Chapter 5: Consumer Theory

Consumer optimizing requires that the consumer:

maximize total benefit, subject to an income constraint

budget constraint

the goods a customer can choose that exactly exhaust her entire budget

The marginal benefit per dollar of the second burger

Mb of the 2nd burger/ $ of a burger

Diamonds have a higher price than water because:

the price reflects marginal, not total, benefit The total benefit of water far exceeds that of diamonds. However, price is determined based on marginal value. Consumers with ready access to gallons of water derive much less benefit from consuming the next gallon of water. However, consumers likely have few diamonds and derive a tremendous amount of benefit from the consumption of one more diamond.

budget set

the set of all possible bundles of goods and services that can be purchased with a consumer's income

Noreen consumes two​ goods, food and clothing. The price of food is ​$3​, the price of clothing is ​$14​, and her income is $5,000. Noreen always spends 40 percent of her income on food regardless of the price of​ food, the price of​ clothing, or her income. 1. What is her price elasticity of demand for​ food? A. Zero. B. Some number between 0 and 1.0. C. Exactly 1.0. D. Indeterminate. 2. What is her​ cross-price elasticity of demand for food with respect to the price of​ clothing? A. Some negative​ number, since food and clothing are complements. B. Some positive​ number, since food and clothing are substitutes. C. Approximately 1.0. D. Exactly zero. 3. What is her income elasticity of demand for​ food? A. Approximately zero. B. A small positive​ number, since food is a necessity. C. A small negative​ number, since food is an inferior good. D. Exactly 1.0.

1. C. Exactly 1.0. 2. D. Exactly zero. 3. D. Exactly 1.0.

Economists have pinpointed three primary reasons for elasticity​ differences:

1. Closeness of substitutes 2. Budget share spend on the good 3. Available time to adjust

consumer's problems

1. what do you like 2. what does it cost 3. can you afford it

How does a​ consumer's budget set differ from his budget​ constraint?

A budget set refers to all of 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.

Given the information about Henry​'s income and the prices for concerts and​ movies, we are unable to determine where on the budget line Henry would choose to consume because​ __________. A. Henry​'s tastes regarding movies and concerts are unknown to us. B. Henry​'s budget line is an incomplete description of his choices. C. like all​ consumers, Henry​'s consumption choice is a rash decision. D. none of the above.

A. Henry​'s tastes regarding movies and concerts are unknown to us.

Why does a demand curve with a constant slope not have a constant​ elasticity? A. Slope is based on absolute change and elasticity is based on percentage change. B. Elasticity depends on more variables than does slope. C. Slope measures responsiveness and elasticity measures change. D. Slope is based on percentage change and elasticity is based on absolute change.

A. Slope is based on absolute change and elasticity is based on percentage change.

Walmart and Target are both discount retailers.​ However, during the Great Recession of​ 2009, Target's​ same-store sales fell while sales at Walmart actually increased. Examine the following statements and identify the ones that could explain this outcome. ​(Check all that apply​.) A. Walmart stocks more goods like food and health items than Target. B. Both Target and Walmart attract a lot of​ price-sensitive customers. C. The unemployment level in the United States increased substantially during the recession of 2009. D. ​Walmart's annual revenues​ have, on​ average, been higher than​ Target's annual revenues. E. Target positions itself in the market as a​ low-cost retailer of home accessories and clothing.

A. Walmart stocks more goods like food and health items than Target. E. Target positions itself in the market as a​ low-cost retailer of home accessories and clothing.

Which of the following criteria would most likely influence an optimizing​ buyer's purchasing​ decisions? A. highest marginal benefit per dollar spent B. highest marginal benefit C. lowest price D. lowest opportunity cost

A. highest marginal benefit per dollar spent

A budget constraint for​ t-shirts and movie tickets is shown in the graph. If the price of either the​ t-shirt or the movie ticket​ decreases, the budget​ constraint: A. pivots outward and the slope changes. B. pivots inward and the slope increases. C. pivots inward and the slope changes. D. pivots outward and the slope decreases.

A. pivots outward and the slope changes. A decrease in the price of one good causes the budget constraint to pivot outward. This is because the​ consumer's income can buy more units of a good if the price goes down. The slope also​ changes, because the opportunity cost changes when the price changes.​ However, whether the slope increases or decreases depends on which​ good's price decreases.

Which of the following best describes why consumers are price​ takers? A. Individual transactions are too small to have much impact on the market price. B. Many individuals lack the skills to negotiate prices. C. Consumers​ don't know what it costs to make most products. D. If consumers​ don't pay the price​ asked, the store will just sell the product to someone else.

A. An individual consumer tends to buy only a tiny fraction of the total amount of a produced good. Because each buyer is only a small part of the​ market, an individual purchase will not have an effect on the market as a whole. Consumers can buy as much of any good they want at the fixed price if they have sufficient money to pay for it. In a perfectly competitive​ market, consumers are price takers.

A​ consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because​ ___________. A. any shift in consumption toward either good will violate her budget constraint. B. the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off. C. her preferences become distorted and therefore invalid when the marginal benefits per dollar are unequal. D. an inequality between these ratios implies that she has insufficient income to achieve maximum satisfaction.

B. the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily make her worse off.

In the market for sweaters​, suppose​ Green's price elasticity of demand is 0.3​, ​Smith's price elasticity is 1.3​, and the price elasticity of all the other consumers is greater than 0.3 but less than 1.3. Could the market price elasticity be less than 0.3 or greater than 1.3​? A. ​Yes, it can be a multiple or fraction of the average of the elasticities of individual consumers. B. ​No, it must lie between 0.3 and 1.3.

B. ​No, it must lie between 0.3 and 1.3. Because price elasticity is based on the % change, not the absolute change

If you were to purchase a ​$700 Samsung smart phone from​ Amazon, we could conclude all of the​ following, except: A. you believed that smart phone would bring satisfaction. B. you would rather have a laptop that costs ​$700. C. you wanted a smart phone. D. you prefer that smart phone to anything else costing ​$700.

B. you would rather have a laptop that costs ​$700. The benefits that you receive from consuming goods and services are a direct result of your tastes and preferences. When you buy​ something, you choose what you think will give you the most satisfaction. At the moment you bought the phone you thought nothing on Amazon was better to​ purchase, including a laptop that costs ​$700.

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. C. Some​ positive, but it will be a very small number. D. Both A and B are possible.

D. Both A and B are possible.

Given that burgers and fries are complementary​ goods, if the price of fries increases the demand for both goods will fall. Is this an accurate​ statement? A. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded​ (not the​ demand) for burgers. It​ will, however, as the statement​ claims, reduce the demand for fries. B. ​Yes, the increase in the price of fries will reduce both the demand for fries and the demand for burgers. C. ​No, the quantity demanded​ (not the​ demand) for both goods is reduced as a result of the increase in the price of fries. D. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded​ (not the​ demand) for fries. It​ will, however, as the statement​ claims, reduce the demand for burgers.

D. It is somewhat inaccurate. The increase in the price of fries will reduce the quantity demanded​ (not the​ demand) for fries. It​ will, however, as the statement​ claims, reduce the demand for burgers.

John is a soda drinker that likes both Coke and Pepsi. He usually picks whichever has the best price or is most convenient. If Pepsi is on sale for ​$1 a liter and Coke is charging ​$1.50 for the​ same, John's demand curve for Coke will​ experience: A. a movement up the curve. B. a right shift​ (outward). C. a movement down the curve. D. a left shift​ (inward).

D. a left shift​ (inward).

For a consumer with a given level of​ income, the combinations of goods for the budget constraint will be -------than for the budget set.

Lower

The demand curve graphs a consumers responsiveness to a change in ________. The points on the curve can be verified through ______ .

Price / marginal analysis A demand curve maps how quantity demanded responds to price​ changes, holding all else equal. Every point on the demand curve represents a unique price and​ quantity, which can be verified through marginal analysis.

Suppose the price is given as ​$1. The consumer surplus is 4.5. ​ Suppose the price increases to ​$3. The new consumer surplus is 0.5. The consumer surplus has reduced because-----------

The consumer surplus has decreased for two​ reasons: 1. Some existing buyers no longer consume the​ good, 2. The buyers who remain in the market pay a higher price and enjoy a lower consumer surplus.

Anna Jones estimated the price elasticity of demand for new vehicles to be 0.78. If the price of cars increased by 12​%, one would expect the quantity of new cars demanded to _____by ____

decrease by 9.36%

The demand curve for an inferior good is __________ sloping while the demand curve for a normal good is __________ sloping.

downward, downward

An increase in income shifts the budget constraint -----. The shift in income causes the budget constraint to increase ----- and the slope to ------

outward/ by the same amount/ remain the same