Test Prep For AP® Courses
Consider the table below, which provides information about the marginal utility ice cream and coffee for a consumer. The price of ice cream is $2, and the price of coffee is $1. Answer the following questions based on the information in this table.
|Quantity||MU (ice cream)||MU/P (ice cream)||MU (coffee)||MU/P (coffee)|
- Calculate and fill in the information for MU/P for both ice cream and coffee.
- Suppose this consumer has $9 and spends $6 on ice cream (three cones) and $3 on coffee (three cups). Are they maximizing their utility? If so, explain why. If not, explain how they can adjust their consumption decisions to maximize their utility.
- Suppose instead that this consumer spends their $9 on two ice cream cones and five cups of coffee. Are they maximizing their utility? If so, explain why. If not, explain how they can adjust their consumption decisions to maximize their utility.
- Why does the marginal utility of consuming ice cream and coffee decline as more are consumed? What principle or law explains this process?
When a worker’s wage increases, after a certain point, they will want to spend more time on leisure activities. This decision is known as the ____________.
- normal good
- income effect
- substitution effect
- wealth effect
- labor supply curve
The model of intertemporal choice can be used to explain which of the following?
- Workers might choose to start working less if their wage becomes very high.
- As a worker’s income increases, demand for most goods increases as well.
- Inflation harms lenders by reducing the purchasing power of the money they loan out.
- People balance present consumption with future consumption based on the rate of return they earn on their savings.
- People smooth their consumption decisions over the very long run.