Chapter 5: Consumer Theory
budget constraint
the goods a customer can choose that exactly exhaust her entire budget
Noreen consumes two goods, food and clothing. The price of food is $3, the price of clothing is $14, and her income is $5,000. Noreen always spends 40 percent of her income on food regardless of the price of food, the price of clothing, or her income. 1. What is her price elasticity of demand for food? A. Zero. B. Some number between 0 and 1.0. C. Exactly 1.0. D. Indeterminate. 2. What is her cross-price elasticity of demand for food with respect to the price of clothing? A. Some negative number, since food and clothing are complements. B. Some positive number, since food and clothing are substitutes. C. Approximately 1.0. D. Exactly zero. 3. What is her income elasticity of demand for food? A. Approximately zero. B. A small positive number, since food is a necessity. C. A small negative number, since food is an inferior good. D. Exactly 1.0.
1. C. Exactly 1.0. 2. D. Exactly zero. 3. D. Exactly 1.0.
Economists have pinpointed three primary reasons for elasticity differences:
1. Closeness of substitutes 2. Budget share spend on the good 3. Available time to adjust
consumer's problems
1. what do you like 2. what does it cost 3. can you afford it
How does a consumer's budget set differ from his budget constraint?
A budget set refers to all of the possible bundles of goods and services a consumer can purchase, while a budget constraint is limited to the bundles he can purchase using all of his income.
Given the information about Henry's income and the prices for concerts and movies, we are unable to determine where on the budget line Henry would choose to consume because __________. A. Henry's tastes regarding movies and concerts are unknown to us. B. Henry's budget line is an incomplete description of his choices. C. like all consumers, Henry's consumption choice is a rash decision. D. none of the above.
A. Henry's tastes regarding movies and concerts are unknown to us.
Why does a demand curve with a constant slope not have a constant elasticity? A. Slope is based on absolute change and elasticity is based on percentage change. B. Elasticity depends on more variables than does slope. C. Slope measures responsiveness and elasticity measures change. D. Slope is based on percentage change and elasticity is based on absolute change.
A. Slope is based on absolute change and elasticity is based on percentage change.
Which of the following criteria would most likely influence an optimizing buyer's purchasing decisions? A. highest marginal benefit per dollar spent B. highest marginal benefit C. lowest price D. lowest opportunity cost
A. highest marginal benefit per dollar spent
John is a soda drinker that likes both Coke and Pepsi. He usually picks whichever has the best price or is most convenient. If Pepsi is on sale for $1 a liter and Coke is charging $1.50 for the same, John's demand curve for Coke will experience: A. a movement up the curve. B. a right shift (outward). C. a movement down the curve. D. a left shift (inward).
D. a left shift (inward).
For a consumer with a given level of income, the combinations of goods for the budget constraint will be -------than for the budget set.
Lower
The demand curve graphs a consumers responsiveness to a change in ________. The points on the curve can be verified through ______ .
Price / marginal analysis A demand curve maps how quantity demanded responds to price changes, holding all else equal. Every point on the demand curve represents a unique price and quantity, which can be verified through marginal analysis.
Suppose the price is given as $1. The consumer surplus is 4.5. Suppose the price increases to $3. The new consumer surplus is 0.5. The consumer surplus has reduced because-----------
The consumer surplus has decreased for two reasons: 1. Some existing buyers no longer consume the good, 2. The buyers who remain in the market pay a higher price and enjoy a lower consumer surplus.
Anna Jones estimated the price elasticity of demand for new vehicles to be 0.78. If the price of cars increased by 12%, one would expect the quantity of new cars demanded to _____by ____
decrease by 9.36%
The demand curve for an inferior good is __________ sloping while the demand curve for a normal good is __________ sloping.
downward, downward
An increase in income shifts the budget constraint -----. The shift in income causes the budget constraint to increase ----- and the slope to ------
outward/ by the same amount/ remain the same
The marginal benefit per dollar of the second burger
Mb of the 2nd burger/ $ of a burger
Consumer optimizing requires that the consumer:
maximize total benefit, subject to an income constraint
Walmart and Target are both discount retailers. However, during the Great Recession of 2009, Target's same-store sales fell while sales at Walmart actually increased. Examine the following statements and identify the ones that could explain this outcome. (Check all that apply.) A. Walmart stocks more goods like food and health items than Target. B. Both Target and Walmart attract a lot of price-sensitive customers. C. The unemployment level in the United States increased substantially during the recession of 2009. D. Walmart's annual revenues have, on average, been higher than Target's annual revenues. E. Target positions itself in the market as a low-cost retailer of home accessories and clothing.
A. Walmart stocks more goods like food and health items than Target. E. Target positions itself in the market as a low-cost retailer of home accessories and clothing.
A budget constraint for t-shirts and movie tickets is shown in the graph. If the price of either the t-shirt or the movie ticket decreases, the budget constraint: A. pivots outward and the slope changes. B. pivots inward and the slope increases. C. pivots inward and the slope changes. D. pivots outward and the slope decreases.
A. pivots outward and the slope changes. A decrease in the price of one good causes the budget constraint to pivot outward. This is because the consumer's income can buy more units of a good if the price goes down. The slope also changes, because the opportunity cost changes when the price changes. However, whether the slope increases or decreases depends on which good's price decreases.
Which of the following best describes why consumers are price takers? A. Individual transactions are too small to have much impact on the market price. B. Many individuals lack the skills to negotiate prices. C. Consumers don't know what it costs to make most products. D. If consumers don't pay the price asked, the store will just sell the product to someone else.
A. An individual consumer tends to buy only a tiny fraction of the total amount of a produced good. Because each buyer is only a small part of the market, an individual purchase will not have an effect on the market as a whole. Consumers can buy as much of any good they want at the fixed price if they have sufficient money to pay for it. In a perfectly competitive market, consumers are price takers.
A consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because ___________. A. any shift in consumption toward either good will violate her budget constraint. B. the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off. C. her preferences become distorted and therefore invalid when the marginal benefits per dollar are unequal. D. an inequality between these ratios implies that she has insufficient income to achieve maximum satisfaction.
B. the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off.
In the market for sweaters, suppose Green's price elasticity of demand is 0.3, Smith's price elasticity is 1.3, and the price elasticity of all the other consumers is greater than 0.3 but less than 1.3. Could the market price elasticity be less than 0.3 or greater than 1.3? A. Yes, it can be a multiple or fraction of the average of the elasticities of individual consumers. B. No, it must lie between 0.3 and 1.3.
B. No, it must lie between 0.3 and 1.3. Because price elasticity is based on the % change, not the absolute change
If you were to purchase a $700 Samsung smart phone from Amazon, we could conclude all of the following, except: A. you believed that smart phone would bring satisfaction. B. you would rather have a laptop that costs $700. C. you wanted a smart phone. D. you prefer that smart phone to anything else costing $700.
B. you would rather have a laptop that costs $700. The benefits that you receive from consuming goods and services are a direct result of your tastes and preferences. When you buy something, you choose what you think will give you the most satisfaction. At the moment you bought the phone you thought nothing on Amazon was better to purchase, including a laptop that costs $700.
Consider a good that you do not like at all, perhaps turnips. Given the market price for turnips, what would be your consumer surplus? A. Zero, since not liking turnips at all implies an unwillingness to pay anything. B. Zero, unless someone actually pays you to eat them. C. Some positive, but it will be a very small number. D. Both A and B are possible.
D. Both A and B are possible.
Given that burgers and fries are complementary goods, if the price of fries increases the demand for both goods will fall. Is this an accurate statement? A. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded (not the demand) for burgers. It will, however, as the statement claims, reduce the demand for fries. B. Yes, the increase in the price of fries will reduce both the demand for fries and the demand for burgers. C. No, the quantity demanded (not the demand) for both goods is reduced as a result of the increase in the price of fries. D. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded (not the demand) for fries. It will, however, as the statement claims, reduce the demand for burgers.
D. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded (not the demand) for fries. It will, however, as the statement claims, reduce the demand for burgers.
Diamonds have a higher price than water because:
the price reflects marginal, not total, benefit The total benefit of water far exceeds that of diamonds. However, price is determined based on marginal value. Consumers with ready access to gallons of water derive much less benefit from consuming the next gallon of water. However, consumers likely have few diamonds and derive a tremendous amount of benefit from the consumption of one more diamond.
budget set
the set of all possible bundles of goods and services that can be purchased with a consumer's income