Question

Tell whether the following statements are true or false. 11. If it costs $6.00 to go to the movies and $25.00 to go to a hockey game, Tom is maximizing his utility between movies and hockey if his marginal utility of movies is 12 units and his marginal utility from hockey is 25. 12. When Tom's income increases, his demand curve for Mountain Dew shifts rightward because the higher income increases his marginal utility of Mountain Dew. 13. To draw your budget line between steak and lobster, all you need to know is your income. 14. When your budget line is just tangent to your indifference curve, you are at your best affordable point.

Answer 1

11. FALSE.

Compare marginal utility per dollar for the two goods. This implies we have MU/P for movies = 12/6 = 2 and the same for hockey game = 25/25 = 1. Since MU/P for movies > MU/P for hockey game, the current bundle is not utility maximizing and Tom should see more movies to increase total utility.

12. FALSE

When Tom's income increases, his demand curve for Mountain Dew shifts rightward because the higher income allows Tom to buy more of a normal good and less of an inferior good. In this case Mountain dew is a normal good so its demand is increased.

13. FALSE

To draw your budget line between steak and lobster, you need to know your income and the prices of steak and lobster.

14. TRUE

When your budget line is just tangent to your indifference curve, you are at your best affordable point because the slope of the budget line is equal to the slope of the indifference curve