Chapter 6
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
10-14-14
1. Define:
a. relative price: The price of one good relative to the price of another
b. utility: A quantitative measure of pleasure or satisfaction obtained from
consuming goods and services
c. Marginal Utility: is the change in utility an individual enjoys from consuming an
additional unit of a good.
d. law of diminishing marginal utility: As consumption of a good or service
increases, marginal utility decreases.
e. substitution effect: As the price of a good falls, the consumer substitutes that good
in place of other goods whose prices have not changed.
f. income effect: As the price of a good decreases, the consumer’s purchasing power
increases, causing a change in quantity demanded for the good.
g. behavioral economics: A subfield of economics focusing on decision-making
patterns that deviate from those predicted by traditional consumer theory.
2. Parvez, a pharmacology student, has allocated $120 per month to spend on paperback
novels and hamburgers at his favorite burger joint. Novels cost $8 each; hamburgers cost
$6 each. Draw his budget line.
a. Draw and label a second budget that shows what happens when the price of a
hamburger rises to $10.
b. Draw and label a third budget line that shows what happens when the price of a
hamburger rises to $10 and Parvez’s income rises to $240.
c. Draw and label a third budget line that shows what happens when the price of a
hamburger rises to $10, the price of novels decrease to $5, and Parvez’s income
decreases to $80.
3. Now go back to the original assumptions of problem 1 (novels cost $8, hamburgers cost
$6, and income is $120). Suppose that Parvez is spending $120 monthly on paperback
novels and hamburgers. For novels, MU/P = 5; for hamburgers, MU/P = 4.
a. Is he maximizing his utility? If not, how could he?
He is not maximizing his Utility. To maximize his utility MU1/P1=MU2/P2
b. I removed question b because it was written poorly.
4. Anita consumes both pizza and Pepsi. The following tables show the amount of utility
she obtains from different amounts of these two goods per week:
Pizza
Pepsi
Quantity
Utility
Quantity
Utility
4 slices
115
5 cans
63
5 slices
135
6 cans
75
6 slices
154
7 cans
86
7 slices
171
8 cans
96
a. Suppose Pepsi costs $1 per can, pizza costs $2 per slice, and Anita has $18 to spend
on those two goods each week. What combination of pizza and Pepsi will maximize
her utility? When MU1/P1=MU2/P2,
For 5 slices of pizza and 8 cans of Pepsi
MU1/P1=[135 – 115]/$2 = 10, MU2/P2 = [96-86]/$1 = 10.
Since they are equal this is the maximization of utility
b. I removed question b because it was written poorly.
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