ECON 401 Chapter Notes - Chapter 7: Indifference Curve, Weighted Arithmetic Mean, Revealed Preference

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ECON 401 Full Course Notes

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In chapter 6 we saw how we can use information about the consumer"s preferences and budget constraints to determine his or her demand. In this chapter we reverse this process and show how we can use information about the consumer"s demand to discover information about his or her preferences. Preferences remain unchanged while we observe their behavior. Underlying preferences can only be strictly convex which means that there will be a unique demanded bundle at each budget. The bundle (x1, x2) that the consumer chooses is revealed preferred to the bundle (y1, y2) a bundle that he could"ve chosen. Directly revealed preferred: if the inequality found is satisfied. When another bundle that is either the same price or less expensive than the chosen bundle is not chosen. The principle of revealed preference: let (x1, x2) be the chosen bundle when prices are (p1, p2), and let (y1, y2) be some other bundle such that p1x1 +p2x2 > p1y1 + p2y2.

Related Questions

True or False. If False explain why it's false.

1. If all prices are doubled an money income is the left the same, the budget set does not change because the relative prices do not change.

2. A decrease in income pivots the budget line around the bundle initially consumed.

3. If preferences are well-behaved, then for any commodity bundle (x1,x2), the set of commodity bundles that are worse than (x1,x2) is a convex set.

4. The marginal rate of substitution measures the distance betwee one indifference curve and the next one.

5. If someone has the utility function U= 2min(x, y), then x and y are perfect complements for that person.

6. At the boundary optimum, a consumers indifference curve must be tangent to her budget line.

7. If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

8. An Engel curve is a demand curve with the vertical and horizontal axes reversed.

9. An inferior good is less durable than a normal good.

10. When other variables are held fixed, the demand for a Giffen good rises when income increase.

12. When prices are (P1, P2)= (1,2), the consumer demands (X1, X2) = (1,2). When prices are (Q1, Q2) = (2,1), the consumer demands (Y1, Y2) = (2,1). Is this consumer behavior consistent with the Weak Axiom of revealed preference?

13. Prove that elasticity of demand is not constant along a linear demand curve.

14. Prove that expenditure share weighted sum of income elasticities equal 1.

15. Prove that both goods cannot be superior or inferior at the same time.

16. Relate elasticity of demand with different slopes of the demand curve.

17. The equation to the Engel's curve of a commodity is X = 50+2M². Calculate the income elasticity of demand at M=$100. What can you infer about the nature of the commodity?

18. Calculate the own-price elasticity of demand for the demand curve P= 15-3X at prices and compare the outcomes.

a) P=0

b) P=1/8

c) P=3

d) P=15

raspberrygrasshopper609

Michael spends all of his income on coffee and donuts. A coffee costs $2.50 and a donut costs $2.00. At his current consumption level, the marginal utility for coffee is 30 utils, and the marginal utility for a donut is 60 utils. Which statement best describes what Michael needs to do to maximize his utility?

Question 1 options:

1)	buy less of both coffee and donuts.

2)	buy less coffee and more donuts.

3)	buy more coffee and less donuts.

4)	spend the same amount on coffee as he does on donuts.

Question 2

What is it called when the marginal utility derived from the last dollar spent on each good is the same across all goods and the last dollar spent uses all of the available budget for the purchase of those goods?

Question 2 options:

1)	the optimal consumption bundle.

2)	the optimal production bundle.

3)	diminishing marginal utility.

4)	optimal point.

Question 3 (1 point)

What does the economic theory of marginal utility infer?

Question 3 options:

1)	consumers naturally know which consumption choices will maximize their utility.

2)	consumers who watch market trends are better at maximizing their utility than are those who do not watch those trends.

3)	one cannot maximize utility without taking an economics class that explains utility theory.

4)	one cannot maximize utility without doing the math of calculating the ratios of marginal utility divided by price.

Question 4

Kate is addicted to chocolate and does not care how much it costs. In fact, she spends more than $20 a week on chocolate. What can be concluded about elasticity in her buying decisions?

Question 4 options:

1)	Her income elasticity of demand for chocolate is equal to one.

2)	Her income elasticity of demand for chocolate is equal to zero.

3)	Her price elasticity of demand for chocolate is equal to one.

4)	Her price elasticity of demand for chocolate is equal to zero.

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Question 5 (1 point)

Why does the demand for a good become relatively more elastic?

Question 5 options:

1)	substitutes for the good become more available.

2)	substitutes for the good become less available.

3)	the good becomes more of a necessity.

4)	the time allowed for adjustment is shortened.

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Question 6 (1 point)

Assume the price of chicken per pound is $3.49 and that Americans purchase 10 million pounds per chicken every month. If the price of chicken increases to $5.49 per pound, identify what will occur to consumer surplus?

Question 6 options:

1)	consumer surplus increases.

2)	consumer surplus decreases.

3)	consumer surplus creates incentive to save.

4)	consumer surplus creates incentive to spend.

Question 7 (1 point)

What is another name for the difference between the price that consumers are willing to pay for a good and a lower price that they may actually have to pay?

Question 7 options:

profit.

revenue.

3)	consumer utility.

4)	consumer surplus.

Question 8

Adam, Brian, Robert, and Sam all want to attend a football game. The admission price is $48. Adam is willing to pay $59 for the ticket. Brian is willing to pay $39. Robert is willing to pay $45, and Sam is willing to pay $55. Based on this information, who will go to the game?

Question 8 options:

1)	Adam, Brian, Robert, and Sam.

2)	Brian and Robert.

3)	Adam and Sam.

4)	Brian, Robert, and Sam.

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Question 9 (1 point)

Lily is willing to pay $10 for one bracelet and $5 for a second. Patty is willing to pay $12 for one bracelet and $2 for a second. If the price is currently $8 per bracelet, identify what is the total consumer surplus after Lily and Patty make their purchases?

Question 9 options:

Question 10 (1 point)

Manfred is willing to shovel one driveway for $25, a second for $30, and a third for $35. Assume that the market rate for shoveling driveways is $32. How many driveways will Manfred shovel, what will be his total revenue, and what will be his producer surplus?

Question 10 options:

1)	Manfred will shovel two driveways for a total revenue of $64 and his producer surplus will be $9.

2)	Manfred will shovel three driveways for a total revenue of $75 and his producer surplus will be $12.

3)	Manfred will shovel three driveways for a total revenue of $96 and his producer surplus will be $5.

4)	Manfred will shovel four driveways for a total revenue of $125 and his producer surplus will be $18.

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Question 11 (1 point)

What would the difference between the price that producers receive and the lower price at which they are willing to sell the good be called?

Question 11 options:

1)	producer shortage.

2)	producer surplus.

3)	consumer shortage.

4)	consumer surplus.

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Question 12 (1 point)

What will happen when there is an increase in the price of eBook downloads?

Question 12 options:

1)	It reduces the marginal utility derived from each dollar spent on eBooks.

2)	It reduces the marginal utility derived from each hardcopy book purchased.

3)	There will not be a substitution effect.

4)	There will not be a change in the number of eBooks in the set of consumption possibilities.

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Question 13 (1 point)

When is price elasticity of demand utilized to measure how an individual changes the quantity they demand?

Question 13 options:

1)	when supply changes.

2)	when product quality changes.

3)	when marketing changes.

4)	when price changes.

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Question 14 (1 point)

Assume Mary consumes only tea and pastries. A cup of tea costs 5 euros and a pastry costs 8 euros. Her weekly income is 450 euros. Mary always drinks 2 cups of tea for every pastry she consumes. What is Maryâs optimal weekly consumption bundle?

Question 14 options:

1)	25 cups of tea and 50 pastries.

2)	50 cups of tea and 25 pastries.

3)	58 cups of tea and 20 pastries.

4)	60 cups of tea and 30 pastries.

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Question 15 (1 point)

When is producer surplus a positive value?

Question 15 options:

1)	the price the producer is willing to charge equals the market price.

2)	there is no tax applied to the good.

3)	the price the producer is willing to charge is less than the market price.

4)	the price the producer is willing to charge is greater than the market price.

ECON 401 Chapter Notes - Chapter 7: Indifference Curve, Weighted Arithmetic Mean, Revealed Preference

ECON 401 Full Course Notes

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