Unit 2B Nature and Functions of Product Market (Surplus, Elasticity, and Utility)

Assume that ice cream is a normal good. If the price of ice cream decreases, the substitution effect and the income effect will lead to which of the following changes in ice cream consumption?

Substitution effect: Increase Income effect: Increase

Which of the following is true of the substitution effect of an increase in the price of a normal good?

It works to reinforce the income effect

A well-known fast-food franchise substantially increases the price of its hamburgers, and poses only some of its customers. Which of the following best explains why the franchise has NOT lost all its customers?

Its hamburgers are differentiated

Jane spends all her weekly allowance to buy only two goods: soda and apples. According to the table above, if her preferences are characterized by the law of diminishing marginal utility, then which of the following statements is correct?

Jane can buy more apples and less soda to maximize her utility

Which of the following will most likely lead to a more equal distribution of income?

More progressive income taxes

Which of the following will tend to make the demand for a product more elastic?

New firms which produce similar products enter the industry

At her current level of consumption, a consumer is willing to pay up to $1.50 for a bottle of water and up to $1,500 for a diamond ring because the

marginal utility of a bottle of water is less than the marginal utility of a diamond ring

Which of the following taxes contributes most to decreasing inequality in the distribution of income?

Progressive income taxes

Assume that demand for bottled water is relatively price elastic. An increase in supply of bottled water will result in which of the following?

A decrease in price, leading to an increase in total revenue

Assume that the demand for a good is perfectly inelastic and the supply curve for the good is upward sloping. Which of the following occurs in the market for the good if the price of an input used to produce the good increases?

A decrease in the supply and an increase in the equilibrium price.

Suppose that the market supply curve for shoes is upward sloping and the market demand curve is downward sloping. How will the imposition of a sales tax on shoes affect the consumer surplus, the producer surplus, and the total surplus?

Consumer surplus: Decrease Producer surplus: Decrease Total surplus: Decrease

If a price ceiling is set at P1, which of the following areas represents the resulting consumer surplus, producer surplus, and deadweight loss? (see graph)

Consumer surplus: f+g+i Producer surplus: k Deadweight loss: h+j

If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?

Consumers will bear most of the burden of the tax

Moving from left to right along a downward-sloping linear demand curve, price elasticity varies in which of the following ways?

First elastic, then unit elastic, and finally inelastic

The diagram above shows the demand curve for a good. If the price increases from P1 to P2, and the quantity consumed decreases from Q2 to Q1, consumer surplus decreases by the area

P1P2BC

A monopolist produces two unrelated goods, X and Y. The demand for X is currently price elastic and the demand for Y is currently price inelastic. To increase its total revenue, the firm should change the price of X and Y in which of the following ways?

Price of X: Decrease Price of Y: Increase

If the government imposes a tariff on imports of cheese, the price and quantity of imported cheese will most likely change in which of the following ways?

Price: Increase Quantity: Decrease

Assume that both the supply of and the demand for a food are relatively price elastic. The imposition of a per-unit exercise tax on the sale of the good would cause the equilibrium price and quantity to change in which of the following ways?

Price: Increase Quantity: Decrease

According to the law of diminishing marginal utility, which of the following is true?

The additional satisfaction received from consuming extra units of a good decreases as consumption of the good increases

If a severe drought destroys a significant portion of the peanut crop and peanut farmers' revenues increase, which of the following is true over the observed range of prices?

The demand for peanuts must be price inelastic

Given an increase in the price of material K, which is an input used to produce good X, and an increase in the price of Y, which is a substitute for good X, which of the following will definitely occur?

The equilibrium price of good X will increase

Assume that the price elasticity of demand for good X is constant and equal to -0.5 and the price elasticity of demand for good Y is constant and equal to -2. Assume that goods X and Y have identical upward-sloping elastic supply curves. If a per-unit exercise tax of the same amount is levied on good X and on good Y, which of the following would be true?

The tax share paid by consumers of good X would be relatively higher than that paid by consumers of good Y.

If the income elasticity of demand for good X is negative and the cross-price elasticity of demand between good X and good Y is negative, which of the following must be true of good X?

X is an inferior good and is a complement to Y

The difference between the price a consumer would be willing to pay for a cone of ice cream and the actual market price that she pays gives a measure of her

consumer surplus

The difference between what consumers are willing to pay for units of a good and the price consumers actually pay for units of the good is called

consumer surplus

In a given time period, a person consumes more and more of a good or service and, as a result, enjoys each additional unit less and is willing to pay less for each individual unit. This behavior is consistent with the law of

diminishing marginal utility

When total utility is at its maximum, marginal utility is

equal to zero

When the market is in equilibrium, the total economic surplus is equal to the area (see graph)

f+g+h+i+j+k

A decrease in the supply of oranges raised the price of oranges in the market. The substitution effect of the price increase will motivate consumers to

increase the quantity of other fruits demanded and decrease the quantity of oranges demanded

To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is

inelastic

The additional satisfaction received from consuming an additional unit of a good is called the

marginal utility

If a good is available free of charge, an individual will consume it until

marginal utility is zero

If the demand for a good is perfectly price inelastic in the short run and the supply curve is upward sloping, imposing a sales tax on the good will

not change the after-tax revenues received by suppliers

To maximize utility, a consumer with a fixed budget constraint will purchase quantities of goods so that the ratios of the marginal utility of each good to its

price are the greatest

Assuming a downward-sloping demand curve and an upward-sloping supply curve, which of the following will occur as a result of an increase in the sales tax on a good?

quantity demanded will decrease

An increase in the effective minimum wage will have less of an impact on employment if the demand for labor is

relatively inelastic

The cross-price elasticity of demand between good X and good Z measures the percentage change in the quantity demanded of good X in response to a percentage change in

the price of good Z