Suppose a consumer is at an optimum, consuming 6 hamburgers a week at a price of $1.50 each and 10 donuts a week at 50 cents a donut. If the price of a hamburger increases to $2.00, what will the consumer do to arrive at a new equilibrium? Why?
What will be an ideal response?
At the equilibrium, the MU of the last dollar spent on both goods is equal. After the price of a hamburger increases, the MU of the last dollar spent on hamburger is less than the MU of the last dollar spent on donuts. Either the MU of hamburger must increase or the MU of a donut must decrease. The latter cannot happen because the consumer cannot afford to buy more donuts. Therefore, the consumer must buy fewer hamburgers. Given the principle of diminishing marginal utility, MU will increase and a new equilibrium can be established.
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Indicate whether the statement is true or false
When income taxes are included in the basic macroeconomic model, the value of the
a. inflationary effect is increased. b. multiplier is increased. c. multiplier is decreased. d. expenditure function is increased.
If demand is highly inelastic and supply shifts to the right, price:
A. hardly changes at all; quantity will rise significantly. B. will rise significantly as will quantity. C. will rise significantly; quantity hardly changes at all. D. will fall significantly; quantity hardly changes at all.
Which of the following is not one of the three basic situations in which regulation is imposed?
A. price fixing B. natural monopoly C. externalities D. imperfect information