Microeconomics Exam 1 Review

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

3.0

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 firm faces _____________________, while the prices for the output the firm produces remain unchanged, a firm's profits will increase.

lower costs of production

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 demand curve for a typical good has a(n):

negative slope because some consumers switch to other goods as the price rises.

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

price

A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and _________________, shown on the horizontal axis.

quantity

A demand curve shows the relationship between price and ______________ on a graph.

quantity demanded

When economists talk about supply, they are referring to a relationship between price received for each unit sold and the ________________.

quantity supplied

The downward slope of the demand curve again illustrates the pattern that as _____________ rises, ______________ decreases.

quantity supplied, quantity demanded

The price elasticity of demand measures the:

responsiveness of quantity demanded to a change in price.

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.

Which of the following is most likely to cause variation in American household spending patterns?

A. differing levels of family income B. geographical location of households C. each household's personal preferences ANSWER: each of the above will cause a variation

Substitution and income effects of a change in price of a good may be used to explain the:

direct relationship between income and demand.

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

Refer to Figure 5-1. With reference to Graph A, at a price of $5, total revenue equals:

$200.

Refer to Figure 5-1. With reference to Graph A, at a price of $10, total revenue equals:

$400.

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

$50

Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. What is Alex's utility maximizing point?

1 movie, 4 video game rentals

Suppose that Dr. Scott plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Dr. Scott's demand curve?

1.0

Refer to Figure 5-1. Graph B represents a demand curve that is relatively __________. Total revenue __________ as the price decreases from $10 to $5.

inelastic; decreases

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

Saving money is a(n) ____________________, because it involves less consumption in the present, but the ability to consume more in the future.

intertemporal choice

The _________________ budget constraint shows the tradeoff between present and future consumption.

intertemporal choice

If an increase in the price of Good X causes a decrease in the demand for Good Y, we can conclude that:

Goods X and Y are complementary goods.

___________________ are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to keep prices from falling.

Price floors

Interpret the following statement: "An increase in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market."

The statement is correct.

After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:

a shift of the demand curve for beef to the left.

Refer to the above diagram. In this instance:

all of the above and the consumer can choose any point on or below the budget constraint line BC.

Marginal utility can:

be positive, negative, or zero

The nature of demand indicates that as the price of a good increases:

buyers desire to purchase less of it.

When demand is inelastic:

consumers are not very responsive to changes in price.

When __________________, a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.

costs of production fall

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:

cross-price elasticity of demand for iced tea is -2.

A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that:

cross-price elasticity of demand for soda is -3.

Refer to Figure 3-2. A change from Point A to Point B represents a(n):

decrease in quantity demanded.

Refer to Figure 3-3. A change from Point A to Point E represents a(n):

decrease in supply.

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

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

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

A price cut will increase the total revenue a firm receives if the demand for its product is:

elastic.

The _________ is the only price where quantity demanded is equal to quantity supplied.

equilibrium price

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ________________.

excess demand

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 increases.

Even with wage increases, the supply curve of labor is most often inelastic for which of the following?

full-time workers

Which of the following would reduce the supply of microcomputers?

higher wage rates for the workers that assemble the computers

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

Refer to Figure 3-1. Using the graph above and beginning on D1, a shift to D2 would indicate a(n):

increase in demand.

Refer to Figure 3-3. A change from Point A to Point D represents a(n):

increase in supply.

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.

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she:

is maximizing utility.

Economists refer to the relationship that a higher price leads to a lower quantity demanded as the _____________________.

law of demand

During a severe recession, the government issued food stamps that could only be used to acquire food to a greater number of families. The budget line graph shows food on the horizontal axis and everything else on the vertical axis. The government expects that issuing the food stamps will cause each family's budget constraint line to:

shift to the right.

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.

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

A drought decreases the supply of agricultural products, which means that at any given price a lower quantity will be supplied; conversely, especially good weather would shift the _________________________.

supply curve to the right

If new manufacturers enter the computer industry, then (ceteris paribus):

the supply curve shifts to the right.

A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of:

the supply curve.

If cola and iced tea are good substitutes for consumers, then it is likely that:

their cross price elasticities are greater than zero.

there is a direct relationship between price and the quantity supplied.

there is a direct relationship between price and the quantity supplied.

When quantity demanded decreases in response to a change in price:

there is a movement up along the demand curve.

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.

Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.

unit elastic

But nearly all supply curves share a basic similarity: they slope ________________.

up from left to right

In microeconomic terms, the ability of a good or a service to satisfy wants is called:

utility.

In economics, the demand for a good refers to the amount of the good that people:

will buy at various prices.

The marginal utility of two goods changes ______________.

with the quantities consumed