Microeconomics: Exam 2 (CH 4, 19, 20, Appendix F)
All of the following are reasons why a higher indifference curve is preferred to a lower one except
. as more of any good or service is consumed, its extra benefit declines.
Which of the following statements is true concerning the consequences of rent controls?
Upper income earners are big winners due to the fact that they can better exploit nonprice rationing devices.
Which of the following statements about the indifference curve is true?
A higher indifference curve represents the possibility of higher rates of consumption if income increases.
How will the quantity of offices that building owners lease changes? How will the market wage and equilibrium quantity of labor services provided by custodial workers be affected by the imposition of rent controls?
The quantity of office buildings supplied will decrease. The market wage will fall and the equilibrium quantity will fall.
What does the price elasticity of demand measure?
The responsiveness of quantity demanded to a change in the price of a good.
The price of orange juice increases. Which of the following is not part of the likely chain of events that follows from this price change?
The manufacturers of orange-picking machines lay off some workers.
The absolute value of the short-run elasticity of demand for bread has been estimated to be 0.15. Its long-run elasticity of demand is
more than 0.15.
The slope of the indifference curve is
negative.
Consider the indifference curve illustrated in the figure on the right. The curve is convex to the origin because
the marginal rate of substitution falls as a consumer buys more movie tickets.
A person's income is $300, the price of a video is $5, and the price of deluxe pizza is $15. At equilibrium,
the marginal rate of substitution is equal to -3.0.
At consumer equilibrium
the marginal rate of substitution is equal to the rate at which consumers can substitute one good for another given the prices of the goods.th
Consider the point on the straight-line demand curve on the graph. Using the line drawing tool, draw another downward-sloping demand curve that is relatively more elastic than this demand curve in the vicinity of point A. Label this new line 'Delastic'.
picture
The more flexible prices are,
the more quickly a shock to the economy can be absorbed.
Price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
A key feature of the __ system is __ exchange, which involves trades between individuals that they both perceive to raise their well-being. __, also known as intermediaries, specialize in linking ultimate sellers and buyers and lowering these parties' __ costs.
price, voluntary, middlemen, transaction
The law of diminishing marginal utility insures that
the total utility curve will eventually increase at a decreasing rate.
To derive the demand curve from the indifference map
vary the price of one good while holding the price of the other good and income constant.
What is the market price of apartmetns in this town? $__ What is the equilibrium quantity of apartments in this town? __ . If this town imposes a rent control of $450 per month, how many studio apartments will be rented? __ .
500; 2000; 1,800
What is the economic effect of price floors?
Surpluses.
If a firm increases the price of their product in the elastic portion of the demand curve, total revenues will
decrease
The diagram at right shows the market for basic cell phones. The equilibrium market price will __. The equilibrium market quantity will __.
decrease, change in an indeterminate way
A firm sells 2 million units of a good when price is $4.00 and 1.8 million units when price is $4.50. The price elasticity of demand is
inelastic.
The budget constraint
is downward sloping.
An import quota is an example of a Restricting the quantity of a good that can be imported is likely to mean that the price of that good will
quantity restriction, rise
Suppose the price of apples falls relative to other similar goods, and as a result the quantity of apples demanded increases. This is caused by
substitution effect.
Along the indifference curve
total utility is constant.
When the price of cell phones increased from $16 to $18, production increased from 1,500 to 2,500 per month. You can conclude that the supply of cell phones is price __.
elastic
If total revenue falls when the market price increases, demand is
elastic.
Consider the total revenue curve, which corresponds to a linear demand curve. Using the point drawing tool, plot a point on this curve that corresponds to the elastic range of demand and label it 'Ep'. OR Consider the total revenue curve, which corresponds to a linear demand curve. Using the point drawing tool, plot a point on this curve that corresponds to the inelastic range of demand and label it 'Ep'.
(anywhere where total revenue curve is increasing) OR (anywhere where total revenue curve is decreasing)
A, B, C, and D represent combinations of Days Skiing and Days Rock Climbing that result in equal satisfaction for a consumer. The slope of the indifference curve is __ and is always __ to the origin.
(graph points given by table) negative, convex
Bundles A, B, C, and D represent combinations of Days Skiing and Days Rock Climbing that provide James the same level of satisfaction. The indifference curve slopes __ indicating that more of one activity will compensate for the other such that the consumer __ these combinations.
(graph points given on table) downward, is indifferent between
The table below represents Sue's preferences for bottled water and soft drinks, the combination of which yields the same level of utility. Sue's monthly budget for bottled water and soft drinks is $20.00. The price of bottled water is $0.80 per bottle, and the price of soft drinks is $2.00 per bottle. If water is on the horizontal axis and soft drinks are on the vertical axis, the slope of Sue's budget constraint is __. Given the information on Sue's budget constraint and her preferences, the combination of goods that satisfies her utility-maximizing problem is __.
-0.4, D (text problem F-5)
When Steve's weekly income is $900, he purchases 5 hamburgers per week. When Steve's weekly income increases to $950, he purchases 3 hamburgers per week. Steve's income elasticity of demand is In this case, hamburgers are __ good.
-9.3, an inferior
The table below represents Sue's preferences for bottled water and soft drinks, the combination of which yields the same level of utility. Sue's marginal rate of substitution of soft drinks for bottled water at B is __. Sue's marginal rate of substitution of soft drinks for bottled water at C is __. Sue's marginal rate of substitution of soft drinks for bottled water at D is __. Sue's marginal rate of substitution of soft drinks for bottled water at E is __.
0.8, 0.6, 0.4, 0.2
Number of cheeseburgers
13, 17, 39, 24, 7, 0 or 60, 78, 180, 99, 10, 3
At a consumer optimum involving goods X and Y, the marginal utility of good X equals 4 (or 5) utils. The price of good Y is four (or three) times the price of good X. What is the marginal utility of good Y?
16. or 15. (found by multiplying price of good by utils)
What are annual consumer expenditures on the Pakistani wheat crop? $ __ billion How much, in total, do Pakistani wheat farmers receive for the wheat they produce? $ __ billion What are annual government expenditures on the Pakistani wheat crop? $ __ billion
2.16, 4.56, 2.4
The short-run price elasticity of demand for tires is 0.90. The mid-point formula was used for this calculation. If an increase in the price of petroleum (used in producing tires) causes the market prices of tires to rise from $40 to $50, by what percentage would you expect the quantity of tires demanded to change? __%
20
Maximum units of goods X and Y that can be purchased with various budget levels When the budget is $150, the slope of the budget constraint is __. When the budget is $250, the slope of the budget constraint is __. When the budget is $400, the slope of the budget constraint is __. Since the budget constraint is a straight line, the slope of the budget constraint is __.
3.8, 12.5, 10 (found by diving budget by price of good X or Y) -2.0, -2.0, -2.0, constant
An increase of 2 percent in price results in a decrease of 12 percent in quantity demanded. Using averages, the absolute value of the price elasticity of demand is __. OR Upper A decrease of 8 percent in price results in an increase of 4 percent in quantity demanded. Using averages, the absolute value of the price elasticity of demand is __.
6 OR 0.5
Greg has a weekly budget of $17, to spend on brownies and milk. The price of brownies is $2, and the price of milk is $3. Calculate marginal utility per dollar for each good, and use it to complete the table below. OR Roy has a weekly budget of $17, to spend on tacos and nachos. The price of tacos is $2, and the price of nachos is $3. Calculate marginal utility per dollar for each good, and use it to complete the table below.
9, 5, 7, 4, 5, 3, 3, 2, 1, 1 (find answers by dividing marginal utility by price)
Indifference curves that are higher than others necessarily imply that for every given quantity of one good
A and C (more of the other good could possibly be obtained on a higher indifference curve., more of that good could possibly be obtained on a higher indifference curve.)
Which one-unit increase in consumption from one point to the next along the total utility curve generates the highest marginal utility? __ to __. Which one-unit increase in consumption from one point to the next along the total utility curve generates zero marginal utility? __ to __. Which one-unit increase in consumption from one point to the next along the total utility curve generates negative marginal utility? __ to __.
A to B, E to F, F to G
Which of the following is not a determinant of the degree of price elasticity of demand for an item?
All of the above are determinants of the degree of price elasticity of demand for an item. (the existence, number, and closeness of substitutes; the length of time allowed for adjustment to changes in the price of the item; the share of a consumer's budget spent on the item)
Total utility
All of the above. (falls as long as marginal utility is negative, is at a maximum when marginal utility is zero, rises as long as marginal utility is positive)
Rational economic agents would resist consuming any good where
Both A and C. (the marginal utility of that good was negative since this would make you worse off, the total utility of that good was falling since this would make you worse off)
Labor is a key input at fast-food restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of fast-food workers. Which of the following best describes the response of the quantity of labor employed at restaurants?
Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor.
Which of the following violates the properties of indifference curves?
Indifference curves are upward-sloping.
The figure drawn on the right shows Sue's initial indifference curve I1 for bottled water and soft drinks. Sue's monthly budget for bottled water and soft drinks is $20.00. Initially the price of bottled water was $0.80 per bottle, and the price of soft drinks was $2.00. Sue's initial budget line is shown as the line LM. Initially Sue's utility-maximizing combination was 20 bottles of water and 2 soft drinks shown by point H in the figure. Suppose that at a higher satisfaction level than the one shown by the indifference curve I1, Sue's constant-utility preferences are as shown in the table below. 1.) Use the multipoint curve drawing tool to draw the new indifference curve for Sue. Label the curve Upper I 2. 2.) Use the point drawing tool to locate the upper end point (on the soft drinks axis) of the budget line. Label the point N. 3.) Use the line drawing tool to draw the new budget line for Sue.
New indifference curve is table plotted. Find 2. and 3. by dividing budget by new price of goods.
Sue consumes bottled water and soft drinks. Her monthly budget for bottled water and soft drinks is $20.00. When the price of a bottle of water was $0.80 and the price of a bottle of soft drink was $2.00, Sue's utility-maximizing combination was 20 bottles of water and 2 bottles of soft drinks. With her monthly budget and the price of a bottle of water remaining unchanged at $20.00 and $.0.80 respectively, when the price of a bottle of soft drink fell to $1.00, Sue's utility-maximizing combination changed to 20 bottles of water and 4 bottles of soft drinks. 1.) Use the point drawing tool to locate the initial utility-maximizing point in the figure to the right. Label this point 'R'. 2.) Use the point drawing tool to locate the utility-maximizing point after the price of soft drinks falls. Label this point 'T'. 3.) Use the line drawing tool to draw the demand curve for soft drinks by joining the points, 'R' and 'T'. Label the line 'D'.
Plot the price (y) and utility maximum number of the good (x). Repeat with new numbers.
Stella is currently spending all of her weekly income purchasing the two goods that she likes tacos and nachos. She is currently purchasing 10 tacos and 5 plates of nachos. She receives 30 utils from her 10th taco and 15 utils from her 5th plate of nachos. The price of tacos is $3, and the price of nachos is $1. Is Stella maximizing her utility, and if not, what should she do? OR Teri is currently spending all of her weekly income purchasing the two goods that she likes hamburgers and fries. She is currently purchasing 10 hamburgers and 5 large fries. She receives 50 utils from her 10th hamburger and 25 utils from her 5th large fry. The price of hamburgers is $9, and the price of fries is $3. Is Teri maximizing her utility, and if not, what should she do?
Stella should buy fewer tacos and more nachos. OR Teri should buy fewer hamburgers and more fries.
Suppose that you are investigating the market for aluminum. The price of steel, a substitute good, has decreased. Which of the following would best describe the market reaction to this event? OR Suppose that you are investigating the market for wheat. The price of corn, a substitute good, has decreased. Which of the following would best describe the market reaction to this event?
The demand for aluminum decreases, which creates a surplus of aluminum, causing the price of aluminum to decrease. OR The demand for wheat decreases, which creates a surplus of wheat, causing the price of wheat to decrease.
Which of the following is not an example of a transaction cost?
The enjoyment of using the good.
Which of the following statements about indifference curves is true
The higher an indifference curve is for a consumer, the greater that consumer's total level of satisfaction.
In a market-based economy, what is the role of a system of prices?
To address the problem of scarcity.
What is the difference between total utility and marginal utility?
Total utility is the total amount of satisfaction derived from consuming a certain amount of a good while marginal utility is the additional satisfaction gained from consuming an additional unit of the good.
Along an indifference curve, every point is equally desirable to the consumer.
True
What condition exists in this city's labor market at the present minimum wage of $9 per hour? There is __ . How many people are unemployed at this wage? __ thousand workers. Assuming that the labor demand and supply curves were to remain in their present positions, how many people would be unemployed at a $6 minimum wage? __ thousand workers. This is because at a wage of $6 per hour Assuming that the labor demand and supply curves were to remain in their present positions, how many people would be unemployed at a $10 minimum wage? __ thousand workers.
a surplus of labor, 4, 0, the quantity demanded of workers is higher than the quantity supplied of workers, 8
Prices perform a rationing function by
allocating goods to the buyers who are willing and able to pay the highest price.
To remain in consumer optimum, a price decrease requires __ in consumption. A price increase requires __ in consumption. Each change in price has a substitution effect. When the price of a good __, the consumer __ in favor of that relatively cheaper good. Each change in price also has a real-income effect. When price __, the consumer's real purchasing power increases, causing the consumer to purchase __ of most goods. Assuming that the principle of diminishing marginal utility holds, the demand curve must slope downward. The price of water is lower than the price of diamonds because people consume __ water than diamonds, which results in a __ marginal utility of water compared with the marginal utility of diamonds.
an increase, a decrease, falls, substitutes, falls, more, more, lower
Advocates of applying behavioral economics to consumer choice theory argue that __ prevents people from accounting for every feasible choice, which __ their ability to pursue their long-term interests effectively The __ economics approach to consumer behavior offers a wider range of possible predictions of a consumer's choices than the __-maximization theory of a consumer optimum, which makes clear-cut predictions about consumers' choices.
bounded rationality, limits, behavioral, utility
The city of New Raven has decided to impose rent controls on office buildings in the city. As a result of this, the new rent
celing is lower than the equilibrium rent and there will be a shortage of rental offices.
Sue consumes bottled water and soft drinks. Her monthly budget for bottled water and soft drinks is $20.00. When the price of a bottle of water was $0.80 and the price of a bottle of soft drink was $2.00, Sue's utility-maximizing combination was 20 bottles of water and 2 bottles of soft drinks. With her monthly budget and the price of a bottle of water remaining unchanged at $20.00 and $.0.80 respectively, when the price of a bottle of soft drink fell to $1.00, Sue's utility-maximizing combination changed to 20 bottles of water and 4 bottles of soft drinks.
consistent with the law of demand, because as the price of soft drinks fell, with the price of bottled water and monthly budget or income remaining unchanged, the quantity demanded for soft drinks increased.
When the __ curve shifts outward or inward with an unchanged __ curve, equilibrium price and quantity increase or decrease, respectively. When the __ curve shifts outward or inward given an unchanged __ curve, equilibrium price moves in the direction opposite to equilibrium quantity. When there is a shift in demand or supply, the new equilibrium price is not obtained __. Adjustment __.
demand, supply, supply, demand, immediately, takes time
A product has perfectly inelastic demand when the price elasticity of demand is
equal to 0.
Prices in a market economy perform a rationing function because they reflect relative scarcity, allowing the market to clear. Other ways to ration goods in an economy include __ , __ , __ , __ , and __ .
first come, first served; political power; physical force; random assignment; and coupons
When the price of cell phones decreased from $20 to $12, production decreased from 2 comma 000 to 1 comma 500 per month. You can conclude that the supply of cell phones is price __.
inelastic
Price elasticity of supply is calculated by dividing the percentage change in __ by the percentage change in __. Usually, price elasticities of supply are __ ----- higher prices yield __ quantities supplied. Long-run supply curves are __ elastic than short-run supply curves because the __ the time allowed, the more resources can flow into or out of an industry when price changes.
quantity supplied, price, positive, greater, more, longer
The demand curve shown on the right is
relatively elastic.
Which of the following is true? If the income elasticity of demand for hot dogs is negative 0.75, hot dogs are __ good and if the income elasticity of demand for lobster is 1.32, lobster is __ good.
All of the above. (Income elasticity is negative for inferior goods where the quantity demanded rises as income falls.; Income elasticity is negative for inferior goods where the quantity demanded falls as income rises.; Income elasticity is positive for normal goods where the quantity demanded rises as income rises.; Income elasticity is positive for normal goods where the quantity demanded falls as income falls.) an inferior, a normal
Price ceilings, such as rent controls
All of the above. (lead to deterioration of existing housing, discourage the construction of new housing, reduce tenant mobility as people may be reluctant to change apartments)
What is the economic effect of price ceilings?
An effective price ceiling will lead to a shortage.
When price increases along the inelastic range of market demand, total revenues will go down.
False
The graph to the right shows Sue's budget constraint for Days Skiing and Days Rock Climbing when the budget is $100, the price of Days Skiing is $20, and the price of Days Rock Climbing is $25. Using the line drawing tool, plot the new budget constraint when the price of Days Skiing is $25 and the price of Days Rock Climbing is $50. Label this line 'BC1'.
Find x- and y- axis intersection points by dividing budget by new prices of goods.
Sue's monthly budget for bottled water and soft drinks is $20.00. The price of bottled water is $0.80 per bottle, and the price of soft drinks is $2.00 per bottle.
Find x- and y- axis intersection points by dividing monthly budget by price of each good.
The negative slope of the consumer's indifference curve measures the consumer's marginal rate of substitution.
True
Voluntary exchange refers to an act of trading between individuals that makes both parties to the trade subjectively better off.
True.
The minimum wage is an example of
a price floor.
The marginal rate of substitution is measured along
a given indifference curve.
Using indifference curve analysis, the consumer optimum occurs
at the point of tangency between an indifference curve and a budget line.
Ryan is deciding between attending Western State University and Eastern State University. He cannot attend both universities simultaneously. Both are fine universities, but the reputation of Western is slightly higher, as is the tuition. Let MUe and MUw be Ryan's marginal utilities from attending Eastern and Western State Universities respectively and Pe and Pw be the prices of attending Eastern and Western State Universities. Using the rule of consumer optimum, Ryan will decide to
attend Eastern State University, if MUe/Pe exceeds MUw/Pw
The graph on the right shows the market for butter. The black market price of butter, including cost of time, is likely to be OR The graph on the right shows the market for sugar. The black market price of sugar, including cost of time, is likely to be
higher than the original equilibrium price.
As more of the good on the X-axis is consumed, and less of the good on the Y-axis is consumed, the marginal rate of substitution
is negative and decreasing.
The market price people are willing to pay for a unit of a particular commodity is determined by
marginal utility.
The long-run elasticity of supply in most industries is ___________ than the short-run elasticity because in the long run, ________________.
more elastic; resources and firms can enter the industry
The price elasticity of demand is equal to the percentage change in __ divided by the percentage change in __. Price elasticity of demand is calculated in terms of __ changes in quantity demanded and in price. Thus, it is expressed as a unitless, dimensionless number that is __ units of measurement. The price elasticity of demand is always __, because an increase in price will lead to __ in quantity demanded and a decrease in price will lead to __ in quantity demanded. One extreme elasticity occurs when a demand curve is vertical. It has __ price elasticity of demand. It is completely __. Another extreme elasticity occurs when a demand curve is horizontal. It has completely __ demand. Its price elasticity of demand is __.
quantity demanded, price, percentage, independent of, negative, a decrease, an increase, zero, inelastic, elastic, infinite
Even when businesspeople can change prices, some rationing by waiting may occur. Such __ arises when there are large changes in demand coupled with high costs of satisfying those changes immediately.
queuing
People often complain about price gouging after a natural disaster. Suppose the government imposed limitations on price increases in the aftermath of a disaster. One would expect
reconstruction to take longer because the quantity supplied of new materials would increase more slowly.
To derive the demand curve we assume that
tastes are constant.
