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