AP_Krugman_Textbook

Tackle the Test:

Multiple-Choice Questions

1. d


2. b


3. a


4. b


5. d

Tackle the Test:

Free-Response Questions

2. a.

b.Yes, 100/$5 =400/$20

c.Total utility will increase because marginal utility is posi-

tive, while marginal utility will decrease due to the princi-

ple of diminishing marginal utility.

Module 52

Check Your Understanding

1. a.Supplies are an explicit cost because they require an out-
   lay of money.
   b.If the basement could be used in some other way that
   generates money, such as renting it to a student, then the
   implicit cost is that money forgone. Otherwise, the
   implicit cost is zero.
   c.Wages are an explicit cost.
   d.By using the van for their business, Karma and Don forgo
   the money they could have gained by selling it. So use of
   the van is an implicit cost.
   e.Karma’s forgone wages from her job are an implicit cost.


2. a.Economic profit is zero, as explained by the following cal-
   culations:

Quantity of good X

0 20

Quantity of

good Y

5

(^054321)
10
8
6
4
2
Quantity of clams (pounds)
BL
Quantity
of potatoes
(pounds)
X
Bundle X is
not affordable
b.The accompanying table shows the consumer’s consump-
tion possibilities, Athrough D.These consumption possi-
bilities are plotted in the accompanying diagram, along
with the consumer’s budget line.
BL
2
1
0
Quantity
of movie
tickets
Quantity of popcorn
(buckets)
2 4
B
C
A
S-32 SOLUTIONS TO AP REVIEW QUESTIONS
Quantity of Quantity of
Consumption Bundle underwear (pairs) socks (pairs)
A06
B14
C22
D30

3. From Table 51.3 you can see that Sammy’s marginal utili-
   ty per dollar from increasing his consumption of clams
   from 3 to 4 pounds and his marginal utility per dollar
   from increasing his consumption of potatoes from 9 to
   10 pounds are the same, 0.75 utils. But a consumption
   bundle consisting of 4 pounds of clams and 10 pounds of
   potatoes is not Sammy’s optimal consumption bundle
   because it is not affordable given his income of $20; a
   bundle of 4 pounds of clams and 10 pounds of potatoes
   costs $4 × 4 +$2 × 10 =$36, $16 more than Sammy’s
   income. This can be illustrated with Sammy’s budget line
   from Figure 51.3: a bundle of 4 pounds of clams and 10
   pounds of potatoes is represented by point Xin the
   accompanying diagram, a point that lies outside Sammy’s
   budget line. If you look at the horizontal axis of Figure
   51.4, it is quite clear that there is no such thing in
   Sammy’s consumption possibilities as a bundle consisting
   of 4 pounds of clams and 10 pounds of potatoes.

BL

6

4

2

0

Quantity

of socks

(pairs)

Quantity of underwear

(pairs)

1 23

A

B

C

D