Chapter 5 & 6

Consumer Surplus (CS)

What the consumer would be willing to pay minus what they actually pay. Total Value - Total Expenditure = CS

When demand is elastic:

a price increase causes total revenue to fall.

A box of corn flakes cereal is likely to be

very price elastic, since there are many close substitutes available

After a $25 million ad campaign, Coca-Cola measured its effectiveness by calculating the cross-elasticity of demand between Coke and Pepsi. A successful campaign would be indicated if the cross-elasticity went from _____. - (-0.9 to -1.5.) - (0.9 to 0.5.) - (0.9 to 1.5.) - (-0.5 to -0.2.)

- (0.9 to 0.5.)

If elasticity of demand for cigs is 0.4, then an increase in the price of a pack of cigs from $1.00 to $1.30 would reduce quantities demanded by about

12 Percent

Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her marginal utility is equal to A. $.50, the value of her last cup of coffee. B. $1.00, the value of her first cup of coffee. C. $2.25. D. $1.50.

A. $.50, the value of her last cup of coffee.

When the price of a commodity rises, we can expect (example: Coffee) A. marginal utility of the last unit purchased will rise. B. marginal utility of the last unit purchased will fall. C. marginal utility of the last unit purchased will be unaffected. D. purchases to rise because of the increased marginal utility.

A. marginal utility of the last unit purchased will rise.

Gwen's decision to buy a new television instead of a bicycle for the same price A. means that the opportunity cost to Gwen is the bicycle that she has given up. B. would not imply a trade-off because of scarcity if Gwen were a multimillionaire. C. means that opportunity cost is zero since both cost the same amount. D. would not have involved trade-off and opportunity cost if Gwen had decided to put the money in a bank CD instead.

A. means that the opportunity cost to Gwen is the bicycle that she has given up.

A well-known women's college whose tuition lagged below similar schools found recruiting difficult and enrollment falling. A substantial tuition increase was effected, and dormitories were soon full again. This can be explained by A. the fact that people sometimes base perceptions of quality on price. B. demand was elastic. C. the law of demand. D. the fact that education at the school was an inferior good.

A. the fact that people sometimes base perceptions of quality on price.

Along a perfectly elastic demand curve, _____. -the price elasticity of demand is infinite. -consumer purchases will not respond at all to a reduction in price. -the slope is always zero. -All of the other answers are correct.

All of the other answers are correct.

Suppose that Joan, the only consumer of pork, has a downward-sloping demand curve for pork and faces an upward-sloping supply curve. If her demand curve shifts out because she develops a craving for pork, then at the new equilibrium (everything else equal), A. Joan's marginal utility from every unit of pork she eats will be higher than before. B. All of the other answers are correct. C. Joan's real income will be lower than before. D. the price of pork relative to other goods will be higher than before.

B. All of the other answers are correct.

The marginal utility to Juan of sleeping an extra hour (from 8 a.m. to 9 a.m.) is negative. A. Juan's average utility from every hour he sleeps must be negative. B. Juan is better off getting up at 8 a.m. C. Juan is better off getting up at 9 a.m. D. Juan's total utility from sleeping must be negative.

B. Juan is better off getting up at 8 a.m.

A consumer has five pounds of bananas and values their total utility at $2.14. If one additional pound is acquired and marginal utility is 11 cents, total utility will A. stay the same. B. fall to $2.11. C. rise to $2.25. D. fall to $2.03.

C. rise to $2.25.

Robinson's marginal utility from 0, 1, 2, 3, and 4 coconuts is as follows: $0, $2.00, $1.88, $1.60, and $1.30. Robinson's total utility from having two coconuts is ______. A. Cannot be determined from the information given. B. $1.87. C. $1.66. D. $3.88.

D. $3.88.

Market demand curves are found by A. summing individual demand curves in a parallel fashion. B. vertically summing individual demand curves. C. adding the slopes of individual demand curves. D. horizontally summing individual demand curves.

D. horizontally summing individual demand curves.

Consumer's surplus can be written as A. marginal expenditure - marginal utility. B. marginal utility - marginal expenditure. C. total expenditure - total utility. D. total utility - total expenditure.

D. total utility - total expenditure.

If the price of gasoline rises by 20% and consumption of gasoline falls 5%

Demand is inelastic

What is the difference between a product that is elastic and one that is inelastic.

Elastic: very responsive to a change in price Inelastic: not so responsive to change in price

Even if all individual demand curves are downward sloping, the market demand curve may slope upward.

False

True or False If a product constitutes a large portion of a consumer's income, demand will be more inelastic.

False

True or False As a price change persists over a long period of time, we should expect the demand elasticity to fall

False

True or False As a price change persists over a long period of time, we should expect the demand elasticity to fall.

False

True or False Scarcity raises price and total utility but generally reduces marginal utility.

False

True or False Necessities such as food and shelter have an inelastic demand.

TRUE

What does the consumer surplus look like on a graph?

The area between the marginal value of the good and the price.

The law of diminishing marginal utility is consistent with the consumer behavior that produces a negatively sloped demand curve

True

True or False A demand curve with an elasticity of 1.0 is a unit-elastic demand curve.

True

True or False A horizontal demand curve is perfectly elastic because a change in price will induce an infinite change in quantity demanded.

True

True or False Scarcity raises both price and marginal utility but generally reduces total utility.

True

True or False Total utility increases if one more unit of a product is purchased and marginal utility is positive

True

True or False Most goods have downward-sloping demand curves

True

If the price of a cup of coffee increases by 50 percent, the quantity demanded decreases by 50 percent. The price elasticity of demand is:

Unit elastic

The price elasticity of a horizontal demand curve is always a. infinitely large. b. zero. c. one. d. increasing as price increases.

a. infinitely large

A craze for apples in Riverside increases the quantity demanded at every price by 5 bushels. Between any two prices, the new demand curve will be _______ the old demand curve. -equal in elasticity to -more elastic than -less elastic than -More information is needed to predict the relationship.

less elastic than

The price elasticity of new automobile purchases is about 1.2. This implies that an increase of $1,000 on a $10,000 automobile will _____. -reduce the number of autos sold by 12%. -reduce the number of autos sold by 1.2%. -increase consumer expenditures on autos by 12%. -increase the consumer expenditures on autos by 1.2%.

reduce the number of autos sold by 12%.

When Johanna cut prices in her jewelry store by 20%, the dollar value of her sales fell by 20%. This indicates that _____. -demand was inelastic. -the demand curve was vertical. -demand was unit elastic. -demand was elastic.

the demand curve was vertical.

Along the inelastic portion of a demand curve, _____. -the change in price will always be more than the change in quantity demanded. -the percentage change in price will be less than the percentage change in quantity demanded. -the change in price will always be less than the change in quantity demanded. -the percentage change in price will be more than the percentage change in quantity demanded.

the percentage change in price will be more than the percentage change in quantity demanded.