Econ 2020 Chapter 8
Econ 2020 Chapter 8 Econ 2020
Popular in Principles of Economics: Microeconomics
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
Popular in Business
verified elite notetaker
This 13 page Class Notes was uploaded by Samantha on Monday January 11, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by Dr. Aditi Sengupta in Winter 2016. Since its upload, it has received 586 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.
Reviews for Econ 2020 Chapter 8
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/11/16
Econ Chapter 9 Possibilities, Preferences, and Choices What goes into when individuals buy something? Satisfaction and Necessary (these two are the consumers goal) Price of goods and Incomes (these constraint the buying power of the consumer) 1. Consumption Possibilities a. Household consumption choices are constrained by its income and the price of the goods and services available. b. The budget line describes the limits to the household’s consumption choices. i. When the consumer uses the whole income ii. Points inside the line is affordable and points outside the boundary are unattainable iii. Some goods are indivisible goods and must be bought in whole units at the points marked iv. Other goods are divisible good and can be bought in any quantity c. Expenditure = Income i. P1Q1 + P2Q2 = Y (downward sloping straight line) ii. -P1/P2 = relative price (slope) iii. I/ P2 = real income (y-intercept) d. A household’s real income is the income expressed as a quantity of goods the household can afford to buy. e. A relative price is the price of one good divided by the price of another food. Relative price is the magnitude of the slope of the budget line. f. Change in income i. Budget line will parallel shift up or down g. Change in price i. Budget line will rotate 2. Preferences and Indifferences a. An indifference curve is a line that shows combination of goods among which a consumer is indifferent. i. All the points above the indifference curve are preferred to the points on the curve ii. All the points on the indifference curve are preferred to the points below the curve b. The marginal rate of substitution (MRS) measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remain indifferent. i. The magnitude of the slope of the indifference curve measures the marginal rate of substitution ii. Steep curve= MRS high and Flat curve= MSR low c. A diminishing marginal rate of substitution is a general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remain indifferent as the quantity of good x increases d. Degree of Substitutability i. The shape of the indifference curves reveals the degree of substitutability between two goods 1. Figure 9.5 (ordinary goods, perfects substitutes, and perfect complements) 3. Predicting Consumer Choices a. The consumer’s best affordable choice is… i. On the budget line ii. On the highest attainable indifference curve iii. Has a marginal rate of substitution between the two goods equal to the relative price of the two goods b. Predicting… i. A change in Price 1. The effect of a change in the price of a good on the quantity of the good consumed is called the price effect a. Changes the slope of the budget curve 2. The effect of a change in income on the quantity of a good consumed is called the income effect a. A shift in the budget curve ii. Substitution Effect and Income Effect 1. For a normal good, a fall in price always increases the quantity consumed. We can prove this assertion by dividing the price effect in two parts: a. Substitution effect i. Is the effect of a change in price on the quantity bought when the consumer remains on the same indifferent curve b. Income effect Chapter 8 Utility and Demand 1. Consumption Choices a. The choice based on her likes and dislikes- preferences b. Her benefit or satisfaction from consuming a good or service is called utility i. Total utility is the total benefit a person gets from the consumption of goods. More consumption gives more total utility ii. Marginal utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed 1. As the quantity consumed of a good increase, the marginal utility from it decreases. We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility. 2. Utility-Maximizing Choice a. Consumer equilibrium is the situation in which a consumer has allocated all of his or her available income in the way that maximizes his or her total utility, given the prices of goods and services. b. Marginal utility per dollar is the marginal utility from a good that results from spending one more dollar on it i. = marginal utility from a good divided by its price c. Utility- Maximizing Rule- a consumer’s total utility is maximized by following the rule: i. Spend all available income ii. Equalize the marginal utility per dollar for all goods 3. New Ways of Explaining Consumer Choices a. Behavioral economics studies the ways in which limits on the human brain’s ability to compute and implement rational decision influences economic behavior i. Bounded rationality- is rationality that is bounded by the computing power of the human brain ii. Bounded willpower- is the less-than-perfect willpower that prevents us from making a decision that we know at the time of implementing the decision we will later regret iii. Bounded self-interest- is the limited self-interest that sometimes results in suppressing our own interests to help others b. The endowment effect is the tendency for people to value something more highly simply because they own it c. Neuroeconomics is the study of the activity of the human brain when a person makes an economic decision Assignment 4 (Chapter 8) 1. Suppose Jill's consumption bundle is made up of 2 goods, apples and bottles of juice. If the price of an apple increases, then Jill's budget line would A) not change. B) shift towards the origin on the apples axis only. C) shift towards the origin on both the apples and bottles of juice axes. D) shift away from the origin on the bottles of juice axis only. 2. Utility is best defined as A) the amount one is willing to pay for a good. B) the price of a good. C) the satisfaction from consuming a good. D) the practical usefulness of a good. 3. As Sean's consumption of rice goes up, his A) average utility from consuming rice increases. B) total utility from consuming rice increases. C) marginal utility from consuming rice increases. D) elasticity of utility from consuming rice increases. 4. Mark's marginal utility from reading books is the ________ when he reads ________. A) change in his total utility; one additional book B) total utility he gets; one more book C) change in his total utility; more books D) consumer surplus he gets; books 5. The total utility you get from eating slices of pizza on a given night is the A) marginal utility of the last slice times the total number of slices eaten. B) sum of the differences in marginal utility as you increase the number of slices eaten. C) sum of the marginal utilities of all slices eaten. D) sum of the marginal utilities per dollar spent on all slices eaten. 6. The total utility from three skirts is A) three times the marginal utility of the third skirt. B) three times the price of a skirt. C) three skirts divided by total income. D) the sum of the marginal utility of the first skirt plus the marginal utility of the second skirt plus the marginal utility of the third skirt. 7. Which of the following is consistent with the assumptions of marginal utility theory? A) As Jose consumes more of one good, his marginal utility from consuming more of that good decreases. B) As Jose consumes more of one good, his marginal utility from consuming more of that good increases. C) As Jose consumes more of one good, his marginal utility from consuming more of all goods decreases. D) As Jose consumes more of one good, his marginal utility from consuming more of all good increases. 8. If Pete enjoys his first pancake of the morning much more than his fifth pancake of the morning, he is exhibiting A) utility maximizing behavior. B) diminishing marginal utility. C) irrational behavior. D) diminishing total utility. 9. If marginal utility is positive but diminishing, as more units of a good are consumed, then the total utility from the good must be A) falling. B) positive and rising at an increasing rate. C) positive and rising at a decreasing rate. D) positive and rising at any rate. Quantity of magazines Total utility from magazines Quantity of CDs Total utility from CDs 0 0 0 0 1 240 1 500 2 400 2 950 3 520 3 1350 4 620 4 1650 5 680 5 1800 6 716 6 1850 7 736 7 1870 8 740 8 1875 10. The table above gives Jane's total utility from magazines and CDs. What is the marginal utility of Jane's sixth magazine? A) 80 units B) 60 units C) 36 units D) 15 units 11. The table above gives Jane's total utility from magazines and CDs. What is the marginal utility of the sixth CD? A) 150 units B) 100 units C) 50 units D) 5 units 12. The table above gives Jane's total utility from magazines and CDs. The price of a magazine is $4 and the price of a CD is $10. Which of the following correctly illustrates the principle of diminishing marginal utility? The fact that A) the sixth magazine has less marginal utility than the sixth CD. B) Jane's marginal utility per dollar from the second magazine is the same as her marginal utility per dollar from the third CD. C) the marginal utility per dollar from the sixth magazine is less than the total utility from six magazines. D) the marginal utility of the third CD is less than the marginal utility of second CD. 13. Jeannie's marginal utility from her 4th book in a month is 50. Her marginal utility from her 5th book A) is greater than 50. B) equals 50. C) is less than 50. D) might be more than, less than, or equal to 50 but more information is needed. 14. When Ramona is in consumer equilibrium, A) her total utilities of all goods are equal. B) she is maximizing her utility, given her income and the prices of goods and services. C) her total utility per dollar spent is equal for all goods. D) any change in prices would make her worse off. 15. Liane maximizes her total utility when she allocates all of her available income such that the marginal utility per dollar spent on each good ________. A) is diminishing B) is maximized C) is the same D) is increasing 16. Danny has $12 to spend on two goods: pies and soda. The price of a pie is $4, and the price of a can of soda is $2. To maximize his utility, Danny buys ________. A) the combination that gives him equal total utility from pies and soda B) 2 pies and 2 cans of soda C) only sodas because they are less expensive D) the combination that gives him the same marginal utility per dollar spent on pies as on soda Quantity of coffee (cups per day) Total utility 1 50 2 80 3 90 4 92 17. Betsy's utility depending from her consumption of coffee is shown in the table above. Betsy's marginal utility from the 3rd cup of coffee per day is A) 30. B) 85. C) 90. D) 10. 18. Betsy's utility depending from her consumption of coffee is shown in the table above. If the price of a cup of coffee is $2, Betsy's marginal utility per dollar from the 2nd cup of coffee per day is A) 15. B) 40. C) 20. D) 32.5. 19. When Frankie spends all his money in such a way that the marginal utility per dollar is the same for all final purchases of products he consumes, Frankie has maximized A) his marginal utility. B) his total utility. C) the number of products he consumes. D) his total expenditure on all products. 20. Emma consumes only hot dogs and hamburgers. She is at her consumer equilibrium. Hot dogs and hamburgers have the same marginal utility. Thus A) her total utility from all the hot dogs eaten must be the same as her total utility from all the hamburgers eaten. B) the price of a hot dog and the price of a hamburger must be the same. C) she must be eating the same number of hot dogs and hamburgers. D) Both answers B and C are correct. 21. Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 200 and his marginal utility of vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. To maximize his utility, Bobby should A) buy more chocolate ice cream and less vanilla ice cream. B) buy more vanilla ice cream and less chocolate ice cream. C) not change his purchases between chocolate ice cream and vanilla ice cream. D) buy no vanilla ice cream. 22. Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $1 per pound. The marginal utility is 30 for the last pound of mangos purchased and 8 for the last pound of bananas. To maximize his utility, Robinson should buy A) more mangos and fewer bananas. B) more bananas and fewer mangos. C) the present combination of goods. D) only bananas. 23. Sam spends all of his income on textbooks and hot dogs. The price of a textbook is $40 and the price of a hot dog is $0.50. If Sam is maximizing his utility and the marginal utility he derives from the last textbook he purchases is 400, then the marginal utility he derives from his last hot dog purchased must be A) 400. B) 10. C) 5. D) 20. 24. Usharani consumes 35 apples a week and 14 loaves of bread. Apples cost $1 each and bread costs $2 per loaf. Usharani is maximizing his utility and finds that the marginal utility from his 35th apple A) equals his marginal utility from his 14th loaf of bread. B) is twice his marginal utility from his 14th loaf of bread. C) is half his marginal utility from his 14th loaf of bread. D) is such that his total utility from apples equals his total utility from bread. 25. Tom spends all his income on comics and cola and maximizes his total utility. If the price of a comic is $4 and the price of a can of cola is $1, then the ratio of the ________ is 4. A) marginal utility from cola to the marginal utility from comics B) marginal utility from comics to the marginal utility from cola C) number of comics Tom buys to the number of cola Tom buys D) total utility from comics to the total utility from cola Assignment 5 (Chapter 9) 1. A budget line shows the A) consumption possibilities of a consumer at a given level of income and prices. B) complete set of preferences for a household at various incomes. C) consumption possibilities for several sets of relative prices at a level of income. D) rate at which consumers wish to substitute one good for another. 2. For a consumer, a budget line shows the boundary between A) what is desired and what is not desired. B) what is needed and what is not needed. C) what is affordable and what is not affordable. D) what is available and what is not available. 3. Bob plans to spend $60 per month on DVD movie rentals and CDs. The price of a movie rental is $3 and the price of a CD is $15. If Bob rents 5 DVDs per month, how many CDs can he buy? A) 1 B) 2 C) 3 D) 4 4. Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. What is the maximum amount of pizza Dave can buy each week? A) 40 B) 20 C) 200 D) 60 5. Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. If Dave buys 15 pizza each week, what is the maximum number of magazines can he buy? A) 40 B) 20 C) 10 D) 200 6. Hilda buys only cauliflower, Qc, and geraniums, Qg. The equation for Hilda's initial budget line is $40 = $2 × Qc + $4 × Qg. If Hilda's income increases by $20, the price of cauliflower decreases by $1, and the price of geraniums increases by $1, the equation of her new budget line is ________. A) $60 = $1 × Qc + $5 × Qg B) $60 + $1 × Qc = $5 × Qg C) $0 = $60 + $1 × Qc + $5 × Qg D) $60 = $5 × Qc $1 × Qg 7. Real income measures the A) slope of the budget line. B) purchasing power of a given income. C) slope of the preference map. D) area under the indifference curve. 8. Suppose that Dave has $200 to spend per week and he buys only magazines and pizza. The price of a pizza is $10 and the price of a magazine is $5. What is Dave's real income in terms of magazines? A) 20 B) 40 C) 200 D) 10 9. John has $40 to spend on pizza and tacos. Pizza costs $10 each and tacos are $1 per taco. John's real income ________. A) is $40 B) is 4 pizzas or 40 tacos C) is 4 pizzas plus 40 tacos D) depends only on his money wage A recent article by the Associated Press examined the effect higher gas prices have on the consumption of other goods. It said that the increase in the price of gasoline has decreased the quantity of other goods, such as food, that people consume. (Source: Associated Press, September 28, 2012) 10. If consumers spend their income either on gasoline or food, then an increase in the price of gasoline rotates the budget line A) inward along the "food" axis. B) outward along the "food" axis. C) inward along the "gasoline" axis. D) outward along the "gasoline" axis. 11. If the price of gasoline increases and the price of food remains the same, then real income measured in terms of A) gasoline increases. B) gasoline decreases. C) food increases. D) food decreases. 12. The price of one good divided by the price of another good is a A) money price. B) relative price. C) budget constraint. D) divisible good. 13. If the relative price of pizza in terms of movies is 3, this means that A) the opportunity cost of a pizza is 3 movies. B) 3 pizzas can be traded for 9 movies. C) in terms of the dollars that must be spent to buy the product, pizza is more expensive than movies. D) All of the above answers are correct. 14. Suppose the price of chocolate chip cookies is $4.00 per pound and the price of a slice of cake is $2.00 per slice. The relative price of cookies in terms of cake is A) $2.00 per cookie. B) $4.00 per cookie. C) 1/2 slice of cake per cookie. D) 2 slices of cake per cookie. 15. If the price of peanuts increases by 10 percent and the price of potato chips does not change, then the relative price of peanuts with respect to potato chips will ________ and the relative price of potato chips with respect to peanuts will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall 16. The magnitude of the slope of the budget line is determined by A) the marginal rate of substitution. B) the level of income. C) the consumer's preferences for the goods. D) relative prices. 17. Nick consumes two goods, chips and lemonade. Located on the xaxis is the quantity of chips and on the yaxis is the quantity of lemonade. The magnitude of the slope of the budget line equals the A) price of lemonade. B) price of chips. C) price of chips/price of lemonade. D) price of lemonade/price of chips. 18. If all prices rise by 5 percent and money income remains constant, the new budget line will have A) a steeper slope. B) a flatter slope. C) a positive slope. D) the same slope. 19. If the price of the good measured on the horizontal axis falls, a consumer's budget line A) becomes flatter. B) becomes steeper. C) shifts rightward and its slope does not change. D) shifts leftward and its slope does not change. 20. Joe has $50, which he spends on movies and pizza. If the price of a pizza falls, Joe can A) consume more of both goods. B) consume more pizza only if he gives up some movies. C) consume more movies only if he gives up some pizza. D) consume more pizza only. 21. Sharmila has a budget line for DVDs and books. DVDs are on the vertical axis and books on the horizontal. Her budget line becomes steeper as A) the price of a DVD falls. B) the price of a DVD rises. C) her income decreases. D) her income increases. 22. If an individual's income increases, A) the person's indifference curves shift outward in a parallel manner. B) the person's budget line shifts outward in a parallel manner. C) there will be no impact on the individual's budget line or indifference curves. D) None of the above answers is correct. 23. Melissa has an income of $240 a month to spend on tennis lessons and concert tickets. The price of a tennis lesson is $20, and the price of a concert ticket is $40. If the price of a tennis lesson rises to $30, Melissa's budget line, with tennis lessons on the horizontal axis, A) shifts rightward with no change in its slope. B) shifts leftward with no change in its slope. C) becomes flatter. D) becomes steeper. 24. An indifference curve shows combinations of goods ________. A) which the consumer prefers equally B) that are affordable C) that are inside or on the budget line D) that have the same relative price 25. Indifference curves are drawn on a diagram with the A) price of a good on the vertical axis and its quantity on the horizontal axis. B) price of one good on the vertical axis and the price of another good on the horizontal axis. C) quantity of a good on the vertical axis and its price on the horizontal axis. D) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis. 26. The rate at which Sam is willing to give up a gallon of gasoline to get one more pound of coffee, and remain on the same indifference curve is called his A) opportunity cost of coffee. B) opportunity cost of gasoline. C) personal price of coffee. D) marginal rate of substitution. 27. The magnitude of the slope of an indifference curve A) is equal to the marginal rate of substitution. B) always equals the relative price of the product measured along the horizontal axis. C) increases as income increases. D) decreases when income increases. 28. As Sam moves rightward along his indifference curve, his marginal rate of substitution A) is diminishing. B) is increasing. C) remains constant. D) shows the change in his income. 29. Jodie has indifference curves for CDs and colas, with CDs on the vertical axis. The flatter her indifference curves are, the A) smaller her average rate of substitution. B) larger her average rate of substitution. C) smaller her marginal rate of substitution. D) larger her marginal rate of substitution. 30. Bobby moves along an indifference curve for shirts and pants by increasing consumption of shirts and decreasing consumption of pants. As Bobby has more and more pants, the number of shirts he is willing to trade for yet another pair of pants A) decreases. B) increases. C) does not change. D) initially decreases and then increases. 31. If green bikes and brown bikes are perfect substitutes, the corresponding indifference curves A) are horizontal. B) intersect each other. C) are vertical. D) have constant slope. 32. If two goods are perfect complements, the shapes of the indifference curves are A) bowed toward the origin. B) bowed away from the origin. C) straight lines. D) rightangled lines. 33. If Bill thinks tacos and turkey sandwiches are perfect substitutes, then his indifference curves for these two goods A) are Lshaped. B) are negatively sloped and linear. C) are positively sloped and linear. D) have slopes equal to 1. 34. Samara's income is $30 a month and she spends all of it on music downloads and gasoline. The price of a music download is $1.50 and the price of a gallon of gasoline is $3. At Samara's best affordable point, her marginal rate of substitution is ________ per video tape. A) 0.5 of a download B) 1 download C) 1.5 downloads D) 2 downloads 35. If consumers buy only gasoline and food, at their best affordable choice the marginal rate of substitution between food and gasoline ________ the relative price of food and gasoline. A) must exceed B) must be less than the C) must equal D) might exceed or be less than but not equal to 36. Tunitra consumes at a point on her budget line where her marginal rate of substitution exceeds the magnitude of the slope of her budget line. As Tunitra moves toward her consumer equilibrium point, she will move to a A) lower budget line. B) higher budget line. C) lower indifference curve. D) higher indifference curve. 37. If Sue is consuming two normal goods and her income decreases, then her best affordable bundle of goods will contain ________ goods with ________ marginal rate of substitution as her bundle prior to her income change. A) less; the same B) less; a higher C) less; a lower D) the same amount of; a lower 38. The ________ effect can be divided into the ________ effect and the ________ effect. A) marginal; substitution; price B) income; substitution; price C) substitution; price; income D) price; substitution; income 39. The effect of a change in price on the quantity bought when the consumer remains indifferent between the original and the new situation is called the A) income effect. B) indifference effect. C) substitution effect. D) demand effect. 40. When the price of a normal good decreases, the ________ can be divided between the ________, which keeps the best affordable point on the same indifference curve and the ________, which moves the best affordable point farther away from the origin. A) substitution effect; price effect; income effect B) price effect; income effect; substitution effect C) income effect; substitution effect; price effect D) price effect; substitution effect; income effect
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'