13. Suppose Katie has the option to buy a shirt or buy a pair of pants. Suppose

Question

13.

Suppose Katie has the option to buy a shirt or buy a pair of pants. Suppose Katie purchases a shirt. Consider the following statements:

I: Katie’s total utility increases
II: Katie’s marginal utility of shirts increases
III: Katie’s marginal utility of shirts decreases
IV: Katie’s marginal utility of pants increases
V: Katie’s marginal utility of pants decreases
VI: Katie’s total utility decrease

Choose the best answer below.
A) Only statements I, III, and V are true
B) Only statements III and VI are true
C) Only statements III and V are true
D) Only statements I and II are true
E) Only statements I, II, and IV are true
F) Only statements I and III are true
G) Only statements I, III, and IV are true
14.
Suppose Travis can buy a burger for $2 and can buy a soft drink for $1. He has spent all of his money. Based on what he consumed, his marginal utility of burgers is 12, and his marginal utility of soft drinks is 4. Did Travis spend his money in a utility-maximizing way?
A) Yes – Travis spent his money optimally.
B) No – Travis should go now go purchase more burgers.
C) No – Travis should have bought more soft drinks and less burgers
D) No – Travis should have bought more burgers and less soft drinks
15.

Suppose Dave is at the arcade. He can play 3 possible games: Mario Pinball, Elk Hunt, and Street Fighter. All games are priced at $1 per play. The table below shows the marginal utility of playing each game. Suppose Dave’s mom gave him $4 to spend. If Dave spends all of his money $1 at a time, in what order will he play games at the arcade?


A) Street Fighter, Mario Pinball, Elk Hunt, Street Fighter
B) Street Fighter, Street Fighter, Mario Pinball, Elk Hunt
C) Mario Pinball, Street Fighter, Elk Hunt, Elk Hunt
D) Elk Hunt, Mario Pinball, Street Fighter, Mario Pinball
16.
Suppose now that upon entering the arcade, Dave finds the strongest kid in the room, beats him up, and steals $3 from him. Thus, Dave now has $7. If Dave spends all $7 optimally, what will his total utility be after playing his last game? (Assume Dave gets no utility from the act of beating up the kid and stealing his money).
A) Total Utility = 20
B) Total Utility = 261
C) Total Utility = 241
D) Total Utility = 243

Explanation / Answer

13. G would be the best answer. Her total utility increases (or else she wouldn't have bought the shirt). Assuming diminishing marginal utility, the utility from the next shirt would be lower than the utility from this one. And it is safe to assume that pants are complements for shirts, so her marginal utility for pants would increase. However, it is possible that the purchase of a shirt has no impact on the marginal utility for pants, so F could also be a reasonable answer. Without more information, you can't be certain. 14. Utility is maximized where the Marginal rate of substitution equals the ratio of prices MRS = Px/Py. The marginal rate of substitution is defined as marginal utility of x/marginal utility of y. Letting X be burgers and Y be soft drinks we have MRS = 12/4 = 3. The ratio of prices is 2/1 = 2. Here MRS does not equal the price ratio. For this to happen he would need to consume fewer burgers and more soft drinks. The answer then is: C 15 and 16. The table isn't showing up, let me know if/when you can get it posted and i'll finish this up.

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