Exam 6: Household Behavior and Consumer Choice

The table below shows how the total utility that Alan derives from watching basketball games changes as he watches more and more games each week: Fill in the table above. Do the numbers in the table support the law of diminishing marginal utility? Explain.

Connor receives a weekly allowance of $20 from his parents that he uses to purchase two goods: Pokemon cards (which cost $5 per pack) and comic books (which cost $4 each). Draw Connor's budget constraint. Show what would happen if Connor's parents lower his allowance to $15 per week. Does the opportunity cost of a comic book change?

What is the law of diminishing marginal utility?

What are the three basic decisions that any household must make.

Differentiate between an income effect and a substitution effect.

What does the assumption of perfect knowledge include?

When total utility is rising but at a decreasing rate what must be happening to marginal utility? When will total utility stop rising?

Joseph earns $200 per week and spends his entire income on cheese (which costs $5 per pound) and crackers (which cost $2 per box). Draw Joseph's budget constraint. If the price of cheese increases to $8 per pound, what will happen to Joseph's budget constraint?

What is the diamond-water paradox?

Colin spends his income of $100 per week on two goods: pizzas (which cost $8 each) and milk (which costs $1 per gallon). At his current level of consumption, the marginal utility from the last pizza consumed is 32 and the marginal utility from the last gallon of milk is 4. Is Colin maximizing his utility? Why or why not? If not, what should Colin do to achieve a higher level of utility?