Chapter 5 Econ Exam
Assume that a combination of 10 bottles of wine and 2 cartons of milk lies on a consumer's budget constraint. If the price of one bottle of wine is $10, and one carton of milk is $1, what is the consumer's income?
$102
Elasticity of Demand =
% change in quantity demanded divided by % change in price.
Elasticity of Demand is GREATER THAN 1 =
ELASTIC. Quantity demanded is very responsive to a price change.
Elasticity of Demand is around or near 1=
PERFECTLY ELASTIC
Suppose the prices of a pair of jeans, a shirt, and a tie are $30, $20, and $10 respectively. Which of the following statements is true in this context?
The opportunity cost of buying a shirt is 2 ties.
Which of the following goods is likely to have the lowest price elasticity of demand?
Life-saving drugs
If a good has a price elasticity of demand equal to 0, ________.
the quantity demanded is completely unaffected by a change in its price
Which of the following pairs of goods has a negative cross-price elasticity?
Pens and paper notebooks
Demand Elasticity and Revenue
R = P times Q
As the ________ increases, ________.
price of a good; its quantity demanded decreases
Elasticity measures
responsiveness.
________ in economics is a measure of satisfaction or happiness that comes from consuming a good or service.
Utility
Which of the following goods is likely to have an income elasticity of demand greater than one?
Diamond jewelry
Price elasticity of demand answers the question:
How much does quantity demanded change when the good's price changes?
Which of the following correctly describes incentives?
Incentives are rewards or penalties that motivate people to behave in a particular way.
The opportunity cost of the two goods is determined by
the slope of the budget constraint or the ratio of the prices of the two goods.
Two different methods to calculate Elasticity
1) Point method, which is the common sense method 2) Arc midpoint method
________ is the difference between the willingness to pay and the price paid for a good.
Consumer surplus
Sharon consumes 10 chocolates when the price of one chocolate is $2. If her arc elasticity of demand for chocolates is -1, she consumes ________ chocolates when the price increase to $4.
5
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. Both A and B
In a set of indifference curves, why do the indifference curves that lie to the right represent higher levels of utility?
An indifference curve represents the different bundles of goods and services that provide a buyer with the same level of utility. Compared to any indifference curve, an indifference curve on the right represents bundles that consist of more of either or both goods and no less of either good than the indifference curve on the left. Hence, it allows for a higher level of consumption and represents a higher level of utility.
The ________ measures the change in the demand of a good due to a percentage change in the consumer's income.
income elasticity of demand
The substitution effect of a decrease in the price of one good always ___________ the amount of that good in the individual's new consumption choice bundle and ______________ the amount of the other good.
increases; decreases be careful with the total opposite answer above!
A(n) ________ shows the bundles of two goods that provide an equal level of satisfaction to the consumer.
indifference curve
Higher price elasticity of demand means that a consumer's demand is:
more responsive to price changes.
The percentage change in the quantity demanded of a good due to a percentage change in its price is referred to as the:
price elasticity of demand.
Consumer surplus is ________________.
the value or total benefits once receives from a good in excess of the price paid for it.
Elasticity of Demand is equal to 1 =
UNIT ELASTIC
Consumer surplus is
the value or total benefits one receives from a good in excess of the price paid for it.
How do we calculate a percentage change in a variable X?
% change in X = final value - initial value divided by initial value times 100.
Which of the following statements is true of incentives?
Incentives are designed to change behavior.
Elasticity of Demand is equal to 0 =
PERFECTLY INELASTIC
Between two indifference curves, the one on the right indicates:
a higher level of utility than the one on the left.
A consumer's budget refers to the:
amount of money she can spend on various goods and services.
A good is said to have a relatively elastic demand if the value of price elasticity is:
greater than 1.
The price elasticity of demand for a good that is a necessity is likely to be:
inelastic.
If demand is INELASTIC,
when price increases, quantity decreases a little.
For an individual , consumer surplus is calculated as the difference between the _______________ to pay and the price actually paid for a good.
willingness
Which of the following are necessary ingredients to the buyer's problem?
- Amount of money the consumer has to spend - Prices of goods and services - Consumer's tastes and preferences
Which of the following statements best describes an inferior good?
An inferior good is a good whose demand decreases with an increase in consumers' income.
Mathematically: the percentage change in demand of good X due to a percentage change in the price of good Y:
Cross-price elasticity = Percentage change in quantity demanded of good X divided by Percentage change in price of goo Y.
Why does a soda machine only dispense one bottle or can at a time, but a newspaper vending machine opens up so that you can take as many as you want?
Law of Diminishing Marginal Benefit
An optimizing consumer has to choose between two goods-Good A priced at PA and Good B priced at PB. Given that MBA is the marginal benefit from consuming Good A and MBB is the marginal benefit from consuming Good B, the consumer's well-being will be maximized at the point where:
MBA/PA = MBB/PB.
Point method, which is the common sense method
Point elasticity % change in X = final value - initial value divided by initial value times 100
Mathematically: the percentage change in quantity demanded due to a percentage change in its price :
Price elasticity of demand = Percentage change in quantity demanded divided by percentage change in price
Prices of goods and services:
Prices of goods and services are the most important determinants of a buyer's purchasing decision. When considering prices, the buyer not only considers the price of the good she is considering for purchase but also the prices of all other available goods.
An optimizing consumer makes her purchase decisions based on:
benefits per dollar spent at the margin.
Willingness to pay:
is the highest price that a buyer is willing and able to pay for a unit of good.
A consumer has $100 to be spent on tables and chairs. If his income increases to $200, the prices of the goods remaining unchanged, his budget constraint:
shifts to the right.
The general rule for benefit maximization suggests that in personal equilibrium:
the ratio of marginal benefits to price should be identical across all goods.
Elasticity is:
the ratio of the percentage change in two variables.
For an individual, consumer surplus is calculated as the difference between the ______________ to pay and the price actually paid for a good.
willingness
Sharon consumes 10 chocolates when the price of one chocolate is $2. If her arc elasticity of demand for chocolates is -1, she consumes ________ chocolates when the price increases to $4.
5
The quantity demanded of a particular range of flashlights is 600 units when price per unit is $5. When the price increases to $20, the quantity demanded falls to 200 units. Later the price of cells used to operate these flashlights falls by 200% and the demand for the flashlights increases from 200 units to 300 units. a) Calculate the arc price elasticity of demand. b) Calculate the cross-price elasticity of demand. c) Joe purchases 20 units of the flashlights when his income is $30 and when his income increases to $120, his quantity demanded changes to 60 units. Calculate Joe's income elasticity of demand for flashlights.
Answer: a) Arc price elasticity of demand = [(200 -600) / [(200 + 600)/2)] / (20 - 5) / [(20 + 5) / 2] = (-400 / 400) / (15 / 12.5) = -1 / 1.2 = -0.83. b) Cross-price elasticity of demand of a good is the ratio of the percentage change in the demand for the good to the percentage change in the price of a related good. The percentage change in the demand for flashlights when the price of cells falls by 200% = [(300 - 200)/200] × 100 = 50%. Hence, cross-price elasticity of demand between flashlights and cells = 50 / -200 = -0.25. c) Income elasticity of demand for a good is the ratio of the percentage change in the demand for a good to the percentage change in the consumer's income. The percentage change in the demand for flashlights when Joe's income increases from $30 to $120 = [(60 - 20)/20] × 100 = 200%. The percentage change in Joe's income = [(120 - 30) / 30] × 100 = 300%. Joe's income elasticity of demand for flashlights = 200 / 300 = 0.67.
If the cross-price elasticity of demand for a good is estimated at -3.9, estimate the percentage change in quantity demanded of the good when the price of the related good increases from $30 per unit to $75 per unit. Also, if it is known that the income elasticity of demand for the same good is 2.5, estimate the percentage change in demand if consumer income increases from $100 to $300.
Answer: Percentage change in price of related good = $75 - $30)/ $30 × 100 = 150% Cross-price elasticity of demand = -3.9 Expected percentage change in quantity demanded= 150 × -3.9 = -585% Thus, quantity demanded is expected to fall by 585%. Percentage change in income = $300-$100 / 100 × 100 = 200% Income elasticity of demand = 2.5 Expected percentage change in demand = 200 × 2.5 = 500% Hence, demand for the good is expected to increase by 500%.
Which of the following is the formula to calculate arc elasticity of demand?
Arc elasticity of demand = Q2 - Q1 divided by Q2+ Q1 divided by 2 divided by P2 - P1 divided by P2 + P1 divided by 2
Which of the following goods is likely to have the highest price elasticity of demand?
Ketchup
Do all consumers in a competitive market enjoy the same amount of consumer surplus?
No, since considerable variation exists among consumers in terms of tastes and incomes.
the firm enjoys, new corporations are interested in entering the market. If a few more companies producing their own line of bottled drinking water enter the market, which of the following statements will be true about Greenaqua Corp.?
The elasticity of demand of Greenaqua Corp.'s product is likely to increase.
Which of the following statements correctly identifies the difference between the cross-price elasticity of demand and the income elasticity of demand?
The income elasticity of demand for a good is independent of the price changes of related goods, whereas the cross-price elasticity of demand for a good is independent of the income changes of the consumer.
Which of the following statements is true about the price elasticity of demand?
The price elasticity of demand for a good is generally higher in the long run than in the short run.
If a 1% change in the price of a good causes a 1% change in the quantity demanded, the good has an elasticity of demand:
equal to 1.
Based on a worked income elasticity, if elasticity of Ramen noodles is -1.67, it is an
inferior good.
Suppose Hershey's increases its chocolate quantity demanded of Nesquick chocolate syrup rises by 9 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 percent. The cross-price elasticity demand between Hershey's syrup and Breyer's vanilla ice cream is ________________, implying these two goods are _____________.
negative; compliments
The cross-price elasticity of demand for a good is the:
percentage change in the quantity demanded for a good due to a percentage change in the price of related goods.
Can two indifference curves intersect? Explain your answer.
No, intersecting indifference curves would imply that a consumer is indifferent between bundles that yield different total benefits.
If a consumer purchases any combination of goods and services on his ________, he will exhaust his income completely.
budget constraint
The set of all possible bundles of goods and services that can be purchased with a consumer's income is referred to as the:
budget set.
The price increase pushes total revenue up,
the quantity decrease pushes total revenue down, but the price increase is more than the quantity decrease, so the final result is that total revenue increases.
John is ready to pay $5 for an extra loaf of bread. Due to an ongoing discount in the store, he gets a loaf for $2. John's consumer surplus from the purchase is ________.
$3
Given that bacon and eggs are complimentary goods, if the price of eggs decreases the demand for both goods will rise. Is this an accurate statement?
It is somewhat inaccurate. The decrease in the price of eggs will increase the quantity demanded , not the demand, for eggs. It will however, as the statement claims, increase the demand for bacon.
Charlie spends all of his income on soft drinks and pizza. Suppose he is currently buying these products in amounts such that his marginal benefit from an additional soft drink is $120 and his marginal benefit from an additional slice of pizza is $90. If the price of a soft drink is $4 and the price of a slice of pizza is $2, is Charlie maximizing his total benefits?
No, he should shift consumption toward pizza and away from soft drinks to maximize total benefits.
Sandra consumes two goods-tea and coffee. Her demand for tea is inelastic while her demand for coffee is elastic. If there is an increase in the price of both tea and coffee, ________.
Sandra's expenditure on tea will increase and her expenditure on coffee will decrease
Which of the following statements is true about the income elasticity of demand?
The income elasticity of demand for normal goods is always positive.
What are the determinants of price elasticity of demand?
There are three important determinants of the price elasticity of demand. These are: a) Closeness of substitutes: As the number of substitutes grows, the price elasticity of demand increases. b) Budget share spent on the good: As a consumer spends more of his budget on a particular good, the good's price elasticity of demand increases. c) Available time to adjust: The price elasticity of demand is lower for a good in the short run in comparison to the long run.
At the midpoint of a linear demand curve, the price elasticity of demand is:
equal to one.
Elasticity =
percentage change in X divided by Percentage change in Y
What are the factors that determine a buyer's purchasing decision?
- Tastes and Preferences - Prices of goods and services - The budget set
Define the following terms: a) Indifference curve b) Utility
a) An indifference curve is a graph that shows all bundles of goods and services that provide an equal level of satisfaction for the consumer. b) Utility refers to a measure of satisfaction or happiness that a consumer receives from consuming a good or service.
The consumption bundle that maximizes a consumer's satisfaction given his income is located:
at the point of tangency of the consumer's budget constraint and indifference curve.
At all the points above the midpoint on a linear demand curve, the value of price elasticity of demand is:
greater than one.
Luxury goods have income elasticity:
greater than one.
From a firm's point of view, when the demand for a good has a price elasticity of 0.5, then, all things remaining the same, a(n):
increase in the price of the good will increase the firm's revenue.
As a consumer spends a larger share of his income on a particular good, the price elasticity of demand for that good:
increases.
As the number of available substitutes increases, the price elasticity of demand for a good:
increases.
The associated income effect of an increase in the price of one good _____ __________ __ __________ the quantity of that good and _____ __________ __ __________ the quantity of the other good, but the quantities of the two goods in the new consumption choice cannot simultaneously ___________ as a result of the income effect.
may increase or decrease; may increase or decrease; increase
A substitution effect of a price change is represented by:
movement along the same indifference curve.
Based on a worked income elasticity problem, if elasticity of salads is 0.56, it is a
normal good.
Which of the following will lead to a change in the opportunity cost of buying a pen and a pencil?
A twofold increase in the price of pens and a threefold increase in the price of pencils
Assume that a consumer has an income of $200 that has to be spent on two goods, decorative lights and shoes. If the price per light is $10 and the price of one pair of shoes is also $10, graphically illustrate his budget set and constraint. Also, calculate the opportunity cost of purchasing either good.
If QL denotes the quantity of lights and QS denotes the quantity of shoes that the consumer purchases, then his budget constraint is given by: 10 QL + 10 QS = 200. When the consumer spends his entire income on lights, i.e. QS = 0, the quantity of lights he can purchase is QL = 200/10 = 20 units. Similarly, when the consumer spends his entire income on shoes, i.e. QL = 0, the quantity of shoes he can purchase is Qs = 200/10 = 20 units.
Charlie spends all of his income on soft drinks and pizza. Suppose he is currently buying these products in amounts such that his marginal benefit from an additional soft drink is $60 and his marginal benefit from and additional slice of pizza is $30. If the price of a soft drink is $2 and the price of a slice of pizza is $6, is Charlie maximizing his total benefits?
No, he should shift consumption toward soft drinks and away from pizza to maximize total benefits.
Price elasticity of demand example: For Elsa, When price was $25, and the optimal quantity of shoes is 4 pairs. When price was $50, the optimal quantity of shoes is 3 pairs.
Quantity decreased by 25% - 3-4 divided by 4. When price increased by 100% = 50-25 divided by 25. So ED = -25% divided by 100% = -0.25
Elasticity of X and Y are greater than 0 =
Quantity demanded of X increase when price of Y increases, and quantity demanded of X decrease when price of Y decreases.
________ is the measure of the sensitivity of one variable to a change in another.
Elasticity
Which of the following best describes a good with perfectly elastic demand?
Even the smallest increase in the price of the good will cause consumers to stop consuming it completely.
If a good is considered to be a luxury good, does it mean the Law of Demand does not hold?
No, it only means that its income elasticity of demand is greater than 1.0, so the Law of Demand still holds.
At all the points below the midpoint on a linear demand curve, the value of price elasticity of demand is:
less than one.
Negative values of the price elasticity of demand of a good can be attributed to:
the Law of Demand.
If the price of a good increases, ________.
the consumer surplus decreases
Which of the following examples identifies the income effect of a price change?
While purchasing shirts and jeans, when the price of a pair of jeans falls, Jack purchases more of both jeans and shirts.
In case of a linear negatively sloped demand curve, the price elasticity of demand:
is different at different points on the curve.
A perfectly elastic demand curve:
is parallel to the quantity axis.
The price elasticity of demand for a good is likely to be elastic _________________.
- the shorter the available time during which consumers can adjust; - the lower the budget share spent on the good. - the smaller the number of close substitutions for the good. all of the above
When the price of one pen is $1, 50 notebooks are demanded. When the price per pen increases to $5, the number of notebooks demanded decreases to 30. What is the cross-price elasticity of demand between the two goods using the arc method?
-0.375
When the price of milk is $3 per bottle, Steve purchases 20 bottles of milk. When the price increases to $6, Steve's consumption falls to 15 bottles. Steve's arc elasticity of demand for milk is:
-0.43.
Gary consumes 10,000 units of electricity when his income is $500. When his income increases to $1,000, his consumption of electricity increases to 18,000 units. What is Gary's income elasticity of demand for electricity?
0.8
Which of the following examples best describes the Law of Demand?
When the price of tea increased, the quantity demanded of tea decreased.
A buyer is said to be a price taker if she:
can purchase any amount of a good at a fixed price provided she has the money to pay for it.
An indifference curve would flatten out as someone consumes more of good X and less of good Y because of the assumption of _______________ marginal benefits.
diminishing
For a given level of total utility, ________.
there is exactly one indifference curve
3 measures of elasticity for Demand
1) Price elasticity of demand 2) Cross-price elasticity of demand 3) Income elasticity of demand
Assume that a consumer can spend $20 on two goods-pens and pencils. If the price of one pen is $5 and the price of one pencil is $2, which of the following combinations of the two goods represents a point on the consumers budget constraint?
2 pens and 5 pencils
Define a budget set. Is it the same as a budget constraint?
A budget set is the set of all possible bundles of goods and services that a consumer can purchase with his income. It is not the same as a budget constraint. A budget constraint represents the combination of goods and services a consumer can purchase that exactly exhausts his income.
How does a consumer's budget set differ from his budget constraint?
A budget set refers to all 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.
Which of the following statements is true?
A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.
Which of the following is NOT a direct determining factor of consumers' purchase decisions?
Cost of factor inputs - Consumers' tastes and preferences - Market price of the finished goods - Consumers' income are three factors of consumer's purchasing decisions.
If a good has a price elasticity of demand of -3, it implies that:
if the price of the good increases by 1%, the quantity demanded of the good will decrease by 3%.
If quantity of milk is measured on the horizontal axis and quantity of juice is measured on the vertical axis, a decrease in the price of milk will cause the budget constraint to:
pivot rightward along the horizontal axis.
If the price of the good measured along the vertical axis increases without a change in the price of the good measured along the horizontal axis, the consumer's budget constraint:
pivots leftward without a change in the intercept on the horizontal axis.
Elasticity of Demand is LESS THAN 1 =
INELASTIC. Quantity demanded is not that responsive to a price change.
Which of the following statements best describes a normal good?
A normal good is a good whose demand increases with an increase in consumers' income.
Which of the following pairs of goods is most likely to have a positive cross-price elasticity?
A privately-owned car and public transportation
Arc midpoint method
Arc elasticity % change in X = final value minus initial value divided by midpoint value times 100.
Cross-price elasticity of demand answers the question:
How much does quantity demanded change of one good when price of another good changes?
Elasticity of X and Y are less than 0 =
Quantity demanded of X increase when price of Y decreases, and quantity demanded of X decrease when price of Y increases.
Which of the following statements is true?
Tastes and preferences of a consumer determine the satisfaction she receives from consumption.
Tastes and Preferences:
The amount of benefits that a buyer receives from consuming goods and services is a direct result of his tastes and preferences. Thus, out of a set of all things that a buyer can purchase, he will decide to purchase the good or service that gives him maximum satisfaction, which is a function of his tastes and preferences.
Which of the following statements is true of the cross-price elasticity of demand?
The cross-price elasticity of demand between complements is negative.
Which of the following statements correctly differentiates between the slope of the demand curve and price elasticity of demand along a linear demand curve?
The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve.
How does a decrease in the price of one good affect a consumer's budget constraint? How is the effect different from a decrease in the consumer's income?
A decrease in the price of one good causes the budget constraint to pivot rightward along the axis that measures the quantity of the good in question. This is because the consumer's endowment can buy more units of a good when the price falls. The slope of the budget constraint also changes because the opportunity cost changes when the price of a good falls. In case of a decrease in the consumer's income, the budget constraint shifts to the left. The slope will not change as the opportunity cost does not change with a change in income.
If the value of price elasticity of demand for a good is equal to "∞", it implies that the good has a ________ demand.
perfectly elastic
Assume that an individual spends his income on sweaters and shirts. If the price of a sweater increases:
the opportunity cost of buying sweaters increases.
The slope of a budget constraint represents:
the opportunity cost of one good in terms of another.
The Law of Demand is the reason behind:
the price elasticity of demand having a negative value.
Based on a worked income elasticity, if scarves are 1.39, they are a
luxury.
What is the economic interpretation of the slope of an indifference curve? The slope indicates the amount of the ___________ measured good that the consumer is willing to exchange for one unit of the _____________ measured good while keeping her total _____________ constant.
vertically; horizontally; utility
Suppose that the government enacts a tax on Good X. In order to estimate the effect of the tax on the quantity demanded of a related good, Good Y, we can use the concept of the:
cross-price elasticity of demand.
The substitution effect of an increase in the price of one good always ___________ the amount of the individual 's new consumption choice bundle and ____________ the amount of the other good.
decreases; increases be careful with the total opposite answer below!
While making a purchase decision using marginal thinking, a buyer should buy the good that yields the:
highest marginal benefit per dollar spent.
For a consumer with a given level of income , the combinations of goods for the budget constraint will be _________________ for the budget set.
lower
The income elasticity of demand
measures the responsiveness of the demand for a good to a change in consumers' income. It is measured as the ratio of the percentage change in the quantity demanded of a good to the percentage change in the income of the consumer.
The cross-price elasticity of demand
measures the responsiveness of the quantity demanded of a good to a change in the price of a related good. It is measured as the ratio of the percentage change in the quantity demanded to the percentage change in the price of a related good.
Consumers in a competitive market are said to be price takers because each tends to buy _____________of the total amount of a produced good.
only a tiny fraction
A consumer's satisfaction is maximized when the marginal benefit from the last dollar spent on one good is equal to the marginal benefit from the last dollar she spent on another good because _______________.
the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off .
If an individual only consumes goods X and Y and is currently maximizing her total benefits, which of the following must be true?
- MBx divided by Px = MBy divided by Py - The "equal bang for the buck" rule is adhered to. - The marginal benefits per dollar spent are the same for both goods. - No other consumption choice can make total benefits greater. All of the above
Determinants of the Price Elasticity of Demand
- Number and closeness of substitutes - Budget share spent on the good - Time horizon available to adjust to price changes
Scenario: When the price of wine is $10 per bottle, Thomas purchases 30 bottles every month. Later, the government introduces a 50% tax on all alcoholic beverages, which is to be completely borne by consumers. This reduces Thomas's consumption to 20 bottles of wine a month. Refer to the scenario above. Thomas's arc elasticity of demand for wine is:
-1
When the price of margarine is $2 per unit, 10 units of butter are demanded. When the price of margarine increases to $6 per unit, 30 units of butter are demanded. What is the cross-price elasticity between the two goods?
1
Suppose the price of X is $40, the price of Y is $50, and a consumer has an income of $400. The opportunity cost of buying one unit of good Y is _____ units of good X. Which of the following combinations of X and Y will be represented by a point on the consumer's budget constraint?
1.25; 5 units of X and 4 units of Y.
Consider indifference curves for goods X and Y. Suppose we plot the quantity on the vertical axis and the quantity of good X on the horizontal axis. These indifference curves are downward-sloping because any other slope would imply that consumption of the two goods reached the point where ____________.
A) one or both goods have zero marginal benefit. B) the positive marginal benefit of one good is exactly offset by the negative benefit of the other. A and B are correct.
Which of the following statements correctly differentiates between consumer surplus and net benefits?
Consumer surplus measures difference between willingness to pay for a good and its price, whereas net benefits measure the overall satisfaction gained from consumption of a good.
A decrease in the price of either good will cause a consumer's budget constraint to:
If quantity of tea is measured on the horizontal axis and quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause the budget constraint to:
Differentiate between the following. a) Normal goods and inferior goods b) Substitutes and complements
a) A normal good is a good whose consumption increases with an increase in the consumer's income. Hence, it has a positive income elasticity of demand. The consumption of an inferior good decreases with an increase in the consumer's income. Hence, inferior goods have a negative income elasticity of demand. b) Two goods are said to be substitutes when an increase in the price of one good leads to an increase in the demand for the other good. Hence, substitute goods have a positive cross-price elasticity of demand. Two goods are said to be complements if an increase in the price of one good leads to a fall in the demand for the other good. Hence, complement goods have a negative cross-price elasticity of demand.
The price elasticity
a) The price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price change. It is measured as the ratio of percentage change in the quantity demanded of a good to the percentage change in the price of the good.
Georgina, an economics student, notices that the price of oil has been increasing steadily. She also observes that the total consumption of oil has actually increased. Georgina concludes that this is an exception to the Law of Demand. Do you agree?
No, she is mistakenly assuming a stationary demand curve when most likely she is observing equilibrium points involving an increasing demand along with a shifting supply curve.
The budget set:
The final component of the buyer's problem is the income she has available to spend on goods and services. This is represented by the budget constraint, which shows all possible bundles of goods and services that exactly exhaust her income.
Elasticity example: - Y increases from 3 to 6. How much percentage change is that? - As a result, X increases from 10 to 12.
Therefore, elasticity of X with respect to Y equals 5.
A change in the slope of a budget constraint indicates:
a change in the price of either good that causes a change in the opportunity cost
A budget constraint is a straight line because:
a consumer faces a fixed price of both goods that do not change with changes in consumption.
In a perfectly competitive market, all consumers:
are price takers.
For economists, the "buyer problem" refers to _____ ______.
how consumers arrive at a choice as to what to purchase.
Suppose Hershey's increases its chocolate quantity demanded of Nesquick chocolate syrup rises by 9 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 percent. Suppose that incomes rise by 9 percent given the price change cited above. As a result, Hershey's experiences a 5 percent increase in sales volume. Given this information, Hershey's syrup is a __________ ___________.
normal good
Suppose Hershey's increases its chocolate squantity demanded of Nesquick chocolate syrup rises by 9 percent and the quantity demanded of Breyer's vanilla ice cream falls by 3 pecent. The cross-price elasticity demand between Hershey's syrup and Nesquick's syrup is _____________, implying these two goods are _______________.
positive; substitutes
An indifference curve is the set of bundles that _____________.
provide an equal level of satisfaction for the consumer.
Consumer surplus
refers to the difference between consumers' willingness to pay for a good and the market price of the good.
Elasticity
the measure of how sensitive one variable X is to changes in another variable Y.
