Bounded rationality suggests that A) individuals might make “incorrect” decisions because they are unable to consider all possible options. B) individuals would rather have less choice to more choice. C) rational decisions can only be made when choices are restricted. D) individuals are happier when their choices are restricted or “bounded.” ANSWER A
Lisa consumes only pizzas (P) and burritos (B). Her utility function is U = P0.5 B0.5. The price of per pizza is $10 and the price per burrito is $5. In equilibrium, Lisa consumes 4 pizzas. Using Lisa’s utility function, calculate how many burritos she consumes. What will be an ideal response? ANSWER The […]
In behavioral economics, salience is best exemplified by A) consumers responding differently when posted prices increase rather than when prices increase because of sales tax increases. B) consumers responding the same regardless of how prices change. C) the end of a controlled experiment. D) consumers responding differently when income increases permanently rather than temporarily. […]
If income increases due to a decrease in taxes, then A) utility will increase because consumers can afford a larger bundle of goods. B) utility will fall because consumers will be forced to buy a smaller bundle of goods. C) utility will remain constant. D) utility will increase because consumers will be forced to buy […]
Data shows that United States college students purchase more e-books than German college students. Assuming that all students have identical preferences for e-books and textbooks, what is the likely explanation for this result? A) Taxes on textbooks are higher in the United States than taxes on textbooks in Germany. B) Taxes on textbooks are lower […]
One reason more sport utility vehicles (SUVs) are driven in the United States than in Europe is A) different marginal rates of substitution. B) different marginal rates of transformation. C) the United States hasn’t had a recession since 2000-2001. D) Either A or B ANSWER D
Cash may be preferred to food stamps because additional cash A) rotates the budget constraint. B) shifts out the budget constraint at every point. C) provides a smaller opportunity set. D) allows the purchase of more food. ANSWER B
People derive utility in their lives from consuming goods (all other goods), g, and clean air (measured as the number of particulates removed per m3), a, as measured with the utility function U(g,a) = g0.6a0.4. The price index of consumer goods equals $20 per day. Income equals $1000. What is likely to happen to the […]
Those who criticize individuals who choose to drive a relatively inefficient sport utility vehicle (SUV) might mistakenly A) assume everyone faces the same relative prices. B) assume everyone has the same preference set. C) assume everyone has the same budget constraint. D) All of the above. ANSWER D
Robinson Crusoe is stranded on an island. He finds that coconuts are freely available (zero harvest cost), but fish are difficult to harvest and require a lot of energy. As a result, harvesting fish has a high price. If coconuts and fish are imperfect substitutes, what is Robinson Crusoe likely to consume? A) He will […]
