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ECON 101 4 5 Kreider Vmwhite Worksheet 20

This document contains an economics study guide that defines key terms and presents sample budget problems and utility maximization questions. It provides definitions for relative price, utility, marginal utility, law of diminishing marginal utility, substitution effect, and income effect. It then presents three sample budget line problems where the price of goods and income levels change. Finally, it presents two utility maximization problems where a consumer must choose an optimal combination of goods given prices and a budget.

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42 views1 page

ECON 101 4 5 Kreider Vmwhite Worksheet 20

This document contains an economics study guide that defines key terms and presents sample budget problems and utility maximization questions. It provides definitions for relative price, utility, marginal utility, law of diminishing marginal utility, substitution effect, and income effect. It then presents three sample budget line problems where the price of goods and income levels change. Finally, it presents two utility maximization problems where a consumer must choose an optimal combination of goods given prices and a budget.

Uploaded by

Mr Nkya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Leader: Veronica

Chapter 6 Course: Econ 101


Supplemental Instruction
Instructor: Kreider
Iowa State University
Date: 10-14-14
1. Define:
a. relative price:
b. utility:
c. Marginal Utility:
d. law of diminishing marginal utility
e. substitution effect:
f. income effect:
g. behavioral economics:
1. Parvez, a pharmacology student, has allocated $120 per month to spend on paperback novels
and hamburgers at his favorite burger joint. Novels cost $8 each; hamburgers cost $6 each.
On another piece of paper, draw his budget line.
a. Draw and label a second budget that shows what happens when the price of a
hamburger rises to $10.
b. Draw and label a third budget line that shows what happens when the price of a
hamburger rises to $10 and Parvez’s income rises to $240.
c. Draw and label a third budget line that shows what happens when the price of a
hamburger rises to $10, the price of novels decrease to $5, and Parvez’s income
decreases to $80.
2. Now go back to the original assumptions of problem 1 (novels cost $8, hamburgers cost $6,
and income is $120). Suppose that Parvez is spending $120 monthly on paperback novels
and hamburgers. For novels, MU/P = 5; for hamburgers, MU/P = 4.
a. Is he maximizing his utility? If not, how could he?

b. What if the price of hamburgers was $10 and his MU/P stay the same?

3. Anita consumes both pizza and Pepsi. The following tables show the amount of utility she
obtains from different amounts of these two goods per week:
Pizza Pepsi
Quantity Utility Quantity Utility
4 slices 115 5 cans 63
5 slices 135 6 cans 75
6 slices 154 7 cans 86
7 slices 171 8 cans 96

a. Suppose Pepsi costs $1 per can, pizza costs $2 per slice, and Anita has $18 to spend
on those two goods each week. What combination of pizza and Pepsi will maximize
her utility?

b. What if Peps costs $2 per can, pizza costs $3 per slice and Anita has $24 dollars?

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