Chapter UTILITY AND DEMAND

1 C h a p t e r 7 UTILITY AND. DEMAND . Topic: Consumption Possibilities Household Consumption Choices Skill: Conceptual 4) Joe has $50 to spend on pizza and movies. If Topic: Consumption Possibilities Skill: Recognition movies are $5 each and a pizza is $10 then, as- 1) The level of UTILITY a consumer can achieve is lim- suming he spends all his money, he can buy ited by A) 6 movies and 2 pizzas. A) prices only. B) 8 movies and 4 pizzas. B) income only. C) 2 movies and 6 pizzas. C) the consumer's preferences. D) 6 movies and 4 pizzas. Answer: A. D) prices and income. Answer: D Topic: Consumption Possibilities Skill: Conceptual Topic: Consumption Possibilities Skill: Recognition 5) Lily is a college student who likes to buy only two 2) The budget line goods: Cheetos and Pepsi.

2 To determine Lily's budget line, you need to know A) identifies affordable bundles. B) identifies preferred bundles. I. Lily's preferences for Cheetos and Pepsi. C) identifies the maximum UTILITY which can be II. The prices of Cheetos and Pepsi. achieved from consumption. III. Lily's income. D) identifies the satisfaction received from con- A) II only. sumption. B) I and II. Answer: A C) II and III. D) I, II and III. Topic: Consumption Possibilities Answer: C. Skill: Analytical 3) Ernie has an income of $40 which he plans to Topic: Consumption Possibilities spend on cookies and milk. The price of milk is Skill: Conceptual $1 per gallon, and the price of cookies is $2 per 6) Lily is a college student who likes to buy only two dozen.

3 If Ernie buys 12 gallons of milk, how goods: Cheetos and Pepsi. Her UTILITY for these many dozens of cookies will he buy if he spends two goods depends on all of his income? I. Lily's preferences for Cheetos and Pepsi. A) 28 II. The prices of Cheetos and Pepsi. B) 20 III. Lily's income. C) 14 A) II only. D) 12 B) I and II. Answer: C C) I only. D) I and III. Answer: C. 239. 240 Chapter 7. Topic: Consumption Possibilities Consumption Video games Baseball cards Skill: Conceptual possibility (quantity) (quantity). 7) Suppose Sam plans to buy only popcorn and soda. He has $40 to spend per week. A change in A 10 0.

4 Which of the following variables will change Sam's B 8 1. consumption possibilities? C 6 2. I. price of popcorn. D 4 3. II. income. E 2 4. III. preferences. F 0 5. IV. UTILITY . Topic: Consumption Possibilities A) II only. Skill: Analytical B) I and II. 10) Jordan has two goods that he consumes this week. C) I, II and III. He can choose to go to the arcade and play video D) III and IV. games or he can purchase baseball cards. The Answer: B price of each video game is $.50 and each pack of baseball cards is $1. Jordan will spend all his al- Topic: Consumption Possibilities lowance this week on these two goods.

5 Jordan's Skill: Analytical consumption possibilities are listed in the table 8) Dean spends all his income on movies and soda. above. What is the amount of Jordan's allowance? Movies cost $6 each and sodas cost $ a can. A) $10. In a diagram with movies on the horizontal axis B) $5. and sodas on the vertical axis, Dean's budget line C) $15. A) becomes steeper to the right. D) $50. B) becomes shallower to the right. Answer: B. C) has a constant positive slope. D) has constant negative slope. Topic: Consumption Possibilities Answer: D Skill: Analytical 11) Jordan has two goods that he consumes this week.

6 Topic: Consumption Possibilities He can choose to go to the arcade and play video Skill: Analytical games or he can purchase baseball cards. The 9) Tonya, who is rich, and Jerome, who is poorer, price of each video game is $.50 and each pack of both buy orange juice and croissants for lunch at baseball cards is $1. Jordan will spend all his al- the student cafeteria. Their budget constraints on lowance this week on these two goods. Jordan's a diagram with orange juice on the vertical axis consumption possibilities are listed in the table and croissants on the horizontal have the same above. For Jordan, what is the opportunity cost of A) horizontal intercepts.

7 Moving from consumption possibility D to E? B) vertical intercepts. A) One set of baseball cards C) slopes. B) Three sets of baseball cards D) midpoints. C) Four video games Answer: C D) Two video games Answer: D. UTILITY AND DEMAND 241. Topic: Consumption Possibilities Topic: Consumption Possibilities Skill: Analytical Skill: Analysis 12) Jordan has two goods that he consumes this week. 14) According to the budget line in the above figure, He can choose to go to the arcade and play video which of the following combinations is unafford- games or he can purchase baseball cards. The able? price of each video game is $.

8 50 and each pack of A) 1 pizza and 3 CDs baseball cards is $1. Jordan will spend all his al- B) 3 pizzas and 2 CDs lowance this week on these two goods. Jordan's C) 2 pizzas and 4 CDs consumption possibilities are listed in the table D) All of the above are affordable. above. Which of the following combinations of Answer: C. video games and baseball cards is not attainable for Jordan? A) 10 video games and 3 sets of baseball cards B) 8 video games and 1 set of baseball cards C) 0 video games and 5 sets of baseball cards D) 3 video games and 3 sets of baseball cards Answer: A. Topic: Consumption Possibilities Skill: Recognition 15) Based on the above figure showing a budget line, which of the following combinations of soda and bottled water are not affordable?

9 A) 3 bottles of water and 4 cans of soda. B) 4 bottles of water and 2 cans of soda. C) 2 bottles of water and 6 cans of soda. Topic: Consumption Possibilities D) None of the above, that is, all the combinations Skill: Analysis listed are affordable. 13) Given the budget line in the above figure, if in- Answer: C. come is $60, then the price of a pizza is ____ and the price of a CD is ____. A) $5; $20. B) $6; $4. C) $15; 15. D) $10; $15. Answer: D. 242 Chapter 7. Topic: Preferences Skill: Recognition 19) UTILITY can best be described as A) a concept that can be derived from a DEMAND curve. B) a testable hypothesis about the level of happiness achieved from consumption of goods.

10 C) an abstract concept useful for obtaining predic- tions about human behavior. D) the units that measure a person's income. Answer: C. Topic: Total UTILITY Skill: Recognition 20) Which of the following is NOT an assumption of marginal UTILITY theory? Topic: Consumption Possibilities A) A consumer derives UTILITY from the goods con- Skill: Analytical sumed. 16) In the above figure, if income is $ , the price B) Each additional unit of consumption yields ad- of hamburgers is $ , and the price of gasoline ditional UTILITY . is $ , then which is the correct budget line? C) Consumers maximize their total UTILITY .