Micro Lessons 6 & 7
Which of the following statements best captures the concept of consumer surplus?
"I was willing to pay $30 for a dozen roses, but I bought them for $20." (consumer surplus is the difference between the maximum a consumer was willing to pay for a good and the actual price paid)
In the article "Men vs. Women: How They Spend,"
Both sexes spend more than they earn annually.
An indifference curve shows the
Combinations of goods giving equal utility to a consumer. (different combinations of two goods may be equally satisfying. an indifference curve is a graphical representation of the combinations of two goods that yield equal total utility)
Cross-price elasticity refers to
How responsive consumers of one good are to a change in the price of another good. (cross-price elasticity looks at how responsive consumers of one good, say Pepsi, are to a change in the price of another good, say coke)
Which of the following statements best captures the concept of consumer surplus?
I was willing to pay $1,000 for my weekend getaway, but I got my vacation package for $910. (consumer surplus is the difference between the maximum a consumer was willing to pay for a good and the actual price paid)
Which statement is true about price discrimination?
No one is hurt by price discrimination. (sellers can take advantage of price discrimination to get individual buyers to pay their maximum amounts. however, this doesn't harm buyers as they will never pay more than they are willing to pay)
The demand for normal goods
Rises when incomes rise. (the demand for normal goods rises when income rise. examples of products that are very sensitive to changes in income are autos, foreign travel, and luxury clothing)
Which of the following must be true for a consumer to make a purchase?
The consumer surplus must be greater than or equal to zero. (the total consumer surplus is the total of the differences between each individual's maximum willingness to pay and the actual price. People will only make a purchase when the maximum willingness to pay is greater than or equal to the actual price)
Consumer surplus measures
The difference between the maximum price a consumer is willing to pay and the price actually paid. (consumer surplus is the difference between what you are willing to pay and the actual equilibrium price)
If the demand for a product is elastic, then
The percentage change in quantity demanded is greater than the percentage in price. (when demand for a product is elastic, the percentage change in quantity demanded is greater than the percentage change in price)
Supply is very elastic when
The quantity supplied has a large increase in response to an increase in price. (elasticity of supply looks at how responsive quantity supplied is to changes in price. if supply is very elastic, it can change quickly in response to a change in price. for example, if the price of pizza is rising, pizza restaurants can easily produce more. the supply curve is flatter and upward sloping)
If the demand for cigarettes is inelastic,
Total revenue will rise if the price of cigarettes rises. (if demand is inelastic, as it is for cigarettes, an increase in price will cause an increase in total revenues for the company)
If marginal utility is negative, then
Total utility will decrease with additional consumption. (as long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative, consumption of one more good will decrease the total utility)
Sociopsychiatric explanations of consumer behavior fail to explain which of the following?
Which goods will be purchased? (sociologists offer explanations for our consumption-behavior not just to "keep up with the joneses" but to surpass them. however, it does not include the explanation of which goods will be purchased, just which are desired and why)
Which of the following is the best example of negative marginal utility?
Your third TV is still in the box and you regret that you were talked into buying it. (marginal utility refers to the amount of satisfaction a consumer gets from consuming the last unit of a product. negative marginal utility means you feel worse off after having consumed/ purchased the item)
Which of the following is used to depict all combinations of goods that are affordable with a given income and given prices?
a budget constraint (consumption possibilities are limited by available income. the budget constraint illustrates this limitation)
Ceteris paribus, which of the following causes demand to be more elastic with respect to price?
a high ratio of price to income (price elasticity of demand tends to be higher for goods with a relative high price, when the availability of substitutes is high, and over a long period of time)
If the price elasticity of demand is equal to 2, the good has _____ demand.
an elastic (if the price elasticity of demand is greater than 1, demand is elastic. consumer response is large relative to the change in price)
The World View titled "Rebounding Oil Price Spurs More Rigs" related to oil prices and oil rigs suggests that
as the price of oil increases, there is an increase in oil rigs and thus an increase in supply, indicating that supply is elastic. (higher oil prices incentivize the development of new oil rigs)
On a demand curve, demand is more elastic
at higher prices (at higher prices, demand is more elastic along a linear or straight demand curve. note that the price elasticity of demand changes along a straight-line demand curve and is more elastic at higher prices, and more inelastic at lower prices)
The benefit that individuals get when they buy goods at the equilibrium price but were willing to pay more is called
consumer surplus (consumers who actually purchase goods at the market price were willing to pay either more than the actual price or the actual price. this benefit is called consumer surplus)
Which of the following is not a determinant of demand?
diminishing marginal costs of production (an individual's demand for a specific product is determined by tastes, income, expectations (for income, prices, tastes), and the availability and price of other goods. the cost of the factor inputs is a determinant of supply)
The demand will be _______________ if the consumer has _________ substitute goods to choose from.
elastic; more (the more substitutes available to the consumer, the more elastic the demand. this means if the price of one good goes up, the consumer does not have to keep purchasing that good and switches to another good)
Which of the following is most likely an inferior good?
generic canned food (with low incomes, people buy discount clothes, used textbooks, and generic brand items, and they eat at home)
A demand curve that is perfectly elastic is
horizontal (if demand were perfectly elastic, the demand curve would be horizontal. in that case, any increases in price would cause quantity demanded to fall to zero)
As compared to sociologists and psychologists, economists accept consumer tastes as given and instead focus on
how price will affect actual consumer purchases. (sociologists and psychologists focus on how consumer desires are formed, but economists focus on how income and price affect consumer purchases)
If a good is inferior, its
income elasticity of demand is negative (for an inferior good demand increases when income falls; therefore, the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be negative)
If a good is normal, its
income elasticity of demand is positive (for a normal good demanded increases when income rises; therefore, the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be positive)
When income falls, the demand for an inferior good
increases (inferior goods' demand rises when incomes fall, as in a recession. consumers switch to cheaper alternatives, and these may be inferior goods such as bus travel, generic goods, and the like)
As more satisfaction is achieved from consuming a good with diminishing marginal utility, then total utility
increases at a decreasing rate. (as long as marginal utility is positive, total utility must be increasing from consuming a good; but total utility increases by smaller and smaller increments when diminishing marginal utility exists)
The additional pleasure or satisfaction from a good will decline as more of it is consumed in a given period. This is the definition of the
law of diminishing marginal utility (as a rule, the amount of additional utility we obtain from a product declines as we continue to consume it)
The slope of the indifference curve is equal to the
marginal rate of substitution. (the slope of the indifference curve is called the marginal rate of substitution. it is the absolute value of the slope of the indifference curve. it is equal to the relative marginal utilities of the two goods)
Maximum utility is achieved when
marginal utility is zero (without budget constraints, a consumer can add to her or his utility by consuming goods with positive marginal utility. therefore, utility will be maximized when marginal utility reaches zero)
Total utility is maximized when the
marginal utility is zero. (as long as the marginal utility is positive, total utility must be increasing; but when the marginal utility is negative, consumption of one more good will decrease the total utility. Therefore, total utility is maximized at the consumption level where marginal utility is neither positive nor negative)
Smart phones and apps are complementary goods. The cross-price elasticity of demand between smart phones and apps is expected to be
negative (the cross-price elasticity of demand is equal to the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. the cross-price elasticity of demand will be negative for complements because a decrease in the price of smart phones will cause an increase in demand for apps)
The determinants of demand that are held constant when we consider a movement along a demand curve include all of the following except
price (a movement along a demand curve corresponds to a change in price only, holding income, tastes, and the availability of substitutes constant)
Economic explanations of consumer behavior take into consideration
prices and income (prices and income are just as relevant to consumption decisions as are more basic desires and preferences)
Total revenue is
quantity sold times price (a firm's total revenue is equal to price times quantity sold. it is the company's income from sales. total profit is equal to total revenue minus cost of production)
Any point on the budget constraint
represents a combination of two goods that are affordable. (any point on the budget constraint line represents a combination of the two goods that are affordable. any point beyond the budget constraint line is unaffordable)
Oil and alternative sources of energy such as wind and solar are
substitute goods.
Which of the following industries is unlikely to exhibit price discrimination?
supermarkets (products that are purchased regularly and that consumers have more information about, tend not to exhibit price discrimination. airlines, new car sales, and colleges engage in price discrimination)
To find the average percentage change in quantity demanded,
the change in quantity demanded is divided by the average quantity. (the longer midpoint formula for price elasticity of demand takes raw numbers and turns them into average percentage changes for both the percentage change in quantity demanded and the percentage change for price. the average percentage change in quantity demanded is found by dividing the change in quantity demanded by the average quantity)
Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because
the marginal utility of the fourth plate would no longer be positive. (as long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative or zero, consumption of one more good will decrease total utility or not add to utility at all)
When demand is inelastic,
the percentage change in price is greater than the percentage change in quantity demanded (when demand is inelastic, the percentage change in price is greater than the percentage change in quantity demanded)
The basic formula for price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price. (the formula for price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price)
The price elasticity of demand is equal to
the percentage change in quantity demanded divided by the percentage change in price. (the response of consumers to a change in price is measured by the price elasticity of demand. specifically, the price elasticity of demand refers to the percentage change in quantity demanded divided by the percentage change in price)
Which of the following products will have an elastic demand?
travel souvenirs (products that have elastic demand have a lot of substitutes for consumers and take a larger percentage of their income. European travel has a very high elasticity of demand)
A price change will have no effect on total revenue if the demand is
unitary elastic. (a price hike has no effect on total revenue if the price elasticity of demand is equal to 1)
Technically the elasticity number is negative because
when price falls, quantity demanded will rise, but for simplicity, economists take the absolute value of the elasticity number. (if there is a percentage change increase in price, the percentage change in quantity demanded will fall, so the elasticity number is always negative. for simplicity, economists take the absolute value of the elasticity number (they drop the negative sign)
All of the possible combinations of two goods that lie on one indifference curve
yield the same level of utility. (each indifference curve represents a certain level of total utility. the consumer is indifferent to the combinations that lie on the same utility curve. that means that all of the combinations on the curve yield the same level of total utility)