Question 1

If the substitution effect and the income effect of a price change move in opposite directions for a particular good, then the good must be an inferior good.

Accepted Answer

This is because an increase in the price of a normal good will cause the substitution effect to suggest buying less of it and more of a substitute, while the income effect will suggest buying less of all goods because the consumer's purchasing power has decreased. However, for an inferior good, the income effect will suggest buying more of it (because it is cheaper than other goods) while the substitution effect will suggest buying less of it and more of a substitute. Therefore, if the substitution and income effects move in opposite directions for a particular good, that good must be an inferior good.

Question 2

Use the following to answer question: 
-(Table: Utility from Coffee and Comic Books) Look at the table Utility from Coffee and Comic Books. Your eccentric professor has a daily budget of $40, and he spends it entirely on coffee and comic books. Each comic book is priced at $8 and each cup of coffee is priced at $4. To maximize his utility, how many cups of coffee and how many comic books should he buy? How many total utils will he enjoy?

Accepted Answer

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

Question 3

The optimal consumption rule implies that if Pascal is maximizing his utility by spending all of his income on concert tickets and cab rides, with prices equal to P_Tickets and P_Rides, respectively, then it must be the case that MU_Tickets / MU_Rides = P_Tickets / P_Rides.

Accepted Answer

This is the income allocation rule for maximizing utility, also known as the equimarginal principle or the utility-maximizing rule. It states that in order to maximize utility, a consumer should allocate their income between different goods in such a way that the marginal utility derived from the last unit of spending on each good is equal, given the prices of the goods. In this case, the ratio of the marginal utility of spending on concert tickets to the marginal utility of spending on cab rides must be equal to the ratio of the prices of concert tickets to cab rides, in order for Pascal to be maximizing his utility.

Question 4

For most goods, the income effect has no significant effect on individual consumption.

Accepted Answer

The answer of For most goods, the income effect has...

Question 5

You have an economics test tomorrow and you think that you might need to stay up all night to study for it. Your professor argues against pulling this all-nighter because he thinks there is a point where more studying (and less sleeping) can actually do more harm than good. Using the concepts of total and marginal utility, explain your professor's position.

Accepted Answer

The answer of You have an economics test tomorrow and...

Question 6

When the price of Spam (an inferior good) decreased, Dale bought more Spam. For Dale, the income and substitution effects moved in the same direction.

Accepted Answer

The answer of When the price of Spam (an inferior...

Question 7

The rising price of gasoline has caused your parents to use public transportation rather than drive to work. They have also decided to cancel a cross-country trip for a family reunion. Are there substitution and income effects here? Explain.

Accepted Answer

The answer of The rising price of gasoline has caused...

Question 8

Two consumers, Eric and Eli, have the same preferences for good X, a normal good. The only difference is that for Eli there would be no income effect if the price of good X changed. For Eric, there are both income and substitution effects for a price change. What does this tell you about Eric's and Eli's demand for good X? Explain.

Accepted Answer

The answer of Two consumers, Eric and Eli, have the...

Question 9

At the optimal consumption bundle, the marginal utility of each good purchased is always the same.

Accepted Answer

At the optimal consumption bundle, the marginal utility per dollar spent on each good is the same, not the marginal utility of each good itself.

Question 10

Explain the difference between the total utility and marginal utility of eating pizza.

Accepted Answer

The answer of Explain the difference between the total utility...

Question 11

James spends his daily income of $50 on protein shakes (PS) and energy bars (EB). Protein shakes are priced at $5 each, and energy bars are priced at $4 each. Provide the equation for his budget constraint. If he spends half of his income on each item, how many units of each will he consume?

Accepted Answer

The answer of James spends his daily income of $50...

Question 12

Suppose Sirach knows that the price of doughnuts is $3 and the price of cupcakes is $4. He also believes that the next doughnut he consumes will increase his total utility by 6 utils and the next cupcake will increase his total utility by 10 utils. Assuming he has enough money to buy either, Sirach should buy a doughnut next.

Accepted Answer

Sirach should buy the cupcake because it provides more utility per dollar spent (2.5 utils per dollar for cupcakes vs. 2 utils per dollar for doughnuts).

Question 13

For a Giffen good, the income effect works in the opposite direction from the substitution effect, and the income effect is larger than the substitution effect.

Accepted Answer

For a Giffen good, the increase in price leads to an increase in quantity demanded because the negative income effect (due to reduced real income) outweighs the substitution effect.

Question 14

If the price of pecan rolls is $2, the price of a gyro is $6, and the marginal utility of the last pecan roll consumed is 12, then the marginal utility of the last gyro consumed for a consumer purchasing the optimal consumption bundle of pecan rolls and gyros is 36.

Accepted Answer

The answer of If the price of pecan rolls is...

Question 15

Use the following to answer question:
Table: MP3 Music Downloads 
-(Table: MP3 Music Downloads) Jen spends her daily income of $28 on MP3 music downloads and jumbo diet sodas. One MP3 music download costs $2, and one jumbo diet soda costs $4. The table provided shows three consumption bundles. Identify the bundle that is unaffordable, the one that lies on her budget line, and the one that is affordable but does not use all of her income.

Accepted Answer

The answer of Use the following to answer question:
Table: MP3...

Question 16

It is said that consumers maximize utility because they are:

Accepted Answer

Consumers are considered rational because they make decisions aimed at maximizing their satisfaction or utility given their budget constraints.

Question 17

Ladan has $500 each semester to spend on textbooks and sandwiches. Textbooks are $100 each and sandwiches are $5 each. Assume that diminishing marginal utility applies to both goods. She has purchased 3 textbooks this semester and 40 sandwiches. She tells you that her marginal utility from the next textbook is about 100 utils and the marginal utility from the next sandwich is about 15 utils. Has Ladan successfully maximized her utility this semester? Should she adjust her spending next semester?

Accepted Answer

The answer of Ladan has $500 each semester to spend...

Question 18

The satisfaction that a consumer gets from the consumption of a bundle of goods and services is:

Accepted Answer

Utility is the term economists use to describe the satisfaction or happiness that consumers get from consuming a bundle of goods and services. It's an important concept in economics because it helps us understand why people make the choices they do. The more utility a consumer gets from a particular bundle of goods and services, the more likely they are to choose that bundle over others.

Question 19

Many people have severe food allergies such that even one bite of something might send a person to the emergency room. For a person with a severe allergy to nuts, for example, describe the total utility function from eating nuts.

Accepted Answer

The answer of Many people have severe food allergies such...

Question 20

Use the following to answer question: 
-(Table: Marginal Utility from Coffee and Comic Books) Look at the table Marginal Utility from Coffee and Comic Books. Your eccentric professor has a daily budget of $40, and he spends it entirely on coffee and comic books. The table shows the marginal utility he receives from consuming different quantities of coffee and comic books. Each comic book is priced at $8, and each cup of coffee is priced at $4. To maximize his total utility, how many cups of coffee should he buy, and how many comic books should he buy? How many utils of total utility will he enjoy?

Accepted Answer