Docstoc

Chapter 6_ THEORY OF CONSUMER BEHAVIOR

Document Sample
Chapter 6_ THEORY OF CONSUMER BEHAVIOR Powered By Docstoc
					Chapter 5:          THEORY OF CONSUMER BEHAVIOR

Multiple Choice

5-1   If Mary prefers bananas to plums and plums to peaches, but is indifferent between bananas and
      oranges, she
      a.      prefers oranges to peaches.
      b.      prefers plums to oranges.
      c.      is indifferent between oranges and plums.
      d.      is indifferent between oranges and peaches.

5-2   A typical indifference curve
      a.      shows all combinations of goods that give a consumer the same level of utility.
      b.      shows that as a consumer has more of a good he is less willing to exchange it for one unit
              of another good.
      c.      shifts out if income increases.
      d.      both a and b
      e.      all of the above

5-3   The rate at which a consumer is ABLE to substitute one good for another is determined by
      a.      the indifference map.
      b.      the marginal rate of substitution.
      c.      the consumer's income.
      d.      the ratio of the prices of the goods.

5-4   A utility function
      a.       shows the relation between prices and a consumer's utility.
      b.       shows the relation between income and a consumer's utility.
      c.       shows the relation between the amount of goods consumed and a consumer's utility.
      d.       all of the above
      e.       none of the above

5-5   Along an indifference curve
      a.     the MRS is constant.
      b.     the ratio of the marginal utilities is constant.
      c.     the price ratio is constant.
      d.     all of the above
      e.     none of the above

5-6   The slope of an indifference curve shows
      a.      the change in utility from an additional unit of the good.
      b.      the rate at which the consumer is able to substitute one good in the market.
      c.      is equal to the price ratio at all points.
      d.      is the rate at which the consumer is willing to exchange one good for another, utility held
              constant.
      e.      all of the above




                                                  Chapter 5: THEORY OF CONSUMER BEHAVIOR              67
5-7     Which of the following assumptions is(are) NOT made in consumer behavior theory?
        a.     Consumers can rank all bundles of goods.
        b.     Consumers can measure the utility they get from all bundles of goods.
        c.     Consumers have complete information.
        d.     both a and b
        e.     None of the above are assumptions made in consumer behavior theory.

5-8     Suppose that 2 units of X and 8 units of Y give a consumer the same satisfaction as 4 units of X
        and 2 units of Y. Then
        a.      the consumer is willing to give up 3 units of Y to obtain 1 more unit of X.
        b.      the consumer is willing to give up 1 unit of Y to obtain 3 more units of X.
        c.      the marginal rate of substitution of X for Y is 3.
        d.      both a and c
        e.      both b and c

5-9     Alexandra consumes only caviar and champagne, but she does have a limited income of $400.
        Her current consumption choice is 5 ounces of caviar, at a price of $50 per ounce, and 6 bottles
        of champagne, at $25 each. The last ounce of caviar added 100 units to Alexandra's total utility,
        while the last bottle of champagne added 75 units. If Alexandra chooses 4 ounces of caviar and 8
        bottles of champagne instead:
        a.       her total utility will increase by 150 units
        b.       her total utility will decrease by 150 units
        c.       her total utility will increase by 100 units
        d.       her total utility will decrease by 100 units
        e.       her total utility will increase by 50 units

The next 2 questions refer to the following figure:

                                                Y



                                            M
                      Q uantity of good Y




                                                        B

                                                    A

                                                                                U2

                                                                  U1




                                                                                          X
                                                            L                         N

                                                                Q uantity of good X




68
5-10   What could have caused a consumer's budget line to shift from ML to MN?
       a.     an increase in the price of X
       b.     a decrease in the price of X
       c.     an increase in the price of Y
       d.     a decrease in the price of Y
       e.     cannot determine without more information

5-11   At point A,
       a.      the marginal rate of substitution of X for Y is greater than it is at point B.
       b.      the ratio of the price of X to the price of Y is greater than it is at point B.
       c.      the consumer's utility is less than it is at point B.
       d.      both a and c
       e.      all of the above

5-12   Marginal utility is
       a.     the utility obtained from the consumption of all but the last unit of a good.
       b.     the relative value of two goods when a utilitymaximizing decision has been made.
       c.     the change in utility that results from increasing the amount of a good consumed by one
              unit.
       d.     the change in the amount of a good consumed that increases total utility by one unit.
       e.     none of the above

5-13   If the marginal rate of substitution of X for Y is 2, the price of X is $3, and the price of Y is $1, a
       utilitymaximizing consumer should
       a.      be indifferent between 1X and 2Y.
       b.      prefer 3Y to 1X.
       c.      choose less X and more Y.
       d.      choose more X and less Y.

5-14   If a consumer is choosing the bundle of goods that maximizes utility subject to a budget
       constraint, then
       a.       the rate at which income affects the utilitymaximizing choice is equal for all goods.
       b.       the rate at which the consumer is willing to substitute between goods is equal to the
                market rate of exchange.
       c.       the ratio of marginal utility to price is equal for all goods.
       d.       both b and c
       e.       all of the above

5-15   Ronald, who consumes only hamburgers and hot dogs, has a weekly income of $50. He is
       currently consuming 20 hamburgers, at a price of $2 each, and 10 hot dogs, at a price of $1 each.
       If the last hamburger and the last hot dog both added 50 units to Ronald's total utility, he
       a.       is making the utilitymaximizing choice.
       b.       should buy more hamburgers and fewer hot dogs.
       c.       should buy more hot dogs and fewer hamburgers.
       d.       obtains more additional utility per dollar from hot dogs than from hamburgers.
       e.       both c and d




                                                    Chapter 5: THEORY OF CONSUMER BEHAVIOR                   69
The next 3 questions refer to the following:

                                        Y


                                   60
                 Units of good Y




                                                                C
                                   26
                                                      B
                                            A                                     U3
                                   20


                                                                      U2


                                                          U1

                                                                                             X
                                                120                         200        300
                                                          Units of good X


The price of Y is $10.

5-16    If the price of X is $5, what combination of X and Y will a utilitymaximizing consumer choose?
        a.       80X, 20Y
        b.       120X, 620Y
        c.       120X, 250Y
        d.       200X, 620Y
        e.       none of the above

5-17    The marginal rate of substitution of X for Y at point C is:
        a.     5
        b.     2
        c.     0.5
        d.     0.3
        e.     none of the above

5-18    Which of the following are points on the consumer's demand curve for X?
        a.     $2, 300 units
        b.     $3, 120 units
        c.     $5, 120 units
        d.     both a and b
        e.     both c and d




70
The next 4 questions refer to the following figure:



                                       80



                                                 A
                                       56
                       Quantity of Y




                                                                         II
                                                                     B   I



                                            0   30                       100
                                                     Quantity of X


The consumer's income is $800.

5-19    What are the prices of goods X and Y?
        a.      PX = $10, PY = $8
        b.      PX = $8, PY = $10
        c.      PX = $100, PY = $80
        d.      PX = $20, PY = $60
        e.      PX = $60, PY = $20

5-20    What is the consumer's marginal rate of substitution in equilibrium?
        a.      1.5
        b.      2
        c.      2.5
        d.      0.8
        e.      unable to tell from information given

5-21    Why doesn't the consumer choose the combination of 30X and 56Y at point A?
        a.    MRS is less than PX PX .
        b.    MRS is greater than PX P .
                                       Y
        c.     MU X is greater than MUY .
        d.     MU X PX is less than MUY P . Y


5-22    Why doesn't the consumer choose the combination at point B?
        a.    The consumer is willing to give up more X for additional units of Y than the rate in the
              market.
        b.    The marginal utility of Y exceeds the marginal utility of X.
        c.    The marginal utility per dollar spent on Y exceeds the marginal utility per dollar spent on
              X.
        d.    both a and c
        e.    both b and c



                                                        Chapter 5: THEORY OF CONSUMER BEHAVIOR        71
5-23   An individual's demand curve for X
       a.     shows how the utilitymaximizing choice of X changes as the price of X changes.
       b.     shows how the individual's preferences change as the price of X changes.
       c.     shows that the income effect is always negative.
       d.     both a and b
       e.     both a and c

5-24   Suppose a consumer who purchases only two goods is making a utilitymaximizing choice and
       then the price of one of the goods decreases. What will happen?
       a.      The consumer's purchasing power will increase.
       b.      The consumer's utility will increase.
       c.      The consumer's income will increase.
       d.      both a and b
       e.      all of the above

5-25   If the price of a good decreases, the substitution effect
       a.       can increase or decrease the quantity of the good demanded.
       b.       shows the increase in the quantity of the good demanded, holding income constant.
       c.       shows the increase in the quantity of the good demanded, holding utility constant.
       d.       must be greater than the income effect.
       e.       is positive since the quantity of the good increases.

5-26   If the price of a good decreases, the income effect
       a.       reinforces the substitution effect if the good is inferior.
       b.       offsets the substitution effect if the good is normal.
       c.       shows the change in the quantity demanded of the good, income held constant.
       d.       a and b
       e.       none of the above

5-27   When the price of a good changes,
       a.     the income effect is always positive and the substitution effect is always negative.
       b.     both the substitution effect and the income effect can be either positive or negative.
       c.     the income effect can be positive or negative, but the substitution effect is always
              negative.
       d.     the income effect can be negative, but in such cases it will never overwhelm the
              substitution effect.
       e.     none of the above




72
The next 4 questions refer to the following figure that shows the effect of an INCREASE in the price of
X.


                                           Y



                     Units of good Y




                                                                     II



                                                         I

                                                                                     X
                                       0       3   5 6         8
                                                         Units of good X


5-28    The substitution effect of the price change is the change in the consumption of X from
        a.     5 to 3.
        b.     6 to 3.
        c.     6 to 5.
        d.     6 to 8.
        e.     none of the above

5-29    The income effect of the price change is the change in the consumption of X from
        a.     5 to 3.
        b.     6 to 3.
        c.     6 to 5.
        d.     6 to 8.
        e.     none of the above

5-30    The total effect of the price change is the change in the consumption of X from
        a.      5 to 3.
        b.      6 to 3.
        c.      6 to 5.
        d.      6 to 8.
        e.      none of the above

5-31    Good X is
        a.     normal.
        b.     inferior.
        c.     a Giffen good.
        d.     both b and c




                                                             Chapter 5: THEORY OF CONSUMER BEHAVIOR   73
5-32    If a demand curve slopes upward, then
        a.      the good is inferior.
        b.      the income effect reinforces the substitution effect.
        c.      the income effect overwhelms the substitution effect.
        d.      both a and b
        e.      both a and c

The next 5 questions refer to the following figure:

                                                 Y


                                       260
                                       240
                                       220
                                       200
                                       180
                      Q uantity of Y




                                       160
                                       140
                                       120
                                       100
                                        80                                                     II

                                        60
                                                                               I
                                        40
                                        20
                                                                                                       X
                                             0       20 40 60 80 100 120 140 160 180 200 220 240 260

                                                                        130
                                                                              Q uantity of X

The consumer's income is $2,600.

5-33    Two points on this consumer's demand for good X are
        a.     PX = $260, X = 140 and PX = $130, X = 80.
        b.     PX = $10, X = 260 and PX = $20, X = 130.
        c.     PX = $10, X = 140 and PX = $10, X = 120.
        d.     PX = $20, X = 80 and PX = $10, X = 100.
        e.     PX = $10, X = 140 and PX = $20, X = 80.

5-34    The total effect of the increase in the price of X is
        a.      X falls 60 units.
        b.      X rises 60 units.
        c.      X falls 130 units.
        d.      X rises 130 units.
        e.      X falls 20 units.

5-35    The substitution effect of the increase in the price of X is (approximately)
        a.     X rises 20 units.
        b.     X falls 40 units.
        c.     X falls 130 units.
        d.     X falls 16 units.
        e.     X rises 40 units.

74
5-36   The income effect of the increase in the price of X is (approximately)
       a.     X falls 130 units.
       b.     X rises 60 units.
       c.     X falls 60 units.
       d.     X falls 20 units.
       e.     X rises 20 units.

5-37   In order to isolate the income and substitution effects what must have happened, temporarily, to
       the consumer's income (approximately)?
       a.      $1,200 added to income
       b.      $600 taken away from income
       c.      nothing, income is $2,600
       d.      $2,600 added to income
       e.      $1,800 taken away from income

5-38   If Ferdinand prefers a Big Mac to a Whopper and a Whopper to a hotdog, but is indifferent
       between a Big Mac and a Quarter Pounder he must
       a.      prefer a Quarter Pounder to a hotdog.
       b.      prefer a Whopper to a Quarter Pounder.
       c.      be indifferent between a Quarter Pounder and a Whopper.
       d.      be indifferent between a Whopper and a hotdog.

5-39   Which of the following is NOT a characteristic of a typical indifference curve?
       a.     The curve shows all combinations of goods that give the consumer the same level of
              utility.
       b.     As a consumer has less of a good, he is less willing to exchange less of it for one more
              unit of another good.
       c.     The marginal rate of substitution is measured by the slope of the tangent to the curve.
       d.     The curve will shift out if income increases.

5-40   According to the Rolling Stones, "You can't always get what you want." What does this mean in
       the context of utility maximization?
       a.      A bundle of goods between the budget line and the origin.
       b.      Vertical indifference curves.
       c.      A bundle of goods above the budget line.
       d.      Downward-sloping indifference curves.

5-41   In spending all his income, the consumer chooses the bundle of goods that maximizes his utility.
       Which of the following statements will be correct?
       a.      The marginal utilities of all goods are equal.
       b.      Expenditures on all goods are equal.
       c.      The addition to utility of the last unit of the good is equal across all goods.
       d.      The addition to utility of the last unit of the good per dollar is equal across all goods.




                                                 Chapter 5: THEORY OF CONSUMER BEHAVIOR                75
5-42    An indifference curve is drawn on a graph with good X on the horizontal axis and good Y on the
        vertical axis. One point on the curve is X = 5, Y = 5. Which of the following points CANNOT
        also be on the curve?
        a.       X = 6, Y = 6
        b.       X = 6, Y = 4
        c.       X = 9, Y = 4
        d.       X = 2, Y = 11

5-43    Ms. Birnbaum is buying bottles of beer and bags of pretzels. The marginal utility of the last
        bottle of beer is 60 and the marginal utility of the last bag of pretzels is 30. The price of beer is
        $0.30 per bottle and the price of pretzels is $0.20 per bag. Ms. Birnbaum
        a.       is buying beer and pretzels in the utility-maximizing amounts.
        b.       should buy more beer and fewer pretzels.
        c.       should buy more pretzels and less beer.
        d.       is not spending all her income.

5-44    The rate at which a consumer is WILLING to substitute one good for another is measured by
        a.      the indifference map.
        b.      the slope of the budget line.
        c.      the consumer's real income.
        d.      the slope of the tangent to the indifference curve.

The next 4 questions refer to the following graph:

                                                     Y
                                               100




                                                         C
                              Q uantity of Y




                                                                     B
                                                             A




                                                                                          II



                                                                                          I


                                                                                                   X
                                                 0               25 35               60       80
                                                                         Q uantity of X


The consumer's income is $600.

5-45    What is the price of Y?
        a.      $0.25
        b.      $4
        c.      $8
        d.      $6
        e.      none of the above

76
5-46   If the price of X is $7.50 per unit, how many units of X will a utility-maximizing consumer
       choose?
       a.       25
       b.       30
       c.       35
       d.       50
       e.       none of the above

5-47   At point C,
       a.      MRS is greater than 1.25.
       b.      MRS is less than 0.4.
       c.      MRS is greater than 2.
       d.      MRS is less than 2.5.

5-48   One point on the consumer's demand curve for X is
       a.     60 units at a price of $10.
       b.     35 units at a price of $10.
       c.     35 units at a price of $6.
       d.     25 units at a price of $10.
       e.     25 units at a price of $7.50.

5-49   If the price of good X rises and X is a normal good, then
       a.       the income effect will induce the consumer to demand less of X and the substitution
                effect will induce him to demand more.
       b.       the income effect will induce the consumer to demand more of X and the substitution
                effect will induce him to demand less.
       c.       the income and substitution effects will both induce the consumer to demand more of X.
       d.       the income and substitution effects will both induce the consumer to demand less of X.

5-50   The Giffen Paradox results whenever
       a.     the substitution effect is positive.
       b.     the substitution effect is negative.
       c.     the income effect is positive.
       d.     the income effect is negative.
       e.     none of the above

5-51   A market demand curve
       a.     is the horizontal summation of the demand curves of all consumers in the market.
       b.     is the sum of the prices consumers are willing to pay at each quantity.
       c.     shows that consumers demand more at higher prices.
       d.     both a and b
       e.     all of the above

5-52   The ratio of the prices of two goods measures
       a.      the rate at which a consumer is willing to substitute one good for another.
       b.      the rate at which a consumer is able to substitute one good for another.
       c.      the marginal rate of substitution of X for Y.
       d.      both a and c
       e.      both b and c


                                                     Chapter 5: THEORY OF CONSUMER BEHAVIOR          77
The next 4 questions refer to the following graph:

The price of X is $20 and the price of Y is $40.
                                                 Y

                                            30




                          Units of good Y


                                                                 B
                                            14
                                                          A
                                                                                U2



                                                                          U1
                                                                                     X
                                             0       24              40
                                                              Units of good X

5-53    If U1 is the highest level of utility the consumer can achieve, what is the consumer's income?
        a.        $ 480
        b.        $ 600
        c.        $ 800
        d.        $1,200
        e.        none of the above

5-54    How many units of X will the consumer choose if point B is the utility-maximizing choice?
        a.    28
        b.    30
        c.    32
        d.    60
        e.    none of the above

5-55    At point B,
        a.      if the consumer obtains one more unit of Y, ½ unit of X must be foregone in order to keep
                utility unchanged.
        b.      if the consumer obtains one more unit of X, two units of Y must be foregone in order to
                keep utility unchanged.
        c.      the marginal rate of substitution is ½.
        d.      both a and c
        e.      all of the above

5-56    If income is $800, how many units of Y will the consumer choose?
        a.      6
        b.      7
        c.      8
        d.      9
        e.      10



78
The next 3 questions refer to the following graph:

                                             Y


                                       150




                                                               B
                     Units of good Y

                                        Y1
                                       100

                                                      A                         U2
                                        Y2


                                                                        U1




                                                                                              X
                                         0       12       16                         80
                                                                   Units of good X



The consumer's income is $1,200.

5-57    What is Y1?
        a.      30
        b.      80
        c.      110
        d.      120
        e.      none of the above

5-58    At what price of Y are Y2 units demanded?
        a.     $8
        b.     $10
        c.     $15
        d.     $16
        e.     $12

5-59    At point B,
        a.      the rate at which the consumer is willing to substitute X for Y is greater than it is at point
                A.
        b.      the consumer is willing to give up more Y in order to gain an extra unit of X than at point
                A.
        c.      the consumer will receive more Y for each unit of X exchanged in the market than at
                point A.
        d.      both a and b
        e.      all of the above




                                                                     Chapter 5: THEORY OF CONSUMER BEHAVIOR   79
5-60      Lord Greystroke uses his limited income to purchase fruits and nuts; he is currently buying 10
          pounds of fruits at a price of $2 per pound and 5 pounds of nuts at a price of $6 per pound. The
          last pound of fruits added 10 units to Lord Greystroke's total utility, while the last pound of nuts
          added 30 units. Lord Greystroke
          a.      is making the utility-maximizing choice.
          b.      should buy more fruits and less nuts because the last pound of fruits cost less than the
                  last pound of nuts.
          c.      should buy more fruits and less nuts because the last dollar spent on fruits added more to
                  total utility than the last dollar spent on nuts.
          d.      should buy more nuts and less fruits because the last pound of nuts added more to total
                  utility than the last pound of fruits.
          e.      should buy more nuts and less fruits because the last dollar spent on nuts added more to
                  total utility than the last dollar spent on fruits.

5-61      Demand curves slope downward because
          a.    the substitution effect, which is always positive, dominates or reinforces the income
                effect.
          b.    the substitution effect, which is always negative, dominates or reinforces the income
                effect.
          c.    the income effect, which is always positive, dominates or reinforces the substitution
                effect.
          d.    the income effect, which is always negative, dominates or reinforces the substitution
                effect.

The next 4 questions refer to the following graphs of a consumer's indifference map and budget lines and
possible demand curves:


      Y                                                        PX


300
                                                                                    D1
                                                                                                              D2
                                                          25



                           C
130
                  B
            A                       D                     15
100
                                        U3
                               U2                         10
                                                                                                             D3

                      U1                                                            D4


                                                     X                                                            X
  0             600             1,000        1,500         0        400   600        1,000           1,500




The price of Y is $50.




80
5-62   If the price of X is $10, what combination of X and Y will a utility-maximizing consumer choose?
       a.       400X, 100Y
       b.       800X, 130Y
       c.       850X, 130Y
       d.       1,000X, 100Y
       e.       none of the above

5-63   If U2 is the maximum attainable utility, the price of X is
       a.        $10.
       b.        $15.
       c.        $20.
       d.        $25.
       e.        none of the above

5-64   At point A,
       a.      the consumer can exchange two units of X for one unit of Y and keep utility unchanged.
       b.      the consumer can exchange two units of X for one unit of Y and keep income unchanged.
       c.      the consumer receives twice as much marginal utility from X as from Y.
       d.      both a and b
       e.      all of the above

5-65   The consumer's demand curve for X is
       a.     D1.
       b.     D2.
       c.     D3.
       d.     D4.

5-66   Suppose that 25 units of X and 16 units of Y give a consumer the same satisfaction as 15 units of
       X and 18 units of Y. Then
       a.     the consumer can exchange five units of X for one unit of Y and keep utility unchanged.
       b.     the consumer can exchange one unit of X for 1/5 unit of Y and keep utility unchanged.
       c.     the market rate of exchange of X for Y is 1/5.
       d.     both a and b
       e.     all of the above

5-67   An individual's demand curve for X
       a.     shows that the income effect is always negative.
       b.     depends on how the individual's utility-maximizing choices change when the price of X
              changes.
       c.     depends on how the individual's money income changes when the price of X changes.
       d.     depends on how the individual's preferences change when the price of X changes.
       e.     both a and c




                                                  Chapter 5: THEORY OF CONSUMER BEHAVIOR              81
5-68    Lulu consumes only candy and cookies; she is currently buying more cookies than candy with
        her limited income. The last bag of candy gave Lulu the same additional utility as the last bag of
        cookies, and the prices of candy and cookies are the same. Lulu
        a.      is maximizing utility given a limited income because the prices of candy and cookies are
                the same.
        b.      is maximizing satisfaction given a limited income because the marginal utility per dollar
                is the same for candy and cookies.
        c.      could get more satisfaction from the same income by buying more candy and less
                cookies.
        d.      could get more satisfaction from the same income by buying more cookies and less
                candy.

The next 4 questions refer to the following graphs:

                                                       Y

                                                  40
                                Units of good Y




                                                                             A
                                                  Y1

                                                                                      U2



                                                  10        B



                                                                     U1
                                                                                                X
                                                                                           40




                                                       $




                                                  30
                   Price of good X (dollars)




                                                  P2




                                                                                                X
                                                           X2           25

                                                                Q uantity of good X


82
The price of Y is $15 per unit.

5-69    What is Y1 ?
        a.     12
        b.     15
        c.     20
        d.     25
        e.     none of the above

5-70    What is X 1 ?
        a.     10
        b.     12
        c.     18
        d.     20
        e.     none of the above

5-71    At point B,
        a.      the consumer can exchange one unit of X for one unit of Y and keep income unchanged.
        b.      the marginal rate of substitution of X for Y is greater than it is at point A.
        c.      the consumer's utility is greater than it is at point A.
        d.      both a and b
        e.      all of the above

5-72    What does the curve in the lower graph show?
        a.     how a consumer's utility-maximizing choices of X and Y change when the budget
               constraint changes
        b.     how a consumer's preferences change when income changes
        c.     how a consumer's utility-maximizing choices of X changes when the price of X changes
        d.     how a consumer's utility-maximizing choices of Y changes when the price of Y changes
        e.     both c and d

5-73    Suppose that utility-maximizing consumers in San Francisco pay three times as much for apples
        as for peaches. What is the ratio of the marginal utility of apples to the marginal utility of
        peaches?
        a.      1/3
        b.      2/3
        c.      3
        d.      none of the above
        e.      cannot determine without further information




                                                Chapter 5: THEORY OF CONSUMER BEHAVIOR             83
For the next 3 questions, assume that an individual consumes two goods X and Y. The total utility
(assumed measurable) of each good is independent of the rate of consumption of other goods. The prices
of X and Y are, respectively, $5 and $10.
             Units of the Good                              Total Utility of X             Total Utility of Y
             1                                               50                             400
             2                                               95                             750
             3                                              135                             950
             4                                              170                            1100
             5                                              200                            1220
             6                                              225                            1320
             7                                              245                            1400
             8                                              260                            1450

5-74    If the consumer buys the third unit of Y,
        a.       the marginal utility of the third unit is 950 units of satisfaction.
        b.       the marginal utility per dollar spent on Y is 200.
        c.       the marginal utility per dollar spent on Y is 20.
        d.       both a and b.

5-75    If the consumer has $65 to spend on X and Y, the utility-maximizing bundle is
        a.       3X and 5Y.
        b.       4X and 4Y.
        c.       5X and 2Y.
        d.       1X and 6Y.
        e.       2X and 7Y.

5-76    If the consumer has $110 to spend on X and Y, which combination will the consumer choose?
        a.       5X and 4Y
        b.       6X and 8Y
        c.       7X and 6Y
        d.       8X and 7Y
        e.       7X and 7Y

The next 2 questions refer to the following graph:
                                                        Y



                                                        R
                                                   18
                                  Q uantity of Y




                                                        L
                                                   10




                                                                               S       M
                                                                                                X
                                                                            10        15

                                                                     Q uantity of X


84
5-77   What is the equation for budget line LM?
       a.      Y = 10 + 1.5X
       b.      Y = 10  (2/3)X
       c.      Y = 1.5 + 1.5X
       d.      Y = 1.5  10X
       e.      Y = 0.667 + 1.5X

5-78   What is the equation for budget line RS?
       a.      Y = 10 + 18X
       b.      Y = 10  1.8X
       c.      Y = 15 + (9/5)X
       d.      Y = 1.8 + (9/5)X
       e.      Y = 18  (18/10)X

5-79   The market demand curve
       a.     shows how much all consumers demand at various prices.
       b.     is the vertical summation of the demand curves of all the consumers in the market.
       c.     is quite complex to construct, given the demand curves of the individual consumers.
       d.     all of the above

5-80   If the total utility of five units of X is 45 units of utility and the marginal utility of the fifth unit is
       3, then
       a.       the total utility of four units is 42 units.
       b.       the demand curve is likely to be upward sloping.
       c.       the good is a Giffen good.
       d.       the substitution effect is equal to 3.

5-81   Market demand
       a.     is the horizontal summation of the individual demand curves.
       b.     slopes downward.
       c.     shows how market purchases vary with price.
       d.     both a and b
       e.     all of the above

For the next 2 questions, assume James purchases only two goods, steak and chicken, with his weekly
income of $60. The price of steak is $10 and the price of chicken is $5. The following table shows the
marginal utility James obtains from each additional pound of steak and chicken:

                                        Marginal     utility   of   Marginal   utility   of
                      Quantity          steak                       chicken
                      1                 70                          50

                      2                 60                          40

                      3                 50                          30

                      4                 40                          20

                      5                 32                          10

                      6                 16                          5


                                                     Chapter 5: THEORY OF CONSUMER BEHAVIOR                     85
5-82   What quantities of steak and chicken should James purchase to maximize his utility?
       a.     3 steak, 2 chicken
       b.     5 steak, 2 chicken
       c.     4 steak, 4 chicken
       d.     2 steak, 5 chicken
       e.     none of the above

5-83   If the price of steak falls to $8, what quantities of steak and chicken should James purchase to
       maximize his utility?
       a.       6 steak, 2 chicken
       b.       5 steak, 3 chicken
       c.       4 steak, 4 chicken
       d.       5 steak, 4 chicken
       e.       3 steak, 6 chicken




86
Fill-in-the-Blank
5-1F   a.      Along an indifference curve ____________ is constant.
       b.      The rate at which a consumer is willing to substitute one good for another, holding utility
               constant, is given by the ____________ of an indifference curve. This rate is called the
               _________________________________.
       c.      If at a given combination of X and Y, a consumer’s marginal rate of substitution is 4, this
               means that the consumer is willing to give up ______ units of Y for another X or ______
               units of X for another Y.
       d.      If a consumer is choosing the levels of goods X and Y in order to maximize utility with a
               given budget the _________ equals the ____________ ratio of the goods.
       e.      The rate at which a consumer can substitute one good for another in the market is given
               by the ______ of the budget line and is equal to the __________ratio of the two goods.


5-2F   Sally consumes only two goods, A and B. The prices are PA = $10 and PB = $15. For the last
       units of each good the marginal utilities are MUA = 30 and MUB = 40. Sally should consume
       more ______ and less ______ because ____________ is greater than ____________. When
       Sally reaches equilibrium her MRS will be ______.


5-3F   a.      Demand curves slope downward because the __________________ effect of a price
               change is negative and dominates the _____________________ effect, which can be
               either positive or negative. Thus the ______ effect is negative.
       b.      Market demand is the _____________ summation of the ______________ of all the
               consumers in the market.


5-4F   The following questions refer to the following graph of a consumer’s indifference curve.
                                                       Y

                                              40


                                                            A
                                              30
                             Q uantity of Y




                                              20
                                                                     C
                                                                                 B
                                              10
                                                                                          I
                                                                                              X
                                                   0       10     20        30       40

                                                                Q uantity of X




                                                                  Chapter 5: THEORY OF CONSUMER BEHAVIOR   87
       a.     What is the consumer’s marginal rate of substitution between points A and C? ______.
              Moving between these points, the consumer is willing to give up ______ units of Y for
              another X or ______ units of X for another Y.
       b.     What is the consumer’s marginal rate of substitution between points C and B? ______.
              Moving between these points the consumer is willing to give up ______ units of Y for
              another X or ______ units of X for another Y.
       c.     At point C the consumer’s marginal rate of substitution at point is approximately
              ______. This means that the consumer is willing to substitute at a rate of ______ units
              of Y for one more X or ______ X for one Y.


5-5F   Use the following graph showing two budget lines, LR and LZ to answer the following questions.
       The consumer’s income is $720.
                                       Y

                                  80



                                       L
                 Q uantity of Y




                                  60



                                  40



                                  20


                                                R                     M            X
                                  0        20   40       60           80   100

                                                     Q uantity of X

       a.     For budget line LR the price of Y is $______ and the price of X is $______. The
              equation for budget line LR is ________________________.
       b.     For budget line LM the price of Y is $______ and the price of X is $______. The
              equation for budget line LM is _____________________.




88
5-6F   Use the following graph showing a consumer’s budget line and some indifference curves to
       answer the following questions. The consumer’s income is $600.




                                 40
                Q uantity of Y


                                 30

                                      A
                                 20



                                 10                                             III
                                                                           II
                                                              B       I

                                 0        10   20        30           40        50

                                                     Q uantity of X


       a.     The price of Y is $______ and the price of X is $______. The consumer should buy
              _____ unit of X and ______ units of Y. In equilibrium the marginal rate of substitution is
              _____.
       b.     If the consumer is buying he combination at point A, the MRS is ________________
              (greater, less) than the price _________, so the consumer should buy more ______ and
              less ______ in order to increase utility. The consumer would buy no combination on
              indifference curve III because
              _______________________________________________________________________.
       c.     If the consumer is buying the combination at point B, the MRS is ______ than the price
              ____________, so the consumer should buy more ______ and less ______ to increase
              utility. At point B, MU X PX is ____________ than the MUY P .
                                                                         Y




                                                    Chapter 5: THEORY OF CONSUMER BEHAVIOR           89
5-7F   The following figure shows a portion of a consumer’s indifference map and budget lines. The
       price of good Y is $17 and the consumer’s income is $7,650.
                                    Y

                              700



                              600



                              500
        Q uantity of good Y




                              400


                                                           A
                              300



                              200
                                                   B                                       II


                              100


                                                                 I
                                                                                                               X

                               0        100     200     300       400       500      600        700   800

                                                               Q uantity of good X

       Let the consumer begin in utility-maximizing equilibrium at point A on indifference curve II.
       Next the price of good X changes so that the consumer moves to a new utility-maximizing
       equilibrium at point B on indifference curve I.
       a.      Two points on this consumer’s demand for good X are PX = $_________ and X =
                               _________; and PX = $_________ and X = _________.
       b.                      The substitution effect of the change in the price of X is _________; the income effect is
                               _________; the total effect is _________.
       c.                      Good X is a(an) ____________ good.




90
5-8F       The following figure shows a portion of a consumer’s indifference map and budget lines. The
           price of good Y is $7 and the consumer’s income is $700.


                                Y
                        120



                        100



                         80
       Q uantity of Y




                                              A
                         60
                                                                B

                         40



                         20                                                                        II
                                                                         I


                                                                                                                 X
                          0           20          40    60          80         100   120     140        160


                                                              Q uantity of X

           Let the consumer begin in utility maximizing equilibrium at point A on indifference curve I.
           Next the price of good X changes so that the consumer moves to a new utility maximizing
           equilibrium at point B on indifference curve II.
           a.      Two points on this consumer’s demand for good X are PX = $______ and X = ______;
                              and PX = $______ and X = ______.
           b.                 The substitution effect of the change in the price of X is ______; the income effect is
                              ______; the total effect is ______.
           c.                 Good X is a(an) ______ good.


5-9F       The marginal rate of substitution of X for Y is 3, the price of X is $4, and the price of Y is $2.
           a.     The consumer is willing to give up ______ units of Y to obtain another X. The consumer
                              is willing to give up ______ units of X to obtain another Y.
           b.                 The consumer must give up ______ units of Y to obtain another X. The consumer must
                              give up ______ units of X to obtain another Y. At what rate is the consumer able to
                              substitute X for Y in the market? ______.
           c.                 Is the consumer making the utility maximizing choice? ______. If not, the consumer
                              should purchase more ______ and less ______.


                                                                Chapter 5: THEORY OF CONSUMER BEHAVIOR                  91
5-10F a.        The rate at which a consumer is able to substitute one good for another is determined by
                the ______. The rate at which a consumer is willing to substitute one good for another is
                given by the ______.
        b.      If a consumer is choosing a bundle of goods that maximizes utility subject to a budget
                constraint the ratio of ______ to ______ is the same for every good and the ______
                equals the ______ ratio for every pair of goods.
        c.      A consumer’s demand curve for a good shows the ______ choice of the good at each
                ______.

5-11F Mary is consuming 3 hot dogs and 2 Cokes at the Bucs game. The marginal utility of the third
      hot dog is 60 utils and the marginal utility of the second Coke is 180 utils. The price of a hot dog
      is $1 and the price of a Coke is $4. From the information given, we can see that Mary consumed
      too many ________________ (hot dogs, Cokes) and too few ________________ (hot dogs,
      Cokes).




92

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:1489
posted:5/18/2011
language:English
pages:26