Mr. Maurer Name: __________________________ AP Economics FRQ #3 Utility Maximization and Consumer Theory – 1. Theresa consumes both cool erasers and glow sticks. Quantity of Marginal Utility from Quantity of Marginal Utility from Cool erasers Cool erasers (utils) Glow sticks Glow sticks (utils) 1 16 1 20 2 14 2 16 3 12 3 12 4 10 4 8 5 8 5 6 6 6 6 1 from cool erasers and glow sticks. (a) The table above shows Theresa’s marginal utility (i) What is her total utility from purchasing three glow sticks? (1 pt.) (ii) weekly income is $11, the price of a cool eraser is $2, and the price of a glow stick Theresa’s is $1. What quantity of cool erasers and glow sticks will maximize if she spends her Theresa’s utility entire weekly income on cool erasers and glow sticks? Explain your answer using marginal analysis. (2 pts.) (b) Assume that the price of rubber, an input for the production of cool erasers, increases. Will demand for cool erasers increase, decrease, or not change? Explain. (1 pt.) Theresa’s (c) Suppose that income elasticity for cool erasers is 0.2. Does the value of Theresa’s Theresa’s income elasticity indicate that cool erasers are normal goods, inferior goods, substitutes, or complements? (1 pt.) (d) Suppose that when the price of glow sticks increases by 15 percent, Theresa buys 8 percent fewer glow sticks and 5 percent less of a different toy, blocks. Calculate the cross-price elasticity for glow sticks and blocks and indicate if it is positive or negative. (1 pt.)
Mr. Maurer Name: __________________________ AP Economics FRQ #3 – Utility Maximization and Consumer Theory 1. Theresa consumes both cool erasers and glow sticks. Quantity of Cool erasers Marginal Utility from Cool erasers (utils) Quantity of Glow sticks Marginal Utility from Glow sticks (utils) 1 16 1 20 2 14 2 16 3 12 3 12 4 10 4 8 5 8 5 6 6 6 6 1 (a) The table above shows Theresa’s marginal utility from cool erasers and glow sticks. (i) What is her total utility from purchasing three glow sticks? (1 pt.) (ii) Theresa’s weekly income is $11, the price of a cool eraser is $2, and the price of a glow stick is $1. What quantity of cool erasers and glow sticks will maximize Theresa’s utility if she spends her entire weekly income on cool erasers and glow sticks? Explain your answer using marginal analysis. (2 pts.) (b) Assume that the price of rubber, an input for the production of cool erasers, increases. Will Theresa’s demand for cool erasers increase, decrease, or not change? Explain. (1 pt.) (c) Suppose that Theresa’s income elasticity for cool erasers is 0.2. Does the value of Theresa’s income elasticity indicate that cool erasers are normal goods, inferior goods, substitutes, or complements? (1 pt.) (d) Suppose that when the price of glow sticks increases by 15 percent, Theresa buys 8 percent fewer glow sticks and 5 percent less of a different toy, blocks. Calculate the cross-price elasticity for glow sticks and blocks and indicate if it is positive or negative. (1 pt.)
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