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EC 201 Exam 2 (Ch. 7-12)

Terms in this set (127)

1. Katie's demand curve for ice cream cones
a. assumes that the only variables that change are the price of ice cream cones and the quantity of ice cream cones demanded by Katie.
b. shows the quantity of ice cream cones Katie consumes as her preference for ice cream changes.
c. makes no assumptions about Katie's preference for ice cream cones.
d. assumes that the only variable that changes is Katie's income.
a
2. The utility generated by consuming a good is
a. Always equal to the opportunity cost of consuming the good.
b. What the consumer is willing to give up in order to consume the good.
c. Dependent on the consumer's budget.
d. The satisfaction or pleasure the consumer experiences when he or she consumes the good.
d
3. Suppose you are eating hot dogs. The marginal utility of the first hot dog is 15 utils, the marginal utility of the second hot dog is 12 utils and the third hot dog brings your total utility up to 35 utils. What was the marginal utility of the third hot dog?
a. 8 utils
b. 12 utils
c. 35 utils
d. 23 utils
a
4. The law of diminishing marginal utility states that
a. as a consumer consumes more of a product, the consumer is willing to pay more and more for each additional unit of the good.
b. as a consumer consumes more of a product, the consumer gets progressively less satisfaction out of each incremental unit of the good.
c. as a consumer consumes more of a product, the consumer always requires a progressively higher price to consume the good.
d. consumers continue to consume the good as long as they derive utility from the good.
b
5. An increase in the price of a good
a. increases the opportunity cost of consuming the good.
b. decreases the opportunity cost of consuming the good.
c. does not affect the opportunity cost of consuming the good.
d. increases the opportunity cost of other goods.
a
6. A consumer maximizes her utility by
a. setting the marginal utility of product A equal to the marginal utility of product
b. setting the marginal utility of product A equal to the price of product A.
c. setting the marginal utility of product A divided by the price of product A equal to the marginal utility of product B divided by the price of product B.
d. setting the total utility of product A divided by the price of product A equal to the total utility of product B divided by the price of product B.
c
7. Tim's marginal utility of beer is 12 utils and his marginal utility of pretzels is 5 utils. The price of beer is $4 and the price of pretzels is $1, and Tim is spending all of his money. Tim can increase his utility by
a. Tim cannot increase his utility.
b. buying more beer and less pretzels.
c. buying less beer and more pretzels.
d. buying more of both goods.
c
8. A consumer should increase her consumption of good Y relative to good X if
a. MUx/MUy > Px/Py
b. MUx/Px > MUy/Py
c. MUx/MUy < Px/Py
d. none of the above
c
9. Table 7.4 presents Bruce's marginal utilities of sweaters and t-shirts. Suppose that the price of sweaters is $40 and the price of a t-shirt is $20. Bruce has $300 to purchase sweaters and t-shirts. How many sweaters will Bruce purchase in equilibrium, assuming that he spends all of his money?
a. 2
b. 3
c. 4
d. 5

Table 7.4
Sweaters Mu T-Shirts MU
1 100 1 150
2 90 2 120
3 80 3 90
4 70 4 60
5 60 5 30
9. D Here we are using the rule above and the budget constraint. The simplest way to do this is to start at consuming zero of both goods. Now divide both the MUs by 40 and 20, which
one is higher? Buy that good { in this case the consumer would buy a t-shirt. Multiply the number of each good that you are buying and add them together. This must be less than $300 dollars. Now divide the MU of the second t-shirt by 20, is it bigger than 2.5? Yes, so consume a second t- shirt. Then a third and fourth, but consuming the fifth t-shirt only gives us 1.5, so now we would consume a sweater. Continue doing this until you cannot buy anymore goods. Actually in this case you would end up with 5 t-shirts and 5 sweaters. The total expenditure on is then 5x40 + 5x20 = $300. The following table shows the marginal utilities divided by their prices.
10. A consumer's budget set:
A) is the set of all affordable combinations of two goods.
B) includes only combinations of two goods that leave the consumer with leftover money.
C) includes only combinations of two goods that exhaust the budget.
D) Both A and C are correct answers.
a
11. Which of the following statements about a consumer's budget line is CORRECT?
I. The budget line shows all the combinations of two goods that exhaust the consumer's budget.
II. The slope of the budget line shows the market tradeoff between two goods.
III. The budget line represents the consumer's preferences or tastes.
A) I only
B) I and II only
C) I and III only
D) II and III only
B III is not correct because it reflects preferences of the consumer, which have nothing to do with the budget line. The budget line only depends on the income of the consumer and the relative prices of the goods.
12. Refer to Figure 7.1. Which of the following includes an unaffordable combination(s) of movies and T-shirts?
A) A, B and C
B) B, C and D
C) C, D and F
D) A, C and E
c
13. Refer to Figure 7.1. Which of the following are the combinations of movies and T- shirts that would exhaust the budget?
A) A and C
B) C and E
C) B and G
D) A and B
b
14. Suppose Jackie can buy either video games or DVDs. If the prices of both goods double, and Jackie's income also doubles, what will happen to Jackie's budget line?
A) It will shift out.
B) It will shift in.
C) It will not change.
D) It will swivel so that the slope is twice as steep.
c
15. The budget line will shift parallel to the right if:
A) income increases.
B) income decreases.
C) the price of the good on the vertical axis increases.
D) the price of the good on the vertical axis decreases.
a
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