Consumers and Incentives Ch. 5

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, the price elasticity of demand is:

-25/20= -1.25

What is the cross-price elasticity of demand for two goods that are unrelated?

0

Marginal Utility of Good X /Price of Good X < Marginal Utility of Good Y/ Price of Good Y According to the inequality, the marginal utility per dollar spent on good X is less than the marginal utility per dollar spent on good Y. According to the rule of equal marginal utility per dollar spent, what can a consumer do to increase total utility for a given budget from consumption of goods X and Y?

A consumer can increase total utility for a given budget by consuming more good Y and less good X.

An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.

An increase, positive

If the cross-price elasticity of demand between two products is -3.0, then the two products are:

Complements

Suppose you have a fixed amount of income and spend equal amounts on two goods, X and Y. The price of good X is Px = $10, and the price of good Y is Py = $5. The marginal benefit (utility) of X is MBx = 60 units of benefit, and the marginal benefit (utility) of Y is MBy = 15 units of benefit (utility). How should the consumption of X and Y change, if at all, to increase benefit (utility)?

Consumption of good X should increase, and consumption of good Y should decrease.

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is __________ in this range.

Elastic

The more substitutes that exist for a particular product, the __________ the price elasticity of demand.

Greater

Considering the Law of Demand, when you compute a price elasticity of demand the answer is always:

Negative

The demand curve for an inferior good is __________ sloping while the demand curve for a normal good is __________ sloping.

downward, downward

The marginal benefit from consuming the second ice cream cone is the:

extra satisfaction you get from consuming the second ice cream cone

Along a linear demand curve, the slope __________ while the price elasticity of demand __________.

is constant, changes from one point to another

The optimal combination of pizza and coke is the one where the:

marginal benefit per dollar spent on pizza equals the marginal benefit per dollar spent on coke

Consumer optimizing requires that the consumer:

maximize total benefit, subject to an income constraint

If the price of Good A rises, other things being constant, then the marginal benefit:

per dollar's worth of Good A falls

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes

The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.

price elasticity of demand

Diamonds have a higher price than water because:

the price reflects marginal, not total, benefit