C) A is preferred to C.
D) B is preferred to A.
E) Both A and B answer choices are correct.

Question 38

Consider the following three market baskets:Table 3.1

Goods that are considered "bads" have this characteristic:

A) their marginal rates of substitution are constant.
B) for those goods, less is preferred to more.
C) preferences for those goods are not complete.
D) those goods have horizontal or vertical indifference curves.

Question 39

Alvin's preferences for good X and good Y are shown in the diagram below.
Figure 3.1.6
Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

A) vertical lines.
B) horizontal lines.
C) diagonal straight lines.
D) right angles.
E) upward sloping.

Question 40

Figure 3.1.7
Refer to Figure 3.1.7 above. This indifference map shows that: this consumer:

A) prefers a car with more acceleration and less space.
B) prefers more expensive rather than less expensive cars.
C) is indifferent between acceleration and space at all levels of utility.
D) all of the above

Question 41

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?

A) Both goods are consumed.
B) No goods are consumed.
C) Only one of the goods is consumed.
D) It occurs at the point of tangency with the budget line.

Question 42

An increase in income, holding prices constant, can be represented as:

A) a change in the slope of the budget line.
B) a parallel outward shift in the budget line.
C) an outward shift in the budget line with its slope becoming flatter.
D) a parallel inward shift in the budget line.

Question 43

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of clothing increases and the price of food and income do not change, then the budget line changes by rotating:

A) counter-clockwise about the fixed vertical axis intercept.
B) clockwise about the fixed vertical axis intercept.
C) counter-clockwise about the fixed horizontal axis intercept.
D) clockwise about the fixed horizontal axis intercept.
E) none of the above

Question 44

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?

A) MRSxy is at a maximum.
B) P_X/P_Y = money income.
C) MRSxy = money income.
D) MRSxy = P_X/P_Y.
E) all of the above

Question 45

Figure 3.2.2
Which of the following will result in a decrease in a consumer's purchasing power?

A) A decrease in the consumer's income
B) An increase in the price of the good on the vertical axis
C) An increase in the price of the good on the horizontal axis
D) all of the above

Question 46

The fact that Alice spends no money on travel:

A) implies that she does not derive any satisfaction from travel.
B) implies that she is at a corner solution.
C) implies that her MRS does not equal the price ratio.
D) Any of the above are possible.

Question 47

Satisfaction from consumption is maximized when:

A) marginal cost equals zero.
B) marginal benefit equals zero.
C) marginal benefit equals marginal cost.
D) marginal benefit is maximum.

Question 48

Figure 3.2.2
Refer to Figure 3.2.2 above. Which of the following could have caused the shift of the budget line?

A) An increase in income
B) An increase in the price of food
C) A decrease in the price of clothing
D) An increase in the preference for both goods

Question 49

The price of coffee is always equal to one-half the price of tea. When we plot the budget line for coffee and tea, coffee is plotted on the horizontal axis. What is the slope of this budget line?

A) -1/2
B) 1/2
C) -2
D) 2

Question 50

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (P_F), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?

A) The budget line is a straight line.
B) The budget line is now concave to (bows out from) the origin.
C) The budget line is now convex to (bows in toward) the origin.
D) The budget line will not be a straight line, but it may be concave or convex.

Question 51

Figure 3.2.3
Refer to Figure 3.2.3 above. The rotation of the budget line could have been caused by:

A) an increase in income.
B) an increase in the price of food.
C) a decrease in the price of food.
D) an increase in the preference for food.

Question 52

Figure 3.2.4
Refer to Figure 3.2.4. Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

A) The price of food and the price of clothing increased.
B) The price of food increased, and the price of clothing decreased.
C) The price of food decreased, and the price of clothing increased.
D) The price of food and the price of clothing decreased.
E) none of the above

Question 53

Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will:

A) become flatter.
B) become steeper.
C) shift outward.
D) become steeper or flatter depending on the relationship between prices and income.

Question 54

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

A) the magnitude of the slope of the indifference curve through that point.
B) one over the magnitude of the slope of the indifference curve through that point.
C) P_X/P_Y
D) P_Y/P_X

Question 55

Figure 3.2.3
Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating:

A) counter-clockwise about the fixed vertical axis intercept.
B) clockwise about the fixed vertical axis intercept.
C) counter-clockwise about the fixed horizontal axis intercept.
D) clockwise about the fixed horizontal axis intercept.
E) none of the above

Question 56

Figure 3.2.4
To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?

A) Makes the budget line steeper
B) Makes the budget line flatter
C) Parallel outward (rightward) shift
D) Parallel inward (leftward) shift
E) none of the above

Question 57

The budget constraint for a consumer who only buys apples (A) and bananas (B) is P_AA + P_BB = I where consumer income is I, the price of apples is P_A, and the price of bananas is P_B. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation:

A) A = -I/P_A + (P_B/P_A)B
B) A = I/P_A - (P_B/P_A)B
C) B = -I/P_B + (P_A/P_B)A
D) B = I/P_B - (P_A/P_B)A

Question 58

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. Also, suppose that all states initially impose state sales taxes on all goods (including food), but then the states exempt food from the state sales tax. How does this tax policy change alter the consumer's budget line?

A) Makes the budget line steeper
B) Makes the budget line flatter
C) Parallel rightward shift
D) Parallel leftward shift
E) none of the above

Question 59

If prices and income in a two-good society double, what will happen to the budget line?

A) The intercepts of the budget line will increase.
B) The intercepts of the budget line will decrease.
C) The slope of the budget line may either increase or decrease.
D) Insufficient information is given to determine what effect the change will have on the budget line but we know society is worse-off.
E) There will be no effect on the budget line.

Question 60

Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3. Which of the following is true?

A) Jack could increase his utility by buying more pens and fewer pencils.
B) Jack could increase his utility by buying more pencils and fewer pens.
C) Jack could increase his utility by buying more pencils and more pens.
D) Jack could increase his utility by buying fewer pencils and fewer pens.
E) Jack is at a corner solution and is maximizing his utility.

Question 61

Which of the following statements is not true?

A) If tea and coffee are perfect substitutes in your consumption, then you will only consume the good with the lowest price.
B) If tea and coffee are perfect substitutes in your consumption, then you will consume some quantity of both goods if the prices of tea and coffee are equal.
C) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. As long as your income and the prices of coffee and donuts are positive, you will not choose a corner solution.
D) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. You will consume coffee and donuts at some point along the 45-degree line where your MRS equals the price ratio for the two goods.

Question 62

Sally consumes two goods, X and Y. Her utility function is given by the expression The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500.
a. Sketch a set of two indifference curves for Sally in her consumption of X and Y.
b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope.
c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

Question 63

You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted P_Y for frozen yogurt and P_IC for ice cream. Under what condition will you only consume frozen yogurt?

A) MRS is greater than P_IC/P_Y.
B) MRS is less than P_IC/P_Y.
C) MRS is less than P_Y/P_IC.
D) MRS is infinite.

Question 64

The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:

A) 2 lemonades for each popcorn.
B) 1 lemonades for each popcorn.
C) 1/2 lemonade for each popcorn.
D) indeterminate unless more information on Fred's marginal utilities is provided.

Question 65

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package?

A) Sue does not change her consumption because these goods are perfect complements.
B) She buys the same amount of hot dog buns and buys more hot dogs.
C) She buys the same amount of hot dogs and buys two less packages of hot dog buns.
D) She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.

Question 66

Suppose that the government subsidizes housing expenditures of low-income families by providing a dollar-for-dollar subsidy to a family's housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 which can be used for housing or other goods. Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two.

Question 67

Amy is currently spending her income to maximize her satisfaction. She is renting an apartment for $900 per month as shown in the diagram below (Assume each dollar spent on housing buys 1 unit of housing. H1 represents her $900 per month apartment). a. Suppose that Amy qualifies for a government housing assistance program that will provide her with a $600 per month apartment at no charge. If she accepts the apartment, she cannot augment her expenditure on housing (for example, she cannot add $300 of her income to the $600 per month provided by the government program, and rent the $900 per month apartment), nor can she exchange the apartment for cash or other goods. How does the government program alter Amy's budget line?
b. Suppose that Amy is given $600 in cash instead of the $600 per month apartment. How will this alter Amy's budget line?
c. Is Amy indifferent between the housing assistance program and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Question 68

The food stamp program provides low income households with coupons which can be exchanged for some specified dollar value worth of food. Many economists argue that this program is an inefficient means of increasing the well-being of low income families. Proponents of this view argue that an equivalent cash subsidy would bring about a greater increase in the well-being of the low income families receiving aid. Although many economists hold this view, not all policy analysts agree with the advocates of cash payments instead of food stamps. Advocates of the existing program argue that food stamps provide an incentive for low income families to increase the nutritional quality of their diets.
a. Carefully analyze the arguments regarding increases in well-being under cash payments and food stamp programs. Use graphical analysis to present your arguments.
b. Critically evaluate the pros and cons of the food stamp program. Do food stamps ensure that low income families increase their consumption of food?

Question 69

The local farmer's market sells corn for 20 cents an ear. At this price, Sam buys 6 ears each Thursday. What would happen to Sam's consumption of corn if the market offered corn at 20 cents an ear for the first 6 ears, but 10 cents an ear for each additional ear? Explain your answer.

Question 70

Larry lives with his parents and enjoys listening to jazz. Because of his living arrangements, his only expense is on jazz music. To earn money to buy new albums, Larry must work. Larry has 16 hours per day he could spend listening to jazz or working. Each hour he works he earns $6. Each album costs him $12. Diagram Larry's budget constraint for new jazz albums and time spent listening to jazz. If Larry's parents require him to spend two hours per day doing chores around the house, what happens to his budget constraint? Does the requirement to do chores make Larry worse off?

Question 71

Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each semester that can only be used to buy books. Diagram Bobby's budget constraint when he has the gift certificate in addition to his $500 income. Is Bobby better-off with the gift certificates?

Question 72

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. What is her optimal choice under this scenario?

A) 8 packages of hot dogs and 6 packages of buns
B) 8 packages of hot dogs and 8 packages of buns
C) 6 packages of hot dogs and 6 packages of buns
D) 6 packages of hot dogs and 8 packages of buns

Question 73

George has a fixed income and can afford at most 7 units of X if he spends his entire income on X. Alternatively, if he spends all his income on Y, he can afford at most 6 units of Y. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's?

Question 74

Sheila can watch as many television programs as she wants for free, but she must pay $2 for each video she rents. Draw Sheila's budget line for t.v. shows (T) and videos (V), and identify the set of affordable bundles (be sure to label the axes). At a particular point on Sheila's budget line, her MRS is 1T/2V. Illustrate this situation on your diagram. Has Sheila maximized her satisfaction at this point? If not, identify a change in consumption that will make her better off. Describe her preferences when satisfaction is maximized.

Question 75

When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that:

A) Joe's preferences are incomplete.
B) Joe's preferences are irrational.
C) Joe is not consuming good X.
D) Joe is not consuming good Y.

Question 76

Sally consumes two goods, X and Y. Her utility function is given by the expression The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500.
a. Sketch a set of two indifference curves for Sally in her consumption of X and Y.
b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope.
c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

Question 77

Suppose that the price of gasoline has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on gasoline? Diagram the impact of the increase in gas prices in a commodity space diagram, and show the relevant indifference curves.
Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less gasoline (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of gasoline with the higher income level or the original price of gas and income?

Question 78

Hulk goes to the gym 20 times a month. His income is $1,000 per month and his visits to the gym cost $4 per visit.
a. Draw Hulk's budget line for visits to the gym and all other goods, show the consumption bundle that maximizes his satisfaction, and draw the indifference curve through that point.
b. Recently, a new health club opened which offers identical facilities but which charges a flat fee of $60 per month plus $1 per visit. Draw Hulk's budget line if he were to join this new club.
c. Would Hulk continue to work out at the gym or would he join the new health club. Why?

Question 79

A consumer decides not to buy a VCR when her income is $20,000. However, when her income rises to $30,000, she decides to buy one. In a single diagram, draw the budget lines and indifference curves to illustrate this situation (assume the VCR costs $300 in both time periods). Be sure to label your diagram completely.

Question 80

Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods?

A) 4 pounds of apples and 6 pounds of oranges
B) 5 pounds of apples and 5 pounds of oranges
C) 10 pounds of oranges and no apples
D) 15 pounds of apples and no oranges
E) none of the above