Question 1

Janice Doe consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4X^0.5Y^0.5. So, MU_X = and MU_Y = . The current prices of X and Y are 25 and 50, respectively. Janice currently has an income of 750 per time period. a. Write an expression for Janice's budget constraint. b. Calculate the optimal quantities of X and Y that Janice should choose, given her budget constraint. Graph your answer. c. Suppose that the government rations purchases of good X such that Janice is limited to 10 units of X per time period. Assuming that Janice chooses to spend her entire income, how much Y will Janice consume? Construct a diagram that shows the impact of the limited availability of X. Is Janice satisfying the usual conditions of consumer equilibrium while the restriction is in effect? d. Calculate the impact of the ration restriction on Janice's utility.

Accepted Answer

The answer of Janice Doe consumes two goods, X and...

Question 2

Scenario 3.1:
Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows:
 
-Refer to Scenario 3.1. What is the total utility that Andy will receive if he consumes 5 units of potato chips (Qp) and no Cola drink (Qc)?

Accepted Answer

A)  4 utils 
B)  10 utils 
C)  30 utils 
D)  40 utils 
E)  none of the above

Question 3

Match the following descriptions of preferences to the indifference curve diagrams that follow.
________ Ann does not care whether she has more diet soft drinks or fewer
diet soft drinks.
________ Peter is very picky about his buttered popcorn. He tops every quart
of popped corn with exactly one quarter cup of melted butter.
________ Amy likes M&M's, plain and peanut. For Amy, the marginal rate of
substitution between plain and peanut M&M's does not vary with the
quantities of plain and peanut M&M's she consumes.
________ George dislikes broccoli and would be willing to pay something to not
have to eat it.
________ Natalya likes rap and rock music. Natalya's preferences exhibit a
diminishing marginal rate of substitution between the two types of music.
________ Matthew knows his limit. He likes beer up to a point, but if he drinks
too much he gets sick.

Accepted Answer

The answer of Match the following descriptions of preferences to...

Question 4

Which of the following statements concerning utility as a measure for well being are false?

Accepted Answer

A)  There is generally a positive relationship between income and utility. 
B)  It is possible to determine which of two individuals is made happier by consuming a particular market basket. 
C)  Utility is an abstract representation of an individual's degree of happiness. 
D)  Cross country studies suggest that citizens in wealthier countries are happier than citizens in poorer countries.

Question 5

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

Accepted Answer

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 6

The magnitude of the slope of an indifference curve is:

Accepted Answer

A)  called the marginal rate of substitution. 
B)  equal to the ratio of the total utility of the goods. 
C)  always equal to the ratio of the prices of the goods. 
D)  all of the above 
E)  A and C only

Question 7

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

Accepted Answer

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 8

If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis), Jill would willingly give up:

Accepted Answer

A)  2, but no more than 2, units of popcorn for an additional unit of candy. 
B)  2, but no more than 2, units of candy for an additional unit of popcorn. 
C)  1, but no more than 1, unit of candy for an additional 2 units of popcorn. 
D)  2, but no more than 2, units of popcorn for an additional 2 units of candy.

Question 9

If the quantity of good A (QA) is plotted along the horizontal axis, the quantity of good B (QB) is plotted along the vertical axis, the price of good A is PA, the price of good B is PB and the consumer's income is I, then the slope of the consumer's budget constraint is ________.

Accepted Answer

A)  -QA/QB 
B)  -QB/QA 
C)  -PA/PB 
D)  -PB/PA 
E)  I/PA or I/PB

Question 10

Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently consumes, the marginal utility he receives from iced tea is 16 utils, and the marginal utility he receives from lemonade is 8 utils. Instead of consuming this bundle, Alfred should:

Accepted Answer

A)  buy more iced tea and less lemonade. 
B)  buy more lemonade and less iced tea. 
C)  buy more iced tea and lemonade. 
D)  buy less iced tea and lemonade. 
E)  none of the above is necessarily correct.

Question 11

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

Accepted Answer

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 12

In what ways can economists help auto manufacturers estimate the marginal rate of substitution between features such as vehicle interior size and acceleration?

Accepted Answer

A)  Examining production cost data 
B)  Conducting consumer surveys about willingness to pay for auto features 
C)  Solving the standard consumer model 
D)  Statistically analyzing historical data on purchases of different types of autos 
E)  B and D only

Question 13

If Px = Py, then when the consumer maximizes utility,

Accepted Answer

A)  X must equal Y. 
B)  MU(X) must equal MU(Y). 
C)  MU(X) may equal MU(Y), but it is not necessarily so. 
D)  X and Y must be substitutes.

Question 14

Figure 3.3
-Refer to the indifference curve in Figure 3.3. Which of the following is true about the MRS?

Accepted Answer

A)  It is negative. 
B)  It is positive. 
C)  It is equal to zero. 
D)  It is undefined.

Question 15

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.

Accepted Answer

The answer of A consumer decides not to buy a...

Question 16

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?

Accepted Answer

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

Question 17

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?

Accepted Answer

The answer of Hulk goes to the gym 20 times...

Question 18

Alvin's preferences for good X and good Y are shown in the diagram below.  Figure 3.1
-Based on Figure 3.1, it can be inferred that:

Accepted Answer

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

Question 19

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.

Accepted Answer

The answer of Suppose that the government subsidizes housing expenditures...

Question 20

In the theory of consumer behavior, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words.

Accepted Answer

The answer of In the theory of consumer behavior, certain...

Exam 3: Consumer Behavior