FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 19: The Logic of Individual Choice: the Foundation of Supply and Demand

Show Answer

Share

---

All types

Filters

Study Flashcards

Question 1

Essay

Review LaterAdd Note

Review Later

What is the law of diminishing marginal rate of substitution? (Appendix)

Correct Answer

verified

The law of diminishing marginal rate of ...

View Answer

Show Answer

Question 2

Essay

Review LaterAdd Note

Review Later

What is the marginal rate of substitution? (Appendix)

Correct Answer

verified

The marginal rate of substitut...

View Answer

Show Answer

Question 3

Essay

Review LaterAdd Note

What is utility, according to economist's use of the term?

Give two explanations of individual choice other than self-interest. Why do economists focus on self-interest?

What is the utility maximizing rule?

The three major assumptions underlying the economist's theory of choice are (1) decisions can be made costlessly, (2) our preferences are given and not shaped by society, and (3) that individuals maximize utility. Explain why each of those assumptions may not reflect reality. Why may the assumption of "bounded rationality" be more realistic?

Assume the utility Janet obtains from consuming apples is given in the table below. (a) Draw the graphs for Jane's total utility curve and marginal utility curve for apples. (b) At what point does diminishing marginal utility set in? (c) What is the maximum satisfaction (total utility) she can obtain from consuming apples? (d) If Janet is at her level of maximum utility from apple consumption, what will happen to her level of utility if she consumes an additional apple? (e) If apples were freely given away at zero cost, how many apples would she choose to consume? $\begin{array} { c c c } \text { Number of apples } & \text { Total Utility } & \begin{array} { c } \text { Marginal } \\\text { Utility }\end{array} \\1 & 7 & 7 \\2 & 13 & 6 \\3 & 18 & 5 \\4 & 22 & 4 \\5 & 25 & 3 \\6 & 27 & 2 \\7 & 28 & 1 \\8 & 28 & 0 \\9 & 27 & - 1 \\10 & 25 & - 2\end{array}$ Note: Marginal utility should be interpreted as between levels of total utility, so that the marginal utility between 0 and 1 apple is 7, and the marginal utility between 1 and 2 apples is 6.

Suppose that every time you go to the library to study economics you buy yourself soda (S) and candy bars (C) as an incentive to study. Having mastered the material on rational choice you always allocate your study snack budget so that MU_S/P_S = MU_C/P_C. What should you do if one night you discover that the price of a can of soda has increased?

Suppose you are considering volunteering some of your time at the student government car wash fundraiser. You compute your utility schedule as follows: $\begin{array} { | c | c | } \hline \text { Hour \# } & \text { TU } \\\hline 0 & 0 \\\hline 1 & 40 \\\hline 2 & 70 \\\hline 3 & 94 \\\hline 4 & 100 \\\hline 5 & 94 \\\hline\end{array}$ Now suppose you discover the person you've been dying to go out with is going to work for five hours at the car wash. (a) How will this change your utility schedule? (b) How will this change your decision to volunteer? (c) How do your answers to (a) and (b) relate to the law of supply? Explain.

The utility maximizing rule states that "if MU_X/P_X = MU_Y/P_Y, then you're maximizing utility." Why is that so? How will the ratio of prices compare to the ratio of marginal utilities when you are maximizing your total satisfaction from a given amount of spending?

What is the principle of rational choice?

Use the principle of rational choice to determine which of the following to choose: (a) buying the latest album by Kanye West for $10.00 that gives you 60 units of utility, or (b) buying the Brady Bunch Greatest Hits for $5.00 that gives you 35 units of utility.

Use the principle of rational choice to determine which of the following to choose: (a) reading one chapter of Aristotle's Metaphysics that will take you three hours and give you 300 units of utility, or (b) reading a chapter of your Chemistry text that takes 2 1/4 hours and gives you 200 units of utility.

Describe how the principle of diminishing marginal utility underlies the law of demand.

Define bounded rationality and explain why bounded rationality might be a more realistic assumption for much of human behavior than pure rational choice.

Describe how the principle of rational choice underlies the law of supply. Use labor supply to demonstrate your answer.

Zach has $100 to spend on meals at restaurants and movie theatre tickets. The price of a meal is $10 and the price of a movie ticket is $5. At equilibrium, Zach goes to the movies 10 times and eats in the restaurant 5 times a month. (Appendix) (a) Draw Zach's budget constraint and an indifference curve showing his equilibrium. (b) What is the relationship between the marginal utility of a meal in a restaurant and the marginal utility of a movie at the current equilibrium condition? (c) If the price of a meal drops to $5 a meal, show graphically how equilibrium changes. (d) If Zach's budget increases to $200 and prices remain constant ($5 a movie and $10 a meal), show graphically how equilibrium changes.

You have determined that the following utility values can be obtained by reading your Economics book. $\begin{array} { | c | c | c | } \hline \text { Number of Chapters } & \text { Total Utility } & \text { Marginal Utility } \\\hline 0 & 0 & \\\hline 1 & 2 & \\\hline 2 & 4 & \\\hline 3 & 6 & \\\hline 4 & 8 & \\\hline 5 & 10 & \\\hline 6 & 12 & \\\hline\end{array}$ (a) Compute marginal utility. (b) Does the example illustrate the principle of diminishing marginal utility? Explain.

Define total utility and marginal utility and explain the relationship between them. Give an example.

Susan has $10 to spend on soda and candy bars. Soda costs $1 per bottle and candy bars cost $.50 each. Using the grid below: (Appendix) (a) Draw Susan's budget constraint. (b) Draw a new budget constraint if the price of soda stays at $1 per bottle but the price of candy bars rises to $1 each. (c) Draw a new budget constraint with the prices at their original levels (soda costs $1 per bottle and candy bars cost $.50 each) but now suppose that on her way to the store to make her purchase Susan loses $5 (she now has only $5 to spend).