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ID: A
CH 11 short answer study questions
Answer Section
ESSAY
1. ANS:
Your friend's description of the budget line is accurate.
PTS: 1
DIF: Level 1: Definition
OBJ: Checkpoint 11.1
TOP: Budget line
2. ANS:
The slope of the budget line equals an opportunity cost. It is the same as the opportunity cost of the good
measured along the x-axis. It also equals a relative price. In particular, it is the same as the relative price of the
good measured along the x-axis.
PTS: 1
DIF: Level 2: Using definitions
TOP: Budget line | slope
3. ANS:
Your budget line shifts outward and its slope does not change.
OBJ: Checkpoint 11.1
PTS: 1
DIF: Level 3: Using models
TOP: Budget line | change in budget
4. ANS:
OBJ: Checkpoint 11.1
The budget line is illustrated in the figure above.
PTS: 1
TOP: Budget line
DIF: Level 3: Using models
1
OBJ: Checkpoint 11.1
ID: A
5. ANS:
a. The budget line is in the figure above.
b. The affordable area is the lighter area and the budget line itself. The unaffordable area is the darker area.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 11.1
TOP: Budget line
6. ANS:
Marginal utility is the change in total utility that results from a one-unit change in the quantity of a good
consumed. In other words, it is the added utility a consumer gains by consuming one additional unit of a good
or service.
PTS: 1
DIF: Level 1: Definition
OBJ: Checkpoint 11.2
TOP: Marginal utility
7. ANS:
As the consumption of a good or service increases, the marginal utility decreases. For example, the first cup
of coffee you drink in the morning will give you great satisfaction. As you keep on drinking more and more
cups of coffee, the satisfaction from additional cups will diminish.
PTS: 1
DIF: Level 1: Definition
OBJ: Checkpoint 11.2
TOP: Diminishing marginal utility
8. ANS:
Your friend's statement is incorrect. To maximize utility, a consumer consumes the combination of goods and
services so that the marginal utility per dollar from the goods is equal.
PTS: 1
DIF: Level 2: Using definitions
TOP: Maximizing utility
2
OBJ: Checkpoint 11.2
ID: A
9. ANS:
The utility-maximizing rule states that for a person to maximize utility, the person must allocate (spend) his or
her entire budget and consume the quantities of goods and services so that the marginal utility per dollar from
each good or service is equal to the marginal utility per dollar from all the other goods and services.
PTS: 1
DIF: Level 2: Using definitions
TOP: Maximizing utility
10. ANS:
OBJ: Checkpoint 11.2
The completed table is above.
PTS: 1
DIF: Level 3: Using models
TOP: Marginal utility
3
OBJ: Checkpoint 11.2
ID: A
11. ANS:
a. The table above has Sam's marginal utility per dollar for bananas and apples.
b. Sam's utility maximizing combination of bananas and apples is 4 pounds of bananas and 3 bags of apples.
This quantity allocates (spends) his budget and equates the marginal utility per dollar from bananas and
apples.
c. The table with Sam's new marginal utility per dollar for bananas is above.
d. Sam's new utility maximizing combination of bananas and apples is 2 pounds of bananas and 3 bags of
apples.
e. When the price of a pound of bananas is $1, the quantity demanded is 4 pounds and when the price rises to
$2, the quantity demanded decreases to 2 pounds.
PTS: 1
DIF: Level 4: Applying models
OBJ: Checkpoint 11.2
TOP: Marginal utility and the demand curve
12. ANS:
Yes, the consumer is maximizing his utility. He has allocated his entire budget and he is consuming the
combination of goods A and B such that the marginal utility per dollar from each is the same.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 11.2
TOP: Marginal analysis
13. ANS:
Mark should buy more burritos and fewer tacos. If Mark decreases his purchases of tacos by $1, he loses 15
units of utility. But if he then spends the dollar on burritos, he gains 20 units of utility. Because his gain in
utility exceeds his loss, Mark's total utility increases as he buys more burritos and fewer tacos.
PTS: 1
DIF: Level 3: Using models
TOP: Marginal analysis
4
OBJ: Checkpoint 11.2
ID: A
14. ANS:
Parts of the statement are true but a key part is false. Water is, indeed, very inexpensive and so its marginal
utility is small. Because water is so inexpensive, the quantity people buy is large, which is why its marginal
utility is small. However, water is essential to life. Hence the total utility of water is immense.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 11.3
TOP: Paradox of value
15. ANS:
No, the analysis is incorrect. The paradox of value points out the error. Diamonds are scarce, so they have a
high price and a high marginal utility. Water is abundant, so it has a low price and a low marginal utility. But
the total utility from water (vastly) exceeds that from diamonds and so the consumer surplus from water
(vastly) exceeds that from diamonds.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 11.3
TOP: Paradox of value | consumer surplus
16. ANS:
The statement is incorrect. The principle of diminishing marginal rate of substitution means that as Mike
consumes more dates, he is willing to give up less other goods in order to get an additional date.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Chapter 11 Appendix - Checkpoint 2
TOP: Diminishing marginal rate of substitution
17. ANS:
The consumer will select the combination of goods and services that he or she most prefers and which he or
she can afford to buy. Taking the latter consideration first, the consumer will buy a combination of goods and
services that lie upon the budget line because all of these combinations are affordable. From the combinations
that lie upon the budget line, the consumer will select the combination that is on the highest indifference
curve because this is the combination that is most preferred.
PTS: 1
DIF: Level 3: Using models
OBJ: Chapter 11 Appendix - Checkpoint 3
TOP: Consumer equilibrium
18. ANS:
A consumer equilibrium occurs when the consumer is
• spending his or her entire income (is on the budget line),
• and is on the highest attainable indifference curve (is consuming the "best" point on the budget line). The
equilibrium occurs at the point where the budget line just touches the highest indifference curve at one point.
At this point, the budget line and indifference curve have the same slope, so the marginal rate of substitution
(the slope of the indifference curve) is equal to the relative price (the slope of the budget line).
PTS: 1
DIF: Level 3: Using models
OBJ: Chapter 11 Appendix - Checkpoint 3
5
TOP: Consumer equilibrium
ID: A
19. ANS:
a. George can buy 20 dinners and his income is $600, so the price of a dinner is $30.
b. George will buy 20 movies and 10 dinners because this combination is on his budget line, and hence is
affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination.
c. If George spends all his income on dinners, he can purchase 40. Therefore the price of a dinner must be $15
äå $600 income
ôõ
åå
$15 per dinner õõõõ .
åå 40 dinners
æ
ö
d. George will buy 20 movies and 20 dinners because this combination is on his budget line, and hence is
affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination.
e. One point on George's demand curve for dinners is a price of $30 per dinner and a quantity demanded of 10
dinners (from part b). Another point is a price of $15 per dinner and a quantity demanded of 20 dinners (from
part d).
PTS: 1
DIF: Level 4: Applying models
OBJ: Chapter 11 Appendix - Checkpoint 3
TOP: Deriving the demand curve
20. ANS:
The statement is correct. The consumer has a preference map that consists of an infinite number of
indifference curves, one through every possible consumption combination.
PTS: 1
DIF: Level 3: Using models
OBJ: Chapter 11 Appendix - Checkpoint 1
TOP: Preference map
21. ANS:
If the price of the good measured on the x-axis increases, the budget line rotates inward as the x-intercept
decreases and the budget line becomes steeper. Conversely, if the price of the good measured on the x-axis
decreases, the budget line rotates outward, the x-intercept increases, and the budget line becomes flatter.
If the price of the good measured on the y-axis increases, the y-intercept decreases as the budget line rotates
inward and becomes flatter. However, if the price of the good measured on the y-axis decreases, the budget
line rotates outward as the y-intercept increases, and the budget line becomes steeper.
Finally, if the budget increases, the budget line shifts outward (both intercepts increase) and the slope remains
unchanged while if the budget decreases, the budget line shifts inward (both intercepts decrease), and the
slope remains unchanged.
PTS: 1
DIF: Level 3: Using models
TOP: Budget line | change in prices and change in income
6
OBJ: Checkpoint 11.1
ID: A
22. ANS:
a. The budget line is in the figure above and is the budget line labeled BL1.
b. The slope of the budget line is 20 key chains divided by 5 T-shirts, which equals 4 key chains per T-shirt. 4
key chains per T-shirt is an opportunity cost because it represents the quantity of key chains that must be
given up to acquire one more T-shirt.
c. The new budget line is in the figure above and is labeled BL2.
d. The slope of the new budget line is 2 key chains per T-shirt, which means that the opportunity cost of one
T-shirt is now 2 key chains, rather than 4. Thanks to the new store, the opportunity cost of a T-shirt has fallen.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 11.1
TOP: Budget line | change in price and change in budget
23. ANS:
The restaurants that engage in this business practice bank on the concept of diminishing marginal utility.
From the first bite of food until the last, the marginal utility derived from successive bites decreases.
Therefore well before a restaurant would face food shortages, angry customers, and financial difficulties,
patrons leave satisfied but without eating the absolute limit of food that they could have consumed.
PTS: 1
DIF: Level 5: Critical thinking
OBJ: Checkpoint 11.2
TOP: Diminishing marginal utility
24. ANS:
The consumer equates the marginal utility per dollar for the goods because goods have different prices. For
instance, the marginal utility of a Porsche might be 120,000 units and the marginal utility of a Hyundai might
be 60,000 units. The consumer certainly prefers the Porsche to the Hyundai because the former has a greater
marginal utility than the latter. However, we did not consider the prices. If the Porsche costs $120,000 and the
Hyundai costs $10,000, the marginal utility per dollar from the Porsche is 1 and the marginal utility per dollar
from the Hyundai is 6. A Hyundai gives the consumer more utility per dollar. Thus when maximizing total
utility, the consumer compares the marginal utility per dollar not the marginal utility
PTS: 1
DIF: Level 3: Using models
TOP: Maximizing utility
7
OBJ: Checkpoint 11.2
ID: A
25. ANS:
Tris buys 4 pairs of pants and 4 belts because this is the combination that allocates (spends) all of his budget
and has the marginal utility per dollar from a pair of pants equal to the marginal utility per dollar from a belt.
For the first requirement, that Tris allocate his entire budget, the combination of 4 pants and 4 belts spends (4
pairs of pants) u ($20 per pair of pants) = $80 on pants and (4 belts) u ($5 per belt) = $20 on belts, for a total
spent of $100. For the second requirement, the equality of the marginal utilities per dollar, the marginal utility
per dollar from a pair of pants is (100 units) ÷ ($20) = 5 units per dollar and the marginal utility per dollar
from a belt is (25 units) ÷ ($5) = 5 units per dollar.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 11.2
TOP: Maximizing utility
26. ANS:
Indifferent means that the consumer does not care if he or she consumes one combination of goods and
services or another, different combination. An indifference curve measures the combinations of goods and
services among which the consumer is indifferent as to which he or she consumes.
PTS: 1
DIF: Level 1: Definition
OBJ: Chapter 11 Appendix - Checkpoint 1
8
TOP: Indifference curve