ECON-UA 1 Lecture Notes - Indifference Curve
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budget line
marginal utility
complete property of preferences
market demand
consumption bundle
substitution effect
Giffen good
total effect
income effect
transitive property of preferences
indifference curves
utility
the marginal rate of substitution
utility function
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1. |
_____ |
The satisfaction or benefit that consumers receive from consuming goods or services.
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2. |
________________ _ |
A particular combination of specific quantities of goods or services |
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3. |
________________ _ |
Consumers can rank all conceivable bundles of goods or services |
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4. |
_____ |
If A is preferred to B, and B is preferred to C, then A is always preferred to C. |
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5. |
_____ |
Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services. |
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6. |
_____ |
A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility. |
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7. |
_____ |
The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed. |
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8. |
_____ |
The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant. |
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9. |
_____ |
The line showing all bundles of goods that can be purchased at given prices if the entire income is spent. |
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10. |
_____ |
The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes. |
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11. |
_____ |
The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes. |
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12. |
________________ _ |
The sum of the substitution and income effects. |
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13. |
_____ |
A good for which quantity demanded varies directly with price, causing an upward sloping demand curve. |
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14. |
_____ |
A list of prices and the corresponding quantity consumers are willing and able to purchase at each price. |
1) Suppose your grandmother gave you $25 for your birthday and you decided to spend all of it on candy bars and bags of popcorn. The price of candy bars is $1.25 and price of a bag of peanuts is $3.75.
a) Construct a table showing the alternative combinations of the two products that are available.
b) Plot the data in your table as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? Of one bag of peanuts?
c) How, in general, would you decide which of the available combinations of candy bars and bags of peanuts to buy?
2) With current technology, suppose a firm is producing 750 screwdrivers daily. Also assume that the least-cost combination of resources in producing those screwdrivers is 15 units of labor, 20 units of land, 4 units of capital, and 3 unit of entrepreneurial ability, selling at prices of $50, $45, $75, and $50, respectively. If the firm can sell these 750 screwdrivers at $2.50 per unit,
a) what is its total revenue?
b) what is its total cost?
c) what is its profit or loss?
d) will it continue to produce screwdrivers?
e) If this firmâs situation is typical for the other makers of screwdrivers, will resources flow toward or away from this product?
3) How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do equilibirium price and quantity rise, fall , or are the answers indeterminate because they depend on the magnitudes of the shifts?
a)Supply decreases and demand is constant. Change in eqilibrium price chnage in eqilibrium quantity
b)Demand decreases and supply is constant.
c)Supply increases and demand is constant.
d)Demand increases and supply increases.
e)Demand decreases and supply decreases.
4)Zeke likes to go to music concerts. The number of times per year that he attends concerts depends on both the price of the concerts as well as Zekeâs income and the cost of other types of entertainmentâin particular, how much it costs to go see a movie instead of attending concerts. The three demand schedules in the $60,000 per year and movies cost $10 each. In scenario D2, Zeke's income is also $60,000 per year, but the price of seeing a movie rises to $12. And in scenario D3, Zeke's income goes up to $80,000 per year, while movies cost $12.
a)Using the data under D1 and D2, calculate the cross-elasticity of Zeke's demand for concerts at all three prices. (To do this, apply the midpoints approach to the cross-elasticity of demand.) Is the cross-elasticity the same at all three prices? Are movies and concerts substitute goods, complementary goods, or independent goods?
b)Using the data under D2 and D3, calculate the income elasticity of Zeke's demand for concerts at all three prices. (To do this, apply the midpoints approach to the income elasticity of demand.) Is the income elasticity the same at all three prices? Are concerts an inferior good?
| PRICE | D1 | D2 | D3 |
| 50 | 10 | 5 | 12 |
| 40 | 15 | 10 | 25 |
| 30 | 25 | 15 | 40 |
Income 60,000 60,000 80,000
Cost of revenue 10 12 12
5) On the basis of the three individual demand schedules below, and assuming these three people are the only ones in the society, determine (a) the market (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good.
| P | Qd(D1) | Qd(D2) | Qd(d3) |
| 20 | 0 | 0 | 1 |
| 19 | 0 | 1 | 2 |
| 17 | 0 | 2 | 3 |
| 16 | 0 | 3 | 4 |
| 15 | 1 | 4 | 5 |
| 14 | 2 | 5 | 6 |
| 13 | 3 | 6 | 7 |
| 12 | 4 | 7 | 8 |
| 11 | 5 | 8 | 9 |
| 10 | 6 | 9 | 10 |
1. Use the table below for the following question. Suppose you have a budget of $6 and that brownies and Twizzlers cost $1 each. What is the consumer optimum?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| 6 brownies |
| 3 brownies and 3 Twizzlers |
| 4 brownies and 2 Twizzlers |
| any combination of 6 because they're both $1 |
| 8 |
2. Use the table below for the following question. What is the consumer equilibrium for a $6 budget if the price of brownies rises to $1.50 and the price of Twizzlers remains at $1.00?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| The consumer will buy all Twizzlers because they're cheaper. |
| 4 brownies |
| 3 Twizzlers and 2 brownies |
| 3 brownies and 3 Twizzlers |
| 7 |
3. At Nice Price for the Ice, an ice cream parlor, customers routinely buy a scoop of ice cream for $3. If consumers purchase one scoop of ice cream at $3, then why don't they keep buying more and more scoops for $3 until the store sells out?
| People would not want more than one scoop of ice cream because then they would have less money to spend on other goods. |
| People do not want to consume all the scoops of ice cream because their total utility is higher the less they eat. |
| At some point, customers do not value an additional scoop at $3, so they will not pay $3 for a scoop after they reach that point. |
4. Suppose you plan on eating 50 potato chips. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, your marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your total utility?
| 1 |
| 10 |
| 49 |
5. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your marginal utility?
| 1 |
| 10 |
| 49 |
| 50 |
6. At current levels of consumption, Alice is spending her entire budget. If Alice gets 3 utils of satisfaction per dollar spent on ice cream and 2 utils per dollar spent on shampoo, then how should she adjust her consumption to get closer to the consumer optimum?
| She is already at the consumer optimum, so no adjustment is necessary. |
| She should buy more ice cream and less shampoo. |
| She should buy more shampoo and less ice cream. |
| She should buy more of both goods. |
7. Suppose you are at a restaurant and your favorite dish costs $20. You can get your next-favorite dish for $17. If your next-favorite dish gives you 100 utils, how many additional utils do you need from your favorite dish to spend the extra $3?
| 15 |
| 17.65 |
| 85 |
| 117.65 |
8. The diamond water paradox is the observation that water is essential to life and inexpensive, while diamonds are not essential and are highly-priced. Which of the other pairs of goods exhibit a pricing structure similar to water and diamonds?
| economy & luxury cars |
| rice & truffles (very expensive mushrooms) |
| paper clips & gasoline |
| paper & textbooks |
9. Rice is a cheap staple food eaten several times a day by many people all over the world. In Trufflelandia, residents also eat expensive mushrooms known as truffles once every year as a birthday celebration. Rice keeps the people alive and truffles are not necessary for sustaining their lives. Why is rice so cheap and truffles so expensive?
| Truffles taste better, so they are worth more money. |
| Rice is easy to cook, so people buy a lot of it. If people are going to buy so much, then it has to be cheap. |
| Truffles are more nutritious, and healthy food is always more expensive than unhealthy food. |
| People eat so much rice that an additional serving of rice has little marginal value, but the marginal value of another serving of truffles is very high. |
