Question

18. Carla purchased cupcakes and milk until the marginal utility per dollar spent was equal for both goods. If the price of the cupcakes was $3 and the price of milk was $1.50, then: A) the marginal utility of cupcakes is two times the marginal utility of milk. B) the marginal utility of milk is two times the marginal utility of cupcakes. C) the marginal utility of both goods are equal. D) milk has a positive marginal utility, and cupcakes have a negative marginal utility. 19. Mehmet and Semra went to a movie. They were both bored with the movie, and Semra wanted to leave. Mehmet didn't want to leave because they had paid so much for their tickets, which would be wasted if they left before the movie was over. What psychological factor associated with behavioral economics explains Mehmet's behavior? A) a framing bias B) a sunk cost fallacy C) overconfidence D) altruism 20. Facing budget cuts, the Pentagon announced its decision to close a local army base. The congressman from the district in which the base was located argued against closing the base, saying the $1.3 billion dollars spent to build it would be wasted if it was closed. This argument is an example of: A) a framing bias. B) altruism. C) a sunk cost fallacy. D) overconfidence. 21. Which of the following expressions warns against incorporating sunk costs into present and future decisions? A) "You can't have your cake and eat it too." B) “Let well enough alone." C) "Don't cry over spilt milk." D) “An ounce of prevention is worth a pound of cure." 22. Bayram had the opportunity to choose between two investments. The first investment was described as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment, because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, which implies Bayram is subject to: A) a framing bias. B) overvaluing the present relative to the future. C) overconfidence. D) a sunk cost fallacy.

Answer 1

18. It is given that:

$\fn_phv \frac{MU_{C}}{P^{_{C}}}=\frac{MU_{M}}{P^{_{M}}}$

Here,

MU_{​​​​​C}​ is the marginal utility of cupcakes.

MU_{​​​​​M} is the marginal utility of milk.

P_{​​​​​​M} is the price of milk.

P_{​​​​​​C} is the price of cupcakes.

Given: P_{​​​​​​C} = $3 and P_{​​​​​​M} = $1.50

Putting the values:

$\fn_phv \frac{MU_{C}}{3}=\frac{MU_{M}}{1.50}$

$\fn_phv MU_{C}=\frac{3MU_{M}}{1.50}$

$\fn_phv MU_{C}=2MU_{M}$

Therefore, the marginal utility of cupcakes is two times the marginal utility of milk. So, option 'a' is correct.