1. A thirsty individual would be willing to play more for the first glass of water than for the third.

2. Most individuals consume only one copy of a particular newspaper each day because a second copy has little value.

3. If Judie was given 50 candy bars it is unlikely that she would eat all of them in a day because once she consumes more than a few she receives less additional satisfaction from them.

4. When consumers receive an increase in their income, they spend less money on inferior goods

5. (A) and (D)

The law of the diminishing marginal utility states that next unit of a good increases utility by less than the previous one thus has smaller value to consumer. Example D refers to different effects arising from the situation when consumer have to make choice given limited resources.

Answer the next two questions on the basis of the following table:

Bottles of soda (per week)	Marginal Utility	Bottles of Wine (per week)	Marginal Utility
1 2 3 4 5 6	34 20 14 12 10 8	1 2 3 4 5 6	120 80 25 10 5 2

28. For the individual whose marginal utility schedules are presented above a combination of two bottles of soda and three bottles of wine results in a level of total utility equal to 540. What will total utility be if the individual consumes four bottles of soda and three bottles of wine?

1. 554

2. 552

3. 566

4. 600

5. impossible to determine

U (2 bottles of soda and 3 bottles of Wine) = 540

MU (3^rd bottle of soda) = 14

MU (4^th bottle of soda) = 12

Consequently

U (4 bottles of soda and 3 bottles of Wine) = 540 + 14 + 12 = 566

29. Suppose the consumer consumes two goods: pepsi and sandwiches. An increase in the price of a sandwich will:

A) Increase consumption of pepsi if the income effect dominates the substitution effect.

B) Increase consumption of pepsi if the substitution effect dominates the income effect.

C) Increase consumption of sandwiches if the income effect dominates the substitution effect.

D) Increase consumption of sandwiches if the substitution effect dominates the income effect.

E) More than one answer is correct.

Correct answers are B and C

B) If pepsi is a normal good then the substitution effect will increase consumption of pepsi while income effect will decrease consumption of pepsi. If substitution effect dominates then consumption of pepsi will increase

C) If sandwiches is a Giffen good then substitution effect decreases consumption of sandwiches, but income effect increases it (because sandwiches is an inferior good). So if income effect dominates substitution effect in this case then consumption of sandwiches must increase

30. The slope of a budget constraint line reflects:

1. the ratio of the marginal utility of the good on the horizontal axis to that of the good on the vertical axis

2. the total amount of income that the individual has to spend

3. the principle of diminishing returns

4. The ratio of the price of the good listed on the horizontal axis to that of the good on the vertical axis

5. none of the above

It could be shown using simple formal derivation.

The budget constraint is defined by the equation:

Px*X + Py*Y = I => Y = I/Py - Px/Py * X

So the slope of the budget line in X-Y axes is – Px/Py

31. In the diagram above, the budget constraint line rotates from AB to AC. As a result, the consumer moves from point X on indifference curve I to point Y on indifference curve II. This illustrates the following: