Question 1

Javon is consuming his optimal utility-maximizing consumption bundle of lobster and macaroni-and-cheese dinners. Call this bundle A. His income is $100, the price of a macaroni-and-cheese dinner is $5, and the price of a lobster is $20. Put lobsters on the vertical axis and put macaroni-and-cheese dinners on the horizontal axis. His income increases to $500 and the prices of macaroni-and-cheese dinners and lobster remain constant. With the increase in income, Javon changes his consumption of the two goods and now maximizes utility at bundle B. If macaroni-and-cheese dinners are an inferior good for Javon:

Accepted Answer

A)  at bundle B, Javon consumes more macaroni-and-cheese dinners. 
B)  at bundle B, Javon consumes less lobster. 
C)  at bundle A and bundle B, the marginal utility of lobster is 5. 
D)  at bundle B, Javon consumes more lobster.

Question 2

Use the following to answer questions: 
-(Table: Food and Clothing Bundles) Look at the table Food and Clothing Bundles. Teddy enjoys consuming food and clothing. The table shows five bundles of food and clothing that all provide Teddy with the same amount of utility. If units of food were put on a horizontal axis, what would we know about the shape of Teddy's indifference curve?

Accepted Answer

A)  It is horizontal. 
B)  It is upward-sloping, with a declining marginal rate of substitution. 
C)  It is downward-sloping, with a constant marginal rate of substitution. 
D)  It is downward-sloping, with a declining marginal rate of substitution.

Question 3

Use the following to answer questions:
Figure: Income and Substitution Effects 
-(Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects. Carlos is originally consuming his optimal consumption bundle at point A when the price of gasoline falls. The movement from K1 to K2 reflects the _____ the decrease in the price of gasoline.

Accepted Answer

A)  total change in quantity demanded due to 
B)  income effect of 
C)  substitution effect of 
D)  income and substitution effects of

Question 4

For some people, coffee and milk are perfect complements. Their indifference curves are:

Accepted Answer

A)  right angles. 
B)  straight lines between the X and Y axis. 
C)  straight lines out of the origin. 
D)  regular downward-sloping indifference curves, but their budget lines are right angles.

Question 5

LaToya sees honey and sugar as perfect substitutes. She is always willing to substitute 1 teaspoon of honey for 2 teaspoons of sugar. If honey is twice as expensive as sugar, LaToya will:

Accepted Answer

A)  use only honey. 
B)  use only sugar. 
C)  use a lot of honey and a little sugar. 
D)  be willing to purchase either sugar or honey.

Question 6

Two goods in an individual's consumption bundle are perfect substitutes. For a given amount of income, the individual's optimal consumption bundle will contain:

Accepted Answer

A)  exactly 50% of each of the two goods. 
B)  only the good with the lower price. 
C)  only the good with the higher price. 
D)  all of the good on the horizontal axis.

Question 7

The relative price rule says that at the optimal consumption bundle the marginal rate of substitution between two goods must be equal to their relative price. This is equivalent to saying that:

Accepted Answer

A)  the marginal utility per dollar is the same for both goods. 
B)  the marginal utility of each good consumed must be the same. 
C)  goods should be consumed in the same ratio as their relative price. 
D)  the marginal rate of substitution is not equal to the ratio of marginal utilities.

Question 8

Use the following to answer questions:
Figure: Kristin's Budget Line 
-(Figure: Kristin's Budget Line) Look at the figure Kristin's Budget Line. The price of a cup of cappuccino is $3, and the price of an apple is $1. Suppose Kristin initially consumes 10 cups of cappuccino and 30 apples. Then the price of apples increases to $3 each and the price of cappuccino remains unchanged. As a result of this price change, Kristin's optimal consumption bundle is now 9 cups of cappuccino and 11 apples. If Kristin's income could be adjusted so that she could maintain her initial level of utility after the price change, she would consume more cappuccino and more apples. This reflects:

Accepted Answer

A)  a substitution effect from the price change and an income effect from the income change. 
B)  the substitution effect alone. 
C)  the income effect alone. 
D)  neither a substitution nor an income effect.

Question 9

Mario sees popcorn and pretzels as perfect substitutes. He is always willing to substitute 3 cups of popcorn for 1 cup of pretzels. If the price of a cup of popcorn is $4 and the price of a cup of pretzels is $1, Mario will eat:

Accepted Answer

A)  only pretzels. 
B)  only popcorn. 
C)  mostly pretzels. 
D)  The answer is impossible to determine.

Question 10

Ellen consumes goods X and Y. As she consumes less X, she must be compensated with additional units of Y, and her marginal rate of substitution of X for Y decreases as she consumes more Y. This means that goods X and Y are:

Accepted Answer

A)  ordinary. 
B)  unique. 
C)  complements. 
D)  substitutes.

Question 11

The income effect of a price change is the effect on consumption changes as a result of a change in:

Accepted Answer

A)  income when all prices change in the same proportion. 
B)  purchasing power caused by a change in the price of the good. 
C)  income caused by a change in the price of labor. 
D)  income sufficient to offset the effect of a price change.

Question 12

Assume that diminishing marginal utility applies to both textbooks and concert tickets and that Sun is spending all of his income. If Sun purchases a combination of textbooks and concert tickets such that MUTextbooks / PTextbooks= 100 and MUTickets / PTickets = 80, to maximize utility, Sun should buy _____ textbooks and _____ tickets.

Accepted Answer

A)  fewer; fewer 
B)  more; fewer 
C)  fewer; more. 
D)  more; more

Question 13

The marginal rate of substitution shows how a consumer can substitute between two goods to:

Accepted Answer

A)  maintain the same income. 
B)  maintain the same level of total utility. 
C)  maintain the same marginal utility. 
D)  increase total utility.

Question 14

Use the following to answer questions:
Figure: Consumer Equilibrium II 
-(Figure: Consumer Equilibrium II) Look at the figure Consumer Equilibrium II. Which of the following is TRUE?

Accepted Answer

A)  To increase utility beyond that received at point I requires an increase in the price of olive oil. 
B)  Point J could be attained with an increase in Ashyra's income. 
C)  An increase in the prices of olive oil and dish soap would allow Ashyra to attain point J. 
D)  To increase utility beyond that received at point I requires an increase in the price of dish soap.

Question 15

Many people have severe food allergies such that even one bite of something might send a person to the emergency room. For a person with a severe allergy to nuts, for example, describe the total utility function from eating nuts.

Accepted Answer

The answer of Many people have severe food allergies such...

Question 16

James spends his daily income of $50 on protein shakes (PS) and energy bars (EB). Protein shakes are priced at $5 each, and energy bars are priced at $4 each. Provide the equation for his budget constraint. If he spends half of his income on each item, how many units of each will he consume?

Accepted Answer

The answer of James spends his daily income of $50...

Question 17

Use the following to answer questions:
Figure: Income and Substitution Effects 
-(Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects. Carlos is consuming his optimal consumption bundle at point A when the price of gasoline falls. As Carlos moves to his new optimal consumption bundle, we observe that gasoline:

Accepted Answer

A)  is not an ordinary good. 
B)  is a normal good. 
C)  is an inferior good. 
D)  and good L are complements.

Question 18

Consumption of more of a good that has become cheaper in place of a good that has become relatively more expensive is the:

Accepted Answer

A)  income effect. 
B)  substitution effect. 
C)  budget constraint. 
D)  inferior effect.

Question 19

Use the following to answer questions:
Figure: Consumer Equilibrium I
The figure shows three of Owen's indifference curves for pizza and soda per week. Owen has $180 per month to spend on the two goods. The price of a pizza is $20, and the price of a soda is $1.50. 
-(Figure: Consumer Equilibrium I) Look at the figure Consumer Equilibrium I. If in equilibrium Owen receives marginal utility of 10 utils from the last pizza he consumes, his marginal utility from the last soda must be _____ utils.

Accepted Answer

A)  0.50 
B)  0.75 
C)  1.5 
D)  13.3

Question 20

Suppose Sirach knows that the price of doughnuts is $3 and the price of cupcakes is $4. He also believes that the next doughnut he consumes will increase his total utility by 6 utils and the next cupcake will increase his total utility by 10 utils. Assuming he has enough money to buy either, Sirach should buy a doughnut next.

Accepted Answer

A) True 
 B)False

Exam 10: The Rational Consumer