522 section 9 Behind the Demand Curve: Consumer Choice
Tackle the Test: Free-Response Questions
- Refer to the table provided. Assume you have $20 to spend.
Snacks (price =$4) Drinks (price =$2)
Quantity Total Utility (utils) Quantity Total Utility (utils)
115112
225221
331329
434436
536542
647
750
852
a. Draw a correctly labeled budget line.
b. Determine the marginal utility and the marginal utility per
dollar spent on the fourth drink.
c. What is the optimal consumption rule?
d. How many drinks and snacks should you purchase to
maximize your total utility?
Answer (6 points)
Quantity of drinks
0 10
Quantity of
snacks
5
1 point:Graph with “Quantity of snacks” and “Quantity of drinks” as axis labels.
1 point:Straight budget line with intercepts at 5 snacks and 0 drinks and at 0
snacks and 10 drinks.
1 point:MU=7 utils
1 point:MU/P=3.5 utils per dollar
1 point:Total utility is maximized when the marginal utility per dollar is equal
for all goods.
1 point:6 drinks, 2 snacks
- Assume you have an income of $100. The price of good X is $5,
and the price of good Y is $20.
a. Draw a correctly labeled budget line with “Quantity of good
X” on the horizontal axis and “Quantity of good Y” on the
vertical axis. Be sure to correctly label the horizontal and
vertical intercepts.
b. With your current consumption bundle, you receive 100
utils from consuming your last unit of good X and 400 utils
from consuming your last unit of good Y. Are you
maximizing your total utility? Explain.
c. What will happen to the total and marginal utility you
receive from consuming good X if you decide to consume
another unit of good X? Explain.
Summary
1.Changes in the price of a good affect the quantity
consumed as a result of the substitution effect,
and in some cases the income effect.Most goods ab-
sorb only a small share of a consumer’s spending; for
these goods, only the substitution effect—buying less
of the good that has become relatively more expensive
and more of the good that has become relatively
cheaper—is significant. The income effect becomes
substantial when there is a change in the price of a
good that absorbs a large share of a consumer’s
spending, thereby changing the purchasing power of
the consumer’s income.
2.Many economic questions depend on the size of con-
sumer or producer responses to changes in prices or
other variables. Elasticityis a general measure of respon-
siveness that can be used to answer such questions.
3.Theprice elasticity of demand—the percent change in
the quantity demanded divided by the percent change
in the price (dropping the minus sign)—is a measure of
the responsiveness of the quantity demanded to
changes in the price. In practical calculations, it is usu-
ally best to use the midpoint method,which calculates
percent changes in prices and quantities based on the
average of the initial and final values.
4.Demand can fall anywhere in the range from perfectly
inelastic,meaning the quantity demanded is unaf-
fected by the price, to perfectly elastic,meaning there
is a unique price at which consumers will buy as much
Section 9 Review