Mrs. Green is spending all her money income by buying bottlesof soda and bags of

ID: 1232663 • Letter: M

Question

Mrs. Green is spending all her money income by buying bottlesof soda and bags of pretzels in such amounts that the marginalutility of the last bottle is 60 utils and the marginal utility ofthe last bag is 30 utils. The prices of soda and pretzels are $.60per bottle and $.40 per bag respectively. It can be concludedthat:
a. Mrs. Green should spend more on pretzels and less onsoda.
b. the two commodities are substitute goods.
c. Mrs. Green is buying soda and pretzels in theutility-maximizing amounts.
d. Mrs. Green should spend more on soda and less onpretzels. India is a major producer of sugar. Recently, however, therehas been a dramatic increase in the price of other grains, grainsthat Indian farmers could grow on their land instead of sugar cane.What is the most likely impact of this event on the sugarmarket? a. there will be an increase in the demand forsugar. b. there will be a movement along the demand curve forsugar. c. there will be a shift in the supply ofsugar. d. there will be a decrease in the demand for sugar. "A paradox occurred last year in the housing market. A studyshowed that the average price of new homes decreased 7.5% to$104,100 but fewer new homes were sold."The best economicexplanation for the above "paradox"is: a. an inward shift in the demand curve for newhomes. b. a movement along the demand curve form new homes on thepart ofconsumers. c. a decrease in the supply of homes due to higher lumbercosts. d. a movement along the supply curve for new homes on the partof producers. Mrs. Green is spending all her money income by buying bottlesof soda and bags of pretzels in such amounts that the marginalutility of the last bottle is 60 utils and the marginal utility ofthe last bag is 30 utils. The prices of soda and pretzels are $.60per bottle and $.40 per bag respectively. It can be concludedthat:
a. Mrs. Green should spend more on pretzels and less onsoda.
b. the two commodities are substitute goods.
c. Mrs. Green is buying soda and pretzels in theutility-maximizing amounts.
d. Mrs. Green should spend more on soda and less onpretzels. India is a major producer of sugar. Recently, however, therehas been a dramatic increase in the price of other grains, grainsthat Indian farmers could grow on their land instead of sugar cane.What is the most likely impact of this event on the sugarmarket? a. there will be an increase in the demand forsugar. b. there will be a movement along the demand curve forsugar. c. there will be a shift in the supply ofsugar. d. there will be a decrease in the demand for sugar. "A paradox occurred last year in the housing market. A studyshowed that the average price of new homes decreased 7.5% to$104,100 but fewer new homes were sold."The best economicexplanation for the above "paradox"is: a. an inward shift in the demand curve for newhomes. b. a movement along the demand curve form new homes on thepart ofconsumers. c. a decrease in the supply of homes due to higher lumbercosts. d. a movement along the supply curve for new homes on the partof producers. "A paradox occurred last year in the housing market. A studyshowed that the average price of new homes decreased 7.5% to$104,100 but fewer new homes were sold."The best economicexplanation for the above "paradox"is: a. an inward shift in the demand curve for newhomes. b. a movement along the demand curve form new homes on thepart ofconsumers. c. a decrease in the supply of homes due to higher lumbercosts. d. a movement along the supply curve for new homes on the partof producers.

Explanation / Answer

1) She wants to maximize her utility. When doing so, she willbe spending equal amounts for utils from pretzels as she will forutils from soda. The cost of 1 util from soda is 60 utils /60 cents = 1 util / cent. The cost of 1 util from pretzels is30 utils / 40 cents = .75 utils / cent. Since she isreceiving fewer utils per cent from pretzels than soda, she shouldbuy more soda and less pretzels until the two ratios areequal. Thus, the answer is D.

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