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Econ E103 unit 2
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Terms in this set (26)
If a consumer is willing and able to pay $200 for a particular good but only has to pay $140
The consumer surplus is $60.
Jared values an hour fishing at $100. His opportunity cost of fishing for an hour is $40. Jared's consumer surplus from one hour fishing is
$60.
At any quantity, the price given by the demand curve
(A) Shows the willingness to pay of the marginal buyer.
(B) Represents the value placed on the good of the buyer who will leave the market first should the price rise.
Both (A) and (B) are correct
Which of the following statements best describes a consumer's budget line?
The limits to a consumer's consumption choices.
If income increases, the budget line will
Shift outward but parallel to the original budget line.
3. Assume that a college student spends her income on Coke and Snickers. During finals week, the price of a Snickers candy bar is $0.75, and a can of Coke is $0.80. If she has $24 of income, she could possibly choose to consume _______ Snickers bars and _____ cans of Coke.
(A) 16, 15
(B) 10, 20
(C) 5, 25
(D) 6, 23
(E) All of the above.
(E) All of the Above
Which of the following statements is not true?
Indifference curves are bowed out from the origin.
The slope of the budget constraint is determined by
Relative market prices.
Suppose that the marginal utility of X per dollar exceeds the marginal utility of Y per dollar, to maximize his utility the consumer should:
Buy more of X and less of Y.
If two goods are perfect substitutes, then their
Indifference curves are negatively sloped straight lines.
When the price of a good changes, we call the change in consumption that leaves the consumer indifferent, the
Substitution effect.
If the price of a normal good rises, then
The income effect and the substitution effect will both decrease consumption of the good.
Sara has an income of $9 a week. Popcorn costs $1 a bag, and cola costs $1.50 a can.
What is Sara's real income in terms of cola?
6 cans of cola
Sara has an income of $9 a week. Popcorn costs $1 a bag, and cola costs $1.50 a can.
What is her real income in terms of popcorn?
9 bags of popcorn
Sara has an income of $9 a week. Popcorn costs $1 a bag, and cola costs $1.50 a can.
What is the relative price of cola in terms of popcorn?
1.5 popcorns per cola
Sara has an income of $9 a week. Popcorn costs $1 a bag, and cola costs $1.50 a can.
What is opportunity cost of a can of cola?
1.5 popcorns per cola
Sara has an income of $9 a week. Popcorn costs $1 a bag, and cola costs $1.50 a can.
What is Sara's budget equation?
I didnt do it
Suppose that an individual owed no taxes on the first $10,000 she earned and 15 percent of any income she earned over $10,000. Now suppose that Congress is considering two ways to reduce the tax burden: a reduction in the tax rate and an increase in the amount on which no tax is owed.
What effect would a reduction in the tax rate have on the individual's labor supply if she earned $30,000 to start? Explain in words using the income and substitution effects.
A lower tax rate would give rise to income and substitution effects on a person's choice of consumption and leisure. The income effect would increase both consumption and leisure, if both are normal goods, since the reduction in the tax rate leaves more after-tax income. The lower tax rate would increase the slope of the budget constraint, so the substitution effect would increase consumption and decrease leisure. The net result is an increase in consumption and an ambiguous effect on leisure, and thus an ambiguous effect on labor supply
Suppose that an individual owed no taxes on the first $10,000 she earned and 15 percent of any income she earned over $10,000. Now suppose that Congress is considering two ways to reduce the tax burden: a reduction in the tax rate and an increase in the amount on which no tax is owed.
What effect would an increase in the amount on which no tax is owed have on the individual's labor supply? Explain in words using the income and substitution effects.
An increase in the amount on which no tax is owed would be a pure income effect. If both consumption and leisure are normal goods, both would increase, so labor supply would decrease.
Mr. A consumes both X and Y. The price of X is $1 per unit and the price of Y is $1.5 per unit. Mr. A's income is $12.
What is the relative price of X?
Answer: the relative price of X is the price of X divided by the price of Y: 2 ∕3
If the price of good X rises, the _______ effect will always imply that less of X will be consumed, while the _______ effect reinforces this only if X is a normal good.
substitution, income
When the indifference curve is tangent to the budget constraint,
A consumer cannot be made better-off without increasing her current income.
An optimizing consumer will select a consumer bundle in which utility is maximized
Subject to constraints imposed by the budget.
An optimizing consumer will select a consumption bundle in which the
Marginal rate of substitution is equal to the relative price.
A consumer receives satisfaction from consuming commodity "Y" and commodity "X". When the consumer pays $2.50 for a unit of "Y" and $0.5 for a unit of "X", the consumer selects Y and X such that the marginal rate of substitution is equal to (assume that the marginal rate of substitution is reported in its absolute value form)
0.20
Which of the following statements is true?
(A) In selecting an optimum consumption bundles, consumers equate the marginal rate of substitution with the relative price.
(B) In selecting an optimal consumption bundle, consumers will always choose a bundle outside their feasible consumption set.
(C) In selecting an optimal consumption bundle, consumers equate utility with income.
(D) In selecting an optimal consumption bundles, consumers inclined to consume at least one commodity at the point of satiation.
(E) None of the above.
(A) In selecting an optimum consumption bundles, consumers equate the marginal rate of substitution with the relative price.
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