Question

In: Economics

22. There is a logical link between the law of demand and the assumption that individuals...

22. There is a logical link between the law of demand and the assumption that individuals seek to maximize utility. Which of the following explains that? a. The condition for consumer equilibrium can be used to express the inverse relationship between price and quantity demanded. b. People are naturally buyers and always think of how they can gain something from nothing c. People buy goods to make them more satisfied and are disappointed when they are not d. None of the above

23. Which of the following is an example of the diamond and water paradox. Keep in mind that the good with the greater value in use has a lower value in exchange than does the good with the lower value in use. a. A dress that was worn by Judy Garland in The Wizard of Oz and peanuts b. A handwritten letter by Dr. Martin Luther King Jr. and rice c. The Shroud of Turin and raisins d. All of the above

24. If the utilities of good x are 10, 19, 26, 32, and 36 utils, respectively, what is the marginal utility of the third unit? a. 5 utils b. 7 utils c. 8 utils d. 36 utils

25. The endowment effect describes: a. The notion that people value things that they do not have at a higher rate than things that they want to acquire. b. The notion that people value things that they have at a higher rate than things that they want to acquire c. The effect that occurs when people begin to compare the way that they feel about purchasing something to the way someone else feels. d. The effect that people believe that they deserve to have something more than someone else does.

26. Indifference curves: a. Are downward sloping b. Are convex to the origin c. Do not cross d. All of the above

27. A demand curve can be derived using: a. The marginal utility of demand theory b. Indifference curve analysis c. Budget analysis d.

Solutions

Expert Solution

22. The law of demand states the inverse relationship between price of a good and its quantity demanded. Utility maximization problem gives us a bundle tht maximizes consumer's utility given the budget constraints. Combining the above two statements, we find that A is the logical answer. We reject B because consumers do not gain from nothing. They pay the price for goods. C is rejected because we do not know about disappointments. D is rejected because A makes sense.

23. D. All the examples compare and give contradictions of two goods, one that is important for survival to a good that is very expensive, but not essential. Hence D.

24.Marginal utility of third unit = 26 -19 = 7 utils. Hence B.

25. The endowment effect is attributed by the tendency of people to value what they have at a higher rate. This is described by B. We reject A because it is opposite of endowment effect. C is irrelevant. D is ruled out because the effect does not say anything about deserving.

26. Indiference curves are downward sloping because of falling marginal rate of substitution. They are convex to the origin and do not cross because each curve is associated with a unique level of utlity. Hence D.

27. Question incomplete


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