Question 1

George has a weekly income (I)of $50,which he uses to purchase doughnuts (D)and coffee (C).The price of a doughnut is $1 and the price of coffee is $2.50.Suppose George's income increases to $100 and the prices of both doughnuts and coffee remain unchanged.Given this income change,one would expect George's budget line to:

Accepted Answer

Since George's weekly income has increased, his budget line will shift to the right. This means that he can now afford more of both doughnuts and coffee, since he has more money to allocate towards each good. However, since the prices of both goods have remained unchanged, the slope of the budget line will stay the same.

Question 2

George has a weekly income (I)of $50,which he uses to purchase doughnuts (D)and coffee (C).If the price of a doughnut is $1 and the price of coffee is $2.50,which consumption bundle lies BEYOND George's budget constraint?

Accepted Answer

George's weekly income is $50. The cost of the consumption bundles are calculated as follows: A) $25 (for coffee) + $25 (for doughnuts) = $50, B) $37.50 (for coffee) + $15 (for doughnuts) = $52.50, C) $12.50 (for coffee) + $10 (for doughnuts) = $22.50, D) $12.50 (for coffee) + $5 (for doughnuts) = $17.50. Only option B exceeds George's budget of $50.

Question 3

If the price of a good changes so that the income effect and the substitution effect reinforce one another,this means the good is:

Accepted Answer

If the income effect and substitution effect reinforce one another, it means that as the price of the good increases, the quantity demanded of that good decreases. However, the decrease in quantity demanded has more to do with the fact that the good is relatively more expensive compared to other goods in the market, rather than any decrease in real income. This is indicative of a normal good. Hence, the correct answer is option C.

Question 4

The income effect will play a greater role in a consumer's spending if the good:

Accepted Answer

The income effect will be larger if the good accounts for a substantial share of the consumer's spending because a change in price will have a greater impact on their overall disposable income.

Question 5

George has a weekly income (I)of $50,which he uses to purchase doughnuts (D)and coffee (C).If the price of a doughnut is $1 and the price of coffee is $2.50,his budget constraint can be expressed as:

Accepted Answer

The budget constraint can be expressed as:
D + 2.50C ≤ 50
This is because the total spending on doughnuts and coffee (D + 2.50C) cannot exceed the weekly income of $50.

To find the best choice, we need to consider the Marginal Rate of Substitution (MRS), which is the rate at which a person is willing to trade off one good for another while keeping the same level of satisfaction. In this case, the MRS can be calculated as the ratio of the prices of doughnuts and coffee, which is 1/2.50 or 0.4.

To maximize his satisfaction, George should choose the combination of doughnuts and coffee where the MRS is equal to the price ratio. This means that for every 1 doughnut he gives up, he should receive 2.50/1 or 2.5 cups of coffee to maintain the same level of satisfaction.

The optimal consumption of doughnuts and coffee can be found by solving for D and C in the budget constraint equation, subject to the MRS equation:

D + 2.50C = 50
MRS = 0.4 = -∆C/∆D

Solving these two equations simultaneously, we get:

D = 20
C = 12

Therefore, the optimal choice for George is to buy 20 doughnuts and 12 cups of coffee.

The correct answer is D, which is the option that represents the budget constraint equation correctly.

Question 6

When a consumer maximizes utility,the marginal utility from the last dollar spent on all goods and services in the consumption bundle must be the same.This is referred to as:

Accepted Answer

The situation described in the question is known as the optimal consumption rule, where the consumer allocates their income in such a way that the marginal utility per dollar spent on each good is equal. This ensures that the consumer is maximizing their utility given their budget constraint. Therefore, the correct answer is B - the optimal consumption rule.

Question 7

Tonya's budget constraint for gallons of gasoline (G)and shirts (S)each month can be expressed by the equation G = 100 - 2S,where G is the number of gallons of gasoline she buys and S is the total number of shirts she buys.Assume that she spends her entire budget each month.If the price of shirts is $10,which consumption bundle is NOT feasible for Tonya?

Accepted Answer

Option A is not feasible because substituting 45 shirts into the budget constraint equation gives G = 100 - 2(45) = 10, not 100 gallons of gasoline.

Question 8

Consumption bundles that Mei CANNOT afford because the bundles cost more than her income are _____ the budget line.

Accepted Answer

The budget line represents all the consumption bundles that can be purchased with Mei's income. Any consumption bundle that costs more than her income will be beyond the budget line, and therefore not affordable for her.

Question 9

A decrease in the price of a good,holding income and the prices of all other goods constant,is associated with:

Accepted Answer

According to the law of demand, as the price of a good decreases, the quantity demanded of that good increases. Holding income and the prices of other goods constant means that the relative price of the good has decreased, leading to a higher marginal utility per dollar spent on that good compared to other goods. This creates a positive substitution effect, which prompts consumers to increase their consumption of the good.

Question 10

George has a weekly income (I)of $50,which he uses to purchase doughnuts (D)and coffee (C).The price of a doughnut is $1 and the price of coffee is $2.50.Suppose George's income drops to $25 and the prices of doughnuts and coffee each fall to one-half their initial prices.One would expect George's budget line to:

Accepted Answer

George's budget line will stay the same because both his income and the prices of goods have been halved, maintaining the same purchasing power and budget constraint.

Question 11

Housing is a normal good that tends to take up a substantial share of a consumer's spending.An increase in the price of housing will result in:

Accepted Answer

An increase in the price of housing will lead to a decrease in the quantity demanded of housing due to both income and substitution effects. The income effect will occur because the consumer's purchasing power will decrease as they will have to spend more on housing, resulting in a decrease in the quantity demanded of all goods, including housing. The substitution effect will occur because the increase in the price of housing will make other goods relatively cheaper and more attractive to consumers, encouraging them to purchase less housing.

Question 12

Use the following to answer question: 
-(Table: Denise's Consumption of Coffee and Gasoline)Use Table: Denise's Consumption of Coffee and Gasoline.Denise will maximize her utility by consuming bundle:

Accepted Answer

The answer of Use the following to answer question: 
-(Table:...

Question 13

Use the following to answer question: 
-(Table: Denise's Consumption of Coffee and Gasoline)Use Table: Denise's Consumption of Coffee and Gasoline.Given the information provided,the price of each cup of coffee is _____ and the price of each gallon of gasoline is _____.

Accepted Answer

From the table, we can see that Denise drinks 3 cups of coffee at a total cost of $3. Therefore, the price of each cup of coffee is $1. Likewise, we can see that she uses 8 gallons of gasoline at a total cost of $16. Therefore, the price of each gallon of gasoline is $2. Thus, the correct answer is C ($1 for coffee, $2 for gasoline).

Question 14

Consuming more of a good that has become cheaper in place of a good that has become relatively more expensive is the:

Accepted Answer

The situation described in the question is known as the substitution effect, which occurs when the consumer chooses to consume more of a good that has become relatively cheaper compared to another good. The income effect, on the other hand, describes the change in consumption due to a change in income. The budget constraint refers to the limit on how much a consumer can spend on goods and services, given their income and prices. The inferior effect refers to the decrease in demand for a good when a consumer's income increases and they can afford to purchase a better alternative.

Question 15

Tonya's budget constraint for gallons of gasoline (G)and shirts (S)each month can be expressed by the equation G = 100 - 2S,where G is the number of gallons of gasoline she buys and S is the total number of shirts she buys.Assume that she spends her entire budget each month.If the price of shirts is $10,which consumption bundle lies INSIDE Tonya's budget line?

Accepted Answer

To determine which consumption bundle lies inside Tonya's budget line, we need to consider the total expenditure on gasoline and shirts. Since Tonya spends her entire budget each month, we know that her expenditure on gasoline (P_G x G) plus her expenditure on shirts (P_S x S) must equal her total budget.

Substituting G = 100 - 2S and P_S = $10, we can rewrite the budget constraint as:

P_G x (100 - 2S) + P_S x S = B

where B is Tonya's budget.

Simplifying this equation, we get:

P_G x 100 - (P_G + P_S) x S = B

Since the prices of gasoline and shirts are positive, the slope of Tonya's budget line is negative. In other words, if she buys more gasoline, she has less money left over to buy shirts, and vice versa.

Now, let's consider each option:

A) 45 shirts and 100 gallons of gasoline

If Tonya buys 45 shirts, her expenditure on shirts is P_S x S = $10 x 45 = $450. Substituting G = 100 - 2S, her expenditure on gasoline is:

P_G x G = P_G x (100 - 2S) = P_G x 100 - 2P_G x S

If we assume that P_G is greater than $2.25 (i.e. her expenditure on gasoline is at least $225), then her total expenditure exceeds her budget.

Therefore, option A is not feasible.

B) 50 shirts and 0 gallons of gasoline

If Tonya buys 50 shirts, her expenditure on shirts is P_S x S = $10 x 50 = $500. Since she buys no gasoline (i.e. G = 0), her total expenditure is $500, which is within her budget.

Therefore, option B is feasible and lies inside Tonya's budget line.

C) 0 shirts and 100 gallons of gasoline

If Tonya buys no shirts (i.e. S = 0), her expenditure on shirts is zero. Substituting G = 100 - 2S, her expenditure on gasoline is:

P_G x G = P_G x 100

If we assume that P_G is greater than $5 (i.e. her expenditure on gasoline is at least $500), then her total expenditure exceeds her budget.

Therefore, option C is not feasible.

D) 10 shirts and 5 gallons of gasoline

If Tonya buys 10 shirts, her expenditure on shirts is P_S x S = $10 x 10 = $100. Substituting G = 100 - 2S, her expenditure on gasoline is:

P_G x G = P_G x (100 - 2S) = P_G x 80

If we assume that P_G is greater than $6.25 (i.e. her expenditure on gasoline is at least $500), then her total expenditure exceeds her budget.

Therefore, option D is not feasible.

In summary, the only feasible consumption bundle that lies inside Tonya's budget line is option B: 50 shirts and 0 gallons of gasoline.

Question 16

Sam always tries to maximize his utility in his consumption of popcorn and soft drinks.Both of these goods are subject to diminishing marginal utility.Suppose the prices of these goods,along with Sam's budget (and spending)for these items,stay the same,but Sam decides to decrease his consumption of popcorn.Holding everything else constant,this means that Sam must _____ his consumption of soft drinks,and his marginal utility per dollar spent on popcorn will be _____ than it used to be.

Accepted Answer

If Sam decreases his consumption of popcorn, he will have more money left over in his budget. Since the prices and budget for soft drinks and popcorn stay the same, this means that Sam can increase his consumption of soft drinks. By doing so, his marginal utility per dollar spent on popcorn will be greater because he is now allocating more of his budget towards soft drinks, thereby increasing the marginal utility per dollar spent on popcorn.

Question 17

A consumer is attempting to maximize utility in her consumption of goods A and B.If her income and the price of good A do not change but the marginal utility of good B is constant and the price of good B decreases,this will _____ utility per dollar spent on good B.

Accepted Answer

If the price of good B decreases while the marginal utility of good B remains constant and the consumer's income and the price of good A do not change, the consumer will be able to purchase more of good B for the same amount of money. This means that the consumer will be able to consume more of good B, which will increase the marginal utility of good B. Therefore, the consumer will be able to achieve a higher level of total utility per dollar spent on good B, which is an increase in the marginal utility of good B.

Question 18

Tonya's budget constraint for gallons of gasoline (G)and shirts (S)each month can be expressed by the equation G = 100 - 2S,where G is the number of gallons of gasoline she buys and S is the total number of shirts she buys.Assume that she spends her entire budget each month.If the price of shirts is $10,the price of gasoline is _____ per gallon,and the total amount of income spent on both shirts and gasoline each month is _____.

Accepted Answer

The price of gasoline can be determined by rearranging the budget constraint equation to solve for the price per unit of each good. Given that the equation is G = 100 - 2S, and knowing that the price of shirts is $10, we can deduce that for every shirt bought (decreasing G by 2 units), $20 is spent (since 2 shirts * $10/shirt = $20). This implies that the "2" in the equation represents $20 spent on shirts, which corresponds to a decrease of 2 gallons of gasoline. Therefore, $20 spent results in a decrease of 2 gallons of gasoline, indicating that the price of gasoline is $10 per gallon. However, to match the options provided and the correct interpretation of the budget constraint, we consider the total budget. The total budget is not directly given, but since the price of gasoline is inferred from the relationship between the number of shirts and gallons of gasoline, we look for an option that correctly reflects the budget given the prices of shirts and the implied quantity relationship. The correct interpretation involves understanding the budget constraint in the context of the prices and quantities involved, leading to the conclusion that the total budget and the price of gasoline must align with the equation's implications. The correct option should reflect the total amount Tonya can spend on gasoline and shirts together, considering the prices of both and how they fit into the budget equation provided.

Question 19

The consumption bundles that Mei CAN afford but that do not use up her entire income lie _____ the budget line.

Accepted Answer

Consumption bundles that Mei can afford but do not use up her entire income lie within the budget line, indicating they cost less than or equal to her total income but do not exhaust it.

Question 20

Jie consumes three heads of broccoli and six bowls of rice each week,using up her weekly budget for these two items.The price of a head of broccoli is $2,and the price of rice is $4 per bowl.Jie's marginal utility from the last head of broccoli consumed is 4 utils,and her marginal utility from her last bowl of rice is 8 utils.If Jie wants to maximize her utility,she should:

Accepted Answer

To maximize utility, the consumer should allocate their budget in a way that the marginal utility per dollar spent on each good is equal. For broccoli, the marginal utility per dollar is 4 utils/$2 = 2 utils per dollar. For rice, it's 8 utils/$4 = 2 utils per dollar. Since these are equal, Jie is already maximizing her utility with her current consumption pattern.

Quiz 10: The Rational Consumer

George has a weekly income (I) of $50,which he uses to purchase doughnuts (D) and coffee (C) .If the price of a doughnut is $1 and the price of coffee is $2.50,which consumption bundle lies BEYOND George's budget constraint?

If the price of a good changes so that the income effect and the substitution effect reinforce one another,this means the good is:

The income effect will play a greater role in a consumer's spending if the good:

George has a weekly income (I) of $50,which he uses to purchase doughnuts (D) and coffee (C) .If the price of a doughnut is $1 and the price of coffee is $2.50,his budget constraint can be expressed as:

When a consumer maximizes utility,the marginal utility from the last dollar spent on all goods and services in the consumption bundle must be the same.This is referred to as:

Consumption bundles that Mei CANNOT afford because the bundles cost more than her income are _____ the budget line.

A decrease in the price of a good,holding income and the prices of all other goods constant,is associated with:

Housing is a normal good that tends to take up a substantial share of a consumer's spending.An increase in the price of housing will result in:

Use the following to answer question: -(Table: Denise's Consumption of Coffee and Gasoline) Use Table: Denise's Consumption of Coffee and Gasoline.Denise will maximize her utility by consuming bundle:

Use the following to answer question: -(Table: Denise's Consumption of Coffee and Gasoline) Use Table: Denise's Consumption of Coffee and Gasoline.Given the information provided,the price of each cup of coffee is _ and the price of each gallon of gasoline is _.

Consuming more of a good that has become cheaper in place of a good that has become relatively more expensive is the:

A consumer is attempting to maximize utility in her consumption of goods A and B.If her income and the price of good A do not change but the marginal utility of good B is constant and the price of good B decreases,this will _____ utility per dollar spent on good B.

The consumption bundles that Mei CAN afford but that do not use up her entire income lie _____ the budget line.

Quiz 10: The Rational Consumer

George has a weekly income (I) of $50,which he uses to purchase doughnuts (D) and coffee (C) .If the price of a doughnut is $1 and the price of coffee is $2.50,which consumption bundle lies BEYOND George's budget constraint?

If the price of a good changes so that the income effect and the substitution effect reinforce one another,this means the good is:

The income effect will play a greater role in a consumer's spending if the good:

George has a weekly income (I) of $50,which he uses to purchase doughnuts (D) and coffee (C) .If the price of a doughnut is $1 and the price of coffee is $2.50,his budget constraint can be expressed as:

When a consumer maximizes utility,the marginal utility from the last dollar spent on all goods and services in the consumption bundle must be the same.This is referred to as:

Consumption bundles that Mei CANNOT afford because the bundles cost more than her income are _____ the budget line.

A decrease in the price of a good,holding income and the prices of all other goods constant,is associated with:

Housing is a normal good that tends to take up a substantial share of a consumer's spending.An increase in the price of housing will result in:

Use the following to answer question: -(Table: Denise's Consumption of Coffee and Gasoline) Use Table: Denise's Consumption of Coffee and Gasoline.Denise will maximize her utility by consuming bundle:

Use the following to answer question: -(Table: Denise's Consumption of Coffee and Gasoline) Use Table: Denise's Consumption of Coffee and Gasoline.Given the information provided,the price of each cup of coffee is _____ and the price of each gallon of gasoline is _____.

Consuming more of a good that has become cheaper in place of a good that has become relatively more expensive is the:

A consumer is attempting to maximize utility in her consumption of goods A and B.If her income and the price of good A do not change but the marginal utility of good B is constant and the price of good B decreases,this will _____ utility per dollar spent on good B.

The consumption bundles that Mei CAN afford but that do not use up her entire income lie _____ the budget line.

Use the following to answer question: -(Table: Denise's Consumption of Coffee and Gasoline) Use Table: Denise's Consumption of Coffee and Gasoline.Given the information provided,the price of each cup of coffee is _ and the price of each gallon of gasoline is _.