Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #10  [40 points total]

November 2, 2005

 

Questions 1 to 10 are worth 2 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.

 

1.        Adam has a monthly income of $840. He spends all of his money on two goods - leasing an apartment and eating at restaurants. If his apartment rent is $560 per month, how many restaurant meals can he buy each month if the cost of each meal is $14?

a.        17

b.       12

c.        20

d.       18

 

2.        When the price of air travel rises, both the income and substitution effects play a role in the response. The income effect describes what happens due to

    1. the fact that consumers find their incomes now to have a lower purchasing power.
    2. the lower utility now received from air travel.
    3. the lower utility now received from travel of any type.
    4. the fact that many consumers will switch to traveling by car or by train.

 

3.        Evan spends all of his income on cheese and wine. A bottle of wine costs $20, and a pound of cheese costs $12. At his current consumption level, the marginal utility of a pound of cheese is 30 utils, and the marginal utility of a bottle of wine is 60 utils. In order to maximize his utility, Evan should

    1. buy more wine and less cheese.
    2. buy less of both wine and cheese.
    3. buy less wine and more cheese.
    4. spend the same amount on cheese as he does on wine.

 

4.        Which of the following statements is TRUE?

    1. The slope of the budget line is determined by the consumer's income.
    2. The consumer is equally happy with all consumption bundles lying along the budget line.
    3. The income effect of a price change refers to the fact that, when the price of a good increases, those consumers who can still afford to buy it derive added utility from the prestige of having a luxury good.
    4. An increase in income expands the set of consumption choices.

 

5.        Which of the following would make the budget line steeper?

    1. The price of the good measured on the horizontal axis decreases.
    2. The price of the good measured on the horizontal axis increases.
    3. The consumer's income decreases.
    4. The consumer's income increases.

 

6.        The collection of all the goods and services you consume is your

    1. utility.
    2. marginal utility.
    3. consumption bundle.
    4. total utility.

 

7.        The optimal consumption rule asserts that

    1. consumers will consume at the point where the total utility derived from each good is the same.
    2. consumers will consume at the point where the marginal utility derived from the last dollar spent on each good is the same across all goods.
    3. consumers will consume at the point where the marginal utility derived from the last unit of all goods is the same.
    4. consumers will consume at the point where the total amount spent on each good is the same.

 

8.        Marcel consumes only tea and pastry. A cup of tea costs 5 euros and a pastry costs 8 euros. His weekly income is 450 euros. Marcel always drinks 2 cups of tea for every pastry he consumes. The optimal weekly consumption bundle for Marcel consists of

    1. 60 cups of tea and 30 pastries.
    2. 50 cups of tea and 25 pastries.
    3. 58 cups of tea and 20 pastries.
    4. 25 cups of tea and 50 pastries.

 

9.        What is the set of consumption possibilities for an individual?

    1. All those goods that could provide some utility.
    2. Those goods she would like to have if her income were higher.
    3. Those goods that are characterized by diminishing marginal utility.
    4. The set of goods that are affordable, given her income and the current prices of the goods.

 

10.     The downward slope of the budget line reflects the fact that

    1. as you buy more of one good, its price decreases.
    2. as you buy more of one good, you become worse off.
    3. as you buy more of one good, you can afford less of the other.
    4. all goods are characterized by diminishing marginal utility.

 

 

Quantity of

Utility from

 

 

Quantity

 

 

Utility

notebooks

notebooks

MU

MU/P

of CDs

MU

MU/P

from CDs

0

0

 

 

0

 

 

0

2

70

35

7

1

80

8

80

4

130

30

6

2

70

7

150

6

180

25

5

3

60

6

210

8

220

20

4

4

50

5

260

10

250

15

3

5

40

4

300

Question 11 [14 pts.] Bruno likes to buy notebooks and CDs.  The table to the right shows his utility from consuming these two goods.  The price of a notebook is $5, the price of a CD is $10, and he has $50 of income to spend. 

 

Using these prices and this income, construct the consumption bundles available to Bruno and enter them in the table provided. 

 

Bundle

Notebooks

CDs

A

0

5

B

2

4

C

4

3

D

6

2

E

8

1

F

10

0

 

 

 

 

 

 

 

 

 

 

 

Calculate the marginal utility of each notebook and each CD and enter them in the table to the right. 

 

Then calculate the marginal utility per dollar and enter those values in the table.  Use either of the methods we went through in class to determine what his optimal consumption bundle will be:

 

Bruno consumes ____3____ CDs and ____4____ notebooks.

 

 

 

 

 

 

 

Question 12 [6 pts.] In each of the following cases, does the consumer have diminishing, constant, or increasing marginal utility?

 

Ø      The more Mabel exercises, the more she enjoys each additional visit to the gym: __increasing_____

Ø      Although Mei’s classical CD collection is huge, her enjoyment from buying another CD has not changed as her collection has grown: ___constant___

Ø      When Dexter was a struggling student, his enjoyment from a good restaurant meal was greater than now, when he has them more frequently: ___decreasing/diminishing_____