Section 6 Econ

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Law of Diminishing Marginal Utility

As someone consumes more of a good marginal utility will eventually decline (as consume more the increase in utility will be smaller each time)

Price elasticity of demand-

% change in quantity demanded resulting from a 1% change in price.

Price elasticity of supply-

% change in quantity supply resulting from a 1% change in price.

An increase in the consumption of a good resulting from a reduction in price that makes the good cheaper in relation to other goods is called the a. substitution effect. b. income effect. c. real balance effect. d. inelasticity effect. e. both a and b.

A

If the price of tickets to Disney World increases 10 percent, and as a result, attendance falls by 15 percent, the demand for the tickets is a. elastic. b. inelastic. c. of unitary elasticity. d. indeterminate. e. WHAT?

A

Sally recently got a 15 percent raise. She now purchases 7.5 percent more steak dinners. Sally's income elasticity for steak dinners is a. 0.5. b. 0.75. c. 1.5 d. 2. e. None of the above.

A

Suppose a city that operates local electric and natural gas companies wants to raise revenues by increasing its rates for electricity and natural gas. The price rise will increase city revenues if the elasticity of demand for electricity and natural gas is a. less than 1 in absolute value. b. elastic. c. negative. d. equal to -1.

A

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the absolute value of the price elasticity of demand for the dolls over this range is a. 2.5. b. 0.4. c. 0.5. d. 5. e. inelastic.

A

The market demand for an item is a. the sum of individual demands. b. steeper for any given price change than the individual demand curves. c. independent of the number of individuals in the market. d. determined by dividing the quantity demanded by each individual by the number of individuals in the market.

A

Which of the following relates most directly to the law of diminishing marginal utility? a. After watching two football games, Terry decides to play golf rather than watch a third game. b. A sports fan enjoys watching Monday night football rather than going to the theater. c. Two carpenters build their own house rather than hiring a contractor. d. A musician receives the biggest ovation of the evening after playing the final work of a recital.

A

Which of the following statements is true? a. The demand curve for a group of consumers in a market is simply the horizontal summation of each individual's demand. b. The single demand curve shows the quantity of a good that people will buy, allowing all factors (price, income, expected future prices, etc.) to vary. c. An increase in income will cause a person to move down and to the right along her demand curve. d. All of the above are true. e. None of the above are true

A

If a Krispy Kreme doughnut shop near campus increases its prices by 5 percent, but revenues from its sales are unchanged, the price elasticity of demand for the services offered by the doughnut shop must be a. elastic. b. of unitary elasticity. c. inelastic. d. equal to 0.5. e. None of the above

B

If the income elasticity of a good is positive, we can conclude that the good is a(n) a. inferior good. b. normal good. c. luxury good. d. necessity.

B

If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more on gas, this would best be explained by a. the substitution effect. b. the income effect. c. the highly elastic demand for gasoline. d. all of the above. e. None of the above

B

Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price elasticity of demand for cigarettes is equal to a. -0.20. b. -0.67. c. -1.50. d. -3.00. e. None of the above

B

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called a. price elasticity of demand. b. consumer surplus. c. the substitution effect. d. income elasticity of demand. e. none of the above.

B

Why do economists use the concept of elasticity in addition to measurement of the slope of the demand curve? a. Mathematical equations are favored over graphical analysis. b. Elasticities are independent of the units of measure. c. The concept of elasticity can be used in other areas of economics, whereas the slope of the demand curve is only useful in demand analysis. d. These terms are interchangeable, but elasticity has the more professional sound.

B

If a Pizza Hut restaurant near campus increases its prices by 10 percent, and as a result, its sales revenue increases by 3 percent, the price elasticity of demand for the services offered by the restaurant must be a. elastic. b. of unitary elasticity. c. inelastic. d. equal to 0.5. e. equal to 2.

C

If the quantity demanded of a product fell from 11,000 to 10,000 when price rose from $9 to $10, the price elasticity of demand over this range is equal to approximately a. -0.1. b. -0.05. c. -0.9. d. -1.1. e. None of the above.

C

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the absolute value of the price elasticity of demand for Starbucks coffee is a. 0.40. b. 0.80. c. 1.25. d. 2.50. e. 4.

C

Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is - .25, by how much would you have to raise the price of water? a. 10 percent b. 25 percent c. 40 percent d. 100 percent e. none of the above

C

Which of the following most directly reflects the law of diminishing marginal utility? a. After watching two football games, Terry decides to watch a third game. b. A sports fan enjoys watching Monday night football rather than going to the theater. c. After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth disc. d. A musician receives the biggest ovation of the evening after playing the final number of a recital.

C

Which of the following would cause a consumer to purchase less of a good when the price of the good rises? a. the income effect b. the substitution effect c. both a and b d. neither a nor b

C

If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should a. bowl less, so the marginal satisfaction from expenditures in this area will increase. b. spend more on hamburgers, so total satisfaction from that activity will increase. c. eliminate spending on hamburgers. d. bowl more and spend less on hamburgers. e. none of the above.

D

If a 10 percent increase in income induced a group of consumers to reduce their yearly purchases of potatoes by 5 percent, for these consumers, a. the income elasticity of potatoes equals approximately 1.05. b. the income elasticity of potatoes is 0.5. c. potatoes are a luxury good. d. potatoes are an inferior good.

D

If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as a. unstable. b. stable. c. relatively inelastic. d. relatively elastic. e. of unitary elasticity.

D

Sarah recently got a 10 percent raise. She now purchases 30 percent more in groceries on a weekly basis. Sarah's income elasticity for groceries is a. 0.33. b. 0.5. c. 1. d. 3.

D

Suppose that the quantity of DVD players sold increased from 200 to 400 when the price fell from $225 to $175. Over this price range, the absolute value of the price elasticity of demand for DVD players is a. 0.25. b. 0.375. c. 1.0. d. 2.67. e. 4.0.

D

When the price of Nike tennis shoes goes from $100 to $80, the quantity demanded increases from 20 to 30 million. Over this price range, the absolute value of the price elasticity of demand is a. 0.55. b. 1. c. 1.25. d. 1.80. e. 2.50.

D

John's demand schedule for pizza is indicated below. If the current price of pizza is $1.10 per slice, what is John's consumer surplus if he buys five slices of pizza? refer to table question 8 a. $0 b. $0.50 c. $1.10 d. $6.50 e. none of the above

E $1.00

If an increase in the excise tax imposed on cigarettes pushes the price per pack up by 20 percent, and the quantity sold declines by 8 percent as a result, the price elasticity of demand for cigarettes is equal to a. -0.2. b. -0.3. c. -0.8. d. -5. e. None of the above.

E -0.4

Marginal Benefit (MB)-

Maximum price a consumer is willing to pay for an additional unit of a product.

Utility [Felicity] (Satisfaction)-

The benefit or satisfaction a person gets from a choice or action

Substitution Effect-

The part of a change in the amount of goods purchased because the good is cheaper or more expensive than other goods

Income Effect-

The part of a change in the amount of goods purchased because the consumer's income is higher or lower

An increase in the price of computer diskettes leads to an increase in total expenditures on the diskettes. Which of the following is true for this price change? a. Computer diskettes are an inferior good. b. The demand for computer diskettes is perfectly elastic. c. The demand for computer diskettes is inelastic. d. The demand for computer diskettes is elastic.

c


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