Mr. Maurer
AP Economics
Name: __________________________
FRQ #3 – Utility Maximization and Consumer Theory
1. Theresa consumes both cool erasers and glow sticks.
Quantity of
Marginal Utility from
Quantity of
Marginal Utility from
Cool erasers
Cool erasers (utils)
Glow sticks
Glow sticks (utils)
1
16
1
20
2
14
2
16
3
12
3
12
4
10
4
8
5
8
5
6
6
6
6
1
(a) The table above shows Theresa’s marginal utility from cool erasers and glow sticks.
(i) What is her total utility from purchasing three glow sticks? (1 pt.)
48 utils
(ii) Theresa’s weekly income is $11, the price of a cool eraser is $2, and the price of a glow stick
is $1. What quantity of cool erasers and glow sticks will maximize Theresa’s utility if she spends her
entire weekly income on cool erasers and glow sticks? Explain your answer using marginal analysis. (2
pts.)
3 cool eraser and 5 glow sticks. At this combination, the last dollar she spends on each good
will bring her equal marginal utility (marginal utility per dollar for both goods is 6) and she will
have spent all $11.
(b) Assume that the price of rubber, an input for the production of cool erasers, increases. Will
Theresa’s demand for cool erasers increase, decrease, or not change? Explain. (1 pt.)
This will not change Theresa's demand for cool erasers. The change in the price of rubber
will decrease supply, which will probably raise price and decrease Theresa's quantity demanded, but
her demand curve itself will not shift.
(c) Suppose that Theresa’s income elasticity for cool erasers is 0.2. Does the value of Theresa’s
income elasticity indicate that cool erasers are normal goods, inferior goods, substitutes, or complements?
(1 pt.)
Normal goods because the coefficient is positive. She buys more cool erasers when
her income increases.
(d) Suppose that when the price of glow sticks increases by 15 percent, Theresa buys 8 percent
fewer glow sticks and 5 percent less of a different toy, blocks. Calculate the cross-price elasticity for glow
sticks and blocks and indicate if it is positive or negative. (1 pt.)
Cross price elasticity = -5%/15% = -1/3
It is negative. (This would indicate that these goods are complements. When
the price of glow sticks goes up, she doesn’t switch and buy more blocks, she actually
buys fewer blocks.)