Exam 2 chapter 5
Refer to the table above. If there is a sixth unit that Jenny consumes, and the marginal benefit derived from that unit is -1, the total benefit derived when the sixth unit has been consumed is: A) $0. B) $3. C) $29. D) $39.
$29
Define a budget set. Is it the same as a budget constraint?
A budget set is the set of all possible bundles of goods and services that a consumer can purchase with his income. It is not the same as a budget constraint. A budget constraint represents the combination of goods and services a consumer can purchase that exactly exhaust his income.
How does a decrease in the price of one good affect a consumerʹs budget constraint? How is the effect different from a decrease in the consumerʹs income?
A decrease in the price of one good causes the budget constraint to pivot rightward along the axis that measures the quantity of the good in question. This is because the consumerʹs endowment can buy more units of a good when the price falls. The slope of the budget constraint also changes because the opportunity cost changes when the price of a good falls. In case of a decrease in the consumerʹs income, the budget constraint shifts to the left. The slope will not change as the opportunity cost does not change with a change in income.
Differentiate between the income effect and the substitution effect of a fall in the price of a good.
A fall in the price of a good makes consumers feel wealthier, which allows them to consume more of all goods. This is referred to as the income effect of a price fall and is represented by a movement to a higher indifference curve. Also, when the price of a good falls, the good becomes relatively cheaper compared to other goods. As such, consumers have a tendency to substitute other goods with this good. This is referred to as the substitution effect and it is represented by a movement along the original indifference curve.
Refer to the figure above. What is the absolute value of the arc elasticity of demand when the price decreases from $5 to $2? A) 0.64 B) 1.25 C) 1.75 D) 2
A) 0.64
Refer to the figure above. What is the absolute value of the arc elasticity of demand when the price falls from $8 to $4? A) 2 B) 4 C) 8 D) 10
A) 2
Sharon consumes 10 chocolates when the price of one chocolate is $2. If her arc elasticity of demand for chocolates is -1, she consumes ________ chocolates when the price increases to $4. A) 5 B) 6 C) 8 D) 9
A) 5
Which of the following goods is likely to have the lowest price elasticity of demand? A) Life-saving drugs B) Potato chips C) Chocolates D) Decorative flowers
A) Life-saving drugs
Which of the following pairs of goods has a negative cross‐price elasticity? A) Pens and paper notebooks B) Nokia and Samsung cell phones C) Compact Disks (CDs) and electronic music files D) Motorcycles and typewriters
A) Pens and paper notebooks
Refer to the figure above. Which of the following statements is true? A) The opportunity cost of buying one chair is 5 tables. B) The price of tables is more than the price of chairs. C) The opportunity cost of tables increases as more tables are bought. D) The opportunity cost of buying one table is 7 chairs.
A) The opportunity cost of buying one chair is 5 tables.
A change in the slope of a budget constraint indicates: A) a change in the price of either good that causes a change in the opportunity cost. B) a change in the consumerʹs income. C) a change in the price of either good without a change in the opportunity cost. D) a change in the consumerʹs tastes and preferences.
A) a change in the price of either good that causes a change in the opportunity cost.
In a perfectly competitive market, all consumers: A) are price takers. B) are price makers. C) have exactly the same demand schedules. D) have exactly the same tastes and preferences.
A) are price takers.
While making a purchase decision using marginal thinking, a buyer should buy the good that yields the: A) highest marginal benefit per dollar spent. B) lowest marginal benefit per dollar spent. C) highest average benefit plus marginal benefit per dollar spent. D) lowest average benefit plus marginal benefit per dollar spent
A) highest marginal benefit per dollar spent.
As a consumer spends a larger share of his income on a particular good, the price elasticity of demand for that good: A) increases. B) decreases. C) initially decreases then increases. D) remains the same.
A) increases
Higher price elasticity of demand means that a consumerʹs demand is: A) more responsive to price changes. B) less responsive to price changes. C) less responsive to income changes. D) more responsive to income changes.
A) more responsive to price changes.
A substitution effect of a price change is represented by: A) movement along the same indifference curve. B) movement to a different indifference curve. C) a change in the initial budget line to a new budget line. D) a change in the slope of the initial budget line.
A) movement along the same indifference curve.
If the value of price elasticity of demand for a good is equal to ʺ∞ʺ, it implies that the good has a ________ demand. A) perfectly elastic B) perfectly inelastic C) unit elastic D) relatively inelastic
A) perfectly elastic
If quantity of tea is measured on the horizontal axis and quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause the budget constraint to: A) pivot leftward along the vertical axis. B) pivot rightward along the vertical axis. C) pivot leftward along the horizontal axis. D) pivot rightward along the horizontal axis.
A) pivot leftward along the vertical axis.
Refer to the scenario above. After the implementation of the tax, Thomasʹs expenditure on wine will: A) remain the same. B) increase by $50. C) decrease by $50. D) increase by $100
A) remain the same.
Negative values of the price elasticity of demand of a good can be attributed to: A) the Law of Demand. B) the Law of Supply. C) the Law of Increasing Marginal Utility. D) the Law of Diminishing Marginal Rate of Substitution.
A) the Law of Demand.
Assume that an individual spends his income on sweaters and shirts. If the price of a sweater increases: A) the opportunity cost of buying sweaters increases. B) the opportunity cost of buying sweaters decreases. C) the opportunity cost of buying shirts increases. D) There is no change in the opportunity cost of consuming either good
A) the opportunity cost of buying sweaters increases.
For a given level of total utility, ________. A) there is exactly one indifference curve B) there are exactly two indifference curves C) there are exactly three indifference curves D) there are exactly four indifference curves
A) there is exactly one indifference curve
In a set of indifference curves, why do the indifference curves that lie to the right represent higher levels of utility?
An indifference curve represents the different bundles of goods and services that provide a buyer with the same level of utility. Compared to any indifference curve, an indifference curve on the right represents bundles that consist of more of either or both goods and no less of either good than the indifference curve on the left. Hence, it allows for a higher level of consumption and represents a higher level of utility
Refer to the table above. What is the marginal benefit that Jenny derives from the fifth unit? A) $0 B) $1 C) $6 D) $30
B) $1
Refer to the figure above. What is the market-wide consumer surplus when the market price of wine is $18? A) $36,000 B) $3,000 C) $45,000 D) $210,000
B) $3,000
When the price of one pen is $1.50 notebooks are demanded. When the price per pen increases to $5, the number of notebooks demanded decreases to 30. What is the cross-price elasticity of demand between the two goods using the arc method? A) 0.1 B) -0.375 C) 3 D) -3
B) -0.375
When the price of milk is $3 per bottle, Steve purchases 20 bottles of milk. When the price increases to $6, Steveʹs consumption falls to 15 bottles. Steveʹs arc elasticity of demand for milk is: A) -0.25. B) -0.43. C) -0.50. D) -0.75.
B) -0.43.
Gary consumes 10,000 units of electricity when his income is $500. When his income increases to $1,000, his consumption of electricity increases to 18,000 units. What is Garyʹs income elasticity of demand for electricity? A) 0.5 B) 0.8 C) 1.8 D) 2
B) 0.8
When the price of margarine is $2 per unit, 10 units of butter are demanded. When the price of margarine increases to $6 per unit, 30 units of butter are demanded. What is the cross-price elasticity between the two goods? A) -1 B) 1 C) 2 D) 5
B) 1
Refer to the scenario above. Instead of the price increase, if there is a fall in price from $6 to $4, the absolute value of Garyʹs arc elasticity of demand for shirts is: A) 1.2. B) 2.14. C) 4. D) 5.
B) 2.14
Refer to the scenario above. What is the absolute value of Garyʹs arc elasticity of demand for shirts? A) 1.2 B) 2.14 C) 3.26 D) 5
B) 2.14
Refer to the figure above. If John spends his entire income on chairs, how many chairs can he purchase? A) 3 B) 8 C) 20 D) 40
B) 8
Which of the following pairs of goods is most likely to have a positive cross‐price elasticity? A) Printers and ink cartridges B) A privately-owned car and public transportation C) Coffee and sugar D) Motorcycles and typewriters
B) A privately-owned car and public transportation
Which of the following statements best describes an inferior good? A) An inferior good is a good whose quantity supplied always exceeds the quantity demanded. B) An inferior good is a good whose demand decreases with an increase in consumersʹ income. C) An inferior good is a good that is sold at a subsidized price. D) An inferior good is a good that is rationed by the government.
B) An inferior good is a good whose demand decreases with an increase in consumersʹ income.
________ is the difference between the willingness to pay and the price paid for a good. A) Producer surplus B) Consumer surplus C) Sellerʹs profit D) Revenue
B) Consumer surplus
________ is the measure of the sensitivity of one variable to a change in another. A) Multiplier B) Elasticity C) Amplitude D) Buoyancy
B) Elasticity
Which of the following correctly describes incentives?A) Incentives refer to the maximum price that a buyer is willing to pay for a good. B) Incentives are rewards or penalties that motivate people to behave in a particular way. C) Incentives are prices that are fixed by the government and not by market forces. D) Incentives refer to the minimum price at which a seller is willing to sell a product
B) Incentives are rewards or penalties that motivate people to behave in a particular way.
Which of the following statements is true? A) Consumersʹ tastes and preferences do not change over time. B) Tastes and preferences of a consumer determine the satisfaction she receives from consumption. C) Tastes and preferences of a consumer are not revealed through her buying decisions and consumption patterns. D) Tastes and preferences of a consumer do not play an important role in arriving at a buying decision
B) Tastes and preferences of a consumer determine the satisfaction she receives from consumption.
Greenaqua Corp. is the only supplier of bottled drinking water in the country Lithasia. Due to the profits the firm enjoys, new corporations are interested in entering the market. If a few more companies producing their own line of bottled drinking water enter the market, which of the following statements will be true about Greenaqua Corp.? A) The profit Greenaqua Corp. earns on their line of bottled drinking water is likely to increase. B) The elasticity of demand of Greenaqua Corp.ʹs product is likely to increase. C) The elasticity of demand of Greenaqua Corp.ʹs product is likely to decrease. D) The elasticity of demand of Greenaqua Corp.ʹs product is likely to remain the same
B) The elasticity of demand of Greenaqua Corp.ʹs product is likely to increase.
Which of the following statements correctly differentiates between the slope of the demand curve and price elasticity of demand along a linear demand curve? A) The price elasticity of demand for a good is the same at different points on the demand curve, whereas the slope of the demand curve varies depending on the point where it is measured. B) The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve. C) The price elasticity of demand is a ratio, whereas the slope of a demand curve is a product. D) The price elasticity of demand is a product, whereas the slope of a demand curve is a ratio.
B) The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve.
________ in economics is a measure of satisfaction or happiness that comes from consuming a good or service. A) Budget B) Utility C) Income effect D) Substitution effect
B) Utility
A budget constraint is a straight line because: A) the tastes and preferences of the consumer change along the constraint. B) a consumer faces a fixed price of both goods that do not change with changes in consumption. C) the opportunity cost of buying each of the goods changes along the constraint. D) a consumer has a limited money income.
B) a consumer faces a fixed price of both goods that do not change with changes in consumption.
Refer to the figure above. A change in the budget constraint from B1 to B2 indicates: A) an increase in the price of sweaters. B) a decrease in the price of sweaters. C) an increase in the consumerʹs income. D) a decrease in the consumerʹs income.
B) a decrease in the price of sweaters.
An optimizing consumer makes her purchase decisions based on: A) the total benefits at various levels of consumption. B) benefits per dollar spent at the margin. C) the total benefits per dollar spent at various levels of consumption. D) the benefits from the first dollar spent on consumption.
B) benefits per dollar spent at the margin.
If a consumer purchases any combination of goods and services on his ________, he will exhaust his income completely. A) indifference curve B) budget constraint C) demand schedule D) demand function
B) budget constraint
A buyer is said to be a price taker if she: A) can bargain over the prices of the goods she consumes. B) can purchase any amount of a good at a fixed price provided she has the money to pay for it. C) always pays less than the market-determined price for the goods she is consuming. D) ignores the prices of related goods and considers only the price of the goods she is purchasing.
B) can purchase any amount of a good at a fixed price provided she has the money to pay for it.
From a firmʹs point of view, when the demand for a good has a price elasticity of 0.5, then, all things remaining the same, a(n): A) increase in the price of the good will decrease the firmʹs revenue. B) increase in the price of the good will increase the firmʹs revenue. C) change in the price of the good will not affect the firmʹs revenue. D) change in the price of the good will not affect the quantity of the good demanded by consumers.
B) increase in the price of the good will increase the firmʹs revenue.
A(n) ________ shows the bundles of two goods that provide an equal level of satisfaction to the consumer. A) budget set B) indifference curve C) demand curve D) budget line
B) indifference curve
A perfectly elastic demand curve: A) is parallel to the price axis. B) is parallel to the quantity axis. C) slopes upward. D) slopes downward.
B) is parallel to the quantity axis.
Willingness to pay: A) is the lowest price that a buyer is willing and able to pay for a unit of good. B) is the highest price that a buyer is willing and able to pay for a unit of good. C) is equal to the price of the lowest-priced goods in a consumption bundle. D) is equal to the price of the highest-priced goods in a consumption bundle.
B) is the highest price that a buyer is willing and able to pay for a unit of good.
If quantity of milk is measured on the horizontal axis and quantity of juice is measured on the vertical axis, a decrease in the price of milk will cause the budget constraint to: A) pivot rightward along the vertical axis. B) pivot rightward along the horizontal axis. C) shift to the left. D) shift to the right.
B) pivot rightward along the horizontal axis.
A decrease in the price of either good will cause a consumerʹs budget constraint to: A) pivot leftward. B) pivot rightward. C) shift leftward. D) shift rightward
B) pivot rightward.
If the price of the good measured along the vertical axis increases without a change in the price of the good measured along the horizontal axis, the consumerʹs budget constraint: A) pivots rightward without a change in the intercept on the horizontal axis. B) pivots leftward without a change in the intercept on the horizontal axis. C) shifts to the right. D) shifts to the left.
B) pivots leftward without a change in the intercept on the horizontal axis.
The percentage change in the quantity demanded of a good due to a percentage change in its price is referred to as the: A) price multiplier. B) price elasticity of demand. C) shadow price of the good. D) consumer surplus.
B) price elasticity of demand.
Refer to the figure above. If the price of a sweater is $3 and the budget constraint of the consumer is B3, his income is: A) $45. B) $90. C) $135. D) $270
C) $135.
Refer to the table above. What is the total benefit that the consumer derives when he consumes 4 quarts of milk? A) $8 B) $22 C) $24 D) $25
C) $24
John is ready to pay $5 for an extra loaf of bread. Due to an ongoing discount in the store, he gets a loaf for $2. Johnʹs consumer surplus from the purchase is ________. A) $2 B) $2.50 C) $3 D) $10
C) $3
Refer to the figure above. What is the market-wide consumer surplus when the market price of wine is $9? A) $180,000 B) $90,000 C) $60,000 D) $210,000
C) $60,000
Refer to the figure above. What is the gain in the market-wide consumer surplus when the price of calculators changes from $6 to $3? A) $565 B) $580 C) $950 D) $1050
C) $950
Assume that a consumer can spend $20 on two goods-pens and pencils. If the price of one pen is $5 and the price of one pencil is $2, which of the following combinations of the two goods represents a point on the consumers budget constraint? A) 3 pens and 2 pencils B) 1 pen and 10 pencils C) 2 pens and 5 pencils D) 2 pens and 3 pencils
C) 2 pens and 5 pencils
Refer to the table above. If the price of one chocolate is $2, the marginal benefit per dollar spent on the fourth unit will equal: A) $4. B) $2. C) $2.5. D) $5
C) 2.5
Refer to the figure above. Given the consumerʹs budget constraint, the consumption bundle that maximizes his satisfaction consists of: A) 0 shirts and 40 pairs of trousers. B) 10 shirts and 30 pairs of trousers. C) 20 shirts and 15 pairs of trousers. D) 35 shirts and 10 pairs of trousers.
C) 20 shirts and 15 pairs of trousers.
Refer to the figure above. What is the absolute value of the arc elasticity of demand when the price increases from $6 to $8? A) 1.25 B) 2.75 C) 3.45 D) 4.00
C) 3.45
Refer to the table above. If the income of the consumer is $24, the optimal choice contains: A) 1 quart of juice and 1 quart of milk. B) 3 quarts of juice and 4 quarts of milk. C) 4 quarts of juice and 4 quarts of milk. D) 4 quarts of juice and 5 quarts of milk.
C) 4 quarts of juice and 4 quarts of milk.
Refer to the figure above. What is the loss in the market-wide consumer surplus when the price of wine changes from $9 to $18? A) $144,000 B) $30,000 C) $57,000 D) $0
C) 57,000
Which of the following is the formula to calculate arc elasticity of demand? A) Arc elasticity of demand = [(Q2 - Q1) / (Q2/2)] / [(P2 - P1) / (P2/2)] B) Arc elasticity of demand = [(Q2 + Q1) / (Q2/2)] / [(P2 + P1) / (P2/2)] C) Arc elasticity of demand = [(Q2 - Q1) / (Q2+ Q1)/2] / [(P2 - P1) / (P2 + P1)/2] D) Arc elasticity of demand =[(Q1 - Q2) / (Q2 + Q1)] / [(P1 - P2) / (P2 + P1)]
C) Arc elasticity of demand = [(Q2 - Q1) / (Q2+ Q1)/2] / [(P2 - P1) / (P2 + P1)/2]
Which of the following statements correctly differentiates between consumer surplus and net benefits? A) Consumer surplus at different levels of consumption can be calculated arithmetically, whereas net benefits at different levels of consumption cannot be estimated. B) Consumer surplus at different levels of consumption cannot be estimated, whereas net benefits at different levels of consumption can be calculated arithmetically. C) Consumer surplus measures difference between willingness to pay for a good and its price, whereas net benefits measure the overall satisfaction gained from consumption of a good. D) Consumer surplus equals the overall satisfaction gained from consumption of a good, whereas net benefits measure the difference between willingness to pay for a good and its price.
C) Consumer surplus measures difference between willingness to pay for a good and its price, whereas net benefits measure the overall satisfaction gained from consumption of a good.
Which of the following is NOT a direct determining factor of consumersʹ purchase decisions? A) Consumersʹ tastes and preferences B) Market price of the finished goods C) Cost of factor inputs D) Consumersʹ income
C) Cost of factor inputs
Which of the following goods is likely to have an income elasticity of demand greater than one? A) Salt B) Gasoline C) Diamond jewelry D) Bread
C) Diamond jewelry
Which of the following best describes a good with perfectly elastic demand? A) For a given price change, the percentage change in quantity demanded will be less than the percentage change in its price. B) The demand curve for the good initially slopes upward, reaches its maximum, and then slopes downward. C) Even the smallest increase in the price of the good will cause consumers to stop consuming it completely. D) The quantity demanded of the good is completely unaffected by a price change.
C) Even the smallest increase in the price of the good will cause consumers to stop consuming it completely.
Which of the following statements is true of incentives? A) Incentives can be financial or moral, but not coercive. B) Incentives can be financial or coercive, but not moral. C) Incentives are designed to change behavior. D) Incentives are always in the form of rewards.
C) Incentives are designed to change behavior.
An optimizing consumer has to choose between two goods-Good A priced at PA and Good B priced at PB. Given that MBA is the marginal benefit from consuming Good A and MBB is the marginal benefit from consuming Good B, the consumerʹs well-being will be maximized at the point where: A) MBA = MBB. B) MBA/PB=MBB/PA. C) MBA/PA = MBB/PB. D) MBA = MBB/PB.
C) MBA/PA = MBB/PB.
Sandra consumes two goods-tea and coffee. Her demand for tea is inelastic while her demand for coffee is elastic. If there is an increase in the price of both tea and coffee, ________. A) Sandraʹs expenditure on both tea and coffee is likely to increase B) Sandraʹs revenue on both tea and coffee is likely to decrease C) Sandraʹs expenditure on tea will increase and her expenditure on coffee will decrease D) Sandraʹs expenditure on coffee will increase and her expenditure on tea will decrease
C) Sandraʹs expenditure on tea will increase and her expenditure on coffee will decrease
Which of the following statements correctly identifies the difference between the cross-price elasticity of demand and the income elasticity of demand? A) The income elasticity of demand can take only positive values, whereas the cross-price elasticity of demand can take both positive and negative values. B) The cross-price elasticity of demand can take only negative values, whereas the income-elasticity of demand can take both positive and negative values. C) The income elasticity of demand for a good is independent of the price changes of related goods, whereas the cross-price elasticity of demand for a good is independent of the income changes of the consumer. D) The income elasticity of demand for a good is zero for normal goods, whereas the cross-price elasticity of demand for a good is always positive for normal goods.
C) The income elasticity of demand for a good is independent of the price changes of related goods, whereas
Which of the following statements is true about the income elasticity of demand? A) The income elasticity of demand for normal goods is always zero. B) The income elasticity of demand for inferior goods is always zero. C) The income elasticity of demand for normal goods is always positive. D) The income elasticity of demand for inferior goods is always positive.
C) The income elasticity of demand for normal goods is always positive.
Which of the following statements is true about the price elasticity of demand? A) As the number of substitutes for a product increases, the price elasticity of demand for that good decreases. B) If the budget share of a particular good in a consumerʹs bundle increases, the price elasticity of demand for that good is likely to decrease. C) The price elasticity of demand for a good is generally higher in the long run than in the short run. D) The demand for a good with a price elasticity of demand of zero is highly responsive to price changes.
C) The price elasticity of demand for a good is generally higher in the long run than in the short run.
Which of the following examples identifies the income effect of a price change? A) When Garyʹs income doubles his wine consumption doubles, the price of wine remaining unchanged. B) When the price of diesel falls, consumers start purchasing more petroleum-powered vehicles. C) While purchasing shirts and jeans, when the price of a pair of jeans falls, Jack purchases more of both jeans and shirts. D) While purchasing pens and pencils, when the price of pens falls, Jill purchases more pens and fewer pencils
C) While purchasing shirts and jeans, when the price of a pair of jeans falls, Jack purchases more of both jeans and shirts
The set of all possible bundles of goods and services that can be purchased with a consumerʹs income is referred to as the: A) demand set. B) supply set. C) budget set. D) universal set.
C) a budget set
Between two indifference curves, the one on the right indicates: A) the same level of utility as the one on the left. B) the same bundle of goods as the one on the left. C) a higher level of utility than the one on the left. D) a lower level of consumer income than the one on the left.
C) a higher level of utility than the one on the left.
2) A consumerʹs budget refers to the: A) wealth she has acquired over time. B) prices of the goods she buys. C) amount of money she can spend on various goods and services. D) difference between the consumerʹs income and expenditure.
C) amount of money she can spend on various goods and services.
Refer to the figure above. A change in the budget constraint from B2 to B3 indicates: A) a decrease in the price of jeans. B) a decrease in the price of sweaters. C) an increase in the consumerʹs income. D) a decrease in the consumerʹs income.
C) an increase in the consumerʹs income.
The consumption bundle that maximizes a consumerʹs satisfaction given his income is located: A) at the point of tangency of the consumerʹs demand curve and indifference curve. B) at any point of intersection of the consumerʹs demand curve and indifference curves. C) at the point of tangency of the consumerʹs budget constraint and indifference curve. D) at any point of intersection of the consumerʹs demand curve and indifference curves
C) at the point of tangency of the consumerʹs budget constraint and indifference curve.
Suppose that the government enacts a tax on Good X. In order to estimate the effect of the tax on the quantity demanded of a related good, Good Y, we can use the concept of the: A) price elasticity of demand. B) income elasticity of demand. C) cross-price elasticity of demand. D) cost elasticity of demand.
C) cross-price elasticity of demand.
If a 1% change in the price of a good causes a 1% change in the quantity demanded, the good has an elasticity of demand: A) equal to 0. B) less than 1. C) equal to 1. D) greater than 1.
C) equal to 1.
At the midpoint of a linear demand curve, the price elasticity of demand is: A) equal to zero. B) between zero and one. C) equal to one. D) greater than one
C) equal to one
At all the points above the midpoint on a linear demand curve, the value of price elasticity of demand is: A) equal to one. B) zero. C) greater than one. D) less than one
C) greater than one.
If a good has a price elasticity of demand of -3, it implies that: A) if the income of the consumer increases by 3%, the quantity demanded of that good will increase by 1%. B) if the income of the consumer increases by 1%, the quantity demanded of that good will increase by 3%. C) if the price of the good increases by 1%, the quantity demanded of the good will decrease by 3%. D) if the price of the good increases by 3%, the quantity demanded of the good will increase by 1%.
C) if the price of the good increases by 1%, the quantity demanded of the good will decrease by 3%.
In case of a linear negatively sloped demand curve, the price elasticity of demand: A) is zero between any two points on the curve. B) is the same between any two points on the curve. C) is different at different points on the curve. D) is equal to the slope between different points on the demand curve.
C) is different at different points on the curve.
At all the points below the midpoint on a linear demand curve, the value of price elasticity of demand is: A) zero. B) greater than one. C) less than one. D) equal to one.
C) less than one.
The slope of a budget constraint represents: A) the price of the good measured along the horizontal axis. B) the price of the good measured along the vertical axis. C) the opportunity cost of one good in terms of another. D) the money income of the consumer.
C) the opportunity cost of one good in terms of another.
The Law of Demand is the reason behind: A) the price elasticity of demand having a positive value. B) the income elasticity of demand having a positive value. C) the price elasticity of demand having a negative value. D) the income elasticity of demand having a negative value
C) the price elasticity of demand having a negative value.
The general rule for welfare maximization suggests that in personal equilibrium: A) the ratio of total benefits to price should be identical across all goods. B) the ratio of total benefits to income should be identical across all goods. C) the ratio of marginal benefits to price should be identical across all goods. D) the ratio of marginal benefits to income should be identical across all goods.
C) the ratio of marginal benefits to price should be identical across all goods.
The following figure illustrates the market demand curve for cell phones. What is the market -wide consumer surplus when the market price is $50? What will the change in consumer surplus be if the government decided to fix and hold the price of cell phones at $80?
Consumer surplus refers to the difference between consumersʹ willingness to pay for a good and the market price of the good. Hence, the market-wide consumer surplus is equal to the area of the triangle below the demand curve for a good and above the market price line. If the market price is $50, the quantity demanded is 2,000 units. Market-wide consumer surplus = 1/2 × 2,000 × $(110 - 50) = 1/2 × 2,000 × $60 = $60,000. Any increase in the price of a good leads to a loss in consumer surplus. The market -wide consumer surplus after the government decides to fix and hold the price at $80 = 1/2 × 1,000 × $(110 - 80) = 1/2 × 1,000 × $30 = $15,000. Hence, if the government decides to fix and hold the price of cell phones at $80, it will lead to a $45,000 loss in the market-wide consumer surplus.
Assume that a combination of 10 bottles of wine and 2 cartons of milk lies on a consumerʹs budget constraint. If the price of one bottle of wine is $10, and one carton of milk is $1, what is the consumerʹs income? A) $100 B) $20 C) $120 D) $102
D) $102
Refer to the figure above. If the price of a table is $2, what is Johnʹs income? A) $20 B) $40 C) $60 D) $80
D) $80
Refer to the scenario above. Thomasʹs arc elasticity of demand for wine is: A) -0.33. B) -0.67. C) -0.25. D) -1.
D) -1
Refer to the figure above. What is the market-wide consumer surplus when the market price of calculators is $3? A) $600 B) $725 C) $1,000 D) $1,120
D) 1,120
Refer to the figure above. If John spends his entire income on tables, how many tables can he purchase? A) 8 B) 10 C) 30 D) 40
D) 40
Which of the following statements is true? A) A price maker is a buyer who can purchase any amount of a good he wants, at a fixed price, if he has the money to pay for it. B) All buyers in a perfectly competitive market are price makers. C) The relative prices of goods do not affect a consumerʹs buying decision. D) A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.
D) A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.
Which of the following statements best describes a normal good? A) A normal good is a good that is rationed by the government. B) A normal good is a good that is readily available in the market. C) A normal good is a good whose supply increases as its price decreases. D) A normal good is a good whose demand increases with an increase in consumersʹ income.
D) A normal good is a good whose demand increases with an increase in consumersʹ income.
Which of the following will lead to a change in the opportunity cost of buying a pen and a pencil? A) An increase in the consumerʹs income B) A decrease in the consumerʹs income C) A twofold increase in the prices of both pens and pencils D) A twofold increase in the price of pens and a threefold increase in the price of pencils
D) A twofold increase in the price of pens and a threefold increase in the price of pencils
Refer to the figure above. Which indifference curve depicts the highest level of utility? A) IC1 B) IC2 C) IC3 D) IC4
D) IC4
Which of the following goods is likely to have the highest price elasticity of demand? A) Salt B) Gasoline C) Life-saving drugs D) Potato chips
D) Potato chips
Which of the following statements is true of the cross-price elasticity of demand? A) The cross-price elasticity of demand between substitutes is zero. B) The cross-price elasticity of demand between complements is zero. C) The cross-price elasticity of demand between substitutes is negative. D) The cross-price elasticity of demand between complements is negative.
D) The cross-price elasticity of demand between complements is negative.
Suppose the prices of a pair of jeans, a shirt, and a tie are $30, $20, and $10 respectively. Which of the following statements is true in this context? A) The opportunity cost of buying a pair of jeans is 2 ties. B) The opportunity cost of buying a tie is 3 pairs of jeans. C) The opportunity cost of buying a tie is 2 shirts. D) The opportunity cost of buying a shirt is 2 ties.
D) The opportunity cost of buying a shirt is 2 ties.
Which of the following examples best describes the Law of Demand? A) When Alex received a pay hike, his consumption of all goods increased. B) When the price of gasoline increased, the demand for cars fell. C) When the price of Nokia phones increased, the demand for Samsung phones increased. D) When the price of tea increased, the quantity demanded of tea decreased
D) When the price of tea increased, the quantity demanded of tea decreased
Refer to the figure above. In comparison to the bundles on IC1, the bundles on IC3: A) give the same level of utility and are affordable. B) give the same level of utility but are not affordable. C) give a higher level of utility and are affordable. D) give a higher level of utility but are not affordable.
D) give a higher level of utility but are not affordable.
A good is said to have a relatively elastic demand if the value of price elasticity is: A) equal to 0. B) between 0 and 0.5. C) between 0.5 and 1. D) greater than 1.
D) greater than 1.
Luxury goods have income elasticity: A) of less than zero. B) between zero and one. C) equal to one. D) greater than one.
D) greater than one.
The ________ measures the change in the demand of a good due to a percentage change in the consumerʹs income. A) substitution effect of a price change B) income effect of a price change C) cross-price elasticity of demand D) income elasticity of demand
D) income elasticity of demand
As the number of available substitutes increases, the price elasticity of demand for a good: A) initially increases then decreases. B) initially decreases then increases. C) decreases. D) increases.
D) increases
The price elasticity of demand for a good that is a necessity is likely to be: A) unit elastic. B) perfectly elastic. C) elastic, but not perfectly elastic. D) inelastic.
D) inelastic.
The cross-price elasticity of demand for a good is the: A) percentage change in the quantity demanded for a good due to a percentage change in the consumerʹs income. B) percentage change in the quantity demanded for a good due to a percentage change in the goodʹs price. C) percentage change in the quantity demanded for a good due to a percentage change in tax rates. D) percentage change in the quantity demanded for a good due to a percentage change in the price of related goods.
D) percentage change in the quantity demanded for a good due to a percentage change in the price of related goods.
As the ________ increases, ________. A) quantity demanded of a good; its price increases B) quantity demanded of a good; its price decreases C) price of a good; its quantity demanded increases D) price of a good; its quantity demanded decreases
D) price of a good; its quantity demanded decreases
A consumer has $100 to be spent on tables and chairs. If his income increases to $200, the prices of the goods remaining unchanged, his budget constraint: A) pivots to the left along the vertical axis. B) pivots to the right along the horizontal axis. C) shifts to the left. D) shifts to the right.
D) shifts to the right
If the price of a good increases, ________. A) the budget constraint shifts to the right B) the budget constraint shifts to the left C) the consumer surplus increases D) the consumer surplus decreases
D) the consumer surplus decreases
If a good has a price elasticity of demand equal to 0, ________. A) the percentage change in quantity demanded for the good will be greater than the percentage change in its price B) the demand curve of the good is upward sloping C) the smallest increase in its price causes consumers to stop consuming it completely D) the quantity demanded is completely unaffected by a change in its price
D) the quantity demanded is completely unaffected by a change in its price
Elasticity is: A) the sum of the percentage change in two variables. B) the difference of the percentage change in two variables. C) the product of the percentage change in two variables. D) the ratio of the percentage change in two variables.
D) the ratio of the percentage change in two variables.
The following figure shows the indifference curves and budget constraint of a consumer. Determine the commodity bundle that will maximize the consumerʹs satisfaction given his budget. Why is the bundle the optimal choice?
IC1, IC2, and IC3 are three indifference curves that depict different levels of satisfaction from the consumption of Good 1 and Good 2. In comparison to IC1 and IC2, bundles on IC3 contain more of both goods and depict a higher level of satisfaction. Although, IC3 gives a higher level of satisfaction, it lies outside the budget constraint and hence is unattainable by the consumer. In other words, his income is not sufficient to purchase bundles on IC3. IC1 is attainable by the consumer because it lies below the budget constraint but gives a lower level of satisfaction than IC2. Therefore, the consumer will be interested in expanding his consumption to IC2 which contains bundles consisting of more of both goods in comparison to IC1. All points on IC2 are not attainable because of the budget constraint, but the point of tangency between IC2 and the budget constraint is attainable and provides the same level of satisfaction as the other points on IC2. Hence, the point of tangency between the budget constraint and the highest attainable indifference curve represents the bundle that maximizes the consumerʹs satisfaction given a fixed income. This optimal bundle contains 4 units of Good 1 and 4 units of Good 2
Assume that a consumer has an income of $200 that has to be spent on two goods, decorative lights and shoes. If the price per light is $10 and the price of one pair of shoes is also $10, graphically illustrate his budget set and constraint. Also, calculate the opportunity cost of purchasing either good.
If QL denotes the quantity of lights and QS denotes the quantity of shoes that the consumer purchases, then his budget constraint is given by: 10 QL + 10 QS = 200. When the consumer spends his entire income on lights, i.e. QS = 0, the quantity of lights he can purchase is QL = 200/10 = 20 units. Similarly, when the consumer spends his entire income on shoes, i.e. QL = 0, the quantity of shoes he can purchase is Qs = 200/10 = 20 units. Some other points on the budget constraint can also be estimated by plugging in different values of QL and QS in the constraint. For example if QL = 5, Qs = 15 and if QS = 12, QL = 8. Using these values, the budget constraint can be plotted as follows: The opportunity cost of the two goods is determined by the slope of the budget constraint or the ratio of the prices of the two goods. This is equal to 10/10 = 1. The opportunity cost of one good is the reciprocal of the other. In this particular example, however, the reciprocal of 1 is 1, so both goods have the same opportunity cost. Hence, the opportunity cost of buying one light is one pair of shoes, and the opportunity cost of buying one pair of shoes is one light.
If the cross-price elasticity of demand for a good is estimated at -3.9, estimate the percentage change in quantity demanded of the good when the price of the related good increases from $30 per unit to $75 per unit. Also, if it is known that the income elasticity of demand for the same good is 2.5, estimate the percentage change in demand if consumer income increases from $100 to $300.
Percentage change in price of related good = [($75 - $30)/ $30] × 100 = 150% Cross-price elasticity of demand = -3.9 Expected percentage change in quantity demanded= 150 × -3.9 = -585% Thus, quantity demanded is expected to fall by 585%. Percentage change in income = [($300-$100) / 100)] × 100 = 200% Income elasticity of demand = 2.5 Expected percentage change in demand = 200 × 2.5 = 500% Hence, demand for the good is expected to increase by 500%.
Using an example of a bundle of two goods, graphically illustrate the substitution effect and the income effect if the price of any one good falls.
Suppose a consumer spends his income on only two goodsjeans and shoes. The optimal combination of both goods is determined at the point of tangency of the consumerʹs budget constraint and the highest possible indifference curve. But if the price of any one good falls, his optimal bundle changes as a result of a change in his budget constraint. There are two effects of a decrease in the price of a good a substitution effect and an income effect. If the price of shoes falls, the consumer will feel wealthier as he will save some income if he consumes the initial bundle. This saved income will allow him to move to a higher indifference curve and this effect is referred to as the income effect of a price decrease. On the other hand, due to a decrease in the price of shoes, shoes will become relatively cheaper than jeans, and the consumer will want to substitute his consumption of jeans with more shoes. This is referred to as the substitution effect of a price decrease. These effects are illustrated in the figure below. Before the price decrease, the budget constraint of the consumer is given by BS1 and it is tangent to IC1 at point a where the consumption of jeans is J2 and shoes is S1. A decrease in the price of shoes causes the budget constraint to pivot rightward along the horizontal axis to BS2. Now, the consumer can reach a higher indifference curve, IC2. But if he has to maintain the same level of utility as before, he will settle at the point of tangency of BS3 and IC1. This is shown by point b where J1 pairs of jeans and S2 pairs of shoes are consumed. From the figure it is seen that J1 < J2 and S2 > S1. Hence, due to a decrease in the price of shoes, the consumer is now consuming more shoes and fewer jeans when compared to the initial utility-maximizing bundle. This change in consumption from point a to b is referred to as the substitution effect. A decrease in the price of shoes has now made the consumer relatively wealthier. This will allow him to reach a higher indifference curve, in this case IC2. Hence, his new optimizing bundle will be determined at the point of tangency, of IC2 and BS2 at c. This bundle contains S3 pairs of shoes and J2 pairs of jeans. From the figure, J2 > J1 and S3 > S2, i.e., there is an increase in the consumption of both goods in comparison to the previous utility-maximizing bundle. This movement from point b to c summarizes the income effect of a fall in the price of shoes.
In the following figure, BL is the budget line and IC1 and IC2 are two indifference curves of a consumer. Why does the optimal bundle for the consumer lie on indifference curve IC1, when IC2 represents a higher level of satisfaction?
The budget line represents the different combinations of two goods that are affordable to the consumer. Hence, only the combinations that lie on the interior of the line or on the line are feasible for the consumer. Although IC2 represents a higher level of utility than IC1, the bundles on IC2 are not affordable by the consumer. Her optimal bundle is determined by the point of tangency of the budget line and the highest indifference curve that the consumer can reach, given her income, which in this case is IC1.
What are the determinants of price elasticity of demand?
There are three important determinants of the price elasticity of demand. These are: a) Closeness of substitutes: As the number of substitutes grows, the price elasticity of demand increases. b) Budget share spent on the good: As a consumer spends more of his budget on a particular good, the goodʹs price elasticity of demand increases. c) Available time to adjust: The price elasticity of demand is lower for a good in the short run in comparison to the long run.
Jack has an income of $150 per month that has to be spent on two goods: Shoes and Jeans. From the following table, estimate the bundle that maximizes Jackʹs well-being.
To estimate the bundle that maximizes Jackʹs well-being, the marginal benefit per dollar spent has to be calculated for both goods.To maximize Jackʹs well-being, the marginal benefit per dollar spent must be equal for both goods. There are two combinations at which the marginal benefit per dollar spent is identical: 6 pairs of shoes and 6 pairs of jeans; and 5 pairs of shoes and 5 pairs of jeans. If Jack wants to consume 6 units of shoes and jeans, his expenditure will be equal to = 6 × $20 + 6 × $10 = $180, which exceeds his income. On the other hand if Jack buys 5 pairs of shoes and 5 pairs of jeans, his expenditure will be equal to = 5 × $20 + 5 × $10 = $100 + $50 = $150, which exactly exhausts his income. Therefore, to maximize Jackʹs well-being he should consume 5 pairs of shoes and 5 pairs of Jeans.
From the information provided in the following table, determine the optimal bundle that the consumer with an income of $34 must choose to maximize his well-being
To estimate the optimal bundle for the consumer the marginal benefit per dollar spent must be equivalent across the two goods and it should completely exhaust the consumerʹs incomeThere are four bundles for which the marginal benefit per dollar spent on each good across the two goods is equivalent. These are: a) 3 pens and 3 notepads. b) 6 pens and 4 notepads. c) 7 pens and 5 notepads. d) 8 pens and 7 notepads. Out of all the bundles that equalize marginal benefit per dollar spent across the two goods, if the consumer purchases the bundle that consists of 7 pens and 5 notepads his expenditure = 7 × 2 + 5 × 4 = $34 which is equal to his income to be spent. Hence, the optimal bundle that maximizes the consumerʹs well-being consists of 7 pens and 5 notepads.
Differentiate between the following a) Normal goods and inferior goods b) Substitutes and complements
a) A normal good is a good whose consumption increases with an increase in the consumerʹs income. Hence, it has a positive income elasticity of demand. The consumption of an inferior good decreases with an increase in the consumerʹs income. Hence, inferior goods have a negative income elasticity of demand. b) Two goods are said to be substitutes when an increase in the price of one good leads to an increase in the demand for the other good. Hence, substitute goods have a positive cross -price elasticity of demand. Two goods are said to be complements if an increase in the price of one good leads to a fall in the demand for the other good. Hence, complement goods have a negative cross -price elasticity of demand.
Define the following terms: a) Indifference curve b) Utility
a) An indifference curve is a graph that shows all bundles of goods and services that provide an equal level of satisfaction for the consumer. b) Utility refers to a measure of satisfaction or happiness that a consumer receives from consuming a good or service.
The quantity demanded of a particular range of flashlights is 600 units when price per unit is $5. When the price increases to $20, the quantity demanded falls to 200 units. Later the price of cells used to operate these flashlights falls by 200% and the demand for the flashlights increases from 200 units to 300 units a) Calculate the arc price elasticity of demand. b) Calculate the cross-price elasticity of demand. c) Joe purchases 20 units of the flashlights when his income is $30 and when his income increases to $120, his quantity demanded changes to 60 units. Calculate Joeʹs income elasticity of demand for flashlights.
a) Arc price elasticity of demand = [(200 -600) / [(200 + 600)/2)] / (20 - 5) / [(20 + 5) / 2] = (-400 / 400) / (15 / 12.5) = -1 / 1.2 = -0.83. b) Cross-price elasticity of demand of a good is the ratio of the percentage change in the demand for the good to the percentage change in the price of a related good. The percentage change in the demand for flashlights when the price of cells falls by 200% = [(300 - 200)/200] × 100 = 50%. Hence, cross-price elasticity of demand between flashlights and cells = 50 / -200 = -0.25. c) Income elasticity of demand for a good is the ratio of the percentage change in the demand for a good to the percentage change in the consumerʹs income. The percentage change in the demand for flashlights when Joeʹs income increases from $30 to $120 = [(60 - 20)/20] × 100 = 200%. The percentage change in Joeʹs income = [(120 - 30) / 30] × 100 = 300%. Joeʹs income elasticity of demand for flashlights = 200 / 300 = 0.67.
a) Define the term ʺconsumer surplus.ʺ If your willingness to pay for a good is $500 and you get it at a discount price of $275, what is your consumer surplus? b) In the following figure, calculate the consumer surplus when the market price is $20.
a) Consumer surplus is the difference between the willingness to pay for a given unit of a good and the price paid. If a consumer is willing to pay $500 for a good and it is available for $275, the consumer surplus is $500 - $275 or $225. b) Graphically, the consumer surplus is the area under the demand curve and above the price line. In the figure, consumer surplus is: CS = 1/2 × 75 × (45 - 20) = $937.50
a) Gary is a heavy smoker who spends $400 per week on cigarettes. The government decides to levy a 20% tax on all cigarettes. This tax will be completely borne by consumers. After the tax is levied, Garyʹs expenditure on cigarettes increases to $432 per week. If each pack of cigarettes sells for $20, calculate Garyʹs price elasticity of demand for cigarettes and the elasticity of demand for addictive goods. b) If the demand for a good has an absolute price elasticity greater than one, what will happen to the total expenditure on the good if its price increases? c) If the demand for a good has an absolute price elasticity equal to one, what will happen to the total expenditure on the good if its price increases?
a) Initially when the price of cigarettes is $20 per pack, Garyʹs consumption of cigarettes is 20 packs every week. Price per pack after the tax is levied is $24. Garyʹs consumption of cigarettes after the tax is levied = ($432/$24) = 18 packs. Garyʹs price elasticity of demand for cigarettes = [(18 -20) / (18 +20)/2] / [(24 - 20) / (24 + 20)/2] = -0.58. Given the information, the demand for addictive goods is relatively inelastic. b) If the demand for a good has an absolute price elasticity greater than one, then an increase in the price of the good will result in a decrease in the total expenditure on the good. c) If the demand for a good has an absolute price elasticity equal to one, then an increase in the price of the good will not affect the total expenditure on the good.
What are the factors that determine a buyerʹs purchasing decision?
a) Tastes and Preferences: The amount of benefits that a buyer receives from consuming goods and services is a direct result of his tastes and preferences. Thus, out of a set of all things that a buyer can purchase, he will decide to purchase the good or service that gives him maximum satisfaction, which is a function of his tastes and preferences. b) Prices of goods and services: Prices of goods and services are the most important determinants of a buyerʹs purchasing decision. When considering prices, the buyer not only considers the price of the good she is considering to purchase but also the prices of all other available goods. c) The budget set: The final component of the buyerʹs problem is the income she has available to spend on goods and services. This is represented by the budget constraint which shows all possible bundles of goods and services that exactly exhaust her income.
Define the following terms: a) The price elasticity of demand b) The income elasticity of demand c) The cross-price elasticity of demand
a) The price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price change. It is measured as the ratio of percentage change in the quantity demanded of a good to the percentage change in the price of the good. b) The income elasticity of demand measures the responsiveness of the demand for a good to a change in consumersʹ income. It is measured as the ratio of the percentage change in the quantity demanded of a good to the percentage change in the income of the consumer. c) The cross-price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of a related good. It is measured as the ratio of the percentage change in the quantity demanded to the percentage change in the price of a related good.
a. Classify and draw the demand curves for two goods with the following price elasticities of demand: i) Price elasticity of demand = ∞ ii) Price elasticity of demand= 0 b. Consider two goods: A and B. Good A has many close substitutes while Good B has a few. An individual spends an equal amount of his budget on both goods. Given this information, which of the two goods will have a higher price-elasticity of demand? c. Consider two goods: A and B. Both goods have the same number of substitutes but consumers spend a higher proportion of their income on Good A than on Good B. Given this information, which of the two goods will have a higher price-elasticity of demand?
a. Based on the magnitude of price elasticity of demand, the classifications of demand for these goods are: i) When price elasticity of demand for a good is infinite, its demand is perfectly elastic. Even small changes in the price may influence consumers to completely stop consuming the good. ii) When price elasticity of demand for a good is zero, its demand is perfectly inelastic. The quantity demanded of such goods is completely unaffected by price changes. b. Generally, when the number of close substitutes for a good increases, the price elasticity of demand for the good increases. Hence, given the information, Good A is more likely to have a higher price elasticity of demand than Good B. c. Generally, as an individual spends more of his budget on a particular good, the price elasticity of demand for the good increases. Hence, given the information, Good A is more likely to have a higher price elasticity of demand than Good B.
Refer to the table above. What is the marginal benefit that Jenny derives from the second unit of chocolate? A) $0 B) $8 C) $9 D) $18
b) 8
Refer to the figure above. What is the market-wide consumer surplus when the market price of calculators is $6? A) $20 B) $35 C) $50 D) $70
c) $50
