ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING Problem Set 4 (Ch8-9) Microeconomics, ECON 2113 -----------------------------------------------------------------------------------------------------------------------------------Part I: Multiple Choice Questions: choose the best answer 1) The principle of diminishing marginal utility means that as you eat fewer slices of pizza, your total utility from pizza will ________ and your marginal utility from an additional slice of pizza will ________. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease 2) In the figure above, the curve that shows the diminishing marginal utility is A) total utility curve A because it gets steeper as consumption of tomatoes increases. B) total utility curve A because it is higher than total utility curves B or C. C) total utility curve C because it gets flatter as consumption of tomatoes increases. D) total utility curve C because it is lower than total utility curves B and A. 3) Which of the following occur when a person maximizes utility? I. The marginal utility of each good bought is equal. II. The highest level of utility is attained. 1 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING III. All of a person's budget is spent. A) I and II B) I and III C) II and III D) I, II and III Pizza Pepsi Slices per week Total utility Quantity per week Total utility 0 0 0 0 1 100 1 70 2 150 2 130 3 175 3 180 4 190 4 220 5 195 5 250 4) Elaine spends $10 a week on pizza and Pepsi. The price of pizza is $2 a slice and the price of a Pepsi is $2. The table shows Elaine's total utility from pizza and Pepsi. Elaine maximizes her total utility by buying ________ slices of pizza and ________ Pepsis a week. A) 5; 0 B) 0; 5 C) 3; 2 D) 2; 3 5) Pam buys only thread and fabric, and she buys the quantities that maximize her utility. Her marginal utility from a spool of thread is 30 units and her marginal utility from a yard of fabric is 60 units. If the price of a spool of thread is $4, then you are sure that the price of a yard of fabric is ________. A) $4 B) $2 C) $8 D) $12 6) When you chose to buy the second cup of coffee instead of the third bagel, which of the following is necessarily CORRECT? A) The second coffee will give you higher marginal utility. B) The second coffee is cheaper than the third bagel. C) The marginal utility per dollar from the third bagel is less than the marginal utility per dollar from 2 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING the second coffee. D) Both answers A and C are correct. 7) Suppose the price of a soda is $2 each, the price of a hot dog is $3 each and the budget is $20. If the marginal utility of the fourth soda is 100 and the marginal utility of the fourth hot dog is 150, to maximize utility, a person will buy A) 4 sodas and 4 hot dogs. B) more hotdogs than 4 and fewer sodas than 4 because hot dogs provide more utility. C) more sodas than 4 to increase their utility. D) fewer sodas than 4 and more hot dogs than 4. 8) Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 200 and his marginal utility of vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. To maximize his utility, Bobby should A) buy more chocolate ice cream and less vanilla ice cream. B) buy more vanilla ice cream and less chocolate ice cream. C) not change his purchases between chocolate ice cream and vanilla ice cream. D) buy no vanilla ice cream. 9) According to the paradox of value, expensive goods, such as gemstones, provide consumers with A) high total utility and low marginal utility. B) low total utility and low marginal utility. C) low total utility and high marginal utility. D) high marginal utility and high total utility. 10) Real income can be measured by A) the slope of the budget line. B) the area under the budget line. C) the length of the budget line. D) an intercept of the budget line. 11) Suppose Sam plans to buy only popcorn and soda. He has $40 to spend per week. A change in which of the following variables will change Sam's consumption possibilities? I. price of popcorn II. income III. preferences IV. utility 3 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING A) II only B) I and II C) I, II and III D) III and IV 12) A recent article suggests that the introduction of the new iPhone XS increased the demand for iPhone protective cases. The article suggests that these two goods are A) substitutes and their indifference curves are close to being straight lines. B) complements and their indifference curves are close to being straight lines. C) substitutes and their indifference curves are close to being L shaped. D) complements and their indifference curves are close to being L shaped. 13) Which of the following statements is FALSE? A) When the relative price of a good falls, the substitution effect always leads the consumer to substitute more of that good with other goods. B) For a normal good, the income effect reinforces the substitution effect. C) For an inferior good, the income effect offsets the substitution effect. D) For an inferior good, the income effect is positive. 14) Some parents struggling with back-to-school buys. "A couple of years ago, I was able to buy everything practically new," said Charles Lane-Bey, a U.S. Postal Service worker who's struggling to make ends meet. Suppose Charles has $10 to spend on back-to-school clothing for his son, and pants cost 50 cents and shirts cost $1. What is the slope of Charles's budget line if it is drawn with pants on the x-axis? A) 2 B) -2 C) -1/2 D) 1/2 15) Janelle spends all of her $40 income on songs (Qsongs) from iTunes ($1 each) and applications (Qapp) for her iTouch ($4 each). What is her budget equation? A) $1 × Qsong - $5 × Qapp = Y B) Qsong = 10 - 4 × Qapp C) $40 + $1 × Qsong = $4 × Qapp D) Qapp = 10 - 1/4 × Qsong 16) Barth Anderson states that the 2008 "downturn in the economy has really brought a lot of people home. They don't say, 'Well, we're going to order a pizza.' They actually cook." Assuming that 4 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING restaurant meals and eating at home are substitutes for one another and only consumers' income decreases, what is TRUE? A) Restaurant meals are an inferior good and eating at home is a normal good. B) Restaurant meals are a normal good and eating at home is an inferior good. C) Restaurant meals are an inferior good and eating at home is an inferior good. D) Restaurant meals are a normal good and eating at home is a normal good. 17) During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for travelling by car. A) If travelling by car is a normal good, the substitution effect would cause an increase and the income effect would cause a decrease in travelling by car. B) If travelling by car is a normal good, both the substitution and income effects would be cause an increase in travelling by car. C) If travelling by car is a normal good, the substitution effect would cause a decrease and the income effect would cause an increase in travelling by car. D) If travelling by car is a normal good, both the substitution and income effects would cause a decrease in travelling by car. 18) Katie finds that the marginal utility from a compact disc is 30 and the marginal utility from a pizza is 10. The price of a compact disc is $15 and the price of a pizza is $10. In order to increase her utility, Katie should A) consume more compact discs and fewer pizzas. B) consume fewer compact discs and more pizzas. C) not change her consumption of pizza and compact discs. D) consume fewer compact discs and fewer pizzas. 5 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING 19) The income effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from A) point A to point C. B) point A to point B. C) point B to point C. D) point A to point B and then to point C. 20) In the above figure, when the price of a gallon of gasoline falls, which points in the above figure are used to derive points on the consumer's demand curve for gasoline? A) points A and B B) points A and C C) points B and C D) points A, B, and C 6 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING Part II: Short- and long-answer questions Total Total Hours utility utility per day from from Use the following data to work Problems 1 to 11. windsurfing snorkeling Max has $35 a day to spend on windsurfing and snorkeling and he can spend as much time as he likes doing them. The price of renting equipment for windsurfing is $10 an hour and 1 120 40 2 220 76 3 300 106 4 360 128 for snorkeling is $5 an hour. The table shows the total utility 5 396 140 Max gets from each activity. 6 412 150 7 422 158 1. Calculate Max’s marginal utility from windsurfing at each number of hours per day. Does Max’s marginal utility from windsurfing obey the principle of diminishing marginal utility? 2. Calculate Max’s marginal utility from snorkeling at each number of hours per day. Does Max’s marginal utility from snorkeling obey the principle of diminishing marginal utility? 3. Which does Max enjoy more: his 6th hour of windsurfing or his 6th hour of snorkeling? 4. Make a table of the combinations of hours spent windsurfing and snorkeling that Max can afford. 5. Add two columns to your table in Problem 6 and list Max’s marginal utility per dollar from windsurfing and from snorkeling. 6. a. To maximize his utility, how many hours a day does Max spend on each activity? b. If Max spent a dollar more on windsurfing and a dollar less on snorkeling than in part (a), how would his total utility change? c. If Max spent a dollar less on windsurfing and a dollar more on snorkeling than in part (a), how would his total utility change? 7. If the price of renting windsurfing equipment is cut to $5 an hour, how many hours a day does Max spend on each activity? 8. Draw Max’s demand curve for rented windsurfing equipment. Over the price range from $5 to $10 an 7 ECON 2113: Microeconomics Problem Set 4 Instructor: Fei DING hour, is Max’s demand for windsurfing equipment elastic or inelastic? 9. How does Max’s demand for snorkeling equipment change when the price of windsurfing equipment falls? What is Max’s cross elasticity of demand for snorkeling with respect to the price of windsurfing? Are windsurfing and snorkeling substitutes or complements for Max? 10. If Max’s income increases from $35 to $55 a day, how does his demand for rented windsurfing equipment change? Is windsurfing a normal good? Explain. 11. If Max’s income increases from $35 to $55 a day, how does his demand for snorkeling equipment change? Is snorkeling a normal good? Explain. Use the following data to work Problems 12 to 15. Natalia has a budget of $24 a month to spend on fruit juice and books. The price of fruit juice is $3 a bottle, and the price of a book is $6. 12. What is the relative price of a bottle of fruit juice in terms of a book and what is the opportunity cost of a bottle of juice? 13. Calculate Natalia’s real income in terms fruit juice? What is her real income in terms of books? 14. Calculate the equation for Natalia’s budget line (with the quantity of fruit juice on the left side). 8 ECON 2113: Microeconomics 15. Problem Set 4 Instructor: Fei DING Draw a graph of Natalia’s budget line with the quantity of books on the x-axis. What is the slope of Natalia’s budget line? What determines its value? Use the following information to work Problems 16 and 17. Najib has made his best affordable choice of sparkling water and jelly beans. He spends all of his income on five bottles of sparkling water at $2 each and 10 jelly bean bags at $4 each. Now the price of sparkling water rises to $2.50 a bottle and the price of jelly beans drops to $3.75 a bag. 16. a. Will Najib now be able and want to buy five bottles of sparking water and 10 jelly bean bags? b. Which situation does Najib prefer: sparkling water at $2 a bottle and jelly beans at $4 a bag or sparkling water at $2.50 a bottle and jelly beans at $3.75 a bag? 17. a. If Najib changes the quantities that he buys, will he buy more or less sparkling water and more or less jelly beans? Explain your answer. b. When the prices change, will there be an income effect, a substitution effect, or both at work? Justify your answer. 9