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Chapter 6: 2QQ (page 133)

Marge buys pizza for \(10 and Pepsi for \)2. She has income of \(200. Her budget constraint will experience a parallel outward shift if.

a. the price of pizza falls to \)5, the price of Pepsi falls to \(1 and her income falls to 100.

b. the price of pizza rises to \)20, the price of Pepsi rises to \(4 and her income remains the same.

c. the price of pizza falls to \)8, the price of Pepsi falls to \(1 and her income rises to \)240.

d. the price of pizza rises to 20, the price of Pepsi rises to \(4 and her income rises to \)500.

Short Answer

Expert verified

The correct answer is option d) the price of pizza rises to 20, the price of Pepsi rises to $4, and her income rises to $500.

Step by step solution

01

Explanation for the correct answer

When the income increases to a considerably high level and the rise in the price of other commodities don’t rise that much, it won’t much affect the individual's budget constraint. In the present scenario, the income has increased more than double, and the price of commodities hasn’t increased that much.

The price of the pizza has only risen nearly 50% and Pepsi by $2. But the income has increased more than double. So it will result in a parallel outward shift in budget constraint.

02

Explanation for incorrect options

  • In option a, there is a fall in both the income and price of commodities. So a parallel outward shift won’t occur in this case. The budget constraint will shift inside.

  • In option b, there is only a rise in the price of commodities, and income remains the same. So there is a chance of inward shift.

  • In option c, there is a fall in the price of commodities and a rise in income. But the rise in income is only minimal. So there will be an outward shift, but only to a minimum extend, but that would not be a parallel shift.

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Most popular questions from this chapter

Homer buys pizza for \(10 and Pepsi for \)2. He has income of \(100. His budget constraint will shift inward if.

a. the price of pizza rises to \)12.

b. the price of Pepsi falls to \(1

c. his income rises to \)150

d. the price of pizza, the price of Pepsi and his income all rise by 50 percent.

Maggie buys peanut butter and jelly, both of which are normal goods. When the price of peanut butter rises, the income effect induces Maggie to buy ___peanut butter and ___ jelly.

a. more; more

b. more; less

c. less; more

d. less; less

If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?

The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in the marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla’s utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers
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