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1. Josie gets satisfaction from both music and fireworks. Josie's income is $240 per
week. Music costs $12 per CD and fireworks cost $8 per bag. The budget
constraint graphed below represents her ability to purchase music and fireworks.
Which values represent X, the maximum number of fireworks she can buy, and Y,
the maximum amount of music she can buy?
a. X = 20, Y = 30
b. X = 8, Y = 12
c. X = 12, Y = 8
d. X = 30, Y = 20
2. Josie gets satisfaction from both music and fireworks. Josie's income is $240 per
week. Music costs $12 per CD and fireworks cost $8 per bag. If Josie spends half
her income on fireworks and half her income on music, how much of each can she
afford?
a. 20 CDs and 30 bags of fireworks
b. 12 CDs and 8 bags of fireworks
c. 10 CDs and 15 bags of fireworks
d. 15 CDs and 10 bags of fireworks
3. Josie gets satisfaction from both music and fireworks. Josie's income is $240 per
week. Music costs $12 per CD and fireworks cost $8 per bag. Assuming fireworks
are on the xaxis
and music (CDs) is on the yaxis,
what is the slope of Josie's
budget constraint?
a. 2/3 = P,F/PM
b. −3/2 = −PM/PF
c. 3/2 = PM/PF
d. −2/3 = −PF/PM
4.
Matthew is redecorating his apartment. The amount of utility he gets from chairs
and couches is listed in the table above, where each number represents how much
utility (in utils) he receives from the combination of chairs and couches.
What is the marginal utility from buying an additional chair if Matthew has 2
chairs and 2 couches?
a. 3 utils
b. 2 utils
c. 4 utils
d. 5 utils
5. Good X sells for $4, and good Y sells for $2. At your current level of
consumption, the marginal rate of substitution between goods X and Y is 4. Which
of the following statements is most accurate?
a. You are not maximizing your utility and should buy less of both goods.
b. You are maximizing your utility.
c. You are not maximizing your utility and should buy more Y and less X.
d. You are not maximizing your utility and should buy more X and less Y.
6. Suppose that there are only two goods, books and coffee. Wally gets utility from
both books and coffee, but his indifference curves between them are concave
rather than convex to the origin. Draw his indifference curves to help you answer
the following question: What do these particular indifference curves tell you about
Wally's marginal rate of substitution between books and coffee?
a. Wally's MRSBC is constant as he consumes more books.
b. Wally's MRSBC increases as he consumes more books.
c. Wally's MRSBC decreases as he consumes more books.
d. Wally's MRSBC increases as he consumes more coffee.
7. Suppose that there are only two goods, books and coffee. Wally gets utility from
both books and coffee, but his indifference curves between them are concave
rather than convex to the origin. Draw his indifference curves to help you answer
the following question: What will Wally's utilitymaximizing
bundle look like?
(Hint: Assume some level of income for Wally, and some prices for books and
coffee, then draw a budget constraint.)
a. Wally will buy some coffee and some books, but not in any specific
proportion.
b. Wally will spend half his budget on coffee and the other half on books.
c. Wally will spend all of his budget on either coffee or books.
d. Wally will buy equal amounts of coffee and books.
8. Anthony spends his income on fishing lures (L) and guitar picks (G). Lures are
priced at $2 while a package of guitar picks cost $1. Assume that Anthony has $30
to spend and his utility function can be represented as: U(L,G) = L0.5G0.5. For this
utility function, MUL = 0.5L−0.5G0.5 and MUG = 0.5L0.5G−0.5. What is the
optimal number of lures and guitar picks for Anthony to purchase?
a. L = 5, G = 20
b. L = 5, G = 10
c. L = 10, G = 10
d. L = 7.5, G = 15
9. Cindy is throwing a party and wants to serve cupcakes and brownies. Her budget
for snacks at the party is $50. Cupcakes cost $1 each while brownies cost $0.50
each. Using the line drawing tool, draw Cindy's budget constraint for snacks at her
party and label it BC. Next use the area drawing tools to shade the regions of
feasible and infeasible bundles and label accordingly.
10. Tom enjoys music and purchases albums and goes to live concerts. He budgets
$600 per year for attending concerts and purchasing albums. Given that an album
costs $20 while attending a live concert costs $60, use the line drawing tool to
draw Tom's budget constraint for music and label it BC1. Now consider that the
price of an album increases to $30. Use the line drawing tool to draw Tom's new
budget constraint for music and label it BC2. Finally, use the appropriate area
drawing tool to shade the region containing bundles that are no longer feasible for
Tom at the new higher album price that were feasible at the old price. Label this
region as Not Feasible.
11. Joyce is considering cell phone plans. She has budgeted $25 per month to spend
on her cell phone. One company has a payasyougo
plan where each text
message costs $0.10 and a call costs $0.10 per minute. Use the line drawing tool
to draw her budget constraint and label it as BC1. Recently the company decided
that if she uses 150 minutes, each additional minute only costs $0.05. As such,
she will now pay $0.10 per minute for the first 150 minutes and $0.05 per minute
for each minute more than 150. Use the multipoint
line drawing tool to draw
Joyce's budget constraint. Label it as BC2. Finally, use the appropiate area
drawing tool to identify the bundles made feasible by the quantity discount. Label
this area as Newly Feasible.
12. Joe is on vacation in Queenstown, New Zealand. He wants to go bungee jumping
and zip lining while there. Zip lining costs $30 per ride while a bungee jump
costs $60 per jump. Because Joe has traveled from the States to be there, he
decides that rather than maximizing his utility given a fixed budget, he wants to
reach utility U*. Here you will find Joe's optimal bundle by drawing multiple
budget constraints. Using the line drawing tool, draw Joe's budget constraint if he
was only willing to spend $240. Label this line BC1. Next, using the line drawing
tool, draw Joe's budget constraint if he was only willing to spend $420. Label this
line BC2. Now, using the line drawing tool, draw Joe's budget constraint if he was
only willing to spend $600. Label this line BC3. Finally, use the double drop
drawing tool to identify the expenditure minimizing bundle of zip line rides and
bungee jumps that Joe can consume to reach utility U*. Label this Optimal
Bundle.
Question 9
Question 10
Question 11
Question 12

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1. D. The maximum amount of bags of fireworks, X, equals income divided by the price of fireworks: X = I/PF = 240/8 = 30. The maximum amount of CDs,Y, equals income divided by the price of music: Y = I/PM = 240/12 = 20....