Econ 201 Stage 2 Microeconomics

Tutorial 2

Question 1:

Liam wants to maximize his utility subject to his budget constraint. But Te Uruti looks at Liam's consumption choice and points out that while Liam has chosen a consumption bundle that puts him on the budget constraint, nevertheless, Liam is consuming too much X and too little Y than would be the case if he was maximizing his utility. Which of the following statements is correct? Draw a diagram of Liam’s indifference curve and budget constraint to indicate where Liam is located on this budget constraint presently.

(a) Liam has chosen a point that lies to the South and East (down and to the right) of the point that maximizes his utility.

(b) Liam has chosen a point that lies to the North and West (up and to the left) of the point that maximizes his utility.

(c) Liam is violating the assumption that of non-satiation (i.e., more is better)

(d) Liam has chosen a point that lies to the South and West (down and to the left) of the point that maximizes his utility; effectively Liam has chosen a point that lies inside the opportunity set.

Question 2:

Henry consumes two goods X and Y. They cost the same per unit. Henry also gets the same marginal utility per dollar for each extra unit of X and Y that he consumes. Which of the following statements is correct? What does this imply for the shape of Henry’s indifference curves and about the nature of the two goods that Henry consumes?

(a) Henry's preferences violate non-satiation and transitivity and therefore it is not possible to conclude what Henry might choose.

(b) In maximizing utility, Henry will consume only Y and zero X.

(c) In maximizing utility, Henry can choose to consume only X and zero Y, only Y and zero X or anything in between that satisfies the budget constraint.

(d) In maximizing utility, Henry will consume only X and zero Y.

Question 3:

Ana consumes two goods X and Y. Both goods cost $1 per unit. However, Ana's utility function is such that each additional unit of X he consumes gives him two utils of happiness while each unit of Y he consumes gives him one util of happiness; in other words, each additional unit of X gives Ana twice as much utility as each additional unit of Y. Which of the following statements is correct? Draw a diagram to illustrate this situation. What can you conclude about the nature of Ana’s indifference curves and the relative slopes of Ana’s budget constraint and Ana’s indifference curves?

(a) Ana's preferences violate non-satiation (the "more is better" axiom).

(b) In order to maximize his utility Ana should only consume Good X.

(c) Ana will be indifferent between consuming only Good X, only Good Y or any potential combination of the two goods.

(d) In order to maximize his utility Ana should only consume Good Y.

Question 4:

Which of the following are examples of items that rely on ORDINAL/CARDINAL measurement?

Happiness

Height.

Military ranks.

Academic degrees.

Weight

Distance

Question 5:

Ana’s dad gave her $20 to spend. She wants to buy gummy bears and M&Ms. Each packet of gummy bears costs $2. Each packet of M&Ms costs $4. Which of the following combinations will she most likely buy?

(a) 4 packs of gummy bears and 3 packs of M&Ms.

(b) 2 packs of gummy bears and 3 packs of M&Ms.

(c) 3 packs of gummy bears and 5 packs of M&Ms.

(d) 4 packs of gummy bears and 2 packs of M&Ms.

Question 6:

Isha’s dad, who likes to subject his children to various economic experiments, gave her the following pairs of choices over shows she can attend. A: Ed Sheeran or Drake; B: Drake or Coldplay and C: ColdPlay or Ed Sheeran. Isha chose Drake for Choice A, Coldplay for Choice B and Ed Sheeran for Choice C. This suggests that Isha’s choices violate the assumption of transitivity. Why?

Question 7.

Dvani has $20 and is trying to decide between tubs of ice-cream and bars of chocolate. Each tub of ice-cream is worth $10 while each bar of chocolate is worth $5. Dvani calculates that if she consumes the entire tub of ice-cream then will gain an extra 30 units of utility, while if she consumes the bar of chocolate then she will get an extra 15 units of utility. If Dvani is only interested in maximizing her utility, which of the following statements CANNOT be correct?

(a) Dvani should buy two tubs of ice-cream.

(b) Dvani should buy four bars of chocolate.

(c) Dvani should buy one tub of ice-cream and two bars of chocolate.

(d) Dvani should buy one tub of ice-cream and one bar of chocolate.

Question 8:

Maia wants to maximize her utility subject to her budget constraint. Currently Maia is consuming at a point on her budget constraint that lies to the north-west (up and to the left) of the point of tangency between an indifference curve and the budget constraint. Which of the following statements is true? Draw a diagram to illustrate this situation. What should Maia do to maximize her utility?

(a) Maia is consuming too much Y and not enough X to maximize utility.

(b) Maia is consuming too much X and not enough Y to maximize utility.

(c) Maia's preferences are intransitive.

(d) Maia's consumption choice is located to the interior of the opportunity set (i.e, below the budget constraint).

Question 9:

Ethan is tossing up between one more unit of Good X and one more unit of good Y. The extra unit of X will give him extra satisfaction of 20 units while the extra unit of Y will give him extra satisfaction of 50 units. X costs $4 per unit while Y costs $10 per unit. Which of the following statements is correct?

(a) Ethan should buy X since X gives him more marginal utility per dollar.

(b) Ethan should buy Y since Y gives him more marginal utility per dollar.

(c) Ethan would be indifferent since both X and Y yield the same marginal utility per dollar.

(d) Ethan should buy Y since the extra unit of Y gives him more satisfaction (of 50 units) compared to X (20 units).

Question 10.

Robbie consumes two goods, X and Y. Robbie's indifference curves are downward (negatively) sloping straight lines exactly like Robbie's budget constraint. Which of the following statements is NOT true?

(a) If Robbie's indifference curves are steeper than the budget constraint, then Robbie will consume only Good X and zero Good Y.

(b) If Robbie's indifference curves are flatter than the budget constraint, then Robbie will consume only Good Y and zero Good X.

(c) If Robbie's indifference curves have the same slope as the budget constraint, then Robbie can consume only Good X and zero Good Y or only Good Y and zero Good X or anything in between.

(d) If Robbie's indifference curves are steeper than the budget constraint, then Robbie will consume only Good Y and zero Good X.