DeVry University, Chicago

ECON ECON312

chapter 8

1)What are two related effects that combine to make a consumer able and willing to buy more of a specific product at a lower price than a higher price? Explain the logic of both effects.

2. Assume that a person only purchases two goods, food and clothing, and has a fixed budget constraint. Both goods are normal goods. If the price of food decreases, what will happen to the consumption of clothing based on the income effect?

3. In a typical month, a family buys six bags of candy bars as snacks when the price of a bag costs

$4.00. When the price of the candy bars falls to $3.00 a bag, the family buys seven bags of candy bars a month. When the price of a bag of candy bars rises to $6.00, the family buys three bags a month. Answer these questions: (a) How did the fall in the price affect real income in terms of bags of candy bars? (b) How did the rise in the price affect real income in terms of bags of candy bars? [Hint: How many bags of candy bars could the family buy in situation (a) and in situation (b) without changing the amount they spend on candy bars in a typical month?]

4. What is the difference between marginal and total utility?

5. Can marginal utility be negative? Briefly explain with an example.

6. Describe the law of diminishing marginal utility. On what assumptions is this law based?

7.  Describe how diminishing marginal utility is related to price elasticity of demand.

8. Assume that a consumer purchases a combination of products A and B. The MUa is 5 and the Pa

is $5. The MUb is 6 and the Pb is $6. What should this consumer do to maximize utility?

9. Assume that a consumer purchases a combination of products Y and Z. The MUy is 50 and the

Py is $25.  The MUz   is 20 and the Pz is $5. What should this consumer do to maximize utility?

10.  How can the utility-maximizing rule be used to explain the substitution and income effect?

11.  A vice president of a company argues that the president of the company should raise workers’ wages if the president wants less absenteeism. The president says that wages probably should be cut so that the workers could not afford to miss so much work. Evaluate the two views using the income and substitution effects in your analysis.

12.  Why would an ounce of gold be priced higher than an ounce of coffee beans, even though coffee is generally considered more essential than gold? Explain the paradox in terms of marginal and total utility.