Economics Chapter 2: Utility and Choice

Questions and Answers

If an individual is to maximize the utility received from consumption, he or she should spend all available income. What does this statement assume?

That saving is impossible

That the individual is not satiated in all goods

Both A and B (correct)

None of the above

An increase in an individual's income without changing relative prices will:

Shift the budget constraint outward in a parallel way (correct)

Change the slope of the budget constraint

Shift the budget constraint inward

No effect on the budget constraint

As an individual moves northwest along an indifference curve substituting more and more Y for X, his or her MRS of X for Y:

Remains constant

Increases (correct)

Decreases

Reflects a diminishing return

For an individual who consumes only two goods, X and Y, the opportunity cost of consuming one unit of X in terms of how much Y must be given up is reflected in:

The slope of the budget constraint Signup and view all the answers

If a person's indifference curves can be represented as a straight line, it means the person views the goods as:

Perfect substitutes Signup and view all the answers

If an individual has a constant MRS of shoes for sneakers of 3/4, then, if sneakers and shoes are equally costly, he or she will:

Buy only sneakers Signup and view all the answers

If an individual's indifference curve map does not obey the assumption of a diminishing MRS,then:

Tangencies of indifference curves to the budget constraint may not reflect utility maximization Signup and view all the answers

If bundle A lies on an indifference curve and bundle B lies to the right of the curve, the individual:

Prefers bundle B to bundle A Signup and view all the answers

If bundles of goods A and B lie on the same indifference curve, one can assume the individual:

Enjoys bundle A and B equally Signup and view all the answers

If people like their goods in fixed proportions, the two goods are:

Perfect complements Signup and view all the answers

If the price of X falls, the budget constraint:

Rotates outward about the Y-intercept Signup and view all the answers

Indifference curves are characterized as:

All of the above Signup and view all the answers

If the price of coffee is $4 and the price of tea is $1, what will a caffeine-deprived man with preferences described by U=3coffee+2Tea buy?

All tea Signup and view all the answers

What is the maximum number of cups of tea a student could buy if tea costs $1.25 and the budget is $20?

16 Signup and view all the answers

What is the market trade-off between coffee and tea if coffee costs $2.50 and tea costs $1.25?

1 coffee to 2 tea Signup and view all the answers

What is the algebraic expression of the budget if coffee is $2.50, tea is $1.25, and the budget is $20?

20=2.5C+1.25T Signup and view all the answers

If the expression of the budget line for coffee is written as Coffee= A+Btea, what would B be if coffee is $2.50 and tea is $1.25?

-1/2 Signup and view all the answers

If a student prefers more caffeine to less and the tea has the same amount of caffeine as coffee, what will the student buy?

All tea Signup and view all the answers

If a little girl has $1.80 to spend on PB&J sandwiches, how many will she make if she uses 2T of jelly and 1T of peanut butter?

4 Signup and view all the answers

What is the level of utility affordable for someone with $20 who has preferences U=C^1/2R^1/2, where the price for rap is $2 and country is $1?

Square root of 50 Signup and view all the answers

What is the lowest level of utility that is unaffordable for someone spending $20 with preferences U=C^1/2R^1/2?

8 Signup and view all the answers

Which point (C, R) makes a person happiest if they have preferences U=C^1/2R^1/2?

9, 9 Signup and view all the answers

If an individual's MRS (of steak for beer) is 2:1 and steak costs $1 while beer costs $0.25, what should the individual do to increase utility?

Buy more beer and less steak Signup and view all the answers

If an individual's marginal utility of an extra hot dog is 10 and that of a soft drink is 2, what is the MRS of soft drinks for hot dogs?

1/5 Signup and view all the answers

The point of tangency between a consumer's budget constraint and his or her indifference curve represents:

Utility maximization Signup and view all the answers

The slope of the budget constraint line is:

The ratio of the prices Px/Py Signup and view all the answers

The X-intercept of the budget constraint represents:

Both A and B Signup and view all the answers

Study Notes

Utility Maximization

Maximizing utility assumes saving is impossible and the individual is not satiated in all goods.
Individuals should spend available income to optimize consumption.

Budget Constraint

A rise in income, while keeping prices constant, shifts the budget constraint outward in a parallel manner.
When the price of good X decreases, the budget constraint rotates outward around the Y-intercept.

Indifference Curves

Indifference curves illustrate consumer preferences; they are negatively sloped and do not intersect.
Bundles of goods along the same curve are equally preferred, while bundles on a higher curve are preferred over those on a lower curve.
Tangencies between these curves and the budget constraint point to utility maximization points.

Marginal Rate of Substitution (MRS)

As a consumer substitutes Y for X along an indifference curve, the MRS of X for Y increases.
Constant MRS indicates perfect substitutes; a linear indifference curve means a consumer sees goods as interchangeable.
If MRS does not diminish, it may hinder achieving maximum utility.

Consumption Decisions

If a person has a persistent MRS of shoes to sneakers (3/4), they will only purchase sneakers when costs are equal.
Preference for fixed proportions results in perfect complements.

Mathematical Applications

The expression of a student's budget for beverages reveals a relationship between coffee and tea prices and their consumption limits.
Maximum cups of tea a student can buy given a budget and prices can be calculated as 16 using unit price ratios.

Specific Utility Examples

A caffeine-dependent individual with a specific utility function will opt for the cheaper item to maximize his caffeine intake.
A child constrained by specific ratios of ingredients for sandwiches maximizes her budget to make four sandwiches within her financial limits.
A person liking both rap and country music maximizes utility at a specific ratio of songs under given price constraints.

Utility Levels and Pricing

Utility obtainable at specific costs reflects affordability, as seen through the relationship between the prices of music genres.
The mathematical representation indicates different utility levels based on consumption choices and available income.

Consumption Strategy

If MRS indicates a consumer is willing to give up more of one product for another, adjustments in consumption strategy towards cheaper alternatives can enhance overall satisfaction.
The MRS can also reflect diminishing returns, affecting how much of one item a consumer is willing to give up for additional quantities of another.

Constrained Utility Maximization

The point of tangency where a budget constraint meets an indifference curve encapsulates the concept of constrained utility maximization.
The budget constraint's slope represents relative price ratios, guiding consumer choice in purchasing decisions.

Intercepts and Purchasing Power

The X-intercept of the budget constraint reveals the complete allocation of income towards one good with none of the other, illustrating total purchasing power effects.

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Description

This quiz focuses on key concepts from Chapter 2 of Economics, specifically discussing utility maximization and consumer choice. It includes critical definitions and implications of changes in income and budget constraints. Test your understanding of these foundational principles!