Page 564 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. Refer to the table provided. Assume you have $20 to spend.
1 point: Graph with “Quantity of snacks” and “Quantity of drinks” as axis labels.
Snacks (price = $4) Drinks (price = $2)
Quantity Total Utility (utils) Quantity Total Utility (utils) 1 point: Straight budget line with intercepts at 5 snacks and 0 drinks and at 0
1 15 1 12 snacks and 10 drinks.
2 25 2 21
1 point: MU = 7 utils
3 31 3 29
4 34 4 36 1 point: MU/P = 3.5 utils per dollar
5 36 5 42 1 point: Total utility is maximized when the marginal utility per dollar is equal
6 47 for all goods.
7 50
1 point: 6 drinks, 2 snacks
8 52
a. Draw a correctly labeled budget line.
2. Assume you have an income of $100. The price of good X is $5,
b. Determine the marginal utility and the marginal utility per
and the price of good Y is $20.
dollar spent on the fourth drink.
a. Draw a correctly labeled budget line with “Quantity of good
c. What is the optimal consumption rule?
X” on the horizontal axis and “Quantity of good Y” on the
d. How many drinks and snacks should you purchase to
vertical axis. Be sure to correctly label the horizontal and
maximize your total utility?
vertical intercepts.
b. With your current consumption bundle, you receive 100
Answer (6 points) utils from consuming your last unit of good X and 400 utils
from consuming your last unit of good Y. Are you
Quantity of
snacks maximizing your total utility? Explain.
c. What will happen to the total and marginal utility you
5
receive from consuming good X if you decide to consume
another unit of good X? Explain.

0 10
Quantity of drinks

Section 9 Review

Summary

1. Changes in the price of a good affect the quantity other variables. Elasticity is a general measure of respon-
consumed as a result of the substitution effect, siveness that can be used to answer such questions.
and in some cases the income effect. Most goods ab- 3. The price elasticity of demand—the percent change in
sorb only a small share of a consumer’s spending; for the quantity demanded divided by the percent change
these goods, only the substitution effect—buying less in the price (dropping the minus sign)—is a measure of
of the good that has become relatively more expensive the responsiveness of the quantity demanded to
and more of the good that has become relatively changes in the price. In practical calculations, it is usu-
cheaper—is significant. The income effect becomes ally best to use the midpoint method, which calculates
substantial when there is a change in the price of a percent changes in prices and quantities based on the
good that absorbs a large share of a consumer’s average of the initial and final values.
spending, thereby changing the purchasing power of
4. Demand can fall anywhere in the range from perfectly
the consumer’s income.
inelastic, meaning the quantity demanded is unaf-
2. Many economic questions depend on the size of con- fected by the price, to perfectly elastic, meaning there
sumer or producer responses to changes in prices or is a unique price at which consumers will buy as much

522 section 9 Behind the Demand Curve: Consumer Choice