Exam 6: Household Behavior and Consumer Choice

What is the utility-maximizing rule?

Graph the budget constraint for Px = 2, Py = 3, and I = 1500. Measure units of X along the horizontal axis and units of Y along the vertical axis.

What role do firms play in output markets? What role do firms play in factor markets?

Comment on the following statement: "Diminishing marginal utility means that total utility falls when an additional unit of a good is consumed."

What does diminishing marginal utility imply about the shape of a person's demand curve? Explain.

Explain how it is possible for marginal utility to fall while total utility is still on the rise?

Kylie spends her income of $150 per week on two goods: movies (which cost $5 each) and books (which cost $10 each). At her current level of consumption, the marginal utility from the last movie consumed is 20 and the marginal utility from the last book consumed is 30. Is Kylie maximizing her utility? Why or why not? If not, what should Kylie do to achieve a higher level of utility?

Mike is a college student who works part time and earns $100 per week. He spends his entire income on two goods: pepperoni pizzas and bottles of soda. The price of a pepperoni pizza is $10 and the price of a bottle of soda is $2. What is the opportunity cost of a pepperoni pizza? What is the opportunity cost of a bottle of soda?

Observe the difference in vending machines between canned soda and newspapers. Typically, if you insert coins into a newspaper vending machine and open it you will see available all of the copies of the newspaper within one's reach. However, soda machines are very different. They work such that only one can is dispensed at a time. The rest of the canned soda is well out of reach. Explain in terms of marginal utility why the newspaper distributor is relatively unconcerned about the rest of the newspapers being taken without payment while the soda distributor uses a machine that goes to great lengths to insure that only one can of soda is dispensed at a time.

Assume that Paula can buy gum or candy. A pack of gum costs $.30 and a candy bar costs $.50. Paula has $3.00 a day to spend on gum and candy bars. Draw Paula's budget constraint. Shade in Paula's choice set. On the graph show how Paula's budget constraint will be affected if the price of gum increases to $.50.

Refer to the information provided in Scenario 3 below to answer the following questions. SCENARIO 3: Consider the budget allocation decision of a family of four on vacation in a beach resort. The family has $300 budgeted for entertainment for the weekend and two options: Renting bicycles for $10 an hour per bicycle or playing miniature golf for $4 a game per person. Consider each question separately, and place golfing on the vertical axis and bicycling on the horizontal axis. Assume that all four family members must do everything together. -Refer to Scenario 3. Graph the effect of a promotion of two free hours of bicycling for each family of four.

Susie receives an allowance from her parents of $10 per week. She spends her entire allowance on two goods: cans of hairspray and bubble gum. The price of a can of hairspray is $2 and the price of a pack of bubble gum is $1. Draw Susie's budget constraint.

What is meant by utility?

List six factors that influence the quantity of a good or service demanded by a household.

Graph the budget constraint for a worker who earns 5 dollars an hour and can, theoretically, work 24 hours a day. Measure units of leisure along the horizontal axis. Now graph the budget constraint for a worker who makes 6 dollars an hour and can, theoretically, work 24 hours a day. Compare the two graphs.

The table below shows how the total utility that Zach derives from eating candy bars changes as he consumes more and more candy bars each day: Fill in the table above. Do the numbers in the table support the law of diminishing marginal utility? Explain.

Why do firms in perfectly competitive markets have no control over the price of their products?

When the price of corn increases, the quantity of corn demanded falls. Explain this change in terms of income and substitution effects.

Suppose that Jeanna's income rises. If tomatoes are a normal good, what will happen to the quantity of tomatoes purchased by Jeanna? Is this an income effect, a substitution effect, or both? Explain.

When the price of raisins falls, the quantity of raisins demanded rises. Explain this change in terms of income and substitution effects.