Micro Econ exam #1
Refer to the figure at right. The slope of the budget line equals
-0.5
Consider the market in the figure to the right. What happens to the market demand curve if consumer income increases?
According to the graph, for a given price, consumers now demand a larger quantity.
What is Pareto improvement?
An improvement to a system when a change in allocation of goods harms no one and benefits at least one person.
Andrew's marginal utility for DVDs (D) is MUD=X and his marginal utility for Xbox games (X) is MUX=D. Andrew's income is $120, the price of a DVD is $20.00, and the price of an Xbox game is $10.00. How many DVDs and Xbox games does Andrew consume to maximize his satisfaction?
Andrew consumes 3 DVDs and 6 Xbox games. Suppose the price of DVDs decreases to $10.00. What is Andrew's new satisfaction-maximizing bundle? Andrew now consumes 6 DVDs and 6 Xbox games.
In recent years the cost of producing organic produce in the United States has decreased largely due technological advancement. At the same time, more and more Americans prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market?
Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.
Recent research estimates that the short-run price elasticity of demand for gasoline in the United States is −0.3 and the long-run price elasticity of demand is −1.4. What happens if the government increases the federal gasoline tax?
Consumer expenditures on gasoline increase over the short run and decline over the long run.
Refer to the figure at right. If close substitutes are difficult to find in the short run, which of the demand curves in the figure best represents market demand in the short run?
D1
Which of the following best describes the demand curve in the figure at right?
Demand is completely inelastic.
Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently consumes, the marginal utility he receives from iced tea is 16 utils, and the marginal utility he receives from lemonade is 8 utils. Instead of consuming this bundle, Alfred should: A. buy more iced tea and lemonade. B. buy more lemonade and less iced tea. C. buy more iced tea and less lemonade. D. buy less iced tea and lemonade. E. None of the above is necessarily correct.
E. None of the above is necessarily correct.
If Px = Py, then when the consumer maximizes utility,
MUx must equal MUy.
Refer to the figure at right. On the assumption that the consumer prefers more to less, which of the following baskets are preferred to market basket A?
Only E
Olive oil producers want to sell more olive oil at a higher price. Which of the following events would have this effect?
Research finds that consumption of olive oil reduces the risk of heart disease
Let D= demand, S = supply, P = equilibrium price, and Q= equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged?
S decreases, D no change, P increases, Q decreases.
price elasticity and quantity supplied
The price elasticity of supply is 1.2, and price increases by 9 percent. As a result, the quantity supplied will increase by 10.8 percent.
When demand is inelastic, an increase in price causes the seller's total revenues to
increase
Marginal utility measures
the additional satisfaction from consuming one more unit of a good.
partial credit,Concept Question 4.1 Question Help A minor league baseball team raised the average price of its tickets from $8 to $8.70 and found that average attendance at its games dropped from 5,200 to 4,700. Using the arc elasticity of demand formula, the price elasticity of demand for tickets is
-1.2. The demand for tickets is therefore price elastic
Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility-maximizing choice between these two goods?
15 pounds of apples and no oranges
The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be
2 lemonades for each popcorn.
Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. What is her optimal choice under this scenario?
6 packages of hot dogs and 6 packages of buns
What is the difference between an 'increase in supply' and an 'increase in quantity supplied'?
An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a given supply curve in response to an increase in price.
Refer to the figure at right. Which of the market baskets—A, B, or C—is preferred to the others?
Basket A
Which of the following best describes the demand curve in the figure at right?
Demand is infinitely elastic.
A price floor policy establishes a minimum price for a market. Which of the following results from a binding price floor?
Excess supply
Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 50 percent increase in the price of new books and a 50 percent increase in the price of used books, Antonio's father offers him $200 extra.
Is Antonio worse or better off after the price change? Explain. Antonio will be equally well off if he continues to spend all of his income on new books. At the same time, he would be equally well off if he were to spend a portion of his money on used books.
Cigarettes were actually subject to a federal tax of 40 cents per pack in 2007, and the tax was levied on buyers. The demand and supply equations given above were the ones after imposition of the tax (so P was the net payment received by sellers). What did this tax do to the market-clearing price and quantity?
It increased the equilibrium price by less than 40 cents per pack and decreased the equilibrium quantity by less than 0.7 billion packs.
The diagram on the right shows a consumer's budget line and three indifference curves for goods X and Y. At which point does the consumer maximize total satisfaction?
Point A
What is the allocative function of price?
Price directs scarce supplies to the users who place the highest value on them.
Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?
Px/Py = money income.
An increase in the number of firms in the market would be represented by a movement from
S1 to S2.
Refer to the figure at right. What can we say about this consumer's preference about bundles D and K?
She prefers K to D.
If prices and income in a two-good society double, what will happen to the budget line?
There will be no effect on the budget line.
Refer to the figure at right. How do total expenditures on movie tickets vary along the demand curve?
Total expenditures remain the same between points along the demand curve.
Ralph usually buys 1 pizza and 2 colas from the local pizzeria. The pizzeria announces a special: All pizzas after the first one are half-price. Show the original and new budget constraint
What can you say about the bundle Ralph will choose when faced with the new constraint? Ralph may consume the same amount of pizza or may consume more, but he will not consume less pizza.
Which of the following is a microeconomic question?
What factors determine the price of carrots?
If the price of chocolate increases, then there will be
a decrease in the quantity of chocolate demanded.
When demand is elastic, an increase in price leads to
a decrease in total expenditures.
Somewhat differently, macroeconomics examines
aggregate economic quantities such as the level of national output.
Refer to the figure at right. Which of the following could have caused the shift of the budget line?
an increase in income
Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses. She just cannot decide. An economist would say that this is an example of preferences that
are incomplete
The indifference curves for two goods that are perfect complements
are shaped as right angles.
The indifference curves for two goods that are perfect substitutes
are downward-sloping straight lines.
If demand in a perfectly competitive market is perfectly inelastic and supply is upward sloping, a specific tax placed on suppliers will
be paid entirely by consumers, and there will be no deadweight loss.
Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will
become flatter
Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods? A set of indifference curves
cannot be upward sloping because this violates the assumption that more is better than less, indicating that one of the goods is a "bad."
On the diagram to the right is plotted a single bundle of 2 books and 4.5 DVDs consumed per month. This bundle is a point on the consumer's budget constraint. If the price of one book is $135.00 and one DVD is $60.00, then the consumer's level of monthly income is $540
consumer's budget constraint
Use the rectangle tool to locate the set of all bundles that unambiguously provide the same level of satisfaction, or are less preferred to bundle A (including bundle A) . Label this area 'Bundles'. Note: Extend your rectangle to the very edges of the graph.
consumption bundles
Refer to the figure at right. Fill in the blanks. For any price higher than P*, the quantity demanded ________, and for any price lower than P*, the quantity demanded ________.
drops to zero; increases without limit
The vertical distance of the shift in supply from a specific tax of t amount on producers will
equal t
In the case of a specific tax, tax incidence is independent of who pays
in all cases
Measuring "y" on the vertical axis and "x" on the horizontal axis, convexity of indifference curves imply that the magnitude of MRS of "y" for "x"
is decreasing as "x" increases.
Satisfaction from consumption is maximized when
marginal benefit equals marginal cost.
If two goods are substitutes, the cross-price elasticity of demand must be
positive.
An indifference curve shows all combinations of two goods that
provide the consumer with the same level of satisfaction.
In a market economy price serves to
ration goods and allocate production resources
The endpoints (horizontal and vertical intercepts) of the budget line
represent the quantity of each good that could be purchased if all of the budget were allocated to that good.
In economics, choices must be made because we live in a world of
scarcity.
Microeconomics is the branch of economics that deals with
the behavior of individual firms and how economic units interact to form markets.
Based on the figure at right, it can be inferred that
the consumer regards orange juice and apple juice as perfect substitutes.
A few years ago, the city of Seattle, Washington, considered imposing a specific tax on all espresso-based coffee drinks sold in the city. The extra tax revenue generated would have been used to fund after-school programs for low-income children. The coffee-house owners (firms) agreed that this would be a good program to fund, but they argued that the tax would sharply reduce their sales volume and they would pay most of the tax burden. This claim is true if
the demand for espresso-based coffee is more elastic than supply.
When the optimal point on an indifference curve and budget line diagram is a corner solution,
the marginal rate of substitution does not necessarily equal the ratio of prices for the two goods.
The slope of an indifference curve reveals
the marginal rate of substitution of one good for another good.
A consumer says he prefers a Toyota automobile to a Ford and a Ford to a Jeep. He also says he prefers a Jeep to a Toyota. Which basic assumption about preferences does this consumer violate?
transivity
Refer to the figure at right. The price elasticity of demand along this demand curve is equal to
zero.
For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?
−2.75%
The price of coffee is always equal to one-half the price of tea. When we plot the budget line for coffee and tea, coffee is plotted on the horizontal axis. What is the slope of this budget line?
-1/2
A decrease in taste or preference would be represented by a change from
D2 to D1.
1. Phil's utility funtion for food (F) and shelter (S) is given by U=3S+2F. Phil's marginal utility function for food is MUF=2. Phil's marginal utility function for shelter is MUS=3.
If shelter is the good on the horizontal axis, Phil's marginal rate of substitution of shelter for food is MRS=3/2. Does Phil have (strictly) diminishing marginal utility for both goods? NO
Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3 (assuming pencil is on the horizontal axis). Which of the following is true?
Jack could increase his utility by buying more pencils and fewer pens.
A vegetable fiber is traded in a competitive world market.....
equation for demand: Q=40-2P equation for supply: Q=2/3P The U.S. price will be $15 and the level of fiber imports will be 10 million. The U.S. price will be $6 and the level of fiber imports will be 24 million.
The income elasticity of demand refers to
the percentage change in quantity demanded resulting from a 1 percent increase in income.
The cross-price elasticity of demand refers to
the percentage change in the quantity demanded of one good resulting from a 1 percent increase in the price of another good.
Along any downward-sloping, straight-line demand curve
the price elasticity varies, but the slope is constant.
A change in all of the following variables will change the market demand for a product except
the price of the product.
Farmers complain that they cannot make a living selling sugar at the current market-clearing price. They successfully lobby the government to initiate price controls on the sale of sugar. The government sets a price floor substantially above the equilibrium price, and no one is allowed to sell sugar for a price less than the price floor. As a result,
there will be a surplus of sugar.
At a price of $20,
there would be a surplus of 8 units.
Assume that the current market price is below the market clearing level. We would expect
upward pressure on the current market price.
Sugar can be refined from sugar beets. When the price of those beets falls,
the supply curve for sugar would shift right
In 2004, hurricanes destroyed a large portion of Florida's orange and grapefruit crops. In the market for citrus fruit,
the supply curve shifted to the left resulting in an increase in the equilibrium price.
Assume that the price for swimming pool maintenance services has risen and sales of these services have fallen. One can conclude that
the supply of swimming pool maintenance services has decreased.
Based on his preferences, Bill is willing to trade 6 movie tickets for 1 ticket to a basketball game. If movie tickets cost $12 each and a ticket to the basketball game costs $68, should Bill trade movie tickets for basketball tickets? Why or why not? Bill should
trade movie tickets for basketball tickets because his marginal utility per dollar spent on movie tickets is less than his marginal utility per dollar spent on basketball tickets.
Suppose that the demand equation for cigarettes in 2007 in the U.S. was Upper Q equals 26.9 minus 1.71 Upper PQ=26.9−1.71P and the supply equation for cigarettes was Q=9.62+2.13P where P was the price per pack in dollars and Q was the number of packs per year in billion packs.
1. How many packs of cigarettes did Americans smoke in 2007? What was the average retail price they were paying for cigarettes? In 2007, Americans smoked 19.2 billion packs of cigarettes. They paid an average retail price of $4.5 per pack. 2. What were the price elasticities of demand and supply in 2007 at the market-clearing price and quantity? At the market-clearing price and quantity in 2007, the price elasticity of demand was -0.4 , and the price elasticity of supply was 0.5
Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and Monica's income is $120.00, how much of good A will she purchase?
120
Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(F,C)=FC. In addition, the price of food is $3 per unit, the price of clothing is $10 per unit, and Julio's weekly income is $50. 1. What is Julio's marginal rate of substitution of food for clothing when utility is maximized? Explain. (Assuming food is on the horizontal axis.) Julio's marginal rate of substitution equals: 0.30, which is the price of food divided by the price of clothing.
2. Suppose instead that Julio is consuming a bundle with more food and less clothing than his utility maximizing bundle. This bundle is also on the budget line. Would this marginal rate of substitution of food for clothing be greater than or less than your answer above? Explain. If Julio is instead consuming a bundle with more food and less clothing than his utility maximizing bundle, then his marginal rate of substitution will be less than 0.30 because he will be consuming a bundle that is to the right of his satisfaction maximizing bundle.
1. Phi's utility function is given by U=2FS where F is the quantity of food and S is the quantity of shelter. Derive an equation for the indifference U=4. The equation for the indifference curve U=4 isUpper S=2/F
2. Phi's utility function is given by U=2F+S where F is the quantity of food and S is the quantity of shelter. Which of the following is an function for the indifference U=4 ? S=4-2F
Phil's utility is given by U=2XY where X is the quantity of good X (on the horizontal axis) and Y is the quantity of the composite good Y. 1. What are Phil's marginal utility functions of good X and good Y? Phil's marginal utility function of good X is MUX=2Y and his marginal utility function of good Y is MUY=2X. 2. What is Phil's marginal utility of good X when he consumes the bundle (X=3, Y=2)? Phil's marginal utility of good X when he consumer the bundle (3, 2) is 4.
3. What is the marginal rate of substitution function of X for Y? The MRS function of X for Y is MRS = Y/X 4. What is the MRS of X for Y at the bundle (X=3, Y=2)? The MRS at the bundle (3, 2) is MRS|(3, 2) = 0.67
Consider the market in the figure to the right. What happens to the market supply curve if the costs of production increase?
According to the graph, for a given price, firms now supply a smaller quantity.
Which of the following would cause the equilibrium price to decrease and the equilibrium quantity of white bread to increase?
A decrease in the price of flour.
From 1970 to 2017, the real price of eggs decreased. Which of the following would cause an unambiguous decrease in the real price of eggs?
A shift to the right in the supply curve for eggs and a shift to the left in the demand curve for eggs
In 2004, hurricanes damaged a large portion of Florida's orange crop. As a result of this, many orange growers were not able to supply fruit to the market. After the hurricane, what would we expect to see happen in the market at the pre-hurricane (initial) equilibrium price?
A shortage of oranges
Which of the following will result in a decrease in a consumer's purchasing power?
An increase in the price of the good on the horizontal axis, A decrease in the consumer's income, An increase in the price of the good on the vertical axis
Recall that the demand equation is Q=27−3P, the supply equation is Q=−9+9P, the initial equilibrium price is P*=$3.00 (dollars per pound), and the initial equilibrium quantity is Q*=18 (million metric tons per year). 1. Using the given demand and supply equations, calculate the effect of a 40-percent decrease in copper demand on the price of copper. Note: use the initial equilibrium values for P* (= $3.00) and Q* (= 18 million metric tons) when calculating the changes below.
As a result of this change in demand, the price of copper will decrease by $0.67. (Enter your response rounded to two decimal places.) and the equilibrium quantity will decrease by 6.03 million metric tons per year. (Enter your response rounded to two decimal places.) 2. Now suppose as well that the U.S. production of copper declined between 2000 and 2003. Calculate the effect of both a 40-percent decrease in copper demand (as you did above) and a 10-percent decline in copper supply. As a result of both of these changes, the equilibrium price of copper will decrease by $0.55 (Enter your response rounded to two decimal places.) and the equilibrium quantity of copper will decrease by 6.25 million metric tons per year.
Recall that the short-run world oil demand equation is: Q=33.6−0.02P, the short-run total oil supply equation is: Q=31.05+0.012P, the initial equilibrium price is P*=$79.69 (dollars per barrel), and the initial equilibrium quantity is Q*=32.01 billion barrels per year (bb/yr). Saudi Arabia is one of the world's largest oil producers, accounting for roughly 3 bb/yr, which is nearly 10 percent of total world oil production. What would happen to the price of oil if, because of war or political upheaval, Saudi Arabia reduced oil production by 2.00 bb/yr?
As a result of this change in supply, the short-run equilibrium price of oil would increase by $62.50 and the short-run equilibrium quantity would decrease by 1.25 bb/yr. 2. Now recall that the long-run world oil demand equation is Q=41.6−0.12P and the long-run total oil supply equation is Q=26.3+0.071P. The long-run equilibrium price is $80.10 and the long-run equilibrium quanity is 31.99 bb/yr. Continue to consider a 2.00 bb/yr reduction in oil supply by Saudi Arabia. As a result of this change in supply, the long-run equilibrium price of oil would increase by $10.48 and the long-run equilibrium quantity of oil would decrease by 1.26 bb/yr.
The budget constraint for a consumer who only buys apples (A) and bananas (B) is: PAA + PBB = I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation
B = I/PB−(PA/PB)A.
The demand for a product is Q = 800 −5P and supply is Q = 100 + 2P. The market-clearing price is $100 and the market-clearing quantity is 300 units.
Consumers complain that this price amounts to price gouging and successfully lobby the government to set a price ceiling of $60 for the product. As a result, consumers will want to consume 500 units while producers will want to sell only 220. As a result of the price ceiling, there will be a shortage of 280 units.
A consumer has $200 per month to be spent on books (good B) and DVDs (good D). Market prices are as follows: PB = $25 and PD = $40. Use the line drawing tool to plot this consumer's budget constraint. Label this line 'Budget'.
Given this data, what is the slope of the budget line? Slope = -0.63 What is the budge line equation? 25 Upper B plus 40 Upper D equals 20025B+40D=200
Paul consumes only books and DVDs. At his current consumption bundle, his marginal utility from DVDs is 25 and from books is 2. Each DVD costs $12, and each book costs $2. Is he maximizing his utility? Explain. Let MUB be the marginal utility of books, MUD be the marginal utility from DVDs, PB be the price of books, PD be the price of DVDs, and MRS be the marginal rate of substitution. not maximizing his utility because MUB/PB<MUD/PD.
If he is not, how can he increase his utility while keeping his total expenditure constant? Paul could increase utility while keeping total expenditures constant by consuming more DVDs and fewer books
Phil's utility funtion for food (F) and shelter (S) is given by U=3F^0.3S^0.7. Phil's weekly budget on food and shelter is $100. Then, in the utility maximizing bundle, the expenditure on food is $30/wk and the expenditure on shelter is $70/wk
If the price of food and shelter are $3/lb and $10/sq yd, Phil consumes 10 lbs/wk of food and 7 sq yds/wk of shelter in his utility maximizing bundle.
Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one can of Coke. What can you say about Jon's marginal rate of substitution? Jon's marginal rate of substitution is equal to 1. The figure to the right includes two budget lines with different slopes (L1 and L2). What conclusions can you draw about Jon's satisfaction-maximizing choices?
If the ratio of the price of Sprite to the price of Coke is less than one, then Jon will only consume Sprite.
When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that
Joe is not consuming good Y.
To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?
Parallel outward (rightward) shift
Assume there is a shortage in the market for digital music players. Which of the following statements correctly describes this situation?
Some consumers will be unable to obtain digital music players at the market price and will have an incentive to offer to buy the product at a higher price.
A consumer has $180 in monthly income to be spent on two goods Z and B. The price of good Z (Pz) is $4.00. The slope of the budge line is equal to −2. That is 2 units of good B can be traded for 1 unit of good Z. What is the price of good B? $2.00 How many units of good B can be purchased if all income is used for that good? 90.00 units
The budget line equation can be written as 2.00B+4.00Z=180
Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (PF), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?
The budget line is now convex to (bows in toward) the origin.
Governments frequently limit how much of a good a consumer can buy. During emergencies, governments may ration "essential" goods such as water, food, and gasoline rather than let their prices rise. Suppose that the government rations water, setting quotas on how much a consumer can purchase. If a consumer can afford to buy 30 thousand gallons a month but the government restricts purchases to no more than 10 thousand gallons a month, how do the consumer's budget line and opportunity set change?
The consumer has fewer opportunities with the quota.
If a 5-percent increase in the price of corn flakes causes a 7-percent decline in the quantity demanded, what is the elasticity of demand?
The elasticity of demand is -1.4
Suppose that Jones and Smith have each decided to allocate $1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games. In the figure to the right, two indifference curves are drawn for Jones for successive levels of utility and two indifference curves are drawn for Smith for successive levels of utility. Smith's indifference curves are the blue (U1B, U2B) pair. Using the concept of marginal rate of substitution, explain why the two sets of curves are different from each other.
The indifference curves are different because Jones's marginal rate of substitution is larger than Smith's.
Consumers in Florida pay half as much for peaches as they do for avacados. However, peaches and avacados are the same price in California. If consumers in both states maximize utility, will the marginal rate of substitution of avacados for peaches be the same for consumers in both states? If not, which will be higher?
The marginal rate of substitution of avacados for peaches will be higher in Florida
Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true?
The marginal utility of X may be positive or negative (depending on the quantity of X and Y consumed).
Suppose the U.S. demand curve for gasoline shifts rightward and the U.S. supply curve for gasoline remains unchanged. As a result, the price of gasoline increases by 9 percent and the equilibrium quantity increases by 3 percent. Which of the following statements is true based on this information?
The price elasticity of supply for gasoline is roughly 0.33.
The diagram on the right shows a consumer's budget line and indifference map for two goods, X and Y. The consumer's income is $60, the price of X is $6, and the price of Y is $4.
The price of X drops to $3 while the price of Y remains at $4 When the price of good X dropped from $6 to $3, the consumer purchased more of X and less of good Y.
Refer to the figure at right. Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?
The price of food decreased, and the price of clothing increased.
Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week, the owner of the pool service informed Danielle that he will have to raise his monthly service fee because of increases in the price of pool chemicals. How is the market for pool maintenance services affected by this?
There is a decrease in the supply of pool maintenance services.
In an effort to get more Americans to drink milk, the government sets a price ceiling on milk that is substantially below the equilibrium price. Which of the following will occur?
There will be a shortage of milk.
Suppose the demand curve for a product is given by Q=13−1P+2PS where P is the price of the product and PS is the price of a substitute good. The price of the substitute good is $2.30. Suppose P=$0.90. The price elasticity of demand is negative . 05−.
The cross-price elasticity of demand is 0.28. Suppose the price of the good, P, goes to $1.80. Now the price elasticity of demand is -0.11 The cross-price elasticity of demand is 0.29
usually buys 1 Big Mac and 2 orders of fries from McDonald's. However, suppose McDonald's announces a special: All Big Macs after the first one are half-price. Show the original and new budget lines. Assume Christopher spends half of his income on Big Macs and the other half on fries when he consumes 1 Big Mac and 2 orders of fries. 1.) Using the line drawing tool, graph the original budget line. Label this line L1. 2.) Using the line drawing tool, graph the portion of the new budget line that differs from the original one. Label this line L2.
What is the slope of the original budget line? -2 After the first Big Mac, the price of successive Big Macs decreases, making the portion of the new budget line that is different from the original budget line flatter.
Refer to the figure at right. When computing the marginal rate of substitution from point to point, as we move downward across the curve, we discover
a diminishing marginal rate of substitution.
If the current market price is $15, the market will achieve equilibrium by
a price increase, increasing the quantity supplied and decreasing the quantity demanded.
What is the difference between ordinal utility and cardinal utility? Ordinal utility refers to
a ranking of market baskets in order of most to least preferred, while cardinal utility indicates how much one market basket is preferred to another.
In 1994, the state of California suffered a devastating earthquake. To help pay for the damages, the state raised its sales tax by one cent per dollar of expenditure on most consumer goods. This state sales tax is an example of what economists call
an ad valorem tax.
An increase in the demand for lobster due to changes in consumer tastes, accompanied by a decrease in the supply of lobster as a result bad weather reducing the number of fishermen trapping lobster, will result in
an increase in the equilibrium price of lobster; the equilibrium quantity may increase or decrease.
Explain why the assumption of cardinal utility is not needed in order to rank consumer choices. Cardinal utility is not needed in order to rank consumer choices because economists
can instead use ordinal utility to show how consumers rank different baskets.
Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of clothing increases and the price of food and income do not change, then the budget line changes by rotating
counter-clockwise about the fixed horizontal axis intercept.
Most economists are against rent control because it
discourages the building of new apartments.
Pablo's demand for pizza is inelastic. If the price of pizza decreases, we can predict that Pablo will
eat more pizza and spend less on pizza than he did before the price decrease.
A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the figure at right. Given this information, the burden of the tax
falls mostly on consumers
A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the figure at right. Given this information, the burden of the tax
falls mostly on producers.
If price and quantity are not at their equilibrium positions, then
it is possible to reallocate so that some people are better off without harming others.
Artificially low rents caused by rent control undercut the allocative function of price by
sending a false signal to investors about the need for additional housing. Under rent controls, apartment builders earn less than they could by investing their money elsewhere.
To protect the cod fishery off the northeast coast of the United States, the federal government may limit the amount of fish that each boat can catch in the fishery. The result of this public policy is to
shift the cod supply curve to the left.
Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level? The hot weather will:
shift the demand curve to the right, initially creating a shortage until the price rises to where quantity supplied again equals quantity demanded.
Assume that steak and potatoes are complements. When the price of steak goes up, the demand curve for potatoes
shifts to the left.
When the price of a normal good falls, consumers buy a larger quantity because of the ________ effect and the ________ effect.
substitution; income
Indifference curves are convex to the origin because of
the assumption of convexity.
At the optimal point on an indifference curve and budget line diagram (assuming an interior solution)
the consumer spends his or her entire budget on the two goods, the optimal indifference curve is tangent to the budget line, the marginal rate of substitution between the two goods equals the ratio of their prices.
When different indifference curves are placed in the Cartesian plane,
the curves cannot intersect, the curves that occupy a place farther away from the origin yield more utility than curves closer to the origin, the result is called an indifference map.
The Internet has created a new category in the book selling market, namely, the "barely used" book. How does the availability of barely used books affect the market for new books?
the demand curve for new books shifts to the left.
When the optimal point on an indifference curve and budget line diagram is a corner solution,
the marginal rate of substitution usually does not equal the ratio of prices for the two goods.
Elasticity measures
the percentage change in one variable in response to a one percent increase in another variable.
If in the market for oranges the supply has increased, then
the supply curve for oranges has shifted to the right.
True or false? The steeper the demand curve for a good relative to the supply curve for that good, the greater the proportion of a tax on that good that will fall on buyers.
true
Refering to the graph above. The equilibrim price and quantity are $12/lobster and 3000 lobsters/day, respectively. The market is not in equilibirum, with the prevailing price being $8/lobster in the market. Suppose a dissatisfied buyer were to offer a supplier $11 for a lobster. This transaction would improve the buyer's position by ___; it would also improve the seller's position by ___.
$7, $1
Phil's utility funtion for food (F) and shelter (S) is given by U=3[SF. Then, Phil's marginal utility function for food is MUf= 1.5[S/F
Phil's marginal utility function for shelter is MUs=1.5S^-0.5F^0.5 If shelter is the good on the horizontal axis, Phil's marginal rate of substitution of shelter for food is MRS= F/S Is Phil's preference convex? YES
The burden of a tax per unit of output will fall heavily on consumers when demand is relatively _____________ and supply is relatively ____________.
inelastic; elastic
