Econ questions
The demand for a product is unit elastic. At a price of $20, 10 units of a product are sold. If the price is increased to $40, then one would expect sales to equal:
5 units
If a decrease in price leads to a decrease in total revenue, the demand must be elastic
False
If the price elasticity of demand equals -0.05 and a oridycear kiwis his/her price, the result will be an increase in total revenue
False
When total utility increases, marginal utility increases
False
Define the elasticity of labor supply.
The percentage change in hours worked divided by the percentage change in wages
Define cross-price elasticity of demand and discuss within the context of complementary goods and substitute goods.
The term "cross-price" refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.
If a consumer's total expenditure on a good does not vary with price, then that consumer's demand curve is unit elastic over that range of prices
True
Approximately what portion of annual consumption is typically spent by American households on shelter?
One-third
behavioral economics
a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation.
income effect
a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
In terms of microeconomic analysis, what is the function of "utils"?
a measurement of utility
Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes.
a systematic way of thinking; misguided conclusions
How does the U.S. Bureau of Labor Statistics gather information with regard to the typical consumption choices of Americans?
consumer expenditure survey
When demand is inelastic
consumers are not very responsive to changes in price
Marginal utility can
be positive, negative, or zero
elasticity
an economics concept that measures responsiveness of one variable to changes in another variable
The most common pattern for marginal utility is ____________________.
diminishing marginal utility
The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.
diminishing marginal utility
the idea that as more of a product is consumed, each additional unit offers less satisfaction is known as
diminishing marginal utility
Substitution and income effects of a change in price of a good may be used to explain the:
direct relationship between income and demand
A price cut will increase the total revenue a firm receives if the demand for its product is
elastic
Demand is said to be ______ when the quantity demanded is very responsive to changes in price
elastic
When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as ____________.
elastic
Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.
elastic
If the supply curve for a product is horizontal, then the elasticity of supply is:
equal to infinity
If the supply curve for a product is vertical, then the elasticity of supply is:
equal to zero
If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:
fall and the equilibrium quantity to stay the same.
An inferior good is a product
for which demand decreases as income creases
Even with wage increases, the supply curve of labor is most often inelastic for which of the following?
full time workers
the long run price elasticity of demand for a product is generally ____ than the short run elasticity for the same product
higher than
A perfectly elastic supply curve is
horizontal
The term _____________ describes a situation where a ________________ causes a reduction in the buying power of income, even though actual income has not changed.
income effect; higher price
When economists attempt to predict the spending patterns of U.S. households, they will typically view the _____________________ as a primary determining factor that influences the individual consumption choices that each will make.
income level of each household
The longer the time period considered, the more the elasticity of supply tends to:
increase
If the demand curve is perfectly elastic, then an increase in supply will
increase the quantity exchanged but result in no change in the price
The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:
increasing the price of game tickets because demand is inelastic.
The key assumption that accompanies the use of numbers for measuring utility is that:
individuals choose based on their preferences.
Demand is said to be _____ when the quantity demanded is not very responsive to changes in price
inelastic
The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be __________.
inelastic
When economists are sketching examples of demand and supply, it is common to sketch a demand or supply curve that is close to vertical, and then to refer to that curve as _________.
inelastic
Price elasticity of demand with an absolute value of -0.88 would indicate
inelastic demand
Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.
inelastic; elastic
tax incidence
manner in which the tax burden is divided between buyers and sellers
The term _____ refers to the additional utility provided by one additional unit of consumption
marginal utility
The step-by-step process of finding the choice with highest total utility involves a comparison of the:
marginal utility gained and lost from different choices along the budget constraint.
A decrease in consumer preference for a product, other things being equal, will cause:
market demand to shift to the left
the slope of the budget line is
negative, since to purchase more of one good means giving up some of the other good
backward-bending supply curve for labor
the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours
If cola and iced tea are good substitutes for consumers, then it is likely that:
their cross price elasticities are greater than zero
total utility
satisfaction derived from consumer choices
budget constraint line
shows the possible combinations of two goods that are affordable given a consumer's limited income
If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:
stay the same and the equilibrium quantity to fall
A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:
total revenue will decrease
The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises,
total utility rises, but marginal utility falls.
as a person consumes more of a good of service, the persons ______ will increase. At the same time, this person's _____ will decrease with each additional unit.
total utility; marginal utility
The budget line shows the combination of two goods a consumer can purchase with her money income
true
Demand is said to be _____ when the quantity demanded changes at the same proportion as the price
unit elastic
In microeconomic terms, the ability of a good or a service to satisfy wants is called:
utility
constant unitary elasticity
when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied
substitution effect
when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
unitary elasticity
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
elastic demand
when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic demand
when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
elastic supply
when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic supply
when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
consumer equilibrium
when the ratio of the prices of goods is equal to the ratio of the marginal utilities (point at which the consumer can get the most satisfaction)
price elasticity of demand
percentage change in the quantity demanded of a good or service divided the percentage change in price
price elasticity of supply
percentage change in the quantity supplied divided by the percentage change in price
The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______ change in price.
percentage; percentage
marginal utility per dollar
the additional satisfaction gained from purchasing a good given the price of the product; MU/Price
marginal utility
the additional utility provided by one additional unit of consumption
diminishing marginal utility
the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
the elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in
price
As a general rule, utility-maximizing choices between consumption goods occur where the:
price ratio and marginal utilities ratio of two goods is equal.
The price elasticity of demand measures the
responsiveness of quantity demanded to a change in price
infinite elasticity
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
Define zero elasticity and describe the resultant demand curve.
the highly inelastic case in which a percentage change in price, no matter how large, results in zero change in quantity. refers to curves that are vertical.
zero inelasticity
the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
fungible
the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual.
What is considered to be a tell tale signal that the point with the highest total utility has been found?
the marginal utility per dollar is the same for both goods
wage elasticity of labor supply
the percentage change in hours worked divided by the percentage change in wages
Price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price
cross-price elasticity of demand
the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B
elasticity of savings
the percentage change in the quantity of savings divided by the percentage change in interest rates
price elasticity
the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
What occurs simultaneously with an income effect
substitution effect
Economists are able to determine total utility by:
summing up the marginal utilities of each unit consumed.
If the question is whether a shift in supply will have a greater effect on equilibrium price or quantity, the answer lies not with the elasticity of supply, but with the elasticity of demand. Why is this?
The shifting supply curve is moving along a fixed demand curve—and the shape of that demand curve will determine the eventual outcome.
What is most likely to cause variation in American household spending patterns?
differing levels of family income, geographical location of households, each households personal preferences
If the demand curve for a life saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to
rise and the equilibrium quantity to stay the same
The ________________ arises when a price changes because consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price.
substitution effect
The marginal utility of two goods changes ______________.
with the quantities consumed