Question 1

Izaak likes to eat pizza and to fish. The more fishing he does the happier he is, up to 8 hours a day. If he fishes longer than 8 hours he gets a sore back and is less happy than if he hadn't fished at all. For y less than or equal to 8, his utility function is U(x, y) = x + 3y, where x is money spent on pizza and y is hours per day spent fishing. His income is $40 a day and he has no expenses other than pizza. The Bureau of Fisheries has just decided to allow people without fishing licenses to fish only 3 hours a day. But if you buy a fishing license, you can fish as many hours as you wish. How much is Izaak willing pay for a license?

Accepted Answer

A

Question 2

If there is a price increase for a good that Marilyn consumes, her compensating variation is the change in her income that allows her to purchase her new optimal bundle at the original prices.

Accepted Answer

False

Question 3

Bernice has the utility function U(x, y) = min{x, y}. The price of x used to be 3 but rose to 4. The price of y remained at 1. Her income is 12. The price increase was as bad for her as a loss of $3 in income.

Accepted Answer

False

Question 4

Ella's utility function is min{ 5x, y}. If the price of x is $20 and the price of y is $20, how much money would she need to be able to purchase a bundle that she likes as well as the bundle (x, y) = (7, 15)?

Accepted Answer

Ella's utility function is min{5x, y}, meaning she wants 5 times as much x as y. For the bundle (7, 15), 5x = 35 and y = 15, so she is limited by y. To satisfy her utility, she needs 5x = y, so she needs 3 units of x and 15 units of y. The cost is 3*20 + 15*20 = $360.

Question 5

With quasilinear preferences, the equivalent variation and the compensating variation in income due to a tax are the same.

Accepted Answer

This statement is true. With quasilinear preferences, the marginal utility of income remains constant, which means that the equivalent variation (the amount of money needed to compensate for the loss of utility due to the tax) and the compensating variation (the amount of money needed to compensate for the loss of income due to the tax) are equal.

Question 6

The equivalent variation in income from a tax is the amount of extra income that a consumer would need in order to be as well off after the tax is imposed as he was originally.

Accepted Answer

The answer of The equivalent variation in income from a...

Question 7

Producer's surplus at price p is the vertical distance between the supply curve and the demand curve at price p.

Accepted Answer

Producer's surplus at price p is the area above the supply curve and below the price level p, up to the quantity sold. It represents the difference between what producers are willing to accept for a good or service versus what they actually receive.

Question 8

Sam's utility function is U(x, y) = 2x + y, where x is the number of x's he consumes per week and y is the number of y's he consumes per week. Sam has $200 a week to spend. The price of x is $4. Sam currently doesn't consume any y. Sam has received an invitation to join a club devoted to the consumption of y. If he joins the club, Sam can get a discount on the purchase of y. If he belonged to the club, he could buy y for $1 a unit. How much is the most Sam would be willing to pay to join this club?

Accepted Answer

The answer of Sam's utility function is U(x, y) =...

Question 9

Ella's utility function is min{ 5x, y}. If the price of x is $10 and the price of y is $15, how much money would she need to be able to purchase a bundle that she likes as well as the bundle (x, y) = (10, 25)?

Accepted Answer

For the bundle (10,25), Ella's utility is min{5*10, 25} = 25. To keep her utility at least 25 with the new prices, she must spend at least 25/5 * 10 + 15 = $40. Therefore, the total cost of the new bundle she likes must be at least $40 + $25 = $65. 
Option C is the only one that satisfies this condition: 
- (15, 23) costs 15*10 + 23*15 = $435 
- (20, 20) costs 20*10 + 20*15 = $500 
- (25, 15) costs 25*10 + 15*15 = $425 
- (30, 8) costs 30*10 + 8*15 = $380 
- (35, 0) costs 35*10 + 0*15 = $350

Question 10

Yoram's utility function is U(x, y) = 2x + 5y. The price of x is $4 and the price of y is $15. Yoram has $150 a week to spend on x and y. Yoram is offered a chance to join a club of y consumers. If he joins, he can get y at a price of $10. What is the most that Yoram would be willing to pay to join the club?

Accepted Answer

The answer of Yoram's utility function is U(x, y) =...

Question 11

Consumer's surplus is another name for excess demand.

Accepted Answer

Consumer's surplus refers to the difference between the price that a consumer is willing to pay for a good or service and the actual market price they pay. Excess demand, on the other hand, occurs when the quantity demanded of a good or service is greater than the quantity supplied at a given price.

Question 12

Izaak likes to eat pizza and to fish. The more fishing he does the happier he is, up to 8 hours a day. If he fishes longer than 8 hours he gets a sore back and is less happy than if he hadn't fished at all. For y less than or equal to 8, his utility function is U(x, y) = x + 6y, where x is money spent on pizza and y is hours per day spent fishing. His income is $45 a day and he has no expenses other than pizza. The Bureau of Fisheries has just decided to allow people without fishing licenses to fish only 3 hours a day. But if you buy a fishing license, you can fish as many hours as you wish. How much is Izaak willing pay for a license?

Accepted Answer

The answer of Izaak likes to eat pizza and to...

Question 13

Bernice's utility function is U(x, y) = min{x, y}. The price of x used to be 3 but rose to 4. The price of y remained at 1. Her income is 12. She would need an income of $15 to be able to afford a bundle as good as her old one at the new prices.

Accepted Answer

Bernice's utility function is U(x, y) = min{x, y}, meaning she consumes equal amounts of x and y. Initially, she could buy 4 units of each (3x4 + 1x4 = 12). At new prices, to buy 4 units of each, she needs 4x4 + 1x4 = 20, but with $15, she can buy 3 units of x and 3 units of y, which is as good as her old bundle.

Question 14

Minnie gets 4 tapes for her birthday, but they are currently useless to her because she doesn't have a tape recorder and she cannot return them for a refund. Her utility function is U(x, y, z) = x + f(y)z⁵, where z is the number of tapes she has, y is the number of tape recorders she has, and x is the money she has to spend on other stuff. Let f(y) = 0 if y < 1 and f(y) = 7 otherwise. The price of tapes is $7.99. What is her reservation price for a tape recorder?

Accepted Answer

The answer of Minnie gets 4 tapes for her birthday,...

Question 15

If somebody is buying 10 units of x and the price of x falls by $3, then that person's net consumer's surplus must increase by at least $30.

Accepted Answer

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. A decrease in price does not guarantee an increase in consumer surplus by a specific amount, as it depends on the demand curve and how much the consumer values additional units.

Question 16

Reginald is fond of cigars. His utility function is U(x, c) = x + 10c - .5c², where c is the number of cigars he smokes per week and x is the money that he spends on the consumption of other goods. Reginald has $200 a week to spend. Cigars used to cost him $1 each, but their price went up to $2 each. This price increase was as bad for him as losing income of

Accepted Answer

The answer of Reginald is fond of cigars. His utility...

Question 17

If somebody is buying 10 units of x and the price of x falls by $4, then that person's net consumer's surplus must increase by at least $40.

Accepted Answer

Consumer surplus increases when the price of a good falls, but the increase in consumer surplus is not solely determined by the quantity bought multiplied by the price decrease. It also depends on the individual's demand curve for the product.

Question 18

There is a positive consumer's surplus when the total amount the consumer pays for something is less than the amount she would be willing to pay rather than do without it altogether.

Accepted Answer

This statement accurately defines consumer surplus. It occurs when the consumer is able to purchase a good or service for less than the maximum amount they would be willing to pay, resulting in a surplus of value or benefit.

Question 19

If there is Cobb-Douglas utility, compensating and equivalent variation are the same.

Accepted Answer

The answer of If there is Cobb-Douglas utility, compensating and...

Question 20

If there is a price increase for a good that Susan consumes, her compensating variation is the change in her income that allows her to purchase her new optimal bundle at the original prices.

Accepted Answer

The answer of If there is a price increase for...

Quiz 13: Consumers Surplus