Economics Chapter 2: Utility and Choice
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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:

    <p>The slope of the budget constraint</p> 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:

    <p>Perfect substitutes</p> 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:

    <p>Buy only sneakers</p> Signup and view all the answers

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

    <p>Tangencies of indifference curves to the budget constraint may not reflect utility maximization</p> 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:

    <p>Prefers bundle B to bundle A</p> Signup and view all the answers

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

    <p>Enjoys bundle A and B equally</p> Signup and view all the answers

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

    <p>Perfect complements</p> Signup and view all the answers

    If the price of X falls, the budget constraint:

    <p>Rotates outward about the Y-intercept</p> Signup and view all the answers

    Indifference curves are characterized as:

    <p>All of the above</p> 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?

    <p>All tea</p> 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?

    <p>16</p> 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?

    <p>1 coffee to 2 tea</p> 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?

    <p>20=2.5C+1.25T</p> 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?

    <p>-1/2</p> 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?

    <p>All tea</p> 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?

    <p>4</p> 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?

    <p>Square root of 50</p> 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?

    <p>8</p> Signup and view all the answers

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

    <p>9, 9</p> 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?

    <p>Buy more beer and less steak</p> 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?

    <p>1/5</p> Signup and view all the answers

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

    <p>Utility maximization</p> Signup and view all the answers

    The slope of the budget constraint line is:

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

    The X-intercept of the budget constraint represents:

    <p>Both A and B</p> 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!

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