ECO232 Chapter 25 Homework Name: Date: Use the following to answer question 1: Figure: Coffee and Comic Books 1. (Figure: Coffee and Comic Books) Refer to the figure. A consumer has $5 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). Using the figure, how many comic books and cups of coffee will this consumer purchase? A) three comic books and two cups of coffee B) two comic books and three cups of coffee C) 2.5 comic books and 2.5 cups of coffee D) one comic book and four cups of coffee 2. Amy purchased four cantaloupes at $2 each and three watermelons at $4 each. If Amy is following the optimal consumption rule, the marginal utility of the fourth cantaloupe and third watermelon are: A) 12 and 24, respectively. B) 4 and 3, respectively. C) 40 and 10, respectively. D) 6 and 8, respectively. 3. As one moves down along an indifference curve, the slope of the indifference curve typically: A) increases. B) decreases. C) remains constant. D) changes in an indeterminate direction. Page 1
4. Figure: Consumption Bundle Refer to the figure. Which statement is FALSE? A) The optimal consumption bundle contains five movie downloads and 10 music downloads. B) The MRS is 0.50 at the optimal consumption bundle. C) The price per music download is half as expensive as the price per movie download. D) In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music downloads. 5. At the consumer's optimal consumption bundle, the MRSXY is 4, and the marginal utility of good X is 8. What is the marginal utility of good Y? A) 1/2 B) 2 C) 24 D) 16 Page 2
6. Figure: Music and Movie Downloads 4 Refer to the figure. According to this figure, which of the following statements is FALSE? A) The optimal consumption bundle contains 5 movie downloads and 10 music downloads. B) The MRS is 0.50 at the optimal consumption bundle. C) The price per music download is half as expensive as the price per movie download. D) At the optimal consumption bundle, the marginal utility of movie downloads is equal to half the marginal utility of music downloads. Page 3
Use the following to answer question 7: Figure: Water and Electricity 2 7. (Figure: Water and Electricity 2) Refer to the figure. If the price of electricity changed and the price of water stayed the same, causing the change in the budget constraint as indicated by the dashed line, did an income effect play a role in the change in this person's consumption bundle? A) No, because the new consumption point is on the same indifference curve. B) No, because the new consumption point has less water, not more. C) Yes, because there was a change in relative prices. D) Yes, because after keeping utility constant this person still buys more electricity. 8. Consider an indifference curve based around video games and pizza. If the price of pizza falls, what would have to be true for the consumer to buy less pizza compared with when the price of pizza was higher? A) Pizza and video games would be perfect substitutes. B) The income effect would be greater than the substitution effect. C) Consumption would lie on the same indifference curve. D) The consumer would be buying as a suboptimal consumption bundle. Page 4
Use the following to answer questions 9-10: Figure: Income and Substitution Effects 9. (Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A then moves to Point B. What is the substitution effect from the price change? A) the reduction of the number of music downloads by three B) the reduction of the number of music downloads by four C) the increase of the number of music downloads by one D) the increase of the number of music downloads by three 10. (Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A then moves to Point B. What is the income effect from the price change? A) the increase of the number of music downloads by three B) the increase of the number of music downloads by four C) the reduction of the number of music downloads by one D) the reduction of the number of music downloads by three Page 5
Use the following to answer questions 11-12: Figure: Labor Supply and Welfare 11. (Figure: Labor Supply and Welfare) Refer to the figure. The budget constraint is: A) ABC. B) BD. C) ABDC. D) ABD. 12. (Figure: Labor Supply and Welfare) Refer to the figure. The presence of the welfare program causes this person to: A) reduce hours of work from 12 to 0. B) increase hours of work from 0 to 12. C) reduce hours of work from 12 to 9. D) reduce hours of work from 8 to 3. Page 6
13. Figure: Leisure 2 Refer to the figure. According to this diagram, which statement is FALSE? A) At 13 hours of leisure and an income of $45.19, the worker earns a wage of $4.17 an hour. B) The labor supply curve is downward sloping. C) The substitution effect dominates the income effect. D) This worker chooses to work more hours if paid higher wages. 14. If an individual's labor supply curve is downward sloping, this indicates that: A) the individual has become wealthier. B) the income effect dominates the substitution effect. C) the substitution effect dominates the income effect. D) the individual faces a diminishing marginal utility for leisure. Page 7
15. Figure: Labor Supply 2 Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker: A) the income effect will dominate and the consumer will work more. B) the substitution effect will dominate and the consumer will work more. C) the income effect will dominate and the consumer will work less. D) the substitution effect will dominate and the consumer will work less. 16. Increasing marginal utility means that marginal utility as consumption. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases 17. If you purchase a ticket to a concert but then lose the ticket, a rational consumer would: A) not repurchase the ticket since the lost ticket is a sunk cost. B) always repurchase the ticket as long as the price hasn't changed. C) repurchase the ticket as long as the price hasn't changed and the income effect is high. D) repurchase the ticket as long as the price hasn't changed and the income effect is low. Page 8
Use the following to answer question 18: Figure: Indifference Curve 2 18. (Figure: Indifference Curve 2) Refer to the figure. Which point generates the highest level of utility for the consumer? A) A B) B C) C D) D 19. Increasing marginal utility means that one's first apple in a sitting is one's second apple in the same sitting. A) worse than B) better than C) incomparable with D) equally good as Page 9
20. Figure: Music and Movie Downloads 3 Refer to the figure. What is the marginal rate of substitution (MRS) between bundle A and bundle B in this figure? A) The MRS is 4.5; the consumer is willing to trade 4.5 movie downloads for 1 music download. B) The MRS is 3; the consumer is willing to give up 3 movie downloads for an additional music download. C) The MRS is 1.5; the consumer will buy 1.5 times as many music downloads as movie downloads. D) The MRS is 1; the consumer faces a one-to-one tradeoff. Use the following to answer question 21: Figure: Water vs. Soda Page 10
21. (Figure: Water vs. Soda) Refer to the figure. The figure represents the marginal utility Janet receives when she consumes bottled water and soda. The prices of bottled water and sodas are both $1 each. Janet has $5 to spend. What mix of bottled water and soda will maximize Janet's utility? A) five bottles of water B) four bottles of water and one soda C) three bottles of water and two sodas D) 2.5 bottles of water and 2.5 sodas 22. Assume that the unit price of good A is $2, and the unit price of good B is $2. If an individual has income of $20, which consumption bundles of (good A, good B) is on the edge of the budget constraint? A) (5,5) B) (5,4) C) (6,3) D) (6,5) 23. The consumption bundle that maximizes utility for a consumer is the bundle that: A) equates the slope of the budget constraint with the slope of the indifference curve. B) maximizes marginal utility across all goods. C) minimizes the costs of production. D) maximizes the marginal rate of substitution. Use the following to answer question 24: Figure: Budget Constraint Page 11
24. (Figure: Budget Constraint) Refer to the figure. If the price of sneakers rises, then the budget constraint in the figure will: A) not change. B) become steeper. C) become flatter. D) shift to the left. 25. Barry's wage increased and he responded by working more hours. Which statement must be TRUE? A) Leisure is an inferior good. B) The substitution effect of the wage increase dominated the income effect. C) The income effect of the wage increase dominated the substitution effect. D) The substitution and income effect both increased hours of work. Use the following to answer question 26: Figure: Music and Movie Downloads Page 12
26. (Figure: Music and Movie Downloads) Refer to the figure. What is the relative price of music downloads to movie downloads? A) 3 B) 1/3 C) 5 D) 4 27. Diminishing marginal utility means that marginal utility as consumption. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases 28. The conventional demand curve appears strange to many students since the dependent variable (quantity) is on the vertical axis and the independent variable (price) is on the horizontal axis. We generally describe our demand as If apples cost $1, then I'd be willing to buy four apples instead of If I want four apples, then I'd be willing to pay $1 per apple. Which concept reframes the dependent and independent variables so the orientation is more intuitive? A) diminishing marginal utility B) indifference curve C) budget constraint D) marginal rate of substitution Use the following to answer question 29: Figure: Coffee and Comic Books Page 13
29. (Figure: Coffee and Comic Books) Refer to the figure. A consumer has $2 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). To maximize utility, should this consumer buy two cups of coffee? A) Yes, buying two cups of coffee maximizes the consumer's total utility. B) Yes, because the marginal utility of the second comic book is less than the marginal utility of the second cup of coffee. C) No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils). D) No, the consumer should buy two comic books to maximize utility. 30. Countries in Western Europe tend to have more generous unemployment benefits for their workers than we do in the United States. All else equal, workers in Western Europe should: A) work more hours on average. B) work fewer hours on average. C) have higher wages. D) have lower tax rates. 31. When the income effect from a wage increase is less than the substitution effect, the labor supply curve: A) slopes upward. B) is vertical. C) is horizontal. D) slopes downward. 32. Assume that the unit price of good A is $2, and the unit price of good B is $5. If an individual has income of $30, which consumption bundles of (good A, good B) is on the edge of the budget constraint? A) (5,5) B) (5,4) C) (6,4) D) (6,5) Page 14
33. Figure: Sam's Club Refer to the figure. According to this figure, how much should Sam's Club charge for membership? A) $60 B) $100 C) $40 D) $10 Page 15
34. Figure: Kiwi and Nuts Refer to figure. Which statement is TRUE for this figure? A) Indifference curve U1 provides higher utility than indifference curve U2. B) Bundle A is preferred to bundle B. C) Bundle C is preferred to bundle D. D) Bundle D is preferred to bundle A. Use the following to answer question 35: Figure: Budget Constraint 2 Page 16
35. (Figure: Budget Constraint 2) Refer to the figure. What is the relative price of music downloads to movie downloads? A) 3 B) 1/3 C) 5 D) 4 36. Assume that the unit price of good A is $3, and the unit price of good B is $5. If an individual has income of $43, which consumption bundles of (good A, good B) is on the edge of the budget constraint? A) (5,5) B) (5,4) C) (6,4) D) (6,5) 37. After purchasing and then losing a ticket to a concert, a rational consumer would: A) not repurchase the ticket since the lost ticket is a sunk cost. B) always repurchase the ticket as long as the price hasn't changed. C) repurchase the ticket as long as the price hasn't changed and the income effect is high. D) repurchase the ticket as long as the price hasn't changed and the income effect is low. Use the following to answer question 38: Figure: Coffee and Comic Books Page 17
38. (Figure: Coffee and Comic Books) Refer to the figure. The price of comic books is $0.50. Using the diagram, the marginal utility per dollar for the third comic book is: A) 11. B) 5.5. C) 22. D) 11.5. 39. If there are only two goods in the economy, chocolate and peanut butter, and the price of chocolate falls, the new utility-maximizing bundle for a typical consumer would entail consuming peanut butter and chocolate. A) less; more B) more; less C) more; more D) less; less 40. Which statement is TRUE? A) The income effect of a wage increase is to consume less leisure. B) The substitution effect of a wage decrease is to consume less leisure. C) The price of leisure decreases with a decrease in wages. D) The price of leisure increases with an increase in income. Page 18