AGEC 2003 Chapter : Chapter 3 Notes
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1. Economists use ____________ as a measure of the relative level of satisfaction when someone consumes a good or service.
| consumer happiness |
| utility |
| a happiness index |
| a satisfaction index |
2. Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.
| sugar sickness |
| total utility |
| diminishing marginal utility |
| increasing marginal utility |
3. When total utility is maximized, the marginal utility will be
| positive. |
| zero. |
| negative. |
| none of these. |
4. Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?
| Dirk and Lee both receive 10 utils from eating pizza. |
| Dirk and Lee both receive the same level of satisfaction from eating pizza. |
| Dirk gets more twice as much satisfaction as Lee from eating pizza. |
| It is difficult to determine because the utility is subjective. |
5. For many products, the total utility curve is
| strictly increasing because of increasing marginal utility. |
| strictly decreasing because of diminishing marginal utility. |
| increasing initially because of increasing marginal utility, but eventually decreases. |
| increasing initially at a decreasing rate because of diminishing marginal utility but eventually decreases. |
6. When consumers get the biggest bang for the buck, we say they
| used the loudest gun in hunting season. |
| reached a consumer optimum. |
| minimized consumer satisfaction. |
| maximized marginal utility. |
7. By choosing to consume at the consumer optimum, consumers will
| maximize their total utility. |
| minimize their total utility. |
| maximize the amount they spend on each good. |
|
minimize the amount they spend on each good. |
8. A consumer is in equilibrium when consuming two goods when which of the following holds?
| MUa/ Pa = MUb/ Pb |
| MUa/ Ph =MUb/ Pa |
| Pa/ MUa = Pb/ MUb |
| MUa x Pa = MUbxPb |
9. If the marginal utility of good 1 is 15 and its price is $3, and the marginal utility of good 2 is 12, and its price is $4, then the consumer
| has achieved a consumer optimum. |
| should increase his or her consumption of good 1. |
| should increase his or her consumption of good 2. |
| should decrease his or her consumption of good 1. |
10.Suppose the price of an iPod decrease and the price of HD TVs remains the same; what noticeable effect(s) occur(s)?
| the substitution effect only |
| the real-income effect only |
| the substitution effect and real-income effect, if there is a noticeable change in purchasing power |
| the substitution effect and real-income effect, if there isnât a noticeable change in purchasing power |
11. The ______________ paradox was described by Adam Smith in 1776.
| diamond-carbon |
| diamond-water |
| diamond-life |
| water-utility |
12. What is the key to solving the diamond-water paradox?
| more water and fewer diamonds |
| marginal utility |
| total utility |
| consumer demand |
13. When solving the diamond-water paradox we notice that the marginal utility of
| diamonds are equal to the marginal utility of water. |
| diamonds are greater than the marginal utility of water. |
| diamonds are less than the marginal utility of water. |
| water is equal to its price, and therefore lower than the marginal utility of diamonds. |
14. The consumer surplus for water is
| greater than that for diamonds because water is nonessential. |
| greater than that for diamonds because water is essential. |
| less than that for diamonds because water is nonessential. |
| less than that for diamonds because water is essential. |
15. Suppose a consumer consumes only diamonds and water, and the price of diamonds increases. All else being equal, a consumerâs marginal utility for diamonds
| decreases and the marginal utility for water stays the same. |
| increases and the marginal utility for water decreases. |
| decreases and the marginal utility for water increases. |
| increases and the marginal utility for water stays the same. |
When deciding consumption levels of more than one good, the utility-maximizing rule states that you are maximizing utility when
| the marginal utility o two goods are equal | ||
| the marginal utility of two goods are zero | ||
| the ratio of marginal utility to price of two goods is zero | ||
| the ratio of marginal utility to price for the two goods are equal |
10 points
QUESTION 2
My brother says the law of diminishing marginal utility is nonsense because he is way happier after his sixth beer than after his first one. Pick the best response.
| He has a point, maybe this is something behavioral economists should take a look at. | ||
| True, but marginal utility refers only to the utility gained (or lost) by drinking that last beer, not to his total utility | ||
| There are always exceptions, but in general this law will hold. | ||
| True, but the law of diminishing marginal utility is really just saying that eventually he will prefer a glass of wine to another beer. |
10 points
QUESTION 3
Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his marginal utility from the final magazine is 10 utils while his marginal utility from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:
| Reallocate spending from magazines to newspapers | ||
| Reallocate spending from newspapers to magazines | ||
| Be satisfied because he is already maximizing his total utility | ||
| None of the above |
10 points
QUESTION 4
Marginal utility can be:
| Positive, negative, or zero | ||
| Decreasing but not negative | ||
| Positive or negative, but not zero | ||
| Positive, but not negative |
10 points
QUESTION 5
In economics, a product provides utility if it:
| is useful | ||||||||||||||
| violates the law of demand | ||||||||||||||
| takes more and more resources to produce successive units of it | ||||||||||||||
| satisfies consumer wants Which of the following is true of an indifference curve?
|
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. |
