Econ3070- modules 1-3 practice probs

Suppose the equilibrium price of milk is​ $3 per gallon but the federal government sets the market price at​ $4 per gallon. The market mechanism will force the milk price back down to​ $3 per gallon unless the government

buys the excess supply of milk and removes it from the market.

Explain why the assumption of cardinal utility is not needed in order to rank consumer choices. Cardinal utility is not needed in order to rank consumer choices because economists

can instead use ordinal utility to show how consumers rank different baskets.

The elasticity of demand is the same as the slope of the demand curve. This statement is

false because the price elasticity of demand equals the slope of the demand curve multiplied by price divided by quantity. false because the price elasticity of demand changes along the demand curve.

The​ cross-price elasticity will always be positive. This statement is

false because the​ cross-price elasticity will be negative for complements.

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is​ $1 per​ can, the price of a hamburger is​ $2, Bill's marginal utility from Pepsi is​ 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by

increasing Pepsi consumption and reducing hamburger consumption.

Which of the following would cause a shift to the right of the supply curve for​ gasoline?

A large reduction in the costs of producing gasoline.

Which of the following would cause an unambiguous decrease in the real price of DVD​ players?

A shift to the right in the supply curve for DVD players and a shift to the left in the demand curve for DVD players.

What happens to the marginal rate of substitution as you move down along a convex indifference​ curve?

Along a convex indifference​ curve, the marginal rate of substitution decreases

What happens to the marginal rate of substitution as you move along a linear indifference​ curve?

Along a linear indifference​ curve, the marginal rate of substitution is constant

The problem of scarcity means that people face​ trade-offs. Which of the following​ trade-offs is the concern of​ microeconomics?

Trade-offs faced by firms in what goods to produce ​Trade-offs faced by consumers in the purchase of goods ​Trade-offs faced by workers between work and leisure

What is the difference between ordinal utility and cardinal​ utility? Ordinal utility refers to

a ranking of market baskets in order of most to least​ preferred, while cardinal utility indicates how much one market basket is preferred to another.

Theories in economics

are used to construct models from which quantitative predictions can be made.

Gasoline rationing​ (allocating to each individual a maximum amount of gasoline that can be purchased each​ year) is poor social policy because it interferes with the workings of the competitive market system. This statement involves

positive analysis because it states what the effect of gasoline rationing is and normative analysis because it makes a value judgment about the desirability of the rationing policy.

Gasoline rationing is a policy under which more people are made worse off than are made better off. This statement involves

positive analysis because it states what the effect of gasoline rationing is.

The government rations the amount of gasoline that consumers can purchase. A consumer who would have purchased more than the rationed amount of gasoline will instead

purchase less​ gasoline, more of other​ goods, and be on a lower indifference curve.

Explain the difference between an individual demand curve and a market demand curve. An individual demand curve

relates the quantity of a good that a single consumer will buy to its​ price, while a market demand curve relates the quantity of a good that all consumers in a market will buy to its price.

Suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. Why will the price of ice cream fall to a new​ market-clearing level? The cold weather will

shift the demand curve to the left​, initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded.

Janet spends her entertainment budget on movies and basketball games. Movie tickets cost ​$10 each and basketball game tickets cost ​$25 each. If Janet saw one more movie​ (holding the number of basketball games​ constant), her total utility would increase by 20. On the other​ hand, if she attended one more basketball game​ (holding the number of movies​ constant), her utility would increase by 45. From this information we can conclude that Janet

should see more movies and attend fewer basketball games.

Explain the difference between the income effect and the substitution effect. The income effect shows

the change in consumption due to a change in purchasing​ power, and the substitution effect shows the effect of a change in consumption due to a change in relative prices.

The change in demand resulting from the change in real purchasing power is called

the income effect.

Upon merging with the West German​ economy, East German consumers indicated a preference for​ Mercedes-Benz automobiles over Volkswagens.​ However, when they converted their savings into deutsche​ marks, they flocked to Volkswagen dealerships. How can you explain this apparent​ paradox? Assume that a​ Mercedes-Benz costs more than a​ Volkswagen, that East German consumers gain satisfaction from automobiles and all other goods​ (evaluated in deutsche​ marks), and that East Germans have income. For East​ Germans,

the marginal utility per dollar spent on a Volkswagen was greater than the marginal utility per dollar spent on a​ Mercedes-Benz.

Explain the difference between an Engel curve and a demand curve. An Engle curve shows

the quantity of one good consumers are willing to buy as that​ consumer's income​ changes, while a demand curve shows the quantity of one good consumers are willing to buy as the price of that good changes.

Explain the difference between a​ price-consumption curve and a demand curve. A​ price-consumption curve shows

the​ utility-maximizing combinations of two goods as the price of one good​ changes, while a demand curve shows the quantity of one good consumers are willing to buy as the price of that good changes.

The supply of apartments is more inelastic in the short run than in the long run. This statement is

true because the supply of apartments in the short run is limited by capacity constraints.

An inferior good

will experience decreases in demand as​ consumers' incomes increase.

What are the four basic assumptions about individual​ preferences? Explain the significance or meaning of each. Consumer theory assumes​ that:

​(1) preferences are complete, which means that consumers are able to rank all possible​ baskets; ​(2) preferences are transitive ​, which means that if bundle A is preferred to bundle B and bundle B is preferred to bundle​ C, then bundle A is preferred to bundle C ​(3) more is always preferred to less because all goods are desirable and ​(4) the marginal rate of substitution is diminishing​, where indifference curves are convex. true