Unit 2: Homework Answers
The marginal utility of the last unit of apples consumed is 12, and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium?
$6 and $4
Cost-benefit analysis attempts to
compare the benefits and costs associated with any economic project or activity.
The demand for a product is inelastic with respect to price if
consumers are largely unresponsive to a per unit price change.
The diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. In the immediate market period, the increase in demand will
increase equilibrium price but not equilibrium quantity.
If the demand for product X is inelastic, a 4 percent decrease in the price of X will
increase the quantity of X demanded by less than 4 percent.
The fact that most medical care purchases are financed through insurance
increases the amount of health care consumed by reducing the price of additional units of care.
Refer to the table. Over the $8-$6 price range, supply is
inelastic.
A public good
is available to all and cannot be denied to anyone.
The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore, demand for X in this price range
is elastic.
An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which
maximum willingness to pay exceeds minimum acceptable price.
If one person's consumption of a good does not preclude another's consumption, the good is said to be
nonrival in consumption.
A demand curve that is parallel to the horizontal axis is
perfectly elastic.
The slope of a budget line reflects the
price ratio of the two products.
The market system does not produce public goods because
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
A consumer who has a limited budget will maximize utility or satisfaction when the
ratios of the marginal utility of each product purchased divided by its price are equal.
Noncash gifts
reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences.
Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that
resources are currently underallocated to the provision of holiday lighting in Anytown.
Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4, respectively. The marginal utility of the last units of A and B are 16 and 24, respectively. These data suggest that Ms. Thomson
should buy less B and more A.
A demand curve for a public good is determined by
summing vertically the individual demand curves for the public good.
(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes
the Coase theorem.
A positive externality or spillover benefit occurs when
the benefits associated with a product exceed those accruing to people who consume it.
Allocative efficiency occurs only at that output where
the combined amounts of consumer surplus and producer surplus are maximized.
If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then
the demand for the product is elastic in the $6-$5 price range.
At the output where the combined amounts of consumer and producer surplus are largest,
the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
In moving along a given budget line,
the prices of both products and money income are assumed to be constant.
The concept of price elasticity of demand measures
the sensitivity of consumer purchases to price changes.
Suppose you have a limited money income and you are purchasing products A and B, whose prices happen to be the same. To maximize your utility, you should purchase A and B in such amounts that
their marginal utilities are the same.
Refer to the information and assume the stadium capacity is 5,000. If the Mudhens' management charges $7 per ticket,
there will be 1,000 empty seats.
Economists consider governments to be "wasteful"
whenever they over- or underallocate resources to a project.
Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price
will increase, but equilibrium quantity will be unchanged.
Which of the following statements is correct?
Noncash gift-giving creates a value loss, but cash gifts do not.
Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2, respectively, and that the consumer's income is $18. Which of the following represents the demand schedule for X?
P Qd $4 2 2 4
In which of the following cases will total revenue increase?
Price rises and demand is inelastic.
Susie buys two goods: rounds of golf and massages. Suppose that the price of a round of golf is $20 and the price of a massage is $30. In a typical week, Susie will play two rounds of golf, getting 20 utils of satisfaction from the second round. She normally buys three massages each week, with the third giving her 30 utils of satisfaction. If she were to buy a fourth massage in a week, it would give her 20 utils of satisfaction. If the price of massages is reduced to $15, which of the following outcomes might we expect to occur?
Susie would buy more massages and fewer rounds of golf, as predicted by the substitution effect.
What two conditions must hold for a competitive market to produce efficient outcomes?
Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.
What do the income effect, the substitution effect, and diminishing marginal utility have in common?
They all help explain the downsloping demand curve.
At the optimal quantity of a public good,
marginal benefit equals marginal cost.
A consumer's demand curve for a product is downsloping because
marginal utility diminishes as more of a product is consumed.
Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2, respectively, and that the consumer's income is $18. If the price of X decreases to $2, then the utility-maximizing combination of the two products is
4 of X and 5 of Y.
Which of the following is the best example of a supply-side market failure?
A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.
Pigovian taxes
are used to correct negative externalities.
If the demand for farm products is price inelastic, a good harvest will cause farm revenues to
decrease.
The two main characteristics of a public good are
nonrivalry and nonexcludability.
Answer the question on the basis of the following demand schedule. The price elasticity of demand is unity
in the $4-$3 price range only.
Answer the question on the basis of the following demand schedule. The price elasticity of demand is relatively elastic
in the $6-$4 price range.
Other things equal, a fall in the market price caused by a change in supply will
increase consumer surplus.
Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2, respectively, and that the consumer's income is $18. What quantities of X and Y should be purchased to maximize utility?
2 of X and 5 of Y
Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2, respectively, and that the consumer's income is $18. What level of total utility will the utility-maximizing consumer realize?
96 utils
How did Apple overcome consumers' diminishing marginal utility for iPads?
Apple introduced new features to entice previous buyers to purchase new models.
Which of the following is correct?
If demand is elastic, a decrease in price will increase total revenue.
Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas
a + b.
Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences
a consumer surplus of $9, and Nathan experiences a producer surplus of $3.
Refer to the diagram. If actual production and consumption occur at Q1,
an efficiency loss (or deadweight loss) of b + d occurs.
When the percentage change in price is greater than the resulting percentage change in quantity demanded,
an increase in price will increase total revenue.
(Last Word) A cap-and-trade program
assigns a property right to polluting the atmosphere.
Other things equal, an increase in the price of product A will
decrease the marginal utility per dollar spent on A.
Demand-side market failures occur when
demand curves don't reflect consumers' full willingness to pay for a good or service.
If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then
demand is price elastic.
The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of
diminishing returns.
The price elasticity of demand of a straight-line demand curve is
elastic in high-price ranges and inelastic in low-price ranges.
A producer's minimum acceptable price for a particular unit of a good
equals the marginal cost of producing that particular unit.
The diamond-water paradox arises because
essential goods may be cheap, while nonessential goods may be expensive.
The movement of the budget line from BB to bb in the figure suggests that income has
fallen and the price of Y has increased.
Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D1 and S1. If there are substantial external benefits associated with the production of Z, then
government can improve the allocation of resources by subsidizing consumers of Z.
A perfectly inelastic demand curve
graphs as a line parallel to the vertical axis.
Prashanth decides to buy a $75 ticket to a particular New York professional hockey game rather than a $50 ticket for a particular Broadway play. We can conclude that Prashanth
has a higher "marginal utility-to-price ratio" for the hockey game than for the play.