Question 1

Say a consumer is choosing between wine and cheese. The price of wine is 10 and the price of cheese is 5. If the marginal rate of substitution is 4, and if wine is on the horizontal axis and cheese is on the vertical axis then the consumer is purchasing

Accepted Answer

The marginal rate of substitution (MRS) of 4 means the consumer is willing to give up 4 units of cheese for 1 unit of wine. Since the price ratio (Pw/Pc) is 2 (10/5), the consumer is giving up too much cheese relative to the price ratio, indicating they are consuming too much cheese.

Question 2

Suppose your parents are thinking of buying you a brand new car as a graduation present. Economists would argue that it would be better if:

Accepted Answer

Economists argue that giving a cash gift equal to the value of the car is more efficient because it allows the recipient to allocate the resources according to their own preferences and needs, maximizing utility.

Question 3

You go to a carnival in town intending to purchase rides for your children. When you get there they have an offer where everyone's first two rides are free. They obviously hope that the free rides will end up making them more money in the long run than if they charged for all rides. First, show on an indifference curve and budget line graph a solution that would make the free rides a bad idea for the company. Then, on a second graph, show a possible situation that would make the giveaway a success that should be repeated.

Accepted Answer

The answer of You go to a carnival in town...

Question 4

Say a consumer is choosing between red wine and white wine. The price of red wine is 20 and the price of white wine is 10. If the marginal rate of substitution is 1, and if red wine is on the horizontal axis then the consumer is purchasing:

Accepted Answer

The marginal rate of substitution (MRS) of 1 means the consumer is willing to give up 1 unit of white wine for 1 unit of red wine. However, since red wine is twice as expensive as white wine, the consumer should be consuming less red wine to maximize utility given the budget constraint.

Question 5

A student buys only two goods, pizza and books. The price of pizza is $5 and the price of books is $10. At the student's present level of consumption, her marginal utility of pizza is 4 and her marginal utility of books is 2. Currently, the student is spending all her income.
A.Is this student currently in consumer equilibrium (maximizing utility)? Explain using a graph.
B.What would this student have to do in order to increase her utility? Use the diagram from part (a) to explain your answer.

Accepted Answer

The answer of A student buys only two goods, pizza...

Question 6

Draw a graph with food on the horizontal axis and shelter on the vertical axis.
A. Now sketch in a budget line such that the relative price of food to shelter is 2, the absolute price of shelter is 10, and the nominal income level is $100. Label the budget line A.
B. Next, the nominal income stays the same, the absolute price of shelter is cut in half, and the absolute price of food is unchanged. Sketch in the new budget line and label it B.
C. Next, the absolute prices are where they were when the problem started and the nominal income increases to 150. Draw a new budget line for this data and label it C.
D. Next, the nominal income is again $100, the relative prices are as they were at the beginning and the absolute prices are cut in half. Draw a new budget line on the graph and label it D.
E. Next, the absolute price of shelter falls to $5 and the absolute price of food and the income stay where it was at the beginning. The relative price of food to shelter also stays at 2. Explain why this is a logical contradiction.

Accepted Answer

The answer of Draw a graph with food on the...

Question 7

If the price of train rides is 1 and the price of food is 10, and the MRS of food for train rides expressed by Karl is 5, is Karl a utility maximizer? How do you know? If Karl is not maximizing, what should he do to improve his situation?

Accepted Answer

The answer of If the price of train rides is...

Question 8

Given the following budget line, (M = PfF + PsS) show the following by reformulating the equation. Assume F (food) is on the horizontal axis and S (shelter) is on the vertical axis.
A. The vertical intercept is _________.
B. The horizontal intercept is _________.
C. The slope of the budget line is __________.

Accepted Answer

The answer of Given the following budget line, (M =...

Question 9

Carl is stranded in the forest and must survive on coconuts and quail. His utility function for those items is U = f(C,Q) = 10C - C² + 4Q - Q². A.By taking the derivative of the utility function with respect to each commodity and setting the result equal to zero it is clear that Carl should get 5 coconuts and 2 quail. A.If Carl maximizes his utility and has no constraints on how many he can get, what will he do? B.If Carl is able to get only some combination of 5 coconuts and quail, how many will he get of each if he is doing the best he can? B.Substituting the constraint into the utility function yields results of 4 coconuts and 1 quail.

Accepted Answer

The answer of Carl is stranded in the forest and...

Quiz 3: Rational Consumer Choice

Say a consumer is choosing between wine and cheese. The price of wine is 10 and the price of cheese is 5. If the marginal rate of substitution is 4, and if wine is on the horizontal axis and cheese is on the vertical axis then the consumer is purchasing

Suppose your parents are thinking of buying you a brand new car as a graduation present. Economists would argue that it would be better if:

Say a consumer is choosing between red wine and white wine. The price of red wine is 20 and the price of white wine is 10. If the marginal rate of substitution is 1, and if red wine is on the horizontal axis then the consumer is purchasing:

If the price of train rides is 1 and the price of food is 10, and the MRS of food for train rides expressed by Karl is 5, is Karl a utility maximizer? How do you know? If Karl is not maximizing, what should he do to improve his situation?

Given the following budget line, (M = PfF + PsS) show the following by reformulating the equation. Assume F (food) is on the horizontal axis and S (shelter) is on the vertical axis. A. The vertical intercept is _____. B. The horizontal intercept is _. C. The slope of the budget line is ______.