chapter 4
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chapter 4

Course Number: ECN 302, Spring 2013

College/University: Cleveland State

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Microeconomics, 8e (Pindyck/Rubinfeld) Chapter 4 Individual and Market Demand 4.1 Individual Demand 1) As we move downward along a demand curve for apples, A) consumer well-being decreases. B) the marginal utility of apples decreases. C) the marginal utility of apples increases. D) Both A and B are true. E) Both A and C are true. Answer: B Diff: 1 Section: 4.1 2) The change in the price of one good has no effect...

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8e Microeconomics, (Pindyck/Rubinfeld) Chapter 4 Individual and Market Demand 4.1 Individual Demand 1) As we move downward along a demand curve for apples, A) consumer well-being decreases. B) the marginal utility of apples decreases. C) the marginal utility of apples increases. D) Both A and B are true. E) Both A and C are true. Register to View AnswerDiff: 1 Section: 4.1 2) The change in the price of one good has no effect on the quantity demanded of another good. These goods are: A) complements. B) substitutes. C) both inferior. D) both Giffen goods. E) none of the above Register to View AnswerDiff: 1 Section: 4.1 3) The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that: A) good A is a normal good. B) good B is an inferior good. C) goods A and B are substitutes. D) goods A and B are complements. E) none of the above Register to View AnswerDiff: 1 Section: 4.1 4) An individual demand curve can be derived from the A) price-consumption B) price-income C) income-substitution D) income-consumption E) Engel Register to View AnswerDiff: 1 Section: 4.1 ________ curve. 1 Copyright 2013 Pearson Education, Inc. 5) Which of the following claims is true at each point along a price-consumption curve? A) Utility is maximized but income is not all spent. B) All income is spent, but utility is not maximized. C) Utility is maximized, and all income is spent. D) The level of utility is constant. Register to View AnswerDiff: 1 Section: 4.1 6) Which of the following is true regarding income along a price-consumption curve? A) Income is increasing. B) Income is decreasing. C) Income is constant. D) The level of income depends on the level of utility. Register to View AnswerDiff: 2 Section: 4.1 7) Which of the following is true regarding utility along a price-consumption curve? A) It is constant. B) It changes from point to point. C) It changes only if income changes. D) It changes only for normal goods. Register to View AnswerDiff: 2 Section: 4.1 8) The income-consumption curve A) illustrates the combinations of incomes needed with various levels of consumption of a good. B) is another name for income-demand curve. C) illustrates the utility-maximizing combinations of goods associated with every income level. D) shows the utility-maximizing quantity of some good (on the horizontal axis) as a function of income (on the vertical axis). Register to View AnswerDiff: 1 Section: 4.1 9) Which of the following pairs of goods are NOT complements? A) Hockey sticks and hockey pucks B) Computer CPUs and computer monitors C) On-campus student housing and off-campus rental apartments D) all of the above E) none of the above Register to View AnswerDiff: 1 Section: 4.1 2 Copyright 2013 Pearson Education, Inc. 10) Which of the following goods has a low, but positive, income elasticity of demand? A) furniture. B) new cars. C) health insurance. D) all of the above E) none of the above Register to View AnswerDiff: 1 Section: 4.1 11) The curve in the diagram below is called A) the price-consumption curve. B) the demand curve. C) the income-consumption curve. D) the Engel curve. E) none of the above Register to View AnswerDiff: 1 Section: 4.1 3 Copyright 2013 Pearson Education, Inc. 12) The curve in the diagram below is called: A) the price-consumption curve. B) the demand curve. C) the income-consumption curve. D) the Engel curve. E) none of the above Register to View AnswerDiff: 1 Section: 4.1 13) If an Engel curve has a positive slope A) both goods are normal. B) the good on the horizontal axis is normal C) as the price of the good on the horizontal axis increases, more of both goods in consumed. D) as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed. Register to View AnswerDiff: 1 Section: 4.1 14) Which of the following pairs of goods are substitutes? A) Baseball bats and baseballs B) Hot dogs and mustard C) Computer hardware and software D) Gasoline and motor oil E) Owner-occupied housing and rental housing Register to View AnswerDiff: 1 Section: 4.1 4 Copyright 2013 Pearson Education, Inc. 15) When the income-consumption curve has a positive slope throughout its entire length, we can conclude that A) both goods are inferior. B) both goods are normal. C) the good on the vertical (y) axis is inferior. D) the good on the horizontal (x) axis is inferior. Register to View AnswerDiff: 2 Section: 4.1 16) Use the following statements to answer this question: I. A price-consumption curve is derived by varying the price of asparagus. If the price-consumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping. II. Fred consumes only food and clothing. Fred's Engel curve traces out the utility maximizing combinations of food and clothing associated with each and every income level. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Register to View AnswerDiff: 2 Section: 4.1 17) Consider two goods X and Y available for consumption. Assume that the price of X changes while the price of Y remains fixed. For these two goods, the price-consumption curve illustrates the A) relationship between the price of X and consumption of Y. B) utility-maximizing combinations of X and Y for each price of X. C) relationship between the price of Y and the consumption of X. D) utility-maximizing combinations of X and Y for each quantity of X. Register to View AnswerDiff: 2 Section: 4.1 18) Consider a graph on which one good Y is on the vertical axis and the only other good X is on the horizontal axis. On this graph the income-consumption curve has a positive slope for low incomes, then it takes a zero slope for a higher income, and then it takes a negative slope for even higher incomes (the curve looks like an arc, first rising and then falling as income increases). This curve illustrates that, for all income levels, A) both X and Y are normal. B) only Y is normal. C) both X and Y are inferior. D) only X is normal. Register to View AnswerDiff: 2 Section: 4.1 5 Copyright 2013 Pearson Education, Inc. 19) According to a survey by the U.S. Bureau of Labor Statistics, which of the following statements about annual U.S. household consumer expenditures is false? A) The income elasticity of demand for entertainment is positive. B) The income elasticity of demand for owner-occupied housing is positive. C) The income elasticity of demand for rental housing is positive. D) The income elasticity of demand for health care is positive. E) Average family expenditures increase with income. Register to View AnswerDiff: 2 Section: 4.1 20) The income-consumption curve for Dana between Qa and Qb is given as: Qa = Qb. His budget constraint is given as: 120 = Qa + 4Qb How much Qa will Dana consume to maximize utility? A) 0 B) 24 C) 30 D) 60 E) More information is needed to answer this question. Register to View AnswerDiff: 3 Section: 4.1 21) Jon's income-consumption curve is a straight line from the origin with a positive slope. Now suppose that Jon's preferences change such that his income-consumption curve remains a straight line but rotates 15 degrees clockwise. Jon's demand curve for the good on the horizontal axis A) will shift left. B) will shift right. C) will not change. D) might do any of the above. Register to View AnswerDiff: 3 Section: 4.1 22) Suppose that a consumer regards two types of soap as perfect substitutes for one another. The price consumption path generated by changing the price of one type of soap A) is always upward sloping. B) is always horizontal. C) is always vertical. D) corresponds with the axis for the cheaper soap. E) corresponds with the axis for the more expensive soap. Register to View AnswerDiff: 3 Section: 4.1 6 Copyright 2013 Pearson Education, Inc. 23) Your income response for bicycle riding changes with the amount of income you earn. At low levels of income, you view bicycle riding as an inferior good and substitute other types of transportation (e.g., auto travel) as your income rises. However, you view bicycle riding as a normal good after your income rises above a particular level. What shape does your Engel curve for bicycle riding have? A) Vertical line B) Horizontal line C) C-shaped D) Upward sloping E) none of the above Register to View AnswerDiff: 1 Section: 4.1 24) Use the following statements to answer this question: I. The income-consumption curve for perfect complements is a straight line. II. The price-consumption curve for perfect complements is a straight line. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false. Register to View AnswerDiff: 2 Section: 4.1 25) As a group, U.S. consumers view hamburger as a normal good at low income levels and as an inferior good at high income levels. Based on this information, which of the following statements is NOT true? A) As income for all consumers rises, the hamburger demand curves of low-income consumers shift rightward, and the demand curves of high-income consumers shift leftward. B) The aggregate demand curve for hamburger in the U.S. is upward sloping at low prices. C) The Engel curve for hamburger consumed in the U.S. is upward sloping at low income levels and downward sloping at high income levels. D) The income-consumption curve for hamburger and all other food products cannot be a straight line. Register to View AnswerDiff: 1 Section: 4.1 26) Suppose the income-consumption curve for goods X and Y is upward sloping. If the price of good Y increases and the income-consumption curve rotates in clockwise fashion, then we know that: A) X and Y are complements. B) X and Y are both inferior goods. C) X and Y are substitutes . D) Y is an inferior good. Register to View AnswerDiff: 2 Section: 4.1 7 Copyright 2013 Pearson Education, Inc. 27) In the diagram below, Marvin's optimal consumption bundles are indicated for five different budget constraints. Sketch the Engel curve for Marvin. Next, use the diagram to sketch Marvin's demand curve for the good on the horizontal axis. Answer: To construct the Engel curve, the relevant budget constraints are 3, 4 and 5. The Engel curve will be increasing in income and quantity space. To construct the demand curve, the relevant budget constraints are 1,2 and 3. Demand for good 1 increases as the price decreases. Diff: 2 Section: 4.1 28) Melissa's optimal consumption is indicated in the diagram below for three different income levels. For Melissa are park visits a normal or inferior good? Explain your answer. Answer: Melissa's demand behavior exhibited above suggests that as her income rises, she demands fewer park visits. Since the income effect is negative, park visits are an inferior good for Melissa. Diff: 1 Section: 4.1 8 Copyright 2013 Pearson Education, Inc. 29) Using the table below, construct an Engel Curve for each beer type. Answer: Diff: 1 Section: 4.1 9 Copyright 2013 Pearson Education, Inc. 4.2 Income and Substitution Effects 1) Based on the diagram below it can be inferred that: A) hot dogs are a normal good for all levels of income. B) hot dogs are an inferior good, but not a Giffen good, for all levels of income. C) hot dogs are a Giffen good for all levels of income. D) hot dogs are an inferior good for low levels of income, but at higher levels of income become a normal good. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 2) Good A is a normal good. The demand curve for good A: A) slopes downward. B) usually slopes downward, but could slope upward. C) slopes upward. D) usually slopes upward, but could slope downward. Register to View AnswerDiff: 1 Section: 4.2 3) Use the following two statements in answering this question: I. All Giffen goods are inferior goods. II. All inferior goods are Giffen goods. A) I and II are true. B) I is true, and II is false. C) I is false, and II true. D) I and II are false. Register to View AnswerDiff: 1 Section: 4.2 10 Copyright 2013 Pearson Education, Inc. 4) The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect. A) Giffen B) real price C) income D) substitution Register to View AnswerDiff: 1 Section: 4.2 5) For an inferior good, the income and substitution effects A) work together. B) work against each other. C) can work together or in opposition to each other depending upon their relative magnitudes. D) always exactly cancel each other. Register to View AnswerDiff: 1 Section: 4.2 6) The substitution effect of a price change for product X is the change in consumption of X associated with a change in A) the price of X, with the level of utility held constant. B) the price of X, with the level of real income not considered. C) the price of X, with the prices of other goods changing by the same percentage as that for product X. D) income, with prices of other goods held constant. Register to View AnswerDiff: 1 Section: 4.2 7) A Giffen good A) is always the same as an inferior good. B) is the special subset of inferior goods in which the substitution effect dominates the income effect. C) is the special subset of inferior goods in which the income effect dominates the substitution effect. D) must have a downward sloping demand curve. Register to View AnswerDiff: 1 Section: 4.2 8) Which of the following is true concerning the substitution effect of a decrease in price? A) It will lead to an increase in consumption only for a normal good. B) It always will lead to an increase in consumption. C) It will lead to an increase in consumption only for an inferior good. D) It will lead to an increase in consumption only for a Giffen good. Register to View AnswerDiff: 1 Section: 4.2 11 Copyright 2013 Pearson Education, Inc. 9) Which of the following is true concerning the income effect of a decrease in price? A) It will lead to an increase in consumption only for a normal good. B) It always will lead to an increase in consumption. C) It will lead to an increase in consumption only for an inferior good. D) It will lead to an increase in consumption only for a Giffen good. Register to View AnswerDiff: 1 Section: 4.2 10) Which of the following describes the Giffen good case? When the price of the good A) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls. B) falls, the income effect is in the same direction as the substitution effect, and consumption rises. C) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls. D) falls, the income effect is in opposite direction to the substitution effect and consumption rises. E) Both A and D are correct. Register to View AnswerDiff: 3 Section: 4.2 11) Use the following two statements in answering this question: I. For all Giffen goods the substitution effect is larger than the income effect. II. For all inferior goods the substitution effect is larger than the income effect. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Register to View AnswerDiff: 2 Section: 4.2 12) Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. A) more, more B) more, less C) less, more D) less, less Register to View AnswerDiff: 2 Section: 4.2 12 Copyright 2013 Pearson Education, Inc. 13) Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. A) more, more B) more, less C) less, more D) less, less Register to View AnswerDiff: 2 Section: 4.2 14) Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by A) more than double. B) exactly double. C) less than double. D) Any of the above are possible. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 15) Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by A) more than double. B) exactly double. C) less than double. D) Any of the above are possible. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 13 Copyright 2013 Pearson Education, Inc. Figure 4.1 A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B. 16) Refer to Figure 4.1. The substitution effect of the price change in food on the quantity of food purchased is: A) the change from F3 to F1. B) the change from F3 to F2. C) the change from F2 to F1. D) the change from F1 to F2. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 17) Refer to Figure 4.1. The income effect of the price change in food on the quantity of food purchased is: A) the change from F3 to F1. B) the change from F3 to F2. C) the change from F2 to F1. D) the change from F1 to F2. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 18) Based on Figure 4.1, food is: A) a normal good. B) an inferior good, but not a Giffen good. C) a Giffen good. D) none of the above Register to View AnswerDiff: 2 Section: 4.2 14 Copyright 2013 Pearson Education, Inc. Figure 4.2 A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B. 19) Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is: A) the change from C3 to C1. B) the change from C3 to C2. C) the change from C2 to C1. D) the change from C1 to C2. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 20) Refer to Figure 4.2. The income effect on the quantity of clothing purchased is: A) the change from C1 to C3. B) the change from C1 to C2. C) the change from C2 to C3. D) the change from C3 to C2. E) none of the above Register to View AnswerDiff: 2 Section: 4.2 21) Based Figure 4.2, clothing is: A) a normal good. B) an inferior good, but not a Giffen good. C) a Giffen good. D) none of the above Register to View AnswerDiff: 2 Section: 4.2 15 Copyright 2013 Pearson Education, Inc. Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. 22) See Scenario 4.1. What is Daniel's budget constraint? A) 240 = 3Pc + 3Pd B) 240 = 3Qc + 3Qd C) 240 = (Pc)(Qc) D) 240 = (Qc)(Qd) E) none of the above Register to View AnswerDiff: 2 Section: 4.2 23) See Scenario 4.1. What is Daniel's income-consumption curve? A) Pc = Pd B) Pc = Qc C) Qd = I - 3Qc D) Qc = Qd E) all of the above Register to View AnswerDiff: 3 Section: 4.2 24) See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above? A) 0 B) 24 C) 40 D) 60 E) none of the above Register to View AnswerDiff: 3 Section: 4.2 25) See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake? A) Qc = 240 - Pc B) Qc = 240/Pc C) Qc = 120/Pc D) Qc = 240/(3 + Pc) E) none of the above Register to View AnswerDiff: 3 Section: 4.2 16 Copyright 2013 Pearson Education, Inc. 26) You have just won a cash award of $500 for academic excellence. A) The substitution effect of this award will be larger than its income effect. B) The income effect of this award will be larger than its substitution effect. C) The substitution and income effects will be of identical size. D) It is impossible to know whether the substitution effect is larger than the income effect or vice versa. Register to View AnswerDiff: 3 Section: 4.2 27) The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s)? A) Vodka is an inferior good. B) Vodka is a normal good. C) Vodka is an inferior good and the taxes collected from this tax are rebated to consumers. D) Vodka is a normal good and the taxes collected from this tax are rebated to consumers. E) both B and C Register to View AnswerDiff: 3 Section: 4.2 28) Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption. A) positive, positive B) positive, negative C) negative, positive D) negative, negative Register to View AnswerDiff: 1 Section: 4.2 29) Your indifference curves for good X (horizontal axis) and good Y (vertical axis) are vertical lines because you do not gain any satisfaction from consumption of Y. As the price of X declines, the change in consumption of X is entirely composed of the: A) income effect. B) substitution effect. C) Giffen effect. D) independent good effect. Register to View AnswerDiff: 2 Section: 4.2 17 Copyright 2013 Pearson Education, Inc. 30) Suppose you only consume rice and bananas. Can both of these goods be Giffen goods in your consumption? A) Yes, this is possible B) No, at least one of the goods must be normal C) No, they both can be inferior, but at least one of the goods cannot be a Giffen good D) We need more information about the goods to answer this question Register to View AnswerDiff: 1 Section: 4.2 31) As a group, U.S. consumers have no income response for their consumption of ice cream so that the income elasticity of demand for ice cream equals zero. Does this mean that the change in ice cream consumption that results from a price increase is entirely composed of the substitution effect? A) Yes, the income effect associated with a price change is zero B) No, any price change moves the point of consumption to a new indifference curve, so there must be a non-zero income effect C) No, the income and substitution effects in this case move in opposite directions and completely offset one another, so it only appears that the income effect is zero D) We need more information about the goods to answer this question Register to View AnswerDiff: 2 Section: 4.2 32) If the marginal rate of substitution is infinite or zero, show that the substitution effect of a price change for a good is zero. Answer: Suppose that the consumer has budget constraint BC1 shown above. If the consumer's MRS is infinite as indicated above as I1, the optimal bundle involves consuming a positive quantity of only good 1. If the price of good 1 falls, the consumer's new budget constraint becomes BC2. The optimal consumption bundle at new prices holding utility constant at I1 is the same. Thus, there is no substitution effect. If the consumer's MRS is zero as indicated above on indifference curve I0, the optimal bundle involves consuming a positive quantity of only good 2. If the price of good 1 falls, the consumer's new budget constraint again becomes BC2. On this new budget constraint, the optimal bundle does not change. Thus, there is no substitution or income effect. 18 Copyright 2013 Pearson Education, Inc. Another possibility is to have certain portions of the indifference curve exhibit either zero or infinite MRS as indicated directly above. The indifference curve Ipc suggests the goods are perfect complements. At initial prices, the consumer's optimal choice is at point A on BC1 and Ipc. When the price of good 1 falls, we see that the optimal consumption bundle holding utility constant at new prices doesn't change. Thus, there is no substitution effect. Diff: 3 Section: 4.2 19 Copyright 2013 Pearson Education, Inc. 33) Suppose the marginal rate of substitution is constant at 6 for all possible consumption bundles. Next suppose that the price of good 1 decreases, and the ratio P1/P2 is greater than 6. Show that the income and substitution effects from this price change are both zero. Answer: When the price of good 1 falls, the price ratio is still greater than 6 and the slope of the new budget constraint (BC2) must be flatter than the slope of the original budget constraint (BC1). Since the MRS is exactly 6, the consumer maximizes utility by consuming as much of good 2 as possible. After the price change, the consumer chooses the same bundle. Thus, the substitution and income effects are both zero in this example. Diff: 2 Section: 4.2 34) Donald derives utility from only two goods, carrots (Qc) and donuts (Qd). His utility function is as follows: U(Qc,Qd) = (Qc)(Qd) The marginal utility that Donald receives from carrots (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Donald has an income (I) of $120 and the price of carrots (Pc) and donuts (Pd) are both $1. a. What is Donald's budget line? b. What is Donald's income-consumption curve? c. What quantities of Qc and Qd will maximize Donald's utility? d. Holding Donald's income and Pd constant at $120 and $1 respectively, what is Donald's demand curve for carrots? e. Suppose that a tax of $1 per unit is levied on donuts. How will this alter Donald's utility maximizing market basket of goods? f. Suppose that, instead of the per unit tax in (e), a lump sum tax of the same dollar amount is levied on Donald. What is Donald's utility maximizing market basket? g. The taxes in (e) and (f) both collect exactly the same amount of revenue for the government, which of the two taxes would Donald prefer? Show your answer numerically and explain why Donald prefers the per unit tax over the lump sum tax, or vice versa, or why he is indifferent between the two taxes. 20 Copyright 2013 Pearson Education, Inc. Register to View AnswerBudget line: 120 = Qc + Qd b. The income consumption curve must satisfy: MUd/MUc = Pd/Pc Substituting for MUd, MUc, Pd, and Pc yields: Qc/Qd = 1 or Qc = Qd c. Substituting the information in (b) into the budget line: 120 = Qc + Qc = 2Qc Qc = 60 Qd = 60 d. Rewriting the budget line: 120 = PcQc + Qd Substituting the information in (b) into the budget line: 120 = PcQc + Qc = Qc(Pc + 1) Qc = 120/(Pc + 1) e. The $1 tax on donuts raises the after-tax price to $2. The income-consumption curve becomes: MUd/MUc = Pd/Pc Substituting for MUd, MUc, Pd and Pc yields: Qc/Qd = 2 or Qc = 2Qd The budget line is: 120 = Qc + 2Qd Substitute the income-consumption curve into the budget line to eliminate Qc: 120 = 2Qd + 2Q = 4Qd Qd = 30 Qc = 60 f. Donald buys 30 donuts, so he pays $30 in tax. If Donald paid $30 in a lump sum tax, his income would be $90. Resolve the utility maximization problem with I = 90, Pc = Pd = 1. The utility maximizing market basket is Qc = Qd = 45. g. Donald prefers the lump-sum tax to the excise tax. Use the utility function to show which market basket is preferred. U(Qc, Qd) = QcQd lump-sum tax U(45, 45) = 45 45 = 2,025 excise tax U(60, 30) = 60 30 = 1,800 Diff: 3 Section: 4.2 21 Copyright 2013 Pearson Education, Inc. 35) The following data pertain to products A and B, both of which are purchased by Madame X. Initially, the prices of the products and quantities consumed are: PA = $10, QA = 3, PB = $10, QB = 7. Madame X has $100 to spend per time period. After a reduction in price of B, the prices and quantities consumed are: PA = $10, QA = 2.5, PB = $5, QB = 15. Assume that Madame X maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Madame X to put her back on the original indifference curve, she would consume this combination of A and B: QA = 1.5, QB = 9 a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect. b. Determine if product B is a normal, inferior, or Giffen good. Explain. Register to View AnswerThe total effect of the price change is the difference in the quantities before and after the price change, or 15 - 7 = 8. This change of 8 includes the income and substitution effects. The reduction in consumption that resulted from the reduction in income to put Madame X back on the original indifference curve represents the income effect. This difference is 15 - 9 = 6. The difference between 15 - 7 = 8 and 15 - 9 = 6 is the substitution effect, i.e. 8 - 6 = 2. b. Since the two effects are additive and both are positive, we have a normal good, i.e., 6 + 2 = 8. Diff: 3 Section: 4.2 22 Copyright 2013 Pearson Education, Inc. 36) The diagram below depicts the change in optimal consumption bundles for Marty when the price of shotgun shells fall. Decompose the change into the income and substitution effects. Answer: Diff: 2 Section: 4.2 23 Copyright 2013 Pearson Education, Inc. 37) Margaret's optimal consumption is shown in the diagram below for two different prices of Hy-Vee Cola. Decompose the change in Hy-Vee Cola consumption into income and substitution effects. Do the effects work in opposite directions? Answer: The substitution effect is (c2 - c1). The income effect is (c3 - c2). Note that the income effect is negative. Thus, the income and substitution effects work in opposite directions. Diff: 2 Section: 4.2 24 Copyright 2013 Pearson Education, Inc. 38) The demand curves for steak, eggs, and hot dogs are given in the table below. The current price of steak is $5. The price of eggs is $2.50, and the price of hot dogs is $0.75. Fill in the remaining columns of the table using this information. Indicate which goods are substitutes and which goods are complements. Good Steak Steak Price Egg Price Hotdog Price Elasticity of Elasticity of Elasticity of Demand Demand Demand Demand Equation DS = 500 - 2PS - PE + PH Egg DE = 75 - 3PE - PS + Hotdog DH = 300 - PH + PS + PH PE Answer: Good Steak Egg Hotdog Steak Hotdog Egg Price Price Price Elasticity Elasticity Elasticity of of of Demand Demand Demand Demand Equation DS = 500 - 2PS - PE + PH DE = 75 - 3PE - PS + DH = 300 - PH + PS + PH PE -0.020 -0.00051 1.53 -0.079 -0.24 1.20E-4 0.016 0.00082 -0.0012 Steak and eggs are complements. Steak and hotdogs and eggs and hotdogs are substitutes. Diff: 3 Section: 4.2 25 Copyright 2013 Pearson Education, Inc. 4.3 Market Demand 1) A consumer spends his income on food and rent. The government places a $1 tax on food. To restore the pre-tax consumption level of food the rebate paid to consumers will be smallest when A) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 5. B) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 5. C) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 10. D) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 10. Register to View AnswerDiff: 3 Section: 4.3 2) Price elasticity of demand measures the A) slope of the demand curve. B) sensitivity of quantity demanded to changes in the price of substitute goods. C) sensitivity of price to changes in the quantity demanded of substitute goods. D) sensitivity of quantity demanded to changes in price. Register to View AnswerDiff: 1 Section: 4.3 3) When a good is price inelastic, consumer expenditures on the good A) increase when price increases. B) decrease when price increases. C) do not change when price increases. D) are not related to price elasticity of demand. Register to View AnswerDiff: 1 Section: 4.3 4) When a good has a unitary price elasticity, consumer expenditures for the good A) change in the same direction as a price change. B) change in the opposite direction to a price change, but not necessarily by the same percentage as the price change. C) do not change when the price of the good decreases. D) change in the opposite direction and by the same percentage as any price change. Register to View AnswerDiff: 1 Section: 4.3 5) Recently, Skooterville has experienced a large growth in population. As a result, the demand curve for telephone service in Skooterville: A) has shifted to the right. B) has shifted to the left. C) has shifted down. D) Both B and C are correct. E) none of the above Register to View AnswerDiff: 1 Section: 4.3 26 Copyright 2013 Pearson Education, Inc. 6) The demand for sirloin steak is probably more elastic than the demand for all meat because A) steak is very expensive. B) people are worried about cholesterol. C) cattle raising is not very profitable. D) there are more substitutes for sirloin steak than for all meats. Register to View AnswerDiff: 1 Section: 4.3 7) Which of the following is true about the demand for gasoline? A) It is probably more price elastic in the long run because price will increase by a higher percentage. B) It is probably more price elastic in the long run because it is easier to find substitutes for gasoline in the long run. C) It is probably more price elastic in the short run because price will increase by a higher percentage. D) It is probably more price elastic in the short run because it is easier to find substitutes for gasoline in the short run. Register to View AnswerDiff: 1 Section: 4.3 8) In a recent article, two economists estimated that the 37.5% increase in price that would result from a 75 cent tax increase on cigarettes would lead to a decrease in smoking among college students of 30%. What can you conclude about the demand for cigarettes among college students? A) It is price elastic. B) It is price inelastic. C) It is unit elastic. D) It is perfectly inelastic. Register to View AnswerDiff: 1 Section: 4.3 9) As the price of good X increases from $5 to $8, quantity demanded falls from 100 to 80. Based upon this information we can conclude that the demand for X is A) elastic. B) inelastic. C) unit inelastic. D) insufficient information for judgment. Register to View AnswerDiff: 2 Section: 4.3 27 Copyright 2013 Pearson Education, Inc. 10) Use the following two statements to answer this question: I. The price elasticity of demand is constant along the entire length of a linear demand curve. II. The price elasticity of demand is the special name that economists give to the slope of a demand curve. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Register to View AnswerDiff: 2 Section: 4.3 11) What is the shape of the total revenue curve derived from a linear downward sloping demand curve? A) Horizontal B) Vertical C) U-shaped D) Inverted u-shaped Register to View AnswerDiff: 2 Section: 4.3 12) What is the shape of the total revenue curve derived from a horizontal demand curve? A) Horizontal B) Vertical C) U-shaped D) Upward sloping, with a positive slope Register to View AnswerDiff: 2 Section: 4.3 13) What is the shape of the marginal revenue curve derived from a linear downward sloping demand curve? A) Horizontal B) Vertical C) U-shaped D) Downward sloping, with a constant slope Register to View AnswerDiff: 3 Section: 4.3 14) Which of the following functions is least likely to represent a real demand curve? A) Q = 120 - 2P B) Q = 120 - 3P + 2I C) Q = 120/P D) Q = 120 + 3P - 2I E) Q = 120/(Pa + Pb) Register to View AnswerDiff: 2 Section: 4.3 28 Copyright 2013 Pearson Education, Inc. Scenario 4.2: Suppose that the demand for artichokes (Qa) is given as: Qa = 200 - 4P 15) Use the information in Scenario 4.2. What is the price elasticity of demand if the price of artichokes is $10? A) 0 B) -0.25 C) -1 D) -4 E) negative infinity Register to View AnswerDiff: 2 Section: 4.3 16) Use the information in Scenario 4.2. Suppose that the price of artichokes is increased slightly from $10. The total expenditure by consumers on artichokes will ________ and the number of artichokes sold will ________. A) rise, rise B) rise, fall C) fall, rise D) fall, fall Register to View AnswerDiff: 2 Section: 4.3 17) Use the information in Scenario 4.2. At what price, if any, is the demand for artichokes completely elastic? A) 50 B) 30 C) 10 D) 0 E) none of the above Register to View AnswerDiff: 2 Section: 4.3 29 Copyright 2013 Pearson Education, Inc. Scenario 4.3: The demand for erasers (Q) is given as follows: Q = 240 - 4Pe + 2I + Pb + A where Pe is the price of erasers I is the level of income Pb is the price of another good A is the level of advertising Suppose that Q = 240, Pe = 10, Pb = 10, and A = 2. 18) Given the information in Scenario 4.3, determine I. A) 0 B) 14 C) 24 D) 36 E) 48 Register to View AnswerDiff: 2 Section: 4.3 19) Given the information in Scenario 4.3, what is the point price elasticity of demand? A) -1/3 B) -1/6 C) -1/10 D) -1/24 E) -5/24 Register to View AnswerDiff: 2 Section: 4.3 20) Given the information in Scenario 4.3, it would be correct to say that demand is: A) infinitely elastic. B) elastic, but not infinitely elastic. C) unit elastic (Ep = -1). D) inelastic, but not completely inelastic. E) completely inelastic. Register to View AnswerDiff: 1 Section: 4.3 30 Copyright 2013 Pearson Education, Inc. 21) Given the information in Scenario 4.3, suppose that the price of erasers increases slightly from $10. How will this affect the total revenue collected by the firm? A) Total revenue will increase. B) Total revenue will not change. C) Total revenue will decrease. D) There will be an indeterminate change in total revenue. Register to View AnswerDiff: 2 Section: 4.3 22) Given the information in Scenario 4.3, erasers are: A) a normal good. B) an inferior good. C) neither normal nor inferior. D) complements. E) necessities. Register to View AnswerDiff: 1 Section: 4.3 23) Given the information in Scenario 4.3, erasers and good b, are: A) substitutes. B) complements. C) completely unrelated. D) normal. E) inferior. Register to View AnswerDiff: 1 Section: 4.3 24) The point price elasticity of demand is -1/2. The price of the product increases from $1.00 to $1.10. Given the information in Scenario 4.3, the quantity demanded will decrease by approximately: A) 5 units. B) 5 percent. C) 10 units. D) 10 percent. E) none of the above Register to View AnswerDiff: 1 Section: 4.3 31 Copyright 2013 Pearson Education, Inc. Scenario 4.4: The demand curve for the new computer game, Rock and Roll Trivia, is given as follows: Q = 200 - 5P - .1Pc - .5Pd + .2A - I where P is the price of the game Pc is the price of a computer Pd is the price of a diskette A is the level of advertising Q is the level of income 25) See the information in Scenario 4.4. Does the demand curve for Rock and Roll Trivia slope downward? A) Yes it does. B) No it does not. C) More information is needed to answer this question. Register to View AnswerDiff: 1 Section: 4.3 26) See the information in Scenario 4.4. From this demand curve, one can infer that: A) Rock and Roll Trivia is an inferior good. B) computers and diskettes are substitutes. C) computers and diskettes are complements. D) computers are a normal good. E) A, B and D are true. Register to View AnswerDiff: 2 Section: 4.3 27) See the information in Scenario 4.4. From this demand curve, one can infer that: A) an increase in advertising will cause an increase in the demand for Rock and Roll Trivia. B) Rock and Roll Trivia and computers are substitutes. C) Rock and Roll Trivia and diskettes are substitutes. D) all of the above E) none of the above Register to View AnswerDiff: 2 Section: 4.3 28) See the information in Scenario 4.4. Suppose P = 10, Pc = 100, Pd = 2, A = 5, and I = 50. How many games will be sold? A) -100 B) 0 C) 50 D) 90 E) none of the above Register to View AnswerDiff: 2 Section: 4.3 32 Copyright 2013 Pearson Education, Inc. 29) See the information in Scenario 4.4. Suppose P = 10, Pc = 100, Pd = 2, A = 5, and I = 50. What is the price elasticity of demand? A) 0 B) -5/9 C) -1 D) -9/5 E) none of the above Register to View AnswerDiff: 2 Section: 4.3 30) See the information in Scenario 4.4. Suppose that the price should increase slightly from $10, how will this affect the total expenditure of consumers on the game? A) Total expenditures will increase. B) Total expenditures will not change. C) Total expenditures will decrease by a larger percentage than the price increase. D) Total expenditures will decrease by a smaller percentage than the price increase. E) either C or D could be true. Register to View AnswerDiff: 2 Section: 4.3 31) See the information in Scenario 4.4. Suppose P = 10, Pc = 100, Pd = 2, A = 5, and I = 50. What is the income elasticity of demand? A) 0 B) 5/9 C) 1 D) 9/5 E) none of the above Register to View AnswerDiff: 3 Section: 4.3 32) See the information in Scenario 4.4. Suppose P = 10, Pc = 100, Pd = 2, A = 5, and I = 50. What is the cross-price elasticity of Rock and Roll Trivia programs and diskettes? A) -1/90 B) 0 C) 1/90 D) 1 E) none of the above Register to View AnswerDiff: 2 Section: 4.3 33 Copyright 2013 Pearson Education, Inc. 33) A local retailer has decided to carry a well-known brand of shampoo. The marketing department tells them that the quarterly demand by an average man is: Qd = 3 - 0.25P and the quarterly demand by an average woman is: Qd = 4 - 0.5P The market consists of 10,000 men and 10,000 women. How may bottles of shampoo can they expect to sell if they charge $6 per bottle? A) 20,000 B) 33,000 C) 25,000 D) 10,000 E) none of the above Register to View AnswerDiff: 2 Section: 4.3 34) General Motors estimates that U.S. demand for its newest product will be: Qus = 30,000 - 0.5P. Export demand will be Qex = 25,000 - 0.5P. The total market demand curve for this product will be a A) straight line with a slope of -0.5. B) straight line with a slope of -1.0. C) kinked line with the kink Q at = 25,000. D) kinked line with the kink at P = 50,000. E) none of the above Register to View AnswerDiff: 3 Section: 4.3 35) The point price elasticity of demand for red herring is -4. The demand curve for red herring is: Q = 120 - P. What is the price of red herring? A) $96 B) $80 C) $100 D) $120 E) none of the above Register to View AnswerDiff: 1 Section: 4.3 36) Consider the following statements when answering this question. I. If no consumer has a kinked demand curve for CDs, then the market demand curve for CDs cannot be kinked either. II. If at a price of $10, every consumer has inelastic demand, then at that price the market demand for CDs will be inelastic too. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false. Register to View AnswerDiff: 3 Section: 4.3 34 Copyright 2013 Pearson Education, Inc. 37) To determine whether an increase in the price of gasoline results in a consumer spending a larger share of their expenditure on gasoline we need to know A) only how much money the consumer spends on gasoline before the price change B) only the change in the price of gasoline C) only the change in the price of gasoline as a percentage of the original price D) only the own price elasticity of demand for gasoline E) none of the above Register to View AnswerDiff: 2 Section: 4.3 38) Microsoft wants to calculate the effect of a worldwide 5% price cut on its sales of Excel to clients in different countries. Microsoft sells Excel at different prices in U.S., Japan and Europe. Before the price cut U.S. sales were twice sales in Japan and Europe. If the price of elasticity of demand in the U.S., Japan and Europe are -3, -4, and -2 respectively, the worldwide sales rise by A) 10%. B) 15%. C) 20%. D) 25%. E) none of the above Register to View AnswerDiff: 3 Section: 4.3 39) Gold buyers are located in New York and Zurich. If the price of gold is $400 an ounce, the worldwide demand for gold is 10,000 ounces. Also, the price elasticity of demand for gold in New York and Zurich are -3 and -2 respectively. If the slope of each demand curve in New York is the same as in Zurich, then the quantity of gold demanded by dealers in Zurich is A) 10,000/3. B) 5,000. C) 6,000. D) 10,000. E) none of the above Register to View AnswerDiff: 3 Section: 4.3 40) The demand curves for gold in New York and Zurich can both be represented by a line with negative slope, -b. When the price is zero the demand for gold is x ounces higher in New York than in Zurich. At the current price of gold the price elasticity of demand for gold in New York and Zurich is -3 and -4 respectively. The value of x equals A) a quarter of the current demand for gold in New York B) a third of the current demand for gold in New York C) a half of the current demand for gold in New York D) three-quarters of the current demand for gold in New York E) none of the above Register to View AnswerDiff: 3 Section: 4.3 35 Copyright 2013 Pearson Education, Inc. 41) Suppose your manufacturing firm is not a price-taking seller (i.e., has some control over your product price) and sells machinery to U.S. (domestic) buyers as well as foreign buyers. The domestic demand for your product is inelastic but the foreign demand is elastic, and the machinery is bulky so that the high transport costs prevent resale among the buyers. You could charge both groups of buyers the same price for the machinery, but you know that you could increase total sales revenue by charging the domestic buyers a ________ price and charging the foreign customers a ________ price. A) higher, higher B) higher, lower C) lower, higher D) lower, lower Register to View AnswerDiff: 2 Section: 4.3 42) Many governments around the world attempt to improve the incomes of commodity producers by taking steps to increase the commodity price in the domestic market. Although this may reduce quantity demanded for the product, the action may be effective because: A) commodity supply tends to be inelastic, so quantity does not decline by much. B) commodity supply tends to be elastic, so producer income increases as a result of the higher prices and quantities. C) commodity demand tends to be inelastic, so higher prices generate higher sales revenue. D) commodity supply tends to be elastic, so producer income increases as a result of the higher prices and quantities. Register to View AnswerDiff: 2 Section: 4.3 43) Suppose the aggregate demand for housing in the U.S. includes a substantial speculative component. What happens of the expectations of speculators change, and they believe housing prices will not increase in the future? A) The aggregate demand curve shifts leftward, and the equilibrium market price declines. B) The aggregate demand curve shifts leftward, and the equilibrium market price increases. C) The speculative demand curve shifts leftward, but the aggregate demand curve is unchanged. D) There is no change in the current demand for housing because speculators' expectations are based on future events. Register to View AnswerDiff: 1 Section: 4.3 44) Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the govenment increases the federal gasoline tax? A) Consumer expenditures on gasoline increase over the short run and long run B) Consumer expenditures on gasoline decline over the short run and increase over the long run C) Consumer expenditures on gasoline increase over the short run and decline over the long run D) Consumer expenditures on gasoline decrease over the short run and long run Register to View AnswerDiff: 2 Section: 4.3 36 Copyright 2013 Pearson Education, Inc. 45) Joe's Pig Palace sells barbecue plates for $4.50 each, and serves an average of 525 customers per week. During a recent promotion, Joe cut his price to $3.50 and observed an increase in sales to 600 plates per week. a. Calculate Joe's arc price elasticity of demand. b. Joe is considering permanently lowering his price to $4.00 to increase revenue. How many plates should Joe expect to sell at the new price? Does the move make sense in the light of Joe's desire to increase revenue? Register to View AnswerE= E= E= E= = -0.533 b. Since 4.00 is within this arc, -0.533 can be regarded as the relevant elasticity. We will use $4.50 and 525 as the beginning price and quantity -0.533 = -0.533 = -0.533 = [Q2- 525] = -0.533 = [Q2 + 525] = -17 Q2 + 8925 -279.83 - 0.533 Q2 = -17 Q2 + 8925 16.47 Q2 = 9204.83 Q2 = 558.88 Joe's move doesn't make sense since demand is inelastic. With inelastic demand, price and total expenditures move in the same direction. As he lowers price, total expenditures will also fall. To verify: Before Cut total expenditures = $4.50 525 = $2,362.50 After Cut total expenditures = $4.00 559 = $2,236.00 Diff: 2 Section: 4.3 37 Copyright 2013 Pearson Education, Inc. 46) Harding Enterprises has developed a new product called the Gillooly shillelagh. The market demand for this product is given as follows: Q = 240 - 4P a. If the shillelagh is priced at $40, what is the point price elasticity of demand? Is demand elastic or inelastic? b. If the shillelagh price is increased slightly from $40, what will happen to the total expenditure on the Gillooly shillelagh? Register to View AnswerThe price elasticity of demand equals (P/Q)(Q/P). If P equals $40, Q equals 80. (Q/P) is constant along a linear demand curve. In this case it equals -4. Therefore, the price elasticity of demand equals (40/80)(-4) = -2 and demand is elastic. b. An increase in the price of a good with elastic demand will result in a decrease in the total expenditure on the good. Diff: 2 Section: 4.3 47) Answer both parts of the following question. a. The San Francisco Chronicle reported that the toll on the Golden Gate Bridge was raised from $2 to $3. Following the toll increase, traffic fell by 5 percent. Based on this information, calculate the point price elasticity of demand. Is demand elastic or inelastic? Explain. b. Stephen Leonoudakis, chairman of the bridge's finance auditing committee, warned that the toll increase could cause toll revenues to decrease by $2.8 million per year. Is this statement consistent with economic theory? Explain. Register to View AnswerIncreasing the toll on the bridge form $2 to $3 is a 50 percent increase. Traffic is expected to decrease by 5 percent as a result of the toll increase. Therefore, the point price elasticity of demand is -5/50 or -0.1. Demand is inelastic. b. Stephen Leonoudakis' statement is not consistent with economic theory. When demand is inelastic, an increase in price will increase total expenditures on a good (the total expenditure on the good is the total revenue of the firm). Since demand is inelastic here, toll revenues will increase rather than decrease. Diff: 3 Section: 4.3 38 Copyright 2013 Pearson Education, Inc. 48) The demand for telephone wire can be expressed as: Q = 6000 - 1,500P, where Q represents units, in pounds per day, and P represents price, in dollars per pound. Determine the price elasticity of demand at P = $2.00 per pound. Answer: We use the point price elasticity concept. First, we calculate Q at P = $2.00. Q = 6000 - 1,500(2) = 3,000 pounds per day. EP = = (-1500) = -1 This indicates a unitary elasticity at this price. Diff: 2 Section: 4.3 49) Sally Henin has a price elasticity of demand for gasoline of -0.8. Her income elasticity for gasoline is 0.5. Sally's current income is $40,000 per year. Sally currently spends $800 per year on gasoline. The price of gasoline is currently $1.00 per gallon. a. A contemplated excise tax on gasoline will cause the price of gasoline to rise to $1.40. What impact will the tax have on Sally's consumption of gasoline? b. Since the purpose of the tax is only to discourage gasoline consumption, Congress is considering a $200 income tax rebate to lessen the burden of the gasoline tax. What impact will the rebates have on Sally's consumption of gasoline? c. Assume that both the tax and rebate are implemented. Will Sally be worse off or better off? Register to View AnswerArc price formula is E = -0.80 = -0.80 = -0.80 = [Q2 + 800] = [Q2 - 800]6 -0.80 Q2 - 640 = 6 - 4800 6.80 Q2 = 4160 Q2 = 611.79 or 612 gallons Her consumption will fall to 612 gallons. At a price of $1.40 per gallon, she will spend $856.80 for gasoline. 39 Copyright 2013 Pearson Education, Inc. b. For part b use 612 as Q1. Arc income formula is: = 0.50 = 0.50 = 0.50[Q2 + 612] = [Q2 - 612]401 0.50 Q2 + 306 = 401 Q2 - 245,412 Q2 = 613.53 The tax rebate will have very little impact on Sally's consumption of gasoline. c. On the final indifference curve, she spends 614 $1.40 on gasoline. 614 $1.40 = $859.60 With an income of 40,200 (after the rebate), she has $40,200 - $859.60 = $34,340.40 left to spend on other goods. Before the tax and rebate, she would have had $40,000 - $614, or $39,386 left for other goods. She could have chosen her current amount of gasoline and had more of the other goods. Therefore she was better off before the tax and rebate. Diff: 3 Section: 4.3 40 Copyright 2013 Pearson Education, Inc. 50) The world demand for power transmission wire is made up of both domestic and foreign demands. Thus, the total demand is the sum of the two sub-demands, which are given as: Domestic demand: Pd = 5 - 0.005Qd Foreign demand: Pf = 3 - 0.00075Qf, where Pd and Pf are in dollars per pound, and Qd and Qf are in pounds per day. a. Determine the world demand for power transmission wire. b. Determine the prices at which domestic and foreign buyers would enter the market. c. Determine the domestic and foreign quantities at P = $2.50 per pound. Check to see if the sum of Qd and Qf equals Q. d. Determine total rate of purchases at P = $4.00 per pound. Register to View AnswerTo calculate world demand, the two demands must be added together. We must express the sum of quantities demanded in terms of price. Thus, Q = Qd + Qf. Each expression must be solved in terms of quantity. Domestic: Qd - = 1,000 - 200 Pd Foreign: Qf - = 4,000 - 1,333.33 Pf Q = 5,000 - 1,533.33 Pf [ b. Domestic buyers enter the market at Pd 5. Foreign buyers enter the market at Pf 3. c. At P = $2.50 per pound: Qd = 1,000 - 200(2.5) = 500.00 pounds per day. Qf = 4,000 - 1,333.33(2.5) = 666.68 pounds per day. Q = 5,000 - 1,533.33(2.5) = 1,166.68 pounds per day. Check: Qd + Qf = Q 500 + 666.08 = 1,166.68 d. At P = $4.00 per pound, only domestic buyers enter the market; therefore, the world demand equation is not the appropriate equation to use in this case. We must use only the domestic demand equation. Qd = 1000 - 200(4) = 200 pounds per day Diff: 3 Section: 4.3 41 Copyright 2013 Pearson Education, Inc. 51) Suppose that the demand for artichokes (Qa) is given as: Qa = 120 - 4P a. What is the point price elasticity of demand if the price of artichokes is $10? b. Suppose that the price of artichokes increases to $12. What will happen to the number of artichokes sold and the total expenditure by consumers on artichokes? c. At what price if any is the demand for artichokes infinitely elastic? Register to View AnswerThe inverse of the slope of the demand curve, is -4, P = 10, Q = 80. Therefore, the point price elasticity of demand is: EP = (-4)(10)(80) = -.5 b. The demand is inelastic. Thus, if the price of artichokes increases to $12, the total expenditure (TE = PQ) on artichokes will increase from PQ = (10)(80) = $800 to PQ = (12)(72) = $864, even though the total number of artichokes sold has fallen. c. Demand is infinitely elastic at the price where the demand curve intersects the vertical axis. This occurs at P = $30. Diff: 3 Section: 4.3 42 Copyright 2013 Pearson Education, Inc. 52) There are two types of people that live on planet Economus. The Utility function of each type is given in the table. Type MU1 Utility MU2 I 2x1 6 II 6 2 x2 Derive the demand curves for each type. Everyone on the planet has $1,000 of income per period and there are 100 individuals of type I and 100 individuals that are type II. Derive the market demand curve for each good. Answer: To find a Type I individual's demand curve, we set MRS1,2 = = . We can then solve for optimal consumption of good 1 as a function of good 2. This is done as follows: = x1 = . We also know the individual will exhaust their income at the optimum consumption bundle. Thus, we may plug the above expression for good 1 into the budget constraint. This is done as follows: $1,000 = P1x1 + P2x2 = P1 ( 1 consumption as: x1 = demand curves: x1 = ) + P2x2 = P2x2 x2 = . This allows us to re-express good . We apply the same procedure to Type II individual's to get the following and x2 = . To arrive at the market demand curve for good 1, we sum total demand by type I agents and total demand by type II agents. Doing so gives us market demand for good 1 as: X1 = 100 ( ) + 100 ( )= . The same procedure should be used to determine market demand for good 2. Thus, X2 = 100 ( ) + 100 ( )= . Diff: 2 Section: 4.3 43 Copyright 2013 Pearson Education, Inc. 53) The table below lists the demand curve for sleeves of tennis balls for each member of the Parker family. Use this information to determine the Parker's aggregate family demand for tennis balls. What is the price elasticity of demand for each member of the family at $2.00? What is the price elasticity of family aggregate demand at $2.00? Family Member Joseph Mary Joe, Jr. Paul David FAMILY Answer: Family Member Demand Elasticity B = 100 - 2P B = 50 - 5P B = 300 B = 150 B=0 Demand Elasticity Joseph B = 100 - 2P E = -2 ( ) = -0.042. Mary B = 50 - 5P E = -5 ( ) = -0.25. Joe, Jr. B = 300 E=0( ) = 0. Paul B = 150 - David B=0 FAMILY B = 600 - 7.5P E=- ( ) = -0.007. E = 0 ( ). E = -7.5 ( ) = -0.026 Diff: 2 Section: 4.3 44 Copyright 2013 Pearson Education, Inc. 4.4 Consumer Surplus 1) The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called A) producer surplus. B) consumer surplus. C) cost benefit analysis. D) net utility. Register to View AnswerDiff: 1 Section: 4.4 2) The area below the demand curve and above the price line measures A) consumer surplus. B) economic profit. C) elasticity of demand. D) the total value obtained from consuming the good or service. Register to View AnswerDiff: 1 Section: 4.4 3) The price of beef and quantity of beef traded are P and Q , respectively. Given this information, consumer surplus is the area: A) 0BCQ B) ABC C) ACP D) CBP E) 0ACQ Register to View AnswerDiff: 1 Section: 4.4 45 Copyright 2013 Pearson Education, Inc. 4) When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture A) increases. B) decreases. C) does not change. D) could be any of the above. Register to View AnswerDiff: 2 Section: 4.4 5) The demand curve for tickets to the George Winston concert (with special guest star, Kenny G) is given as follows: Q = 200 - 0.1P At a price of $30, what is the consumer surplus from concert tickets? A) $0 B) $20 C) $2,000 D) $1,970 E) $194,045 Register to View AnswerDiff: 3 Section: 4.4 6) A consumer's demand for CDs can be represented by a line with slope -b and intercept a. If the current price of CDs is $P, then the ratio of consumer surplus to total expenditures on CDs equals A) (a - P)(a - bP). B) 1/2(a - P)(a - bP). C) D(a - bP). D) (a - P)/P. E) (a/b - P)/(2P). Register to View AnswerDiff: 3 Section: 4.4 7) In closing down a military base, environmental inspectors found 100 tons of toxic waste. Which of the following is NOT a determinant of the consumer surplus generated by cleaning up 40 tons of waste? A) The price of removing a ton of toxic waste B) The original quantity of toxic waste found by the inspectors C) The quantity of toxic waste removed by cleanup D) The effect of each ton reduction of toxic waste on the profitability of the alternative uses for this land E) The effect of each ton reduction of toxic waste on the health of citizens living near the base Register to View AnswerDiff: 2 Section: 4.4 46 Copyright 2013 Pearson Education, Inc. 8) The price of video cassette recorders (VCRs) remains constant, but the market demand curve for VCRs shifts leftward as consumers shift to DVDs and other video technologies. What happens to the consumer surplus in this market as the demand curve shifts? A) Increases B) Decreases C) Remains the same D) We do not have enough information to answer this question. Register to View AnswerDiff: 1 Section: 4.4 9) Suppose the market demand curve for cable internet service is completely elastic. At the market equilibrium price under perfect competition, the consumer surplus in this market equals: A) total consumer expenditures. B) total sales revenue. C) zero. D) an amount slightly more than total consumer expenditure. Register to View AnswerDiff: 1 Section: 4.4 10) Consider a particular market-clearing price and quantity under a perfectly competitive equilibrium. As the demand curve at this point becomes more inelastic, the consumer surplus in the market tends to: A) increase. B) decrease. C) remain the same. D) We do not have enough information to answer this question. Register to View AnswerDiff: 1 Section: 4.4 11) Suppose the major soft drink companies develop vending machines for canned and bottled drinks that can determine your maximum willingness-to-pay for a drink, and the machine charges you that price when you purchase a drink. If this were possible, the consumer surplus in the vended soft drink market would be: A) positive because consumer surplus equals consumer expenditures in this case. B) positive because the market demand curve is perfectly inelastic in this case. C) negative because people are not actually willing to pay their maximum value for the product. D) zero because all surplus value is captured by the seller. Register to View AnswerDiff: 2 Section: 4.4 47 Copyright 2013 Pearson Education, Inc. 12) The aggregate demand for good X is Q = 20 - P. If the price rises from P = $4 to P = $5, what is the change in consumer surplus? A) $4.50 B) $5.50 C) $15.50 D) $16 Register to View AnswerDiff: 1 Section: 4.4 13) The aggregate demand for good X is Q = 20 - P, and the market price is P = $8. What is the maximum amount that consumers are willing to pay for the quantity demanded at this price? A) $72 B) $96 C) $144 D) $168 Register to View AnswerDiff: 2 Section: 4.4 14) The demand curve for the daily edition of the Lubbock Avalanche Journal is D = 85,000 - 30,000P. The current price of the newspaper is $0.50. Derive the Consumer Surplus for the newspaper. Answer: At a price of $0.50, the quantity demanded is 70,000. The vertical axis intercept of the demand curve is $2.83 (choke price). Thus, Consumer Surplus is ($2.83 - $0.50)70,000 = $81,550. Diff: 1 Section: 4.4 48 Copyright 2013 Pearson Education, Inc. 15) Ronald's monthly demand for Cap Rock Chardonnay is given by Q = 6 + ( ) (I - T ) - P, where I is Ronald's monthly income, T is his tax expense and P is the price of Cap Rock Chardonnay. Suppose the Price of Cap Rock Chardonnay is $10, Ronald's monthly income is $15,000, and his tax expense is $5,000. Calculate how much Ronald changes his Chardonnay consumption if his taxes are increased by 20%. Also, calculate Ronald's Consumer Surplus from consuming Cap Rock Chardonnay before and after the increase in taxes. Answer: Before the tax change, Ronald's optimal consumption of Cap Rock Chardonnay is Q=6+ (15,000 - 5,000) - (10) = 7. The vertical axis intercept for Ronald's budget constraint is initially $80. Thus, Ronald's Consumer Surplus before the increase in taxes is ($80 - $10)7 = $245. After the tax change, Ronald's optimal consumption of Cap Rock Chardonnay is Q=6+( ) (15,000 - 6,000) - (10) = 6.8. The vertical axis intercept for Ronald's new budget constraint becomes $78. Thus, Ronald's Consumer Surplus after the tax increase is ($78 - $10)6.8 = $231.20. Diff: 2 Section: 4.4 16) Adriana is in charge of setting the price on basketball tickets for the local team's home games. From previous experience, she has estimated demand to be P = 50 - 0.00166Q, where P represents price in dollars per seat, and Q represents seats that could be sold per game. The seating capacity is 25,000 seats. Determine the number of tickets that would be sold at a ticket price of $15 each. Also, determine the consumer surplus that could be absorbed from these consumers if Adriana were able to set ticket prices so that each customer (who values the ticket at least at $15) pays the entirety of his or her actual valuation of the ticket. Answer: At P = 15, the quantity sold is = 21,084 tickets. The consumer surplus that could be absorbed is represented by the area under demand and above the price line at 15. Area = (1/2)b*h. b = 21,084 - 0 = 21,084 h = 50 - 15 = 35 Consumer surplus = (.5)(21,084)(35) = $368,970 Diff: 2 Section: 4.4 49 Copyright 2013 Pearson Education, Inc. 17) The wheat market is perfectly competitive, and the market supply and demand curves are given by the following equations: QD = 20,000,000 - 4,000,000P QS = 7,000,000 + 2,500,000P, where QD and QS are quantity demanded and quantity supplied measured in bushels, and P = price per bushel. a. Determine consumer surplus at the equilibrium price and quantity. b. Assume that the government has imposed a price floor at $2.25 per bushel and agrees to buy any resulting excess supply. How many bushels of wheat will the government be forced to buy? Determine consumer surplus with the price floor. Register to View AnswerThe first step is to determine the equilibrium price (Pe) and quantity (Qe) by equating QD and QS. 20,000,000 - 4,000,000 Pe = 7,000,000 + 2,500,000 Pe 13,000,000 = 6,500,000 Pe Pe = $2.00. Substitute into QD or QS Qe = 20,000,000 - 4,000,000(2) Qe = 12,000,000. To find consumer surplus, we must also determine the choke price (Pc). That is, the price at which quantity demanded is zero. solve for P in terms of QD and QS. 0 = 20,000,000 - 4,000,000 Pc 4,000,000 Pc = 20,000,000 Pc = 5. CS = ( Pc - Pe) Qe = 0.5(5 - 2)12,000,000 = 18,000,000. 50 Copyright 2013 Pearson Education, Inc. b. At price of 2.25 QD = 20,000,000 - 4,000,000(2.25) QD = 11,000,000 QS = 7,000,000 + 2,500,000(2.25) QS = 12,625,000 Excess supply is QS - QD. 12,625,000 - 11,000,000 = 1,625,000 Government should expect to buy 1,625,000 bushels. Cs = (0.5)(Pc - $2.25)QD = (0.5)(5 - 2.25)(11,000,000) = 15,125,000. C.S. fell from 18,000,000 to 15,125,000 Diff: 2 Section: 4.4 51 Copyright 2013 Pearson Education, Inc. 18) The market supply curve of rubber erasers is given by QS = 35,000 + 2,000P. The demand for rubber erasers can be segmented into two components. The first component is the demand for rubber erasers by art students. This demand is given by qA = 17,000 - 250P. The second component is the demand for rubber erasers by all others. This demand is given by qO = 25,000 - 2000P. Derive the total market demand curve for rubber erasers. Find the equilibrium market price and quantity. Also, determine the consumer surplus for each component of demand. Answer: The aggregate market demand is given by summing the two components of demand at each price. That is, QD = qA + qO = 42,000 - 2,250P. The equilibrium quantity occurs where quantity demanded equals quantity supplied. Thus, we can equate supply and demand and solve for the market price. That is, QS = 35,000 + 2,000P = 42,000 - 2,250P = QD P = = $1.65. The equilibrium quantity is then Q = 42,000 - 2,250(1.65) = 38,187.5. At this price, qA = 17,000 - 250(1.65) = 16,587.5 and qO = 25,000 - 2000(1.65) = 21,700. The consumer surplus to the first component of demand is CSA = (16,587.5)$66.35 = $550,290.30. The consumer surplus to the second component is CSO = (21,700)$10.85 = $117,722.50. Diff: 2 Section: 4.4 4.5 Network Externalities 1) When negative network externalities are present A) the demand curve is more elastic than otherwise. B) the demand curve is less elastic than otherwise. C) the demand curve shifts to the right. D) the demand curve shifts to the left. Register to View AnswerDiff: 1 Section: 4.5 2) The bandwagon effect corresponds best to which of the following? A) Snob effect B) External economy C) Negative network externality D) Positive network externality Register to View AnswerDiff: 1 Section: 4.5 52 Copyright 2013 Pearson Education, Inc. 3) Which of these is an example of a negative network externality? A) Bandwagon effect B) Pollution C) Snob effect D) Two-part tariff Register to View AnswerDiff: 1 Section: 4.5 4) The snob effect corresponds best to a A) negative network externality. B) Giffen good. C) positive network externality. D) bandwagon effect. Register to View AnswerDiff: 1 Section: 4.5 5) When the bandwagon effect exists, a change in price is likely to A) change total revenue less than if there were no network externalities. B) change total revenue more than if there were no network externalities. C) change total revenue the same amount as if there were no network externalities. D) not change total revenue at all. Register to View AnswerDiff: 1 Section: 4.5 6) When the snob effect exists, a change in price is likely to A) change total revenue less than if there were no network externalities. B) change total revenue more than if there were no network externalities. C) change total revenue the same amount as if there were no network externalities. D) not change total revenue at all. Register to View AnswerDiff: 1 Section: 4.5 7) As more and more firms have acquired fax machines, the fax machine has become a standard means of business communication. The increase in demand for fax machines for business communication: A) is an example of the snob effect. B) proves that the fax machine is an inferior good. C) proves that the fax machine is a luxury good. D) is an example of a positive network externality. E) is an example of a negative network externality. Register to View AnswerDiff: 1 Section: 4.5 53 Copyright 2013 Pearson Education, Inc. 8) Which of the following goods may have demand that is potentially affected by the bandwagon effect? A) Satellite radio B) Cellular telephones C) High-definition (HD) televisions D) Electronic book readers E) all of the above Register to View AnswerDiff: 1 Section: 4.5 9) Due to the bandwagon effect, demand for some products is ________ elastic than it would be without the positive network externality. A) more B) less C) equally D) more strongly unitary Register to View AnswerDiff: 1 Section: 4.5 10) Use the following statements to answer this question: I. A network externality is a situation in which each individual's demand depends on the purchases of other buyers. II. Network externalities are mainly positive effects resulting from the actions of others, while ordinary externalities are mainly negative effects resulting from the actions of others. A) I and II are true. B) I is true and II is false. C) I is false and II is true. D) I and II are false. Register to View AnswerDiff: 1 Section: 4.5 11) Some luxury product manufacturers will purposefully raise prices on their goods in order to reduce sales volume. This strategy may successfully increase sales revenue if the luxury goods are subject to the ________ effect and have relatively ________ demand. A) bandwagon, elastic B) bandwagon, inelastic C) snob, elastic D) snob, inelastic Register to View AnswerDiff: 2 Section: 4.5 54 Copyright 2013 Pearson Education, Inc. 12) Luxury brands like designer sunglasses are goods that may exhibit snob effects. Suppose this is true, and the price for a particular brand increases. What happens to the component changes in the quantity demanded? A) Pure price effect and snob effect are negative B) Pure price effect and snob effect are positive C) Pure price effect is positive, snob effect is negative D) Pure price effect is negative, snob effect is positive Register to View AnswerDiff: 1 Section: 4.5 13) Software companies continually work to develop new features of their products that make it easier for users to interact and share their work. As more of these features are embedded in the software, what happens to the individual demand curve for the software products? A) Demand curve becomes more elastic due to the bandwagon effect B) Demand curve becomes less elastic due to the snob effect C) Demand curve shifts, but its degree of elasticity does not change D) There is no change in the individual demand curve Register to View AnswerDiff: 2 Section: 4.5 14) Laser disc players have been around for 10 years, but in the last several years, the sales have skyrocketed. Manufacturers attribute the increase in sales to lower prices, increased availability of movies on laser disk, and the appearance of laser disks for rent in video cassette rental stores. Describe this market using the concept of network externalities. Answer: There is a strong positive network externality at work in the laser disk player market. Laser disk players can only play movies that are prerecorded on disks. As more movies become available, and as disk rental has become a reality, more people are buying the laser disk players. The sales of laser disk players has also been aided by lower prices, but the effect of the lower prices is not a positive network externality. Diff: 2 Section: 4.5 4.6 Empirical Estimation of Demand 1) If an Engel curve has a negative slope, A) the good is inferior. B) the good is normal. C) the good has no substitutes. D) the good has no complements. Register to View AnswerDiff: 1 Section: 4.6 55 Copyright 2013 Pearson Education, Inc. 2) Assume that we have a demand curve of the form: log(Q) = a - b log(P) + c log(I) where Q = quantity, P = price, I = income, and a, b, and c are positive constants. The income and price elasticities for the demand curve represented above are always A) equal to one. B) equal to zero. C) equal (i.e., income elasticity always equals price elasticity). D) constant but not necessarily equal to one another. Register to View AnswerDiff: 1 Section: 4.6 Scenario 4.5: The demand curve for grilled cheese sandwiches has been estimated using statistical techniques as follows: log(Q) = -1.10 - 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph) where Q is the quantity of grilled cheese sandwiches P is the price of grilled cheese sandwiches I is income Ph is the price of hamburgers 3) See Scenario 4.5. If P = $1,000, the price elasticity of demand: A) is 0, B) is negative infinity. C) is -0.18. D) cannot be determined without knowing I and Ph. Register to View AnswerDiff: 2 Section: 4.6 4) See Scenario 4.5. As the price of grilled cheese sandwiches decreases, the price elasticity of demand: A) increases. B) does not change. C) decreases. D) none of the above Register to View AnswerDiff: 2 Section: 4.6 5) See Scenario 4.5. The Engel curve for grilled cheese sandwiches is: A) downward sloping. B) horizontal. C) upward sloping. D) none of the above Register to View AnswerDiff: 2 Section: 4.6 56 Copyright 2013 Pearson Education, Inc. 6) Scenario 4.5 indicates that grilled cheese sandwiches and hamburgers are: A) substitutes. B) complements. C) independent goods. D) none of the above Register to View AnswerDiff: 2 Section: 4.6 7) Which of the following algebraic forms for a demand curve yields an isoelastic demand curve? A) Q = a - b log(P) + c log(I) B) Q = a - bP + cI C) log(Q) = a - b log(P) + c log(I) D) log(Q) = bP + cI Register to View AnswerDiff: 3 Section: 4.6 8) Another commonly used algebraic form for a demand function is the semi-logarithmic functional form, ln(Q) = a - bP + cI, where Q is quantity demanded, P is the product price, and I is income. Here, 100 c represents the percentage change in quantity demanded given a one unit increase in income. For a normal good, we should expect the value of c to be: A) positive. B) negative. C) positive or negative. D) We do not have enough information to answer this question. Register to View AnswerDiff: 1 Section: 4.6 9) Another commonly used algebraic form for a demand function is the semi-logarithmic functional form, log(Q) = a - bP + cI, where Q is quantity demanded, P is the product price, and I is income. Here, -100b represents the percentage change in quantity demanded given a one unit increase in price. By the Law of Demand, we should expect the value of b to be: A) positive. B) negative. C) positive or negative. D) We do not have enough information to answer this question. Register to View AnswerDiff: 2 Section: 4.6 57 Copyright 2013 Pearson Education, Inc. 10) Suppose we believe the income response for hamburger consumption is positive (normal) at low income levels but becomes negative (inferior) at high income levels. Is the log-linear demand function a good choice for this particular product? A) Yes, the log-linear model has an income elasticity that can be positive or negative. B) No, the log-linear model has a constant income elasticity that cannot change with the income level. C) No, the Engel curves for this case are vertical lines, and this behavior cannot be represented with the log-linear demand function. D) none of the above Register to View AnswerDiff: 2 Section: 4.6 11) Which of the following demand functions represents a price elasticity of demand equal to -0.33 and an income elasticity of demand equal to 0.8 at all points along the curve? A) Q = 3 - 0.33P + 0.8I B) Q = 4.5 - 0.33 log(P) + 0.8I C) log(Q) = 1.34 - 0.33 log(P) + 0.8I D) log(Q) = 2.34 - 0.33 log(P) + 0.8 log(I) Register to View AnswerDiff: 2 Section: 4.6 12) Let P be the price of a good and let I represent consumer income. Which of the following demand functions represents a luxury good with inelastic price response? A) log(Q) = 4 2 log(P) + 2 log(I) B) log(Q) = 4 - 0.5 log(P) + 0.25 log(I) C) log(Q) = 4 - 0.25 log(P) + 2 log(I) D) log(Q) = 4 + 2 log(P) + 0.2 log(I) Register to View AnswerDiff: 1 Section: 4.6 13) The market demand curve for denim jeans is Q = 231 - 45 P + 23 I where P is the product price and I is per-capita consumer income. Which of the following statements about this demand function is NOT true? A) Denim jeans are normal goods. B) The price elasticity of demand is -45. C) The demand curve is downward sloping. D) The Engel curve for this denim jeans is upward sloping. Register to View AnswerDiff: 2 Section: 4.6 58 Copyright 2013 Pearson Education, Inc. 14) The demand for hamburgers is estimated from this theoretical model: Q = kPaIbAce, where Q = units per day, P = price per unit, A = advertising budget per month by sellers, I = per capita income of consumers, and e = a random error. In a recent study, one researcher estimated the log-linear form of this equation with regression analysis as: log Q = 2.5 - 0.33 log P + 0.15 log I + 0.2 log A. Explain what the coefficients of log P, log I, and log A reveal about this product. Answer: The coefficients of the variables are the respective elasticities of demand. The price elasticity is (-0.33), income elasticity is 0.15, and advertising elasticity is 0.2. These coefficients indicate that the product is relatively price inelastic, is a normal good, and is responsive to advertising outlays by sellers. Diff: 2 Section: 4.6 15) The following table gives the current price, quantity, and price elasticities of the linear demand curves for pencils, paper and scissors. The columns Erc under the Price Elasticities heading are calculated as Erc = ( ) . The terms r and c refer to the row of the table and the column under the price elasticities heading, respectively. For example, if r is one and c is two, the value E12 is the responsiveness of pencil demand to changes in the paper price (i.e., a cross-price elasticity). The demand curves for each good are in the form Qr = ar + brP1 + crP2 + drP3 . Using the information in the table, derive the demand curve for each good. Price Elasticities Demand Own Price Quantity Item Pencils 0.35 25,000 Paper 2.00 90,000 Scissors 3.15 1,500 Er1 Er2 Er3 -1.2 0.01 0 0.25 -0.85 1.20 0 0.45 -1.75 Answer: Using the information in the table allows us to solve for the coefficients on prices as follows: br = Er1 ( ); cr = Er2 ( ); and dr = Er3 ( ) Substituting these coefficient values into the demand equation allows us to solve for ar. This is done by setting ar = Qr - (br P1 + crP2 + drP3). Performing these calculations for the first row of the table gives us the demand for pencils Q1 = 48,750 - 85,714.3P1 + 3,125P2 + 0P3. The demand for paper is Q2 = 125,000 + 2,571.43P1 - 38,250P2 + 12,857.14P3. The demand for scissors is Q3 = 2,325 + 0P1 + 900P2 - 833.33P3. Diff: 3 Section: 4.6 59 Copyright 2013 Pearson Education, Inc. 4.7 Appendix: Demand Theory--A Mathematical Treatment 1) A mathematical technique used to solve constrained optimization problems (finding the consumer optimum, for example) is: A) the method of Lagrange multipliers. B) the Cobb-Douglas method. C) the Slutsky method. D) the Hicks substitution method. Register to View AnswerDiff: 1 Section: Appendix to Chapter 4 2) You have just found the consumer's optimal combination of goods using constrained optimization. The marginal utility of income is the: A) Cobb-Douglas statistic. B) Hicks factor. C) Slutsky equation. D) Lagrange multiplier. Register to View AnswerDiff: 2 Section: Appendix to Chapter 4 3) The Slutsky equation is a mathematical representation of: A) a utility function. B) the marginal utility of income. C) a demand curve. D) the income expansion path. E) the substitution and income effects. Register to View AnswerDiff: 2 Section: Appendix to Chapter 4 4) The dual approach to the consumer's problem is to choose: A) the highest indifference curve that just touches the budget line. B) the least-cost budget line required to achieve a given level of utility (satisfaction). C) the maximum income required to achieve a given level of utility (satisfaction). D) all of the above Register to View AnswerDiff: 2 Section: Appendix to Chapter 4 5) By the method of Lagrange multipliers, the optimal value of the Lagrange multiplier equals the: A) marginal utility of income. B) marginal utility of each good. C) marginal utility per dollar spent on the last unit of each good. D) A and B above E) A and C above Register to View AnswerDiff: 2 Section: Appendix to Chapter 4 60 Copyright 2013 Pearson Education, Inc. 6) Suppose you solve a utility maximization problem, and the solution value of the Lagrange multiplier equals zero. What does this outcome imply about the problem solution? A) You must have made an error while solving the problem. B) The budget constraint is not binding, and the constrained solution is equal to the solution to the unconstrained utility maximization problem. C) The optimal utility level for the consumer equals zero. D) The consumer's demand curve is upward sloping. Register to View AnswerDiff: 1 Section: Appendix to Chapter 4 7) Which of the following statements about the optimal solution to the consumer problem based on the Cobb-Douglas utility function is NOT true? A) The cross-price elasticities of demand are zero. B) Both goods have downward sloping demand curves. C) Both goods are normal goods. D) The marginal utility of income may be negative. Register to View AnswerDiff: 2 Section: Appendix to Chapter 4 61 Copyright 2013 Pearson Education, Inc.
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