1.

The notion of utility is an ‘‘ordinal’’ one for which it is assumed that people can
rank combinations of goods as to their desirability, but that they cannot assign a
unique numerical (cardinal) scale for the goods that quantifies ‘‘how much’’ one
combination is preferred to another. For each of the following ranking systems,
describe whether an ordinal or cardinal ranking is being used: (a) military or
academic ranks; (b) prices of vintage wines; (c) rankings of vintage wines by the
French Wine Society; (d) press rankings of the ‘‘Top Ten’’ football teams; (e)
results of the U.S. Open Golf Championships (in which players are ranked by
the number of strokes they take); (f) results of the U.S. Open Tennis
Championships (which were conducted using a draw that matches players
against one another until a final winner is found)
Solution:
a) Military or academic ranks are ordinal, these can be ordered from the lowest
to highest as: officer, lieutenant, captain, najor, colonel, general
b) Prices of vintage wines is cardinal
c) Rankings of vintage wines by the French Wine Society is ordinal
d) Press rankings of the ‘‘Top Ten’’ football teams is ordinal
e) Results of the U.S. Open Golf Championships (in which players are ranked
by the number of strokes they take) is cardinal
f) Results of the U.S. Open Tennis Championships (which were conducted using
a draw that matches players against one another until a final winner is found)
is ordinal

2. How might you draw an indifference curve map that illustrates the following
ideas?
a. Margarine is just as good as the high-priced spread.
b. Things go better with Coke.
c. A day without wine is like a day without sunshine.
d. Popcorn is addictive the more you eat, the more you want.
e. It takes two to tango.
Solution:

3. Inez reports that an extra banana would increase her utility by two units and an
extra pear would increase her utility by six units. What is her MRS of bananas
for pears—that is, how many bananas would she voluntarily give up to get an
extra pear? Would Philip (who reports that an extra banana yields 100 units of
utility whereas an extra pear yields 400 units of utility) be willing to trade a pear
to Inez at her voluntary MRS?

Solution:

4. Oscar consumes two goods, wine and cheese. His weekly income is $500.
a. Describe Oscar’s budget constraints under the following conditions:
●
Wine costs $10/bottle, cheese costs $5/ pound;
●
Wine costs $10/bottle, cheese costs $10/ pound;
●
Wine costs $20/bottle, cheese costs $10/ pound;
Wine costs $20/bottle, cheese costs $10/ pound, but Oscar’s income increases to
●
$1,000/week.
b. What can you conclude by comparing the first and the last of these budget
constraints?

Solution:

5. While standing in line to buy popcorn at your favorite theater, you hear someone
behind you say, ‘‘This popcorn isn’t worth its price—I’m not buying any.’’ How
would you graph this person’s situation?

Solution:

6. A careful reader of this book will have read foot- note 2 and footnote 5 in this
chapter. Explain why these can be summarized by the commonsense idea that a
person is maximizing his or her utility only if getting an extra dollar to spend
would provide the same amount of extra utility no matter which good he or she
chooses to spend it on. (Hint: Suppose this condition were not true—is utility as
large as possible?)
Solution:
7. Most states require that you purchase automobile insurance when
you buy a car. Use an indifference curve diagram to show that
this mandate reduces utility for some people. What kinds of
people are most likely to have their utility reduced by such a
law? Why do you think that the government requires such
insurance?
Solution

8. Two students studying microeconomics are trying to understand

why the tangent condition studied in this chapter means utility is
at a maximum. Let’s listen:
Student A. If a person chooses a point on his or her budget
constraint that is not tangent, it is clear that he or she can manage
to get a higher utility by spending differently.
Student B. I don’t get it—how do you know he or she can do
better instead of worse?
How can you help out Student B with a graph?
9. Suppose that an electric company charges consu- mers $.10 per kilowatt hour
for electricity for the first 1,000 used in a month but $.15 for each extra kilowatt
hour after that. Draw the budget con- straint for a consumer facing this price
schedule, and discuss why many individuals may choose to consume exactly
1,000 kilowatt hours.
10. Suppose an individual consumes three items: steak, lettuce, and tomatoes. If
we were interested only in examining this person’s steak purchases, we might
group lettuce and tomatoes into a single composite good called ‘‘salad.’’
Suppose also that this person always makes salad by combining two units of
lettuce with one unit of tomato.
a. How would you define a unit of ‘‘salad’’ to show (along with
steak) on a two-good graph?
b. How does the price of salad (PS) relate to the price of lettuce
(PL) and the price of tomatoes (PT)?
c. What is this person’s budget constraint for steak and salad?
d. Would a doubling of the price of steak, the price of lettuce,
the price of tomatoes, and this person’s income shift the
 budget constraint described in part c?
e. Suppose instead that the way in which this person made salad
depended on the relative prices of lettuce and tomatoes. Now
could you express this person’s choice problem as involving
only two goods? Explain