Question 1

Exhibit 6-7 Marginal utility for sandwiches and sodas $$\begin{array} { | c | c | c | } 
\hline \text { Quantity } & \text { Sandwiches } & \text { Sodas } \
\hline 1 & 10 & 5 \
2 & 8 & 4 \
3 & 6 & 3 \
4 & 3 & 1 \
5 & - 1 & 0 \
\hline
\end{array}$$
-Refer to Exhibit 6-7. If price of a sandwich is $1, the price of a soda is $1, and income is $5, Marian should buy ____ sandwiches and ____ sodas.

Accepted Answer

Marian should allocate her budget to equalize the marginal utility per dollar spent on each good. The marginal utility per dollar for sandwiches and sodas is highest when buying three sandwiches and two sodas, maximizing her total utility within her $5 budget.

Question 2

If a consumer is choosing the optimal combinations of two goods X and Y, and then the price of good Y decreases, this causes:

Accepted Answer

When the price of good Y decreases, the MU/P of good Y will increase because the consumer can now purchase more units of good Y for the same amount of money they were originally willing to spend. This will lead the consumer to buy more good Y and adjust their consumption of good X accordingly to find a new optimal combination. Therefore, the correct answer is C.

Question 3

If a consumer is spending all of his/her income in a manner where MU_a / P_a is greater than MU_b / P_b, then the consumer:

Accepted Answer

The consumer should increase the purchases of A and decrease the purchases of B to equalize the marginal utility per dollar spent across goods, thereby maximizing utility.

Question 4

When the price of a good falls, consumers may increase the quantity consumed because they have greater total purchasing power. This statement describes the:

Accepted Answer

The statement describes the income effect, which occurs when a change in price affects the consumer's real income or purchasing power. When the price of a good falls, the consumer can afford to purchase more of the good, thus increasing the quantity demanded.

Question 5

If a consumer is indifferent between 5 units of A and 8 units of B, then the consumer would:

Accepted Answer

The answer of If a consumer is indifferent between 5...

Question 6

Georgia has a MU/P of 10 for tennis lessons, a MU/P of 6 for sewing lessons, and a U/P of 2 for cooking lessons. In order to maximize utility, she should:

Accepted Answer

Georgia should take more tennis lessons because it has the highest MU/P ratio of 10 compared to sewing (MU/P ratio of 6) and cooking (U/P ratio of 2). This means that for each dollar spent on tennis lessons, she is getting more utility (10 units) compared to sewing (6 units) or cooking (2 units). Therefore, taking more tennis lessons would allow her to maximize her overall utility.

Question 7

Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MU_a = 15 and MU_b = 80, and the P_a = $5 and the P_b = $20. Then the consumer:

Accepted Answer

The consumer should increase his/her purchases of B and decrease the purchases of A because the marginal utility per dollar spent on B (MUb/Pb = 80/20 = 4) is greater than the marginal utility per dollar spent on A (MUA/Pa = 15/5 = 3).

Question 8

If good A has a marginal utility of 30 and a price of $5, and good B has a marginal utility of 10 and a price of $2, then:

Accepted Answer

To determine which good is a better buy, we need to calculate their marginal utility per dollar:

Marginal utility per dollar of good A: 30/5 = 6
Marginal utility per dollar of good B: 10/2 = 5

Therefore, good A provides more marginal utility per dollar than good B, making it the better buy.

Question 9

If a consumer allocates income between goods A and B, total utility is maximized when:

Accepted Answer

Total utility is maximized when the consumer allocates income between goods A and B in such a way that the marginal utility per dollar spent on each good is equal. This means that the consumer gets the most satisfaction for the money spent. Therefore, the ratio of marginal utility to price should be equal for both goods. This is represented by the equation: marginal utility of A / price of A = marginal utility of B / price of B. Choice E is the only option that reflects this.

Question 10

Exhibit 6-8 Bea's total utility of 3-minute telephone calls $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Quantity of } \
\text { 3-Minute Calls }
\end{array} & \begin{array} { c } 
\text { Total Utility of } \
\text { Telephone Calls }
\end{array} \
\hline 0 & 0 \
1 & 15 \
2 & 28 \
3 & 38 \
4 & 45 \
5 & 50 \
6 & 48 \
\hline
\end{array}$$
-Refer to Exhibit 6-8. Bea's marginal utility of her second telephone call is:

Accepted Answer

The marginal utility of the second call is the change in total utility from the first to the second call: 28 - 15 = 13.

Question 11

If a consumer is spending all of his/her income in a manner where MU_a / P_a = MU_b / P_b, then the consumer:

Accepted Answer

The equation MU_a / P_a = MU_b / P_b represents the marginal utility per dollar spent on A and B respectively. If this equation holds, it means that the consumer is allocating their spending in a way that the marginal utility per dollar spent on A is the same as the marginal utility per dollar spent on B. This is the condition for utility maximization, as allocating one more dollar to either A or B would result in a lower marginal utility per dollar spent on that good. Therefore, the consumer is already maximizing their utility and option B is the correct answer.

Question 12

Exhibit 6-7 Marginal utility for sandwiches and sodas $$\begin{array} { | c | c | c | } 
\hline \text { Quantity } & \text { Sandwiches } & \text { Sodas } \
\hline 1 & 10 & 5 \
2 & 8 & 4 \
3 & 6 & 3 \
4 & 3 & 1 \
5 & - 1 & 0 \
\hline
\end{array}$$
-Refer to Exhibit 6-7. Diminishing marginal utility for sandwiches sets in after the ____ sandwich.

Accepted Answer

Diminishing marginal utility occurs when the additional satisfaction from consuming an additional unit decreases. For sandwiches, the marginal utility decreases from 10 to 8 after the first sandwich.

Question 13

Suppose you have spent your entire budget and for all the goods you purchase the marginal utilities per dollar spent are identical. Which of the following is true?

Accepted Answer

The answer of Suppose you have spent your entire budget...

Question 14

Exhibit 6-7 Marginal utility for sandwiches and sodas $$\begin{array} { | c | c | c | } 
\hline \text { Quantity } & \text { Sandwiches } & \text { Sodas } \
\hline 1 & 10 & 5 \
2 & 8 & 4 \
3 & 6 & 3 \
4 & 3 & 1 \
5 & - 1 & 0 \
\hline
\end{array}$$
-Refer to Exhibit 6-7. If the price of a sandwich is $1 and the price of a soda is $1, Marian should spend her first dollar on a ____ and her second dollar on a ____.

Accepted Answer

Marian should spend her first dollar on a sandwich because it provides the highest marginal utility of 10. The second dollar should also be spent on a sandwich as it still provides a higher marginal utility (8) compared to a soda (5).

Question 15

Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MU_a = 15 and MU_b = 75, and the P_a = $3 and the P_b = $15, then the consumer:

Accepted Answer

The given information implies that the marginal utility per dollar spent on good B is 5 times as much as the marginal utility per dollar spent on good A. Therefore, in order to maximize utility, the consumer should allocate more money to good B and less money to good A until the marginal utility per dollar spent on each good is equal (assuming there are no budget constraints or other factors influencing the consumer's purchasing decisions). Since the question does not provide any information about the consumer's budget or preferences, we cannot determine whether the current consumption bundle is optimal or not. Therefore, the correct answer is A) the consumer may or may not be maximizing his/her utility, depending on other factors that are not given.

Question 16

If a consumer is maximizing his/her utility for a given income, the:

Accepted Answer

When a consumer is maximizing their utility for a given income, they are allocating their spending in a way that the marginal utility per dollar spent for all goods is equal. In other words, the consumer is getting the most utility out of each dollar spent across all goods. This is known as the principle of equimarginal utility. Therefore, choice B is the correct answer.

Question 17

Eric is maximizing his total utility through his choices of two goods: clothes and food. His marginal utility of clothes is 60 and his marginal utility of food is 12. The price of clothes is $20. What must be the price of food?

Accepted Answer

To maximize utility, the ratio of marginal utility to price should be equal for both goods. Thus, 60/20 = 12/Price of food. Solving gives the price of food as $4.

Question 18

Exhibit 6-8 Bea's total utility of 3-minute telephone calls $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Quantity of } \
\text { 3-Minute Calls }
\end{array} & \begin{array} { c } 
\text { Total Utility of } \
\text { Telephone Calls }
\end{array} \
\hline 0 & 0 \
1 & 15 \
2 & 28 \
3 & 38 \
4 & 45 \
5 & 50 \
6 & 48 \
\hline
\end{array}$$
-Refer to Exhibit 6-8. Diminishing returns set in after which telephone call?

Accepted Answer

The answer of Exhibit 6-8 Bea's total utility of 3-minute...

Question 19

A utility-maximizing consumer is currently spending all of his/her income on two products, A and B. The MU of the last unit of A consumed is 50, the price of A is $25, and the price of B is $10. The MU of the last unit of B consumed is:

Accepted Answer

For utility maximization, the marginal utility per dollar spent should be equal for both goods. MU_A/Price_A = MU_B/Price_B. Given MU_A = 50 and Price_A = 25, MU_B/10 = 50/25, so MU_B = 20.

Question 20

The income effect refers to a change in:

Accepted Answer

The income effect refers to the change in quantity demanded of a good because of a change in the buyer's real income. Real income is the income adjusted for inflation, and when it changes, it affects the purchasing power of the buyer. As a result, the buyer may either increase or decrease the demand for a particular good, depending on whether the change in real income was positive or negative. Therefore, option B correctly defines the income effect. Option A is incorrect because changes in the CPI do not directly affect income, but indirectly affect the purchasing power of income. Option C is incorrect because changes in the buyer's money income do not necessarily result in a change in the quantity demanded of a good. Option D is incorrect because one of the options is correct.

Quiz 6: Consumer Choice Theory