Exam 3
Define altruism
unselfish regard for the welfare of others EXAMPLE: WHY DO PEOPLE LEAVE GENEROUS TIPS IF IT DOES NOT AFFECT THE QUALITY OF SERVICE ALREADY PROVIDED?
formula for price elasticity of demand
% change in quantity demanded / % change in price
Income elasticity of demand
0<EY<1 : normal good EY>1 : luxury good EY<0 : inferior good
Income elasticity of demand:
A measure of how responsive quantity demanded is to changes in consumer income.
Describe what types of goods and services are inelastic.
Essential goods have low elasticity or can be considered inelastic because they are unresponsive in regards to a change in price.
What is an example of an Excise Tax?
It is a sales tax applied to a specific product, such as a tax on tobacco.
Define luxury goods:
Like normal goods but a more sensitive to changes in incomes e.g incomes increase so does demand for gym memberships. Incomes decrease people cancel there gym memberships to save money .
List the three-time periods for supply and their relative elasticity:
Market Period - highly inelastic. Short Run - increasingly elastic. Long Run - relatively elastic
Describe what types of goods and services are elastic.
Non-essential goods have a high elasticity of demand as a change in price changes the quantity demanded.
define framing bias
TECHNIQUES USED TO STEER INDIVIDUALS TO MAKING ONE DECISION OVER ANOTHER. Example buy one, get one 50% off vs. 25% off purchase
Describe how the budget line would shift when the price of good Y decreases:
The budget line pivots inward, reducing consumption choices. (Point c)
Describe how the budget line would shift when the price of good X increases:
The budget line pivots outward, making many more combinations affordable. (point b)
Describe how the budget line would shift when income increases and decreases
The budget line shifts parallel outward, allowing more consumption choices. A reduction in income would shift the line inward
time horizon
The longer the period, the more a firm is able to adjust to changing prices and therefore the more elastic the good
Describe the utility maximizing
The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.
What happens to total revenue if demand is elastic and the price increases?
Under elastic demand, if the price increases, the total revenue will decrease.
What happens to total revenue if demand is inelastic and the price increases?
Under inelastic demand, if the price rises, the total revenue will increase.
Give an example of law of diminishing marginal utility.
Wall climbing is fun, but climbing the same rock wall every time might make the experience less exciting over time
Elasticity of Supply
a measure of the way quantity supplied reacts to a change in price
excise tax
a tax on the production or sale of a good
If the price of chicken rises by 15% and the sales of turkey breasts expand by 10%, what is the cross elasticityof demand for these products and are the goods substitutes or complements? a.0.67; substitutes b.0.67; complements c.1.5; substitutes d.1.5; complements
a.0.67; substitutes To find the cross elasticity of demand, compute the following numbers: .10/.15 = +0.67. The elasticityis positive; therefore, the goods are substitute goods.b.0.67; complements
Consider the following chip plants: potato and computer. Assume there is a large rise in the demand forcomputer chips and potato chips. How should the manufacturers of each product respond to an increase inproduction in the short run? a.Both should hire employees. b.Only the computer chip plant should hire employees. c.Only the potato chip plant should hire employees. d.Neither should hire employees.
a.Both should hire employees. Both can hire extra employees, but computer chip manufacturers need to hire and train new employees,and this will take longer for them than for potato chip firms.
For which of the following pairs of goods or services would the cross elasticity of demand be positive? a.Camping tents and camping permits b.Textbooks and study guides c.Uber and Yellow Cab d.Movie streaming subscriptions and tablets
c.Uber and Yellow Cab Uber and Yellow Cab are substitutes; therefore, the cross elasticity of demand is positive.
Scruffie the cat has $15 to spend each month on cat toys, which cost $3 each, and cat treats, which costs $1.50each. Which of the following shows a combination of each good that Scruffie can afford if she spends her entirebudget on the two goods? a.three cat toys and three cat treats b.six cat toys and two cat treats c.four cat toys and no cat treats d.one cat toy and eight cat treats
d.one cat toy and eight cat treats Scruffie can purchase one cat toy for $3. This leaves her with $12 to spend on cat treats. She canpurchase eight cat treats totaling $12.
Define overconfidence bias
dont assume overconfident ppl have the best recommendations EXAMPLE: MANY GYM MEMBERSHIPS GO UNUSED BECAUSE AMBITION EXCEEDS FOLLOW-THROUGH.
What is a budget line
shows all the combinations of two goods that can be purchased with a given income and prices of each good
Flat Tax
take a constant percentage of one's income.
When does total revenue increase?
when price rises for an inelastic good or is lowered on an elastic good.
lump-sum tax
which takes a fixed amount of tax regardless of income earned and therefore falls in percentage as income rises.
What is the equation for calculating Total Revenue?
Units sold (Q) times the price of each unit (P), otherwise written as TR = Q x P
Describe the law of diminishing marginal utility
AS ONE CONSUMES MORE OF A GIVEN PRODUCT, THE ADDITIONAL SATISFACTION FROM EACH ADDITIONAL UNIT FALLS.
elasticity of supply formula
% change in quantity supplied / % change in price
Base method formula
%ChangeinP=ChangeinP/oldP
Formula for cross elasticity of demand
(Percentage Change in Quantity Demanded of Product A)/(Percentage Change in Price of Product B)
List the determinants of price elasticity of demand:
- Substitutability - Proportion of Income Spent on a Product - Luxuries Versus Necessities - Time Period.
Explain the different formulas (the base method and the midpoint method) forcalculating price elasticity.
- The base method for calculating price elasticity is used when given numerical values instead of percentages. In this formula, you need to subtract the old price from the new price, then divide it by the old price, you then multiply by 100 to get a percentage. - For the midpoint method, you would take the average price and average quantity demanded of two points and diving them by two, you find the midpoint of the line. Using this method, you find the average elasticity between two points.
Define Utility
A HYPOTHETICAL MEASURE OF THE SATISFACTION ONE RECEIVES FROM CONSUMING A GOOD OR SERVICE
9. Suppose a $50 carbon tax is collected from airlines for each one-way ticket sold. The tax causes the price of a Seattle-St. Louis flight to increase from $225 to $265. What is the incidence of the tax? A.Passengers bear a burden of $40 per ticket; airlines bear a burden of $10. B.Passengers bear a burden of $10 per ticket; airlines bear a burden of $40. C.Passengers bear the entire burden of the tax. D.The burden of the tax is split evenly between airlines and passengers.
A. Passengers bear a burden of $40 per ticket; airlines bear a burden of $10. (correct answer)
In August 2015, Turing Pharmaceuticals decided to increase the price of the drug Daraprim, which is used totreat a life-threatening parasitic infection. Unlike typical price increases that never make the evening news,Turing raised the price from $13.50 per dose to $750 per dose, representing an increase of over 50 times theprice. Turing's CEO, Martin Shkreli, argued that the extreme price increase is justified based on market demand and the fact that the drug does save lives. How would you describe the elasticity of Daraprim? a.Perfectly inelastic b.Elastic c.Inelastic d.Perfectly elastic
A. Perfectly inelastic The elasticity of Daraprim is very low, near 0, representing a very inelastic (almost perfectly inelastic)good. This allows Turing Pharmaceuticals to raise its prices substantially without losing manycustomers. Because most drug patients pay for Daraprim through medical or drug insurance policies,most customers are insensitive to the price changes, in addition to the obvious fact that this is a life-saving drug with very few substitutes. If generic versions of the drug were made available, that wouldsurely increase elasticity as patients (or their insurance providers) search for the lowest cost alternativesto the drug.
3. A tariff imposed on good increases the selling price of the good. Based on the determinants of elasticity, when a tariff is imposed on high-priced luxury cars, we can expect: A.a significant reduction in quantity demanded because the cars are not a necessity and they represent a large portion of a household budget B.a small reduction in quantity demanded because there are few substitutes for a luxury car. C.no reduction in quantity demanded because the wealthy people who buy luxury cars have a perfectly inelastic demand. D.a small increase in quantity demanded due to the added prestige of owning a more expensive car.
A.a significant reduction in quantity demanded because the cars are not a necessity and they represent a large portion of a household budget.
5. Lars has $60 to spend on socks and mittens for the winter. If each pair of mittens costs $12 and each pair of socks costs $3, Lars will: A.choose a combination of socks and mittens such that the marginal utility of the last pair of mittens is four times greater than the marginal utility of the last pair of socks. B.choose a combination of socks and mittens such that the number of pairs of mittens is four times the number of pairs of socks. C.buy four pairs of mittens and four pairs of socks. D.come as close as he can to spending an equal amount on mittens and socks, which would mean buying three pairs of mittens and 10 pairs of socks.
A.choose a combination of socks and mittens such that the marginal utility of the last pair of mittens is four times greater than the marginal utility of the last pair of socks. (correct answer)
. If the demand curve is inelastic and the price decreases, then: a.revenue increases. b.revenue decreases. c.revenue remains constant. d.the change in revenue cannot be determined with the information provided above.
B revenue decreases. If the demand curve is inelastic and the price decreases, then total revenue decreases also. When demandis inelastic, the percentage change in quantity demanded is less than the percentage change in price, sorevenue will move in the same direction as price.
The demand for gasoline is relatively inelastic, while the demand for Exxon gasoline is elastic because: a.there are no close substitutes for gasoline or Exxon. b.there are no close substitutes available for gasoline; however, there are close substitutes for Exxon. c.there are close substitutes for both gasoline and Exxon. d.there are close substitutes available for gasoline; however, there are no close substitutes for Exxon.
B there are no close substitutes available for gasoline; however, there are close substitutes for Exxon. The demand for gasoline as a whole is relatively inelastic because there are no close substitutes. Gaspurchases are a small part of our overall budget, and gas-consuming cars last a long time. Gasoline,given our current lifestyles, is a necessity. Exxon's gas is just one brand of many, and if Exxon raises itsprice, many consumers will switch to another brand because gasoline is essentially a commodity (onebrand is as good as another).
A greenhouse discounts the price of plants for a 50%-off sale. If the demand for plants is inelastic in the relevant price range, what will happen as a result? A.The total revenue collected from plant sales will increase. B.The total revenue collected from plant sales will decrease.C.The quantity of plants sold will decrease.D.There will be a decrease in demand for complementary goods for plants, such as potting soil and watering cans.
B. The total revenue collected from plant sales will decrease.
Which pair of goods would be most likely to have a positive cross elasticity of demand? A.Bread and butter B.Apples and oranges C.Coffee and doughnuts D.Cheese and crackers
B.Apples and oranges (correct answer)
10. Oregon has no sales tax, and it shares a border with Washington state, which has a high sales tax. For an electronics retailer located in Washington near the Oregon border, how would its geographic location affect the sales tax incidence? A.The retailer would bear a small burden of the sales tax because it would face a relatively elastic demand. B.The retailer would bear a large burden of the sales tax because it would face a relatively elastic demand. C.The retailer would bear a small burden of the sales tax because it would face a relatively inelastic demand. D.The retailer would bear a large burden of the sales tax because it would face a relatively inelastic demand.
B.The retailer would bear a large burden of the sales tax because it would face a relatively elastic demand. (correct answer)
8. Behavioral economics examines: A.behaviors that are unique to economists. B.common behaviors that contradict the predictions of economic models. C.the random, unexplained behaviors of firms. D.the random, unexplained behaviors of consumers.
B.common behaviors that contradict the predictions of economic models. (correct answer)
2. The budget line becomes steeper when the: A.price of the good measured on the horizontal axis decreases. B.price of the good measured on the horizontal axis increases. C.consumer's income decreases. D.consumer's income increases.
B.price of the good measured on the horizontal axis increases. (correct answer)
Would an excise tax placed on cereal be more likely or less likely to be passed on to consumers than an excise tax on wireless phone and data services?a.More likely, because cereal is less elastic than wireless phone and data services.b.Less likely, because cereal is less elastic than wireless phone and data services.c.Less likely, because cereal is more elastic than wireless phone and data services.d.More likely, because cereal is more elastic than wireless phone and data services.
C. Less likely, because cereal is more elastic than wireless phone and data services. An excise tax on cereal is less likely to be passed on to consumers because cereal is more elastic thanwireless phone and data services. In other words, if cereal prices rise, consumers can switch to muffins,bagels, and other breakfast items. If wireless phone and data service prices rise, most individuals areunwilling to give these items up. Therefore, a tax on these services is more likely to be passed on. Notethat we are not referring to a specific cereal or a specific wireless company, but to the products ingeneral, in which demand for wireless phones and data services is more inelastic than cereal.
If the absolute value of the price elasticity of demand for chili peppers is 0.5, what happens when the price rises by 20%? A.Quantity demanded falls by 5%. B.Quantity demanded rises by 10%. C.Quantity demanded falls by 10%. D.Quantity demanded rises by 20%.
C. Quantity demanded falls by 10%. (correct answer)
An electric utility announcing a rate increase tackled complaints by saying that consumers who found ways to conserve electricity could see no change in their monthly bill. What was the utility implying about these customers? A.They have an elastic demand for electricity. B.They have an inelastic demand for electricity. C.They have a unitary elastic demand for electricity. D.Their income elasticity of demand for electricity is negative.
C. They have a unitary elastic demand for electricity. (correct answer)
If the demand curve is elastic and the price increases, then: a.revenue remains constant. b.revenue increases. c.revenue decreases. d.the change in revenue cannot be determined with the information provided.
C. revenue decreases. If the demand is elastic and the price increases, then total revenue decreases. When demand is elastic, thepercentage change in quantity demanded is greater than the percentage change in price, so revenue willmove in the same direction as quantity.
1. When a budget line is drawn on a graph, what is measured on the two axes? A.The marginal utility received from two goods B.The total utility received from two goods C.The quantities of two goods D.The prices of two goods
C.The quantities of two goods (correct answer)
7. A store that lowers the price of an item usually keeps the original price visible so that customers will know the item has been discounted. Merchants do this to take advantage of: A.the customer's sense of overconfidence. B.the customer's sense of altruism. C.framing bias. D.the sunk cost fallacy.
C.framing bias. (correct answer)
8. The Medicare tax is the same percentage on all income earned for all workers. Thus, it is a: A.regressive tax. B.progressive tax. C.lump-sum tax. D.flat tax.
D. flat tax. (correct answer)
4. Economic theory predicts that a consumer choosing between two goods will always choose the good that: A.has the lowest price. B.provides the highest total utility. C.provides the highest marginal utility. D.provides the highest marginal utility per dollar spent.
D. provides the highest marginal utility per dollar spent. (correct answer)
6. The demand curve derived from marginal utility analysis: A.is identical to the budget line. B.reveals the consumer's total utility. C.is unaffected by changes in the consumer's income. D.has a downward slope due to the law of diminishing marginal utility.
D.has a downward slope due to the law of diminishing marginal utility. (correct answer)
Define sunk cost fallacy
DECISIONS ARE INFLUENCED BY COSTS ALREADY INCURRED INSTEAD OF HOW THE DECISION AFFECTS CURRENT WELL-BEING. EXAMPLE: REFUSING TO DROP A CLASS BECAUSE TUITION IS ALREADY PAID.
What Do the Ed Numbers Mean?
Ed>1: Elastic Demand (many substitutes, large portion of income, longer time horizon, luxury goods) Ed<1: Inelastic Demand (few substitutes, small portion of income shorter time horizon, necessities) Ed=1: Unitary Elastic Demand (a percentage change in price results in an equal percentage change in quantity demanded)
Define substitute goods:
Goods consumers substitute for one another depending on their relative prices
Define complements:
Goods that are typically consumed together.
Define normal goods:
Goods that have positive income elasticities less than 1.
Describe the process of maximizing utility
INDIVIDUALS MAXIMIZE TOTAL SATISFACTION WHEN CONSUMING WHERE THE MARGINAL UTILITY PER DOLLAR IS EQUAL FOR ALL GOODS AND SERVICES.
What is meant by the term "incidence of taxation"?
It is referring to who bears the economic burden of a tax.
define overvaluing bias
OVERVALUING THE PRESENT RELATIVE TO FUTURE. EXAMPLE: NOT SAVING ENOUGH FOR RETIREMENT.
What is the formula for income elasticity of demand?
Percentage Change in Quantity Demanded/Percentage Change in Income
Define marginal utility
THE ADDITIONAL SATISFACTION FROM CONSUMING ONE MORE UNIT OF A GOOD OR SERVICE
Define Behavioral economics:
THE STUDY OF HOW HUMAN PSYCHOLOGY ENTERS INTO ECONOMIC BEHAVIOR AS A WAY TO EXPLAIN WHY INDIVIDUALS SOMETIMES ACT IN PREDICTABLE WAYS COUNTER TO ECONOMIC MODELS.
7. Why would the demand for business airline travel be less elastic than the demand for vacation airline travel byretirees? a.Business travelers must determine their flying arrangements in a short time period whereas retirees havethe flexibility of determining when they fly. b.The elasticity of demand cannot be determined for retirees or business travelers. c.The elasticity would actually be the same for both retirees and business travelers because their flyingneeds are the same. d.Business travelers can determine their flying needs in a longer time period than retirees.
a.Business travelers must determine their flying arrangements in a short time period whereas retirees havethe flexibility of determining when they fly. Business travelers have less flexibility and typically decide to travel with a shorter time horizon than doretirees, who can travel when they can get better prices.
n today's technology-driven society, individuals are often multitasking with the help of mobile devices, withthe objective of increasing productivity by always being "connected." However, countering this belief is agrowing interest in the role of mindfulness, which is defined by Time as being attentive to one's experiences inthe present moment. Adherents of mindfulness believe that one should limit activities (such as the constantchecking of messages) that may appear productive but actually are counterproductive. In fact, Google hastaken this one step further by promoting one of its lead engineers, Chade-Meng Tan, to the official title of"Jolly Good Fellow (which nobody can deny)." Mr. Tan's well-paid job is to help Google's employees be moremindful. Discuss how Google's decision to have a Jolly Good Fellow title on its payroll might affectconsumers of Google's products despite not directly producing any goods or services? a.Consumers will receive benefits from the improved products and appreciate the value placed in hiringpractices and increased morale of employees. b.Having a Jolly Good Fellow will decrease the morale of the workers because they will feel he is moreof a watchdog than a helper. c.Having a Jolly Good Fellow will cost the company money since the position does not create goods orservices. d.Employees can concentrate on producing better products for consumers; however, the consumers mayexperience an increase of price of the goods and services.
a.Consumers will receive benefits from the improved products and appreciate the value placed in hiringpractices and increased morale of employees. Although Google's Jolly Good Fellow does not directly produce goods or services for consumers, he ispromoting a work environment that fosters creativity and productivity by helping Google's employeesbe more mindful about the tasks they are pursuing. If this leads to the development of better products,consumers will benefit and therefore find value in Google's hiring practices. But more importantly,Google's strategy is to improve the well-being of its employees, a practice that leads to better retentionand company loyalty. This strategy generally results in higher productivity that ultimately benefits theconsumer, especially for a company that thrives on creating innovative products and services.
Consider chip plants: potato and computer. Assume there is a large rise in the demand for computer chips andpotato chips. How responsive to demand is the supply in each market period? a.Neither potatoes nor computers are responsive. b.Potatoes are not responsive and computers are responsive. c.Potatoes are responsive and computers are not responsive. d.Both potatoes and computers are responsive.
a.Neither potatoes nor computers are responsive. Neither would be responsive in the market period. In the market period, the supply is fixed (the supplycurve is drawn as a vertical line).
Should we consider sunk costs when making decisions about the present or the future? a.No, sunk costs cannot be recovered. b.No, sunk costs have a non-monetary value; therefore, we should not consider the costs.c.Yes, we should consider all costs when making decisions for the present and the future.d.Yes, sunk costs are avoidable so we should consider the costs when making decisions.
a.No, sunk costs cannot be recovered. Sunk costs are costs that have been spent and cannot be recovered. Therefore, any future decision shouldcompare the benefits of the action with the additional costs of that action (and not the costs that havealready been incurred). For example, the preregistration fee for a 10k race is a sunk cost. Whether oneactually runs the race or not, the fee cannot be recovered. Therefore, if one is injured, the lost registrationfee should not be a factor in determining whether to run. The relevant cost to consider should be whetherrunning the race would make one's injury worse.
For most consumers, maximizing utility through consumption generally means finding good deals in order tomaximize the utility received for each dollar spent. However, some makers of luxury goods believe that theircustomers actually achieve utility by paying high prices, such that lowering prices may lead to reduced sales.How is this counterintuitive view rationalized in our analysis of consumer behavior and the utilitymaximization rule? a.Some consumers do not mind paying the higher price because paying higher prices denotes wealth,which increases their level of satisfaction.b.Higher prices means consumers are maximizing their utility.c.Consumers are not willing to pay the high price because they strive to maximize their utility with everypurchase.d.Consumers only look to pay the lowest prices because they want to purchase more with their money.
a.Some consumers do not mind paying the higher price because paying higher prices denotes wealth,which increases their level of satisfaction. For most consumers, prices and utility are independent factors, such that when prices fall, the utilityreceived for each dollar spent increases. However, for certain luxury goods, such as high-end handbags,rare gems, or limited edition luxury cars, a higher price itself might convey an image of wealth that aconsumer is trying to portray. In other words, higher prices result in more utility as these consumers seekto buy exclusive items that only the very rich can afford.
A common practice at many supermarkets is to show the total "savings" customers received from theirpurchase at the bottom of the receipt. Such savings include the total discounts from goods purchased, alongwith savings from coupons used. How would listing the total savings on a receipt influence an individual'sconsumption habits?
a.The consumers will feel like they saved money and they will be more likely to return to the store forfuture purchases. Showing the total savings on a supermarket receipt is a type of framing technique in which stores try tomake consumers feel that they received a great deal. In this case, shoppers leave the supermarketfeeling like they saved money, even if in reality other supermarkets offer similar prices. This is anexample of framing bias.
A common practice at many supermarkets is to show the total "savings" customers received from theirpurchase at the bottom of the receipt. Such savings include the total discounts from goods purchased, alongwith savings from coupons used. How would listing the total savings on a receipt influence an individual'sconsumption habits? a.The consumers will feel like they saved money and they will be more likely to return to the store forfuture purchases. b.It would cause the consumers to spend less money as the consumers will feel like they did not reallysave any money. c.Including the total savings does not have an impact on the consumers.d.Consumers will shop around to see if they really received the best deal.
a.The consumers will feel like they saved money and they will be more likely to return to the store forfuture purchases. Showing the total savings on a supermarket receipt is a type of framing technique in which stores try tomake consumers feel that they received a great deal. In this case, shoppers leave the supermarketfeeling like they saved money, even if in reality other supermarkets offer similar prices. This is anexample of framing bias.
Which of the following is true? a.Total utility can be positive even if marginal utility is negative. b.Total utility is negative at the point where marginal utility is zero. c.Total utility still increases if marginal utility is negative. d.Total utility is positive only when marginal utility is positive.
a.Total utility can be positive even if marginal utility is negative. You have consumed so much of a product that you are essentially satisfied. You still receive utility fromyour total consumption, but if you consumed one more unit, the marginal utility would be negative andtotal utility would fall, although it still would be positive. This is the typical outcome from an all-you-can-eat buffet: You enjoy the meal, but you eat so much that the extra dessert can make you feel sick,indicating a negative marginal utility and a fall in total utility.
One major rationale for farm price supports is that demand is inelastic and that rapidly improving technology,better crop strains, improved fertilizer, and better farming methods increased supply so significantly that farmincomes were severely depressed. Why would this rationale seem to be correct? a.When demand is inelastic, revenue is more affected by price changes. b.When demand is inelastic, revenue is more affected by price changes. c.When demand is elastic, revenue is more affected by price changes. d.When supply is inelastic, revenue is more affected by price changes.
a.When demand is inelastic, revenue is more affected by price changes. Many farm products tend to have inelastic demands; therefore, a significant increase in supply wouldpush prices down a great deal, causing farming incomes to fall.
Why do price changes cause a budget line to pivot, while income changes cause a budget line to shift in aparallel manner? a.A change in price of one good will cause consumers to only change the quantity purchased of the othergood. b.An increase or decrease in income will cause the consumer to change the quantity purchased of bothgoods. c.A change in price of one good will cause consumers to change the quantity purchased of both goods. d.A change in income will cause the consumer to change the quantity purchased of one good.
b. An increase or decrease in income will cause the consumer to change the quantity purchased of bothgoods. When the price of one good changes, the maximum quantity of that good changes. And because themaximum quantity of the other good remains the same (assuming its price does not change), the budgetline will therefore pivot outward (if price falls) or inward (if price rises). When income rises or falls andprices stay the same, the ability to consume both goods changes proportionally, which means that therewill be an outward parallel shift of the budget line (if income rises) or parallel inward shift of the budgetline (if income falls).
Rising peanut prices have forced peanut butter makers to raise the price of a jar of peanut butter from $2 to $3per jar, causing quantity demanded to fall. In addition, sales of jelly also dropped by 15%. Soon thereafter,makers of chocolate spread dropped its price from $4 to $3 per jar. This resulted in a further decline in peanutbutter sales by 20%. What is the cross elasticity of demand between peanut butter and jelly using the midpointmethod? Are these two products complements or substitutes? a.-0.625; complements b.-0.375; complements c.0.625; substitutes d.0.375; substitutes
b.-0.375; complements The cross elasticity of demand between peanut butter and jelly is -15% / (+$1.00/$2.50) = -15% /+40% = -0.375. When cross elasticity of demand is negative, the two goods are complements.
According to By the Numbers, how much greater is the elasticity of demand for food in Canada than in theUnited States? a.0.05 times greater b.0.1 times greater c.0.15 times greater d.0.20 times greater
b.0.1 times greater The elasticity of demand for food in Canada is 0.21 and 0.11 for the United States.
Advertisements on television both inform consumers and persuade them to purchase products in differingproportions depending on the ad. But today, digital video recorders can be found in 50 to 60 millionhouseholds, and much of what these households watch is recorded, as the vast bulk of the ads are skipped. Ifthis trend continues, where will consumers find out about new products?a.Consumers will just have to learn about the new products when they visit the stores. b.Ads will not go away; the way ads are presented will change forms. c.Consumers will learn about new products by word of mouth. d.Consumers will learn about new products through the newspaper only.
b.Ads will not go away; the way ads are presented will change forms. Ads don't go away—they just change forms. Ad agencies realize that this trend exists, and they aretrying a host of new techniques such as product placements within the program itself, in which yourfavorite TV show has characters that talk about the product. Sometimes, ads that build on thisplacement look like a continuation of the show. Additionally, more ad money is moving to alternativemedia like the Internet, cable, and event sponsorship.
1. In the case of two goods, does a decrease in the price of one good allow someone to potentially consume moreof both goods? Consider the budget line when answering this question. a.Yes, a decrease in price increases the income of the consumer allowing the consumer to purchase more ofboth goods. b.Yes; however, the consumer can only purchase more of one good. c.No, consumers will not gain money from the decrease in price. d.No, consumers will save the money or use it to purchase something else.
b.An increase or decrease in income will cause the consumer to change the quantity purchased of bothgoods. When the price of one good changes, the maximum quantity of that good changes. And because themaximum quantity of the other good remains the same (assuming its price does not change), the budgetline will therefore pivot outward (if price falls) or inward (if price rises). When income rises or falls andprices stay the same, the ability to consume both goods changes proportionally, which means that therewill be an outward parallel shift of the budget line (if income rises) or parallel inward shift of the budgetline (if income falls).
An organization holding a charity event sold raffle tickets for 50% off last week. This week, it changed theoffer: instead of discounting tickets, it offered buyers a 60% bonus (i.e., for every 10 tickets purchased, buyersget 6 more tickets free). If raffle tickets normally sell for $10 each and a person wishes to buy $100 in raffletickets, is the 60% bonus offer better? Why or why not? a.No, consumers will receive the same amount of tickets regardless of the offer.b.No, consumers would receive 20 tickets with the 50% offer versus 16 tickets with the 60% bonus.c.Yes, the discount offer is higher. Consumers will receive more tickets at the discounted price.d.Yes, with the 60% offer, consumers receive 20 tickets instead of 16.
b.No, consumers would receive 20 tickets with the 50% offer versus 16 tickets with the 60% bonus.The 60% bonus offer is not better. This is an example of a framing bias to make consumers believe thatthey are getting a better deal. If tickets are 50% off, this means that each ticket sells for $5 instead of$10, which means $100 can buy twenty raffle tickets. With the 60% bonus offer, $100 can buy tenregular tickets and six bonus tickets, for a total of sixteen raffle tickets. Therefore, although the 60%bonus offer might appear better, in reality it is worse than the 50% discounted offer.
If one automobile brand has an income elasticity of demand of 1.5 and another has an income elasticity equalto -0.3, what would account for the difference? a.The income elasticity of demand of 1.5 is for a complement whereas the income elasticity of demand of-0.3 is for a substitute. b.The income elasticity of demand of 1.5 is for a luxury item whereas the income elasticity of demand of-0.3 is for an inferior good. c.The income elasticity of demand of 1.5 is for an inferior good whereas the income elasticity of demandof -0.3 is for a luxury item. d.The income elasticity of demand of 1.5 is for a substitute whereas the income elasticity of demand of -0.3 is for a complement.
b.The income elasticity of demand of 1.5 is for a luxury item whereas the income elasticity of demand of-0.3 is for an inferior good. An income elasticity of demand of 1.5 suggests a luxury brand such as BMW or Mercedes. The carwith the income elasticity of -0.3 would be an "inferior good" brand (any inexpensive car brand mayfall into this category).
Suppose you estimated the cross elasticities of demand for two pairs of products and came up with thefollowing values: 2.3 and -1.7. Based on those elasticities, you can conclude that: a.the good with an elasticity of demand of 2.3 represents a complement and the good with an elasticity ofdemand of -1.7 represents a substitute. b.the good with an elasticity of demand of 2.3 represents a substitute and the good with an elasticity ofdemand of -1.7 represents a complement. c.both goods are complements. d.both goods are substitutes.
b.the good with an elasticity of demand of 2.3 represents a substitute and the good with an elasticity ofdemand of -1.7 represents a complement. When the cross elasticity estimate is 2.3, these products are close substitutes; for 0.1, the products areunrelated; and a value of -1.7 would represent complements. To find out if the products of two firmscompete in the market, we would look for a positive cross elasticity number: the higher the number, themore competitive the product (a substitutable).
Which is the correct statement about the impact of time on the price elasticity of supply? a.In both the short run and long run, the plant size is fixed. b.In both the short run and long run, the plant size is variable. c.In the short run, the plant size is fixed while in the long run the plant size is variable. d.In the short run, the plant size is variable while in the long run the plant size is fixed.
c.In the short run, the plant size is fixed while in the long run the plant size is variable. For firms to expand output in response to price changes requires time: time to hire more labor, time toorder raw materials, and so on. In the market period, supplies are essentially fixed. In the short run, plantcapacity is fixed, but in the long run all factors are variable. The elasticity of supply will be most elasticin the long run and least elastic in the market period.
Eric enjoys having sushi and sashimi for lunch every day. Suppose the marginal utility of the last roll of sushiEric eats is 40 and the marginal utility of the last piece of sashimi Eric eats is 20. If the price of a roll of sushi is$8 and the price per piece of sashimi is $2, did Eric maximize his utility? a.Yes, Eric maximized his utility because the price of each good is reasonable. b.Yes, Eric maximized his utility because the marginal utility per dollar spent is less than 100. c.No, the marginal utility per dollar spent on each good must be equal. d.No, the marginal utility of each good must be equal.
c.No, the marginal utility per dollar spent on each good must be equal. The last roll of sushi gave Eric 40 units of utility at a price of $8 per roll; therefore, marginal utility perdollar for sushi is 40/$8 = 5. The last piece of sashimi Eric ate gave him 20 units of utility; at a price of$2 per piece, the marginal utility per dollar for sashimi is 20/$2 = 10. Eric is not maximizing his utilitybecause the marginal utilities per dollar for the last unit of sushi and sashimi consumed are not equal.Eric should consume more sashimi and less sushi until the marginal utilities per dollar of the last unitconsumed are equal.
The market for organic and locally sourced foods has skyrocketed over the past decade as consumers focus onimproved eating habits. However, severe droughts have caused organic food prices to rise significantly,forcing many consumers to shop at conventional supermarkets (which are increasingly adding organic foodoptions) instead of organic food markets such as Whole Foods. In response, companies such as Whole Foodshave begun offering more nonorganic options on their store shelves in order to provide their consumers withmore affordable options. Based on this response, what did companies such as Whole Foods realize about theelasticity of demand for organic foods that caused them to lower their prices by changing the type of foodsthat they sell? a.Consumers will still purchase organic foods regardless of the price increases, which would make thegoods unit elastic. b.Consumers only purchase goods based on the prices without considering other factors that could affecttheir purchase. c.Companies realized the organic foods were inelastic, driving up the price for the goods. d.Companies realized the consumers would substitute other goods for organic foods, making the goodselastic.
d.Companies realized the consumers would substitute other goods for organic foods, making the goodselastic. Organic food companies realized that organic foods tend to be very elastic because they are easilysubstituted by non-organic versions sold at lower prices at other grocery stores. Also, organic foods takeup a larger share of one's income, and their demand is largely based on personal preferences forhealthier foods or animal rights. Finally, conventional grocery stores have increased their offerings oforganic foods, creating more choices for consumers that further increases the elasticity of organic foods.Therefore, by offering non-organic foods, companies like Whole Foods can retain more of theircustomers who still desire some organic foods but are looking to stay within their budgets by makingsome substitutions.
6. Why do the prices of many goods and services end in 99 cents?a.The penny does not make a difference to the organizations. b.Businesses incur additional fees for selling goods outside of the 99 cents price range. c.The extra penny is considered a sunk cost.d.Consumers believe a good ending in 99 cents is more affordable than a good rounded up to the nearestdollar.
d.Consumers believe a good ending in 99 cents is more affordable than a good rounded up to the nearestdollar. Although rounding all prices to the nearest whole dollar would be simpler and would save time withsales transactions and accounting, businesses are reluctant to do so because evidence on consumerbehavior suggests that consumers are more likely to view a price such as $5.99 to be more affordablethan a price of $6.00, even though the actual price difference is a small fraction of 1%. Therefore,consumers are more likely to purchase a good when it is priced at $5.99 rather than a good price at $6.00.This is an example of a framing bias.
According to By the Numbers, rank the types of alternative fuel vehicles in use from the most popular to theleast popular. a.liquefied petroleum gas, E85, compressed natural gas, liquefied natural gas, electricE85 (ethanol), liquefied petroleum gas, compressed natural gas, electric, liquefied natural gas b.liquefied natural gas, electric, compressed natural gas, liquefied petroleum gas, E85E85 (ethanol), liquefied petroleum gas, compressed natural gas, electric, liquefied natural gas c.E85, liquefied natural gas, electric, liquefied petroleum gas, compressed natural gasE85 (ethanol), liquefied petroleum gas, compressed natural gas, electric, liquefied natural gas d.E85, liquefied petroleum gas, compressed natural gas, electric, liquefied natural gasE85 (ethanol), liquefied petroleum gas, compressed natural gas, electric, liquefied natural gas
d.E85, liquefied petroleum gas, compressed natural gas, electric, liquefied natural gasE85 (ethanol), liquefied petroleum gas, compressed natural gas, electric, liquefied natural gas
Income elasticity of demand: a.examines how the quantity supplied of a good changes in response to a change in consumer income. b.examines how the quantity supplied of a good changes in response to a change in the price of asubstitute. c.examines how the quantity demanded of a good changes in response to a change in the price of asubstitute. d.examines how the quantity demanded of a good changes in response to a change in consumer income.
d.examines how the quantity demanded of a good changes in response to a change in consumer income. Income elasticity of demand measures how responsive quantity is to consumer income. When consumerincome rises, the demand for normal goods rises, but falls for inferior goods.
Cross elasticity of demand: a.examines how the quantity demanded of a good changes in response to a change in consumer income. b.examines how the quantity supplied of a good changes in response to a change in consumer income. c.examines how the quantity supplied of a good changes in response to a change in the price of asubstitute. d.examines how the quantity demanded of a good changes in response to a change in the price of substitute.
d.examines how the quantity demanded of a good changes in response to a change in the price of asubstitute. Cross elasticity of demand measures how responsive the quantity demanded of one product is to the priceof another product. A positive cross elasticity means that as the price of one product rises, the quantitydemanded for the other rises. For example, if the price of beef rises, the quantity of chicken demandedrises; therefore, beef and chicken are substitutes because chicken is substituted for beef when beef's priceincreases.
Utility maximization means the: a.marginal utility for each good is equal. b.total utility per dollar spent is equal for all goods. c.total utility for each good is equal. d.marginal utility per dollar spent is equal for all goods.
d.marginal utility per dollar spent is equal for all goods. Utility maximization is reached when marginal utility per dollar spent is equal for all goods. If youreceived five units of utility per dollar for one product and only two units of utility per dollar for anotherproduct, total utility would be increased by consuming more of the first product and less of the secondproduct. This process would continue until you no longer could gain by choosing one product overanother.
Regressive taxes
fall in burden as income increases, which means that individuals with lower incomes pay a greater percentage of their income in taxes than individuals with higher incomes.
Define the general concept of elasticity of demand:
measures how sensitive quantity demanded is to a change in price
