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This Document Contains Chapters 5 to 6 Chapter 05 Elasticity: Demand and Supply MULTIPLE CHOICE 1. Which of the following is explained by the price elasticity of demand? A. The effect of price changes on supply. B. The effect of quantity changes on supply. C. The effect of quantity changes on price. D. The effect of price changes on quantity demanded. E. The effect of price changes on quantity supplied. Answer: D 2. When the manager of a local movie theater raises the price of movie tickets from $7. 50 to $8. 50 total revenue falls. This means that: A. the demand for movie tickets is highly elastic. B. the supply of movie ticket is perfectly elastic. C. the supply of movie tickets is elastic. D. the demand for movie tickets is inelastic. E. the supply of movie tickets is inelastic. Answer: A 3. Which of the following is true of price elasticity of demand? A. It measures the responsiveness of quantity demanded or quantity supplied to a change in one of the determinants of demand and/or supply. B. It is calculated as the percentage change in the quantity demanded of a product divided by the percentage change in the price of that product. C. It is calculated as the percentage change in the demand for a good divided by the percentage change in income, everything else held constant. D. It measures the responsiveness of demand to a change in the quantity supplied. E. It is calculated as the percentage change in the quantity demanded for one good divided by the percentage change in the price of a related good, everything else held constant. Answer: B 4. The less responsive consumers are to a change in the price of a product: A. the more price-elastic is the supply curve. B. the more income-elastic is the demand curve. C. the more price-inelastic is the demand curve. D. the more income-elastic is the supply curve. E. the more price-elastic is the demand curve. Answer: C 5. Price elasticity of demand is a measure of the: A. extent of competition in the market. B. change in the purchase of a product relative to a change in income. C. change in the quantity demanded due to factors other than price. D. degree of consumer responsiveness to changes in price. E. percentage change in the prices of two related products. Answer: D 6. If the price elasticity of demand is equal to 4, a 1 percent increase in price will cause the quantity demanded to _____ by _____ percent. A. increase; 0. 25 B. decrease; 0. 25 C. increase; 4 D. decrease; 25 E. decrease; 4 Answer: E 7. If a 50 percent increase in the price of pizza results in a 25 percent decrease in the quantity demanded of pizza, then the elasticity of demand for pizza: A. is equal to 0. 5 and demand is inelastic. B. is equal to 0. 5 and demand is elastic. C. is equal to 2 and is elastic. D. is equal to 2 and is inelastic. E. cannot be determined from the information provided. Answer: A 8. Assume that the price elasticity of demand for a commodity is 0. 20. A 10 percent increase in price will be followed by a: A. 20 percent increase in the quantity demanded. B. 2 percent decrease in the quantity demanded. C. 20 percent decrease in the quantity demanded. D. 0. 2 percent decrease in the quantity demanded. E. 2 percent increase in the quantity demanded. Answer: B 9. If a 10 percent increase in the price of gasoline results in a 2 percent decrease in the quantity demanded of gasoline, then the elasticity of demand for gasoline is: A. equal to 0. 2 and demand is inelastic. B. equal to 0. 2 and demand is elastic. C. equal to 0. 02 and demand is elastic. D. equal to 0. 5 and demand is inelastic. E. equal to 0. 5 and the demand is elastic. Answer: A 10. If demand is unit-elastic, a 25 percent increase in price will result in: A. a 25 percent change in total revenue. B. no change in quantity demanded. C. a 1 percent decrease in quantity demanded. D. a 25 percent decrease in quantity demanded. E. a 100 percent change in quantity demanded. Answer: D 11. If a 1 percent change in the price of a good causes a 1 percent change in the quantity demanded of that good, then demand is said t be: A. perfectly elastic. B. elastic. C. unit-elastic. D. inelastic. E. perfectly inelastic. Answer: C 12. When the elasticity of demand for a particular good is less than 1: A. demand is elastic. B. demand is inelastic. C. the elasticity of demand is unit-elastic. D. the good is a substitute. E. the good is a normal good. Answer: B 13. If a product has an elastic demand, this means that: A. consumers are relatively sensitive to a change in the price of the product. B. consumers are relatively insensitive to a change in the quantity demanded. C. consumers are relatively insensitive to a change in the price of the product. D. producers are relatively insensitive to a change in the price of the product. E. producers are relatively sensitive to a change in the quantity demanded. Answer: A 14. What would be the consequences of a 10 percent decrease in the price of a good for which price elasticity of demand is 5? A. A 50 percent decrease in quantity demanded B. A 5 percent increase in quantity demanded C. A 50 percent increase in quantity demanded D. A decrease in quantity demanded by 0. 2 E. An increase in quantity demanded by 0. 2 Answer: C 15. If the percentage change in quantity demanded of a good is greater than the percentage change in price that caused it, then demand for the good is _____. A. inelastic B. relatively elastic C. unit-elastic D. perfectly inelastic E. perfectly elastic Answer: B 16. Suppose 50 loaves of bread are demanded at a particular price. If that price rises by 2 percent, the quantity demanded decreases to 49. 5 loaves of bread. This implies: A. demand is elastic. B. demand is unit-elastic. C. the price elasticity of demand is equal to 2. D. demand is inelastic. E. consumers are very responsive to a price change. Answer: D NARRBEGIN: Figure 5. 1 The figure given below shows the demand curves for five products: A, B, C, D, and E. Figure 5. 1 NARREND 17. Refer to Figure 5. 1. The demand curve B is: A. more elastic compared to demand curve E. B. less elastic compared to demand curve C. C. perfectly elastic. D. more elastic compared to demand curve D. E. an example of a unit-elastic demand curve. Answer: B 18. Refer to Figure 5. 1. The value of the coefficient of price elasticity of demand for E is: A. infinity. B. equal to 1. C. equal to zero. D. less than 1. E. greater than zero but less than one. Answer: A 19. Refer to Figure 5. 1. Which of the following is true of the demand curve for A? A. Consumers purchase any quantity regardless of the price. B. There is no change in quantity demanded as the price changes. C. A small price change will cause consumers to change their consumption by a much larger quantity. D. The smallest price increase will cause consumers to switch to the producer with a lower price. E. The price elasticity of demand for A is equal to 1. Answer: B 20. Refer to Figure 5. 1. Which of the following is true when prices increase from P1 to P2? A. The demand for D is relatively less elastic than the demand for C. B. The change in the quantity demanded following the price increase was the largest for C. C. The change in the quantity demanded following the price increase was the least for D. D. The demand for E is perfectly elastic as the price increase did not affect the quantity demanded. E. Since the change in quantity demanded was larger for C than A, the demand for C is more elastic than it is for C. Answer: E 21. Refer to Figure 5. 1. The demand curve E is most likely to represent the demand for: A. alcohol by an alcoholic. B. a life-saving drug. C. holiday travel packages. D. a particular brand of breakfast cereal. E. air conditioning during a hot summer. Answer: C 22. In Figure 5-1, which demand curve is most likely to represent demand for insulin by diabetics? A. A B. B C. C D. D E. E Answer: A 23. Which of the following is an example of inelastic demand? A. A 10 percent increase in the price of milk leads to a 20 percent decrease in the quantity demanded of milk. B. A 10 percent increase in the price of milk leads to a 10 percent decrease in the quantity demanded of milk. C. A 10 percent increase in the price of milk leads to a 5 percent decrease in the quantity demanded of milk. D. A 10 percent increase in the price of milk leads to no change in the quantity demanded of milk. E. A 10 percent increase in the price of milk leads to a 5 percent increase in the quantity demanded of milk. Answer: C 24. If a price increase from $20 to $40 causes quantity demanded to decrease from 100 units to 50 units, one can conclude that demand for the product is _____. A. inelastic B. elastic C. perfectly inelastic D. infinitely elastic E. unit-elastic Answer: A 25. If demand is perfectly inelastic, then: A. the elasticity of demand is 1. B. the elasticity of demand is -1. C. the demand curve will be nonexistent. D. the demand curve will be a horizontal line. E. quantity demanded does not change when price changes. Answer: E 26. Assume that the demand curve for a certain good is a vertical line. This vertical demand curve illustrates the idea that: A. consumers are unwilling to pay more than a certain price for the good. B. the good is a complement to another good. C. consumers are unwilling to pay less than a certain price for the good. D. there are many substitutes for this good. E. people will not change the quantity of the good when the price of the good is changed. Answer: E 27. If the demand for corn is elastic, then: A. there are not many substitutes in the consumption of corn. B. the price elasticity of demand for corn is greater than 1. C. a decrease in price will reduce total revenue for corn producers. D. a decrease in price will increase total revenue for corn producers. E. consumers will continue buying the same quantity even if price increases. Answer: B 28. An economic survey observed that, a 20 percent cut in the price of a certain line of women’s clothing, almost doubled the quantity demanded of the clothing. This led economists to conclude that the demand for this line of clothing is _____. A. very elastic B. very inelastic C. vertical D. horizontal E. inferior Answer: A 29. A horizontal demand curve shows that demand for the good is _____. A. unit-elastic B. relatively inelastic C. perfectly inelastic D. relatively elastic E. perfectly elastic Answer: E 30. A 0. 5% increase in the price of a particular product causes the quantity demanded of the product to drop to zero. This means that the price elasticity of demand for the product is: A. moderately inelastic. B. highly inelastic. C. unitary elastic. D. perfectly inelastic. E. perfectly elastic. Answer: E 31. If the demand for cream cheese produced by a dairy is perfectly elastic, then what will be the shape of the demand curve faced by the dairy? A. The demand curve will be vertical B. The demand curve will be horizontal C. The demand curve will be upward sloping D. The demand curve will be downward sloping E. The demand curve will be concave Answer: B 32. Consider a medical breakthrough that led to the discovery of a simple microchip which when inserted inside the human ear could prevent certain chronic diseases. The price elasticity of demand for that microchip would most likely be _____. A. very elastic B. very inelastic C. infinite D. negative only for high prices E. positive only for high prices Answer: B 33. If a 15 percent reduction in the price of electricity per kilowatt hour has no impact on the total electricity consumption, we can infer that in the short run, the demand for electricity is _____. A. perfectly inelastic B. perfectly elastic C. unitary elastic D. relatively inelastic E. relatively elastic Answer: A 34. If = 1. 50, and price decreases by 20 percent, then: A. quantity demanded will decrease by 30 percent. B. quantity demanded will increase by 30 percent. C. total revenue will remain unchanged. D. total revenue will decrease. E. quantity demanded will increase by 3 percent. Answer: B 35. Suppose that the absolute value of the price elasticity of demand for firms A, B, C, and D is 0, 0. 8, 1, and 1. 5 respectively. An increase in the price would reduce quantity demanded for: A. firms A, B, C, and D. B. firms B, C, and D only. C. only firm A. D. firms C and D only. E. only firm D. Answer: E 36. Which of the following is a determinant of price elasticity of demand? A. Availability of substitute goods B. Excess capacity C. Scale of production D. Inventories E. Cost of production Answer: A 37. Demand becomes more elastic as: A. the number of substitutes available declines. B. the time period becomes shorter. C. a good makes up a larger percentage of a consumer’s budget. D. a product is defined more broadly. E. the producer has more time to respond to price changes. Answer: C 38. In the opinion of many consumers, there are few, if any, substitutes for the popular search engine Google. If Google were to charge consumers for its services, it would face: A. a relatively inelastic demand curve. B. a relatively elastic demand curve. C. a negative income elasticity of demand. D. a positive cross elasticity of demand. E. a perfectly elastic demand curve. Answer: A 39. Which of the following would most likely be highly price-elastic? A. The demand for milk by a household B. The demand for insulin by a diabetes patient C. The demand for water D. The demand for new houses E. The demand for coal over a period of one month Answer: D 40. Which of the following is true with respect to the price elasticity of demand? A. The coefficient of price elasticity of demand will change with changes in the units of measurement (for instance, going from pounds to ounces). B. Elasticity of demand will be equal to the slope of the demand curve. C. Elasticity measures the sensitivity of total expenditure to a change in price. D. Elasticity will tend to be greater for a relatively expensive product than for a cheaper one. E. A coefficient of 1 means that the percentage change in total expenditure is equivalent to the percentage change in price. Answer: D 41. If a product has an inelastic demand, then: A. there is probably a long time period under consideration. B. as price increases, total revenue to producers decreases. C. an increase in the price will decrease total consumer expenditures. D. there are probably many complements for the good. E. there are probably few substitutes for the good. Answer: E 42. Since an expensive sports car constitutes a greater portion of the consumer’s budget than does laundry soap, the elasticity of demand for an expensive sports car is _____. A. relatively less elastic B. a vertical line C. a downward sloping straight line D. relatively more elastic E. not subject to elasticity because of the income level of the consumers who purchase expensive sports cars Answer: D 43. Price elasticity of demand is more likely to be greater than one if: A. consumers have a long time to adjust to a price change. B. the product is a necessity. C. demand is inelastic. D. there are few close substitutes for the product. E. total revenue declines in response to a price reduction. Answer: A 44. A fall in the average income of consumers, say during a recession, is represented by: A. an upward movement along the demand curve for product A. B. a movement along the demand curve for product A that may be up or down, depending on the direction of the price change. C. a shift of the demand curve for product A. D. a rotation of the demand curve for product A. E. a shift of the demand curve for the related good or service. Answer: C 45. _____ measures the percentage change in quantity demanded caused by a given percentage change in the price of a related good. A. Income elasticity of demand B. Cross-price elasticity of demand C. Advertising elasticity of demand D. Price elasticity of demand E. Point elasticity Answer: B 46. When product A is a good substitute for product B, the cross-price elasticity of demand for products A and B will be _____. A. unity B. negative C. positive D. decreasing E. increasing Answer: C 47. Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey increases by 50 percent. The quantity consumed of herbal tea declines immediately by 25 percent. Everything else held constant, the: A. cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are substitutes. B. cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are complements. C. cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are substitutes. D. cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are complements. E. cross-price elasticity of demand cannot be determined from the information provided. Answer: B 48. When the cross-price elasticity of demand is a large positive number, one can correctly conclude that: A. the goods are normal goods. B. the goods are inferior goods. C. the goods are substitutes. D. the goods are complements. E. total revenue will increase when the price increases. Answer: C 49. Since they are often used together, peanut butter and jelly are: A. substitutes and have a positive cross-price elasticity. B. complements and have a positive cross-price elasticity. C. substitutes and have a negative cross-price elasticity. D. complements and have a negative cross-price elasticity. E. inferior goods when the demand or goods is positive. Answer: D 50. As the price of movie tickets increases, which of the following is most likely to take place? A. The quantity demanded for DVDs will increase B. The quantity of books demanded will decrease C. The number of Broadway tickets purchased will decrease D. The prices of popcorn and soda will increase E. The number of movies being produced will increase Answer: A 51. When the price of hot dogs at the supermarket increases, the quantity demanded of hot dog buns declines. This situation describes: A. the income elasticity of demand for hot dogs. B. the income elasticity of demand for hot dog buns. C. the price elasticity of supply for hot dogs. D. the cross-price elasticity of demand for hot dogs and hot dog buns. E. the cross-price elasticity of supply for hot dogs and hot dog buns. Answer: D 52. If the demand for product R increases as the price of product S increases, then _____. A. consumer preferences for S have increased B. R and S are not related goods C. R and S are substitutes D. R and S are complements E. R is an inferior good Answer: C 53. Suppose the manager of a store wants to know whether the product of the store across the street is a substitute for her product. In other words, she would need to know if the cross-price elasticity of demand for the products _____. A. is positive B. is negative C. is unity D. is zero E. is infinite Answer: A 54. Goods whose income elasticity of demand is greater than zero are _____. A. inferior goods B. normal goods C. luxury goods D. superior goods E. public goods Answer: B 55. As income levels rose moderately last year in the San Jose area, it was observed by local realtors that housing sales increased substantially. It is clear from this information that, everything else held constant, the income elasticity of demand for houses is _____. A. negative and relatively low B. negative and relatively high C. positive and relatively low D. positive and relatively high E. neither positive nor negative Answer: D 56. An inferior good or service is any good or service for which: A. an increase in price causes an increase in the quantity demanded. B. a decrease in price causes an increase in demand. C. an increase in price causes a decrease in the quantity demanded. D. an increase in the amount consumed causes a decrease in marginal utility. E. an increase in income causes a decrease in demand. Answer: E 57. Income elasticity of demand is expected to be _____. A. relatively high for necessities B. positive for most products C. relatively low for luxuries D. negative for most products E. zero for most products Answer: B 58. Ceteris paribus, a 10 percent increase in income results in a 50 percent decline in the quantity of potatoes purchased. This implies potatoes can be categorized as _____. A. complements B. substitutes C. inferior goods D. normal goods E. luxurious goods Answer: C 59. Last year, Alice bought 40 CDs when her income was $20,000. This year, her income increased to $25,000, and she purchased 48 CDs. We can conclude that: A. Alice’s price elasticity of demand for CDs is equal to 1. B. Alice’s demand for CDs is price-inelastic. C. Alice’s demand for CDs is price-elastic. D. the income elasticity of demand for CDs is negative. E. CDs are a normal good. Answer: E 60. Which of the following goods is likely to have an income elasticity of demand that is less than zero? A. A luxury yacht B. A beach house C. A state-of-the-art cellular phone D. A box of generic macaroni and cheese dinner E. A dinner at a French restaurant Answer: D 61. If the demand for beans tends to decline as incomes rise, everything else held constant, beans are _____. A. a luxury good B. a normal good C. price sensitive D. not price sensitive E. an inferior good Answer: E 62. For a given product, income elasticity of demand relates the percentage change in: A. quantity demanded to the percentage change in income. B. quantity demanded to the absolute change in income. C. income to the percentage change in price. D. price to the absolute change in quantity demanded. E. income to the percentage change in quantity available for sale. Answer: A 63. Which of the following items is likely to have the highest positive income elasticity of demand? A. Bread B. Jewelry C. Soap D. A plumber’s service E. Table salt Answer: B 64. When income elasticity of demand is a negative number, one can correctly conclude that: A. the good is a normal good. B. the good is an inferior good. C. the good is a substitute. D. the good is a complement. E. total revenue will decrease when the price increases. Answer: B 65. The income elasticity of demand _____. A. must be negative because of the law of diminishing marginal utility B. could be positive or negative or zero, depending on the nature of the good C. must be positive because consumers tend to buy more at higher incomes D. is usually zero because “you can only have so much” E. can never be zero Answer: B 66. Price elasticity of demand measured over a range of prices and quantities along the demand curve is _____. A. point elasticity B. arc elasticity C. income elasticity D. cross elasticity E. price elasticity Answer: B NARRBEGIN: Table 5. 1 The table given below reports the price and quantity demanded of a commodity. 67. According to Table 5. 1, when the price increases from $5 to $6, the price elasticity of demand is _____. A. 0. 25 B. 1. 0 C. 1. 3 D. 1. 8 E. 1. 67 Answer: E NARRBEGIN: Table 5. 2 The table below shows the quantities of automobiles, margarine, and coffee purchased by Ted at different levels of income. 68. Refer to Table 5. 2. What is the income elasticity of demand for automobiles? A. 0. 5 B. 0. 35 C. 2 D. 0. 2 E. Zero Answer: A 69. Based on the information given in Table 5. 2, margarine is: A. an inferior good. B. a necessity. C. a normal good. D. a complementary good. E. a luxury good. Answer: A 70. Based on the information given in Table 5. 2, coffee would be considered: A. an inferior good. B. a necessity. C. a normal good. D. a negative good. E. a luxury good. Answer: C 71. Suppose the price of a product is reduced from $10 to $6 and the quantity demanded increases from 40 to 60 units. From this we can conclude that the price elasticity of demand over this price range is equal to _____. A. 1. 2 B. 1. 25 C. 0. 80 D. 0. 20 E. 0. 5 Answer: B 72. If 12 candy bars are demanded at $0. 30 each and 4 candy bars are demanded at $0. 50 each, what is the elasticity of demand over the price range from $0. 30 to $0. 50? A. 2 B. 1. 67 C. 0. 5 D. 7. 5 E. 0. 4 Answer: A 73. Arc elasticity is calculated as _____. A. B. C. D. E. Answer: D NARRBEGIN: Scenario 5. 1 Scenario 5. 1 The demand for noodles is given by the following equation: Q = 20 - 4P + 0. 2I - 2Px. Assume that P = $8, I = 200, and Px = $10. NARREND 74. Given the above equation, the quantity of noodles demanded at a price of $8 is _____. A. 8 B. 10 C. 12 D. 4 E. 20 Answer: A 75. Given the above equation, the price elasticity of demand for noodles is _____. A. 4 B. 0. 5 C. 2 D. 2. 5 E. 1. 6 Answer: A 76. Given the above equation, the income elasticity of demand for noodles is _____. A. 5 B. 0. 5 C. 2 D. 2. 5 E. 1. 6 Answer: A 77. Which of the following statements correctly describe the elasticities of demand for gasoline and automobiles? A. The income elasticity of demand for gasoline and automobiles is negative. B. The price elasticity of demand for gasoline is elastic and the cross-price elasticity between gasoline and SUVs is positive. C. The price elasticity of demand for gasoline is inelastic and the cross-price elasticity between gasoline and SUVs is negative. D. The price elasticity of demand for gasoline is inelastic and the income elasticity between gasoline and SUVs is positive. E. The price elasticity of demand for gasoline is elastic and the income elasticity between gasoline and SUVs is negative. Answer: C 78. When the supply elasticity of a product is 2. 5, a 10 percent decrease in price will _____ the quantity supplied of the product by _____ percent. A. increase; 25 B. decrease; 25 C. increase; 2. 5 D. decrease; 2. 5 E. decrease; 4 Answer: B 79. Acme Tools manufactures anvils, a forging tool. When the price of anvils was increased from $7 to $13, Acme Tools was willing and able to increase production from 1 to 4 units per day. Using the midpoint formula, what is Acme's price elasticity of supply for anvils? A. 2 B. 1 C. 0. 5 D. 4 E. 3. 5 Answer: C 80. A measure of the responsiveness of quantity supplied to changes in price is known as _____. A. cross-price elasticity B. price elasticity of demand C. price elasticity of supply D. income elasticity E. point elasticity Answer: C 81. There are some special types of goods for which supply cannot change irrespective of the length of time allowed for change, such as Beethoven symphonies. The price elasticity of supply for these goods is _____. A. infinite B. nonexistent C. negative D. zero E. unity Answer: D 82. Which of the following situations is represented by a nearly horizontal supply curve? A. Small price changes lead to small changes in quantity demanded of the good. B. Small price changes lead to small changes in quantity supplied of the good. C. Producers of the good are not operating efficiently. D. Producers of the good are not maximizing profit. E. Small changes in the price of the good lead to large changes in the quantity supplied of the good. Answer: E 83. When economists speak of the short run, they are referring to _____. A. a specific period of time, usually less than one year B. a specific period of time, more than one year, but less than two years C. a specific period of time just long enough that the quantities of all resources can be varied D. a period of time short enough that the quantities of at least one of the resources cannot be varied E. a period of time short enough that none of the quantities of the resources can be varied Answer: D 84. Supply curves applicable to shorter periods of time tend to: A. be represented by horizontal lines parallel to the quantity axis. B. be perfectly elastic. C. be more inelastic than supply curves that apply to longer periods of time. D. be more elastic than supply curves that apply to longer periods of time. E. have a price elasticity of supply that is approximately equal to 1. Answer: C 85. Economists have said that deregulation of the electric utility industry might lead to increased prices in the short run but prices will fall in the long run. In this context: A. the short run means the middle of next year. B. the short run means after all adjustments have been made and the quantities of all resources have been varied as necessary. C. the long run means after all adjustments have been made, the quantities of all resources have been varied as necessary, and new market entrants begin producing electricity. D. the short run means after new firms begin producing electricity. E. the long run means approximately ten years. Answer: C 86. If the price elasticity of supply is 0. 75, it would imply that a _____. A. a 100 percent increase in price would increase the quantity supplied by 75 percent B. doubling of the price would increase the quantity supplied by 175 percent C. 50 percent increase in price would increase the quantity supplied by 25 percent D. 75 percent increase in price would increase the quantity supplied by 100 percent E. 120 percent increase in price would increase the quantity supplied by 90 percent Answer: E 87. Ceteris paribus, if a 20 percent increase in the price of shoes leads to a 10 percent increase in the quantity supplied of shoes, then the price elasticity of supply is equal to _____. A. 2 B. 20 C. 10 D. 0. 5 E. 0. 2 Answer: D 88. Ceteris paribus, if a 20 percent increase in the price of shoes leads to a 10 percent increase in the quantity supplied of shoes, then the price elasticity of supply is equal to _____. A. 2 B. 20 C. 10 D. 0. 5 E. 0. 2 Answer: D 89. The social security tax, like any other tax, is shared by employers and employees based on elasticities of demand and supply. If the wage elasticity of demand for labor is zero and the wage elasticity of supply for labor is positive: A. most of the tax will be paid by the employer. B. most of the tax will be paid by the employee. C. all of the tax will be paid by the employer. D. all of the tax will be paid by the employee. E. the tax is split evenly between the employer and employee. Answer: D 90. If the demand for liquor is elastic, and the government increases liquor tax, then _____. A. most of the tax will be paid by the consumer B. most of the tax will be paid by the producer C. all of the tax will be paid by the consumer D. all of the tax will be paid by the producer E. the tax will be paid by the retailer Answer: B 91. In which of the following cases will an effective price floor lead to the largest surplus in a market? A. When demand is elastic and supply is inelastic B. When demand is inelastic and supply is elastic C. When both demand and supply are elastic D. When both demand and supply are inelastic E. When demand is inelastic and supply is perfectly inelastic Answer: C TRUE/FALSE 1. Price elasticity of demand measures the responsiveness of quantity demanded in a market to a change in price. Answer: True 2. Price elasticity of demand is the sole determinant of profit for a firm. Answer: False 3. If a product has an elastic demand, it means that consumers are relatively insensitive to a change in the price of the product. Answer: False 4. The coefficient of the price elasticity of demand is always negative. Answer: True 5. If demand is unit-elastic, then a $5 decrease in price will lead to an increase in quantity demanded by 5 units. Answer: False 6. If a 10 percent increase in the price of tomatoes leads to a 20 percent decrease in quantity demanded, then the price elasticity of demand for tomatoes, , equals 2. Answer: True 7. If the price elasticity of demand is greater than 1, then demand is inelastic. Answer: False 8. Since demand curves are mostly downward sloping, economists tend to ignore the negative sign when calculating the price elasticity of demand. Answer: True 9. A perfectly elastic demand curve is represented by a vertical line. Answer: False 10. A perfectly inelastic demand curve is represented by an upward rising straight line. Answer: False 11. As the price is raised along a straight-line demand curve, the demand curve becomes more elastic. Answer: False 12. Demand is price-elastic at the top portion of a straight-line downward-sloping demand curve. Answer: True 13. The price elasticity of demand is the ratio of the change in quantity demanded to the change in price. Answer: False 14. By measuring the price elasticity of demand in terms of percentage changes, economists are able to compare the way consumers respond to changes in the prices of different products. Answer: True 15. Since the slope of a downward sloping demand curve is constant, the price elasticity of demand does not change when moving along this line. Answer: False 16. If the price of chocolate increases by 15 percent and the quantity demanded of chocolate declines by 5 percent, the price elasticity of demand ( ) is 3. Answer: False 17. Everything else held constant, the greater the number of close substitutes there are for a good, the smaller the price elasticity of demand for that good. Answer: False 18. The demand for mansions is elastic because a small percentage change in price results in a large change in quantity demanded. Answer: True 19. If a consumer is spending a small portion of his or her income on a good, then the demand for the good is likely to be inelastic. Answer: True 20. The price elasticity of demand depends on how readily and easily consumers can switch their purchases from one product to another. Answer: True 21. Other things remaining unchanged, the longer the time period under consideration the greater will be the price elasticity of demand. Answer: True 22. The cross-price elasticity between movie tickets and video rentals is positive. Answer: True 23. If the quantity demanded of product S increases as the price of product T decreases, then S and T are complements. Answer: True 24. The cross-price elasticity between baseballs and tennis balls is likely to be a large positive number. Answer: False 25. When the income elasticity of demand for a good is negative, the good is called a luxury good. Answer: False 26. If butter has an income elasticity equal to 0. 75, then butter is an inferior good. Answer: False 27. An inferior good or service is any good or service for which an increase in income causes a decrease in demand. Answer: True 28. Jen considers smoking an inferior good. In other words, for Jen to quit smoking she would require a significant increase in income. Answer: True 29. If consumer income increases, then the demand shifts right for an inferior good. Answer: False 30. The point elasticity is a measure of the sensitivity of consumers to a larger price change - a range from one price to another. Answer: False 31. Cross-price elasticity is represented by the formula DQ/DP ´ P/Q; where P and DP represent the price and change in price of a related good respectively. Answer: True 32. Assume that as the price of wheat falls from $10 to $8, the quantity demanded of wheat increases from 100 bushels to 150 bushels. This implies the price elasticity of demand for wheat is 0. 5. Answer: False 33. In order to avoid problems involved with calculating percentage changes over a wide range, economists use the base or midpoint formula to calculate percent changes when measuring the price elasticity of demand. Answer: True 34. If the price elasticity of supply is zero, the supply curve is a horizontal line parallel to the quantity axis. Answer: False 35. In the long run, the quantity of capital available to a firm is fixed. Answer: False 36. The actual or chronological time for the short and the long run does not vary from industry to industry. Answer: False 37. If firms have to change their production techniques in order to change the quantities they supply, they can respond less in a year to a price change than they could in a month. Answer: False 38. Supply tends to be more elastic in the long run than in the short run. Answer: True 39. If a 10 percent increase in price leads to a 20 percent increase in quantity supplied, then the elasticity of supply is 0. 5. Answer: False 40. Tax incidence explains how taxes are shared between producers and consumers. Answer: True 41. If supply is price-inelastic and demand is price-elastic, then the firm can earn positive profits by increasing the price. Answer: False 42. If price elasticity of supply is large and demand is price-inelastic, then the firm can earn positive profits by increasing the price. Answer: True 43. If demand is relatively elastic and supply is relatively inelastic, then the incidence of a tax will fall mainly on consumers. Answer: False Chapter 06 Consumer Choice MULTIPLE CHOICE 1. Utility is most closely defined as _____. A. the purchasing power of individuals B. welfare maximization C. a medium of exchange D. satisfaction E. an opportunity cost Answer: D 2. To economists, feelings such as peace, serenity, religious devotion, and self-esteem are captured in the concept known as _____. A. rational self-interest B. utility C. profit D. total revenue E. surplus Answer: B 3. When attempting to explain why a consumer purchases a Ford automobile instead of a Honda automobile or a Compaq computer instead of an IBM computer, an economist would assert: A. that the consumer is making a decision based on what gives him maximum utility. B. that everyone knows Hondas are superior to Fords; the consumer cannot possibly be maximizing his utility. C. that everyone knows IBM computers are superior to Compaq computers; the consumer may be maximizing his utility at the margin, but is not maximizing total utility. D. that there is no standard explanation for consumer choices because consumers have varied tastes and preferences. E. that since rationality is bounded by lack of information, a consumer purchases goods based on convenience than on utility maximization. Answer: A 4. When economists describe the theory of consumer choice, they A. portray people as simple and methodical with perfectly predictable patterns of behavior. B. assert that consumers decide which goods and services give them the greatest utility within their limited incomes. C. point out that consumers rarely consider utility in their purchase decisions; they look at other factors like convenience, peer behavior, and price. D. assert that the retail price is the only variable consumers really consider in making their purchasing decisions. E. admit that consumer behavior is random and there is no credible economic theory to explain the phenomenon. Answer: B 5. As a consumer eats additional pieces of pizza, total utility will _____. A. always keep increasing B. always keep decreasing C. keep increasing until dissatisfaction sets in D. keep decreasing until dissatisfaction sets in E. initially keep decreasing until it becomes zero and then increase Answer: C 6. The additional satisfaction that a consumer receives from one more unit of a good or service is known as _____. A. marginal utility B. total utility C. disutility D. profit E. the law of diminishing marginal utility Answer: A 7. The prices that people are willing to pay for goods and services mostly depend on: A. the total utility derived from the goods. B. the marginal utility derived from the goods. C. the availability of the goods. D. the cost of producing the goods. E. whether the goods are legal since the laws affect the position of both supply and demand curves. Answer: B 8. _____ is the change in total utility that occurs because one more unit of the good is consumed or acquired. A. Total utility B. Marginal utility C. Disutility D. Diminishing marginal utility E. Expected utility Answer: B 9. _____ is the lack of satisfaction yielded after consuming too much of the same product. A. Diminishing marginal utility B. Disutility C. Total utility D. Marginal utility E. Cardinal utility Answer: B 10. _____ is a measure of the total satisfaction derived from consuming a quantity of some good or service. A. Disutility B. Diminishing marginal utility C. Total utility D. Marginal utility E. Ordinal utility Answer: C 11. Suppose two out for coffee and donuts at the local donut store. The first donut you eat tastes incredibly good. The second one also tastes pretty good. The third donut seems just okay. With the fourth donut you are turning somewhat green. The fifth donut makes you sick. Your friend, an economist, describes your experience as the principle of: A. utility maximization. B. irrationality in consumer behavior. C. instant gratification. D. differing tastes and preferences. E. diminishing marginal utility. Answer: E 12. Total utility is determined by: A. multiplying the quantity purchased by the price of the good. B. finding the additional utility gained from consuming one more unit of product. C. summing the marginal utilities for each successive unit of product consumed. D. summing the number of units of a good consumed. E. dividing the marginal utility derived from consuming a good by its price. Answer: C 13. Marginal utility is _____. A. always greater than total utility B. utility that is not as good as normal utility C. the extra utility derived from consuming one additional unit of a good or service D. always positive E. not related to total utility Answer: C 14. When marginal utility is negative, total utility is _____. A. increasing B. at a minimum C. equal to zero D. decreasing E. at a maximum Answer: D 15. Total utility is maximized when _____. A. marginal utility is maximized B. marginal utility is the same for all goods consumed C. marginal utility per dollar expenditure is maximized D. marginal utility per dollar expenditure is the same for all goods consumed E. any change in purchasing from good A to good B reduces marginal satisfaction Answer: D 16. Due to the law of diminishing marginal utility, _____. A. the first unit of a product offers more satisfaction than the last unit of the same product B. the marginal utility curve is upward sloping C. when marginal utility becomes negative, total utility increases D. there is more satisfaction with each unit of good consumed E. when marginal utility becomes positive, total utility declines Answer: A 17. The law of diminishing marginal utility states that: A. the marginal utility of the last unit consumed of any good is less than the marginal utility of all other products consumed. B. as more of a good or service is consumed, ceteris paribus, its marginal utility relative to the marginal utility of other products increases. C. as more of a good or service is consumed, its marginal utility decreases. D. as more of a good or service is consumed, its marginal utility relative to other products remains the same. E. the marginal utility of all products consumed must be equal. Answer: C 18. If a consumer purchases more of a product, then most likely the marginal utility of _____. A. that product decreases B. that product remains the same C. other products decreases D. other products increases E. that product increases Answer: A 19. If the marginal utility of a product is diminishing relative to the marginal utility of other products, then _____. A. the consumer is in equilibrium B. the consumer has been purchasing relatively less of the product C. the consumer has been purchasing relatively more of the product D. the price of this product must have increased E. the price of the product must have decreased Answer: C NARRBEGIN: Table 6. 1 The table given below depicts the total utility derived from the consumption of a good. 20. According to Table 6. 1, the total utility from consuming all 5 units is _____. A. 13 B. 55 C. 64 D. 188 E. 303 Answer: B 21. According to Table 6. 1, marginal utility _____. A. increases from the first unit to the third unit and then declines B. decreases from the third unit to the fifth unit only C. increases from the first unit to the third unit and decreases from the third unit to the fifth unit D. decreases from the first unit to the fifth unit E. increases from the fourth unit Answer: D 22. If one were to plot the data from Table 6. 1 (with utility on the vertical axis and quantity of the good on the horizontal axis): A. the total utility curve would begin to decline after the second unit of the good. B. the marginal utility curve would begin to decline after the third unit of the good. C. the marginal utility curve would intersect the horizontal axis at the third unit of the good. D. the marginal utility curve would intersect the horizontal axis at the second unit of the good. E. the total utility curve would rise from the first unit to the fifth unit. Answer: C 23. According to Table 6. 1, which of the following units of the good yields disutility? A. Units 1 and 4 B. Units 2 and 3 C. Unit 3 D. Units 3, 4, and 5 E. Units 4 and 5 Answer: E 24. Which of the following statements about marginal utility is correct? A. When marginal utility is negative, an increase in the quantity will increase total utility. B. When marginal utility is decreasing, an increase in quantity will decrease total utility. C. When marginal utility is positive, an increase in quantity will decrease total utility. D. When marginal utility is zero, an increase in quantity will leave total utility unchanged. E. When total utility is increasing, marginal utility will be negative. Answer: D 25. Marginal utility diminishes more quickly: A. the less durable the good is. B. the greater the number of consumers consuming the good. C. the shorter the time period between two successive consumptions. D. the greater the number of firms producing the good. E. the cheaper the good is. Answer: C 26. Which one of the following is based on the idea that marginal utility of income diminishes as income increases? A. Progressive taxation B. Capital controls C. Minimum wages D. Price controls E. Employee compensation regulations Answer: A 27. In the theory of utility, it is assumed that marginal utility: A. increases as consumption of a product increases. B. is always zero irrespective of any increase or decrease in consumption. C. remains constant when consumption of a product increases. D. diminishes as consumption of a product increases. E. remains constant when consumption of a product decreases. Answer: D 28. If total utility increases by smaller and smaller amounts as more units of a product are consumed, then marginal utility is: A. decreasing and is a negative amount. B. decreasing and is a positive amount. C. zero. D. increasing and is a negative amount. E. increasing and is a positive amount. Answer: B 29. When total utility is at a maximum, marginal utility is: A. increasing. B. at a minimum. C. equal to zero. D. decreasing. E. at a maximum. Answer: C 30. When marginal utility is positive and increasing, then A. total utility must be negative. B. total utility must be increasing at an increasing rate. C. total utility must be increasing at a decreasing rate. D. total utility is decreasing. E. total utility is at its maximum point. Answer: B 31. The total utility of the consumer diminishes whenever: A. he or she buys an additional unit of a good. B. his or her marginal utility decreases. C. his or her total utility increases at a decreasing rate. D. the last unit consumed of a particular good is distasteful or provides dissatisfaction. E. other consumers are also purchasing the product. Answer: D NARRBEGIN: Table 6. 2 The table given below records the total utility derived from the consumption of avocados. 32. According to Table 6. 2, the marginal utility of the third avocado is _____. A. 12 B. 8 C. 48 D. 18 E. 4 Answer: A 33. According to Table 6. 2, marginal utility is positive _____. A. for any number of avocados B. for up to five avocados C. for one or two avocados D. only after five avocados are consumed E. for the first four avocados Answer: B 34. According to Table 6. 2, marginal utility is negative _____. A. for any number of avocados B. up to five avocados C. only for one or two avocados D. only after five avocados are consumed E. only after the first avocado is consumed Answer: D 35. Refer to Table 6. 2. The law of diminishing marginal utility holds _____. A. for any number of avocados B. up to five avocados C. only for one or two avocados D. only after five avocados are consumed E. for the first three avocados Answer: A NARRBEGIN: Table 6. 3 The below table shows the average utility (in utils) obtained from the consumption of goods A and B. 36. Refer to Table 6. 3. The marginal utility of the fourth unit of B is _____ utils. A. 5 B. 4 C. 3 D. -2 E. 1 Answer: E 37. Refer to Table 6. 3. The total utility of the third unit of A is _____ utils. A. 15 B. 12 C. 21 D. 20 E. 7 Answer: C 38. Refer to Table 6. 3. Marginal utility diminishes for good A from the _____ unit. A. 6th B. 4th C. 3rd D. 2nd E. 1st Answer: A 39. Refer to Table 6. 3. Which of the following statements is false? A. The consumer prefers the first unit of B to the first unit of A B. The consumer prefers the sixth unit of A to the sixth unit of B C. The marginal utility from the consumption of the fourth unit of A is 3 D. The marginal utility from the consumption of the second unit of B is 7 E. The marginal utility from the consumption of the second unit of A is 9 Answer: D 40. According to the law of diminishing utility, _____. A. the same tax rate should be applied to every dollar B. the rich people should have a lower tax rate C. the rich people should have a higher tax rate D. the total burden on the society from a tax will be less if proportional taxation is used E. the poorer people should have a lower tax rate Answer: C 41. It is often observed that, over the same period of time and for the same good, marginal utility declines rapidly for some consumers and very little for others. This observation illustrates: A. that economic theory is of little value in explaining consumer behavior. B. that consumers are not identical. C. tastes and preferences should not be included in any discussion of consumer choice. D. tastes and preferences among consumers are quite similar. E. that if consumers weren’t identical, economic theory would not be able to provide insight into consumer behavior. Answer: B 42. Suppose that there are five bottles of lemonade, each of which gives the consumer the same level of utility. According to the law of diminishing marginal utility, how can one receive the highest utility? A. Consume all five bottles in the next hour B. Consume all five bottles today C. Consume all five bottles in one day next week D. Consume two bottles today and three tomorrow E. Consume one bottle each day for the next five days Answer: E 43. Suppose a friend gives you two pieces of gum, and you decide to have one piece now and save the other for tomorrow. You do this because: A. the total utility you get from the two pieces of gum will be higher tomorrow. B. the marginal utility you get from the second piece will be higher tomorrow. C. the marginal utility you get from the second piece will be higher today. D. the marginal utility you get from the first piece will be less today. E. the total utility you get from the two pieces will be less tomorrow. Answer: B 44. An “all you can eat” restaurant illustrates the economic principle: A. of consumers’ inability to maximize their total utility. B. that economic theory clearly breaks down under certain circumstances. C. that marginal utility is always positive. D. that consumers will stop eating when marginal utility is zero. E. that consumers will stop eating when total utility is zero. Answer: D 45. If a dinner guest was serious when she said that she could never get enough of your cooking, you would conclude that the marginal utility of your cooking for her was _____. A. negative B. decreasing C. increasing at an increasing rate D. positive E. less than total utility Answer: D 46. In order to maximize utility, consumers _____. A. continue to make purchases until the marginal utility of each good is zero B. compare the marginal utilities of the last dollar spent on each good C. equate the total utilities of each good consumed D. continue to purchase a good until total utility is equal to zero E. will continue purchasing till diminishing marginal utility is not achieved Answer: B 47. Mr. Max is about to purchase 4 units of good A and 6 units of good B. The price of both A and B is $2. Mr. Max has only $20 to spend. If the marginal utility of the fourth unit of A is 12 and the marginal utility of the sixth unit of B is 12, then: A. he should not buy anything. B. he should buy more of A and less of B. C. he should buy less of A and more of B. D. he should buy A and B in the quantities indicated. E. he should buy more of A and little more than that of B. Answer: D 48. Because incomes are limited, purchasing one thing means not being able to purchase other things. This indicates that: A. marginal utility diminishes. B. marginal utility is constant. C. people will allocate their income among goods so as to achieve the most satisfaction. D. people will allocate their income among goods so that the marginal utilities of all goods is equal. E. people will allocate their income among goods so that the marginal utilities of all goods is zero. Answer: C 49. To decide which of two goods is the better buy, a consumer should compare the products’ _____. A. marginal utilities B. total utilities C. marginal utilities per dollar D. total utilities per dollar E. disutility Answer: C 50. Jason is trying to decide whether to buy a bagel or a muffin for breakfast. The bagel costs $. 50 and has a marginal utility of 5. The muffin costs $1 and has a marginal utility of 20. Which should he buy, and why? A. The muffin, because it has a higher marginal utility B. The muffin, because it has a lower marginal utility per dollar C. The bagel, because it costs less D. The bagel, because it has a higher marginal utility per dollar E. The muffin, because it has a higher marginal utility per dollar Answer: E 51. In economic theory, the idea of the equimarginal principle, or consumer equilibrium, means: A. consumers appear to be similar in their buying habits, which explains why prices are almost always in equilibrium. B. to maximize utility, consumers allocate all of their incomes among goods so as to equate the total utility of all units of goods purchased. C. to maximize utility, consumers must allocate their scarce incomes among only the cheapest products available. D. to maximize utility, consumers must allocate their scarce incomes among goods so as to equate the marginal utilities per dollar of expenditure on the last unit of each good purchased. E. the marginal utilities among luxury goods are always equal among certain high income earners. Answer: D 52. As long as the marginal utilities per dollar obtained from the last unit of all products consumed are the same, _____. A. the consumer is in equilibrium and will not reallocate income B. the consumer is not in equilibrium and will reallocate income C. the consumer is most likely operating a budget deficit D. the consumer is not maximizing utility E. the government will recognize this as an intolerable disequilibrium and will most likely intervene by imposing a tax and reallocate the consumer’s income Answer: A 53. Jen spent her weekly allowance of $110 on clothes and cosmetics. Assume that she had allocated $100 to shoes and $10 to lipsticks and is in equilibrium. What can you conclude from her purchase decisions? A. She likes shoes ten times as much as she likes lipsticks B. Jen liked the last pair of shoes ten times as much as the last tube of lipstick C. Jen purchased ten pairs of shoes for each tube of lipstick D. She likes lipsticks ten times as much as she likes shoes E. She purchased ten pairs of shoes for each tube of lipstick Answer: B 54. Derek has $1 to spend at the grocery store. An apple, an orange, and a banana cost $. 50 each. If Derek’s MUA/PA (ratio of marginal utility to price) of an apple is 45, MUO/PO of an orange is 38, and MUB/PB of a banana is 52, he will purchase a(n) _____ first and a(n) _____ second. A. apple; orange B. orange; apple C. banana; orange D. banana; apple E. orange; banana Answer: D 55. A ten-year-old boy spent his allowance on a soccer ball and a baseball glove. He said he could not be happier buying anything else. The price of the ball was $5, while the price of the glove was $10. If the marginal utility he received from the ball was 15 utils, then: A. the marginal utility he received from expenditure on the glove was 3 utils. B. the marginal utility he received from expenditure on the glove was 30 utils. C. the total utility per dollar he received from expenditure on the glove was 3 utils. D. the total utility per dollar he received from expenditure on the glove was 10 utils. E. the marginal utility he received from the expenditure of the glove was 10 utils Answer: B 56. The equimarginal principle illustrates: A. that consumers are essentially robots. B. that people behave irrationally. C. that people behave in rather consistent ways in order to maximize happiness. D. that people behave in rather inconsistent ways. E. that people will spend all their incomes. Answer: C 57. Suppose the prices of goods X, Y, and Z are $4, $1, and $5, respectively, and the last unit purchased of good X has a marginal utility MUx = 16 utils. At the point of equilibrium, the marginal utility of the last unit purchased of goods Y and Z will be: A. MUy = 16 utils and MUz = 16 utils, respectively. B. MUy = 8 utils and MUz = 2 utils, respectively. C. MUy = 4 utils and MUz = 20 utils, respectively. D. MUy = 2 utils and MUz = 4 utils, respectively. E. MUy = 12 utils and MUz = 20 utils, respectively. Answer: C 58. Mr. Rational has $27 that he plans to spend purchasing 5 units of good X (priced at $3 per unit) and 6 units of good Y (priced at $2 per unit). The marginal utility of the fifth unit of X is 30, and the marginal utility of the sixth unit of Y is 30. If Mr. Rational is a utility maximizer, he should: A. not buy anything. B. buy more of X and less of Y. C. buy less of X and more of Y. D. buy X and Y in the quantities indicated. E. but less of X and even lesser than that of Y. Answer: C 59. According to utility theory, a consumer is in equilibrium when: A. total income is spent. B. marginal utility per dollar spent for a good is maximized. C. total utility per unit of a good is maximized. D. total utility per dollar spent is equal for all goods. E. marginal utility per dollar spent is equal for all goods. Answer: E 60. Consumers should allocate their income so that the marginal utility associated with the: A. first dollar spent is equal for all goods. B. last dollar spent is equal for all goods. C. last dollar spent is lower for high-priced items than for lower- priced items. D. first dollar spent is greater for high-priced items than for lower-priced items. E. first dollar spent is less for high-priced items than for lower-priced items. Answer: B 61. If MUx/Px = MUY/PY then _____. A. the consumer should purchase same quantity of X and Y. B. the consumer should purchase less X C. the consumer is maximizing utility D. the consumer should purchase more Y E. the consumer is minimizing utility Answer: C 62. Assume that a consumer purchases a combination of products X and Y and the MUx/Px = 75 utils per dollar and MUy/Py = 50 utils per dollar. To maximize utility without spending more dollars, the consumer should buy: A. more of both X and Y. B. less of Y only if the price of Y increases. C. more of Y and less of X. D. more of X and less of Y. E. less of both X and Y. Answer: D 63. As the price of a good increases: A. that good will yield less satisfaction per dollar than before. B. consumers will have more real income to spend on other goods. C. the quantity demanded of that good will also increase. D. the utility-maximizing quantity of that good willl not change. E. consumers will buy the good and substitute away from other goods. Answer: A 64. If MUX/PX < MUY/PY then this consumer: A. will buy less of X and more of Y. B. will buy more of X and more of Y. C. is in equilibrium. D. will buy more of X and less of Y. E. will buy less of X and less of Y. Answer: A 65. Assume MUX = 30 utils, MUY = 15 utils, PX = $2 and PY = $0. 50. This consumer: A. should buy less of X and less of Y. B. is in equilibrium. C. should buy more of X and less of Y. D. should buy less of X and more of Y. E. should buy more of X and more of Y. Answer: D NARRBEGIN: Table 6. 4 The table given below reports the total utility derived by an individual from the consumption of different units of goods A, B, and C. 66. Refer to Table 6. 4. With an income of $10, the consumer would maximize utility by purchasing _____. A. 7 units of good A, 7 units of good B, and 7 units of good C B. 2 units of good A, 6 units of good B, and 7 units of good C C. 3 units of good A, 5 units of good B, and 6 units of good C D. 3 units of good A, 6 units of good B, and 4 units of good C E. 6 units of good A, 0 units of good B, and 7 units of good C Answer: C 67. Refer to Table 6. 4. What is the highest possible total utility a consumer can attain given an income of $10? A. 554 B. 705 C. 706 D. 717 E. 899 Answer: D 68. Refer to Table 6. 4. If the consumer’s income increases from $10 to $20 but the prices of each of the goods doubles, the consumer would maximize utility by purchasing _____. A. 7 units of good A, 7 units of good B, and 7 units of good C B. 3 units of good A, 5 units of good B, and 6 units of good C C. 2 units of good A, 6 units of good B, and 7 units of good C D. 3 units of good A, 6 units of good B, and 4 units of good C E. 6 units of good A, 0 units of good B, and 7 units of good C Answer: B 69. A consumer is in equilibrium when: A. his or her marginal utility derived from each good is maximized. B. each dollar spent on each item provides more and more satisfaction. C. each dollar spent on each item provides less and less satisfaction. D. the last dollar spent on each item provides the same additional satisfaction as that dollar would if spent on any other item. E. his or her average utility for each item is the same. Answer: D NARRBEGIN: Table 6. 5 The table below shows the total utility associated with various units of goods X and Y. 70. Refer to Table 6. 5. Given that the price of good X is $2 per unit, the price of good Y is $5 per unit, and that the consumer spends a total of $14 on both goods, what is the total utility associated with the utility-maximizing combination? A. 84 B. 154 C. 172 D. Indeterminate E. 215 Answer: C 71. Refer to Table 6. 5. Given that the price of good X is $2 per unit, the price of good Y is $5 per unit, and that the consumer spends a total of $14 on both goods, what is the total utility associated with the utility-maximizing combination? A. 84 B. 154 C. 172 D. Indeterminate E. 215 Answer: C 72. The demand curve for a product can be derived from consumer equilibrium by: A. altering the prices of all other products. B. altering consumer incomes. C. shifting consumer preferences. D. altering the price of the good itself. E. knowing the demand curves for all other products. Answer: D 73. The demand curve slopes downward because of: A. diminishing marginal utility and consumer equilibrium. B. the fact that consumers cannot decide how much they want to pay for goods and services. C. the fact that suppliers cannot decide how much to charge for the goods and services they supply. D. the fact that consumer tastes and preferences change rapidly. E. the fact that consumers are fickle, which makes pricing a good or service very difficult. Answer: A 74. The demand curve for a product slopes downward and to the right because: A. total utility decreases as more of the product is consumed. B. total utility derived from both, the product and its substitutes is the same. C. marginal utility of the product diminishes as more of the product is consumed. D. there are no substitutes for the product. E. when the price falls, the income effect causes consumers to buy less of the product. Answer: C 75. Following a decrease in the price of a good or service, an individual will purchase more of the now less expensive good and less of other more expensive goods. This is known as the _____ effect. A. income B. endowment C. substitution D. price E. scale Answer: C 76. The _____ effect indicates that an individual’s income can buy more of all goods when the price of one good declines, everything else held constant. A. scale B. endowment C. substitution D. price E. income Answer: E 77. When the price of a good changes, the substitution effect occurs because: A. the consumers’ real income measured in terms of that good changes. B. the relative price of that good changes compared to other goods in the consumption bundle. C. the total utility of that good changes. D. the marginal utility of that good changes. E. consumers have an incentive to substitute irrational behavior for rational behavior. Answer: B 78. Which of the following statements concerning income and substitution effects is not true? A. Income and substitution effects cause the demand curve to slope downward. B. When the price of a good falls, real purchasing power increases and consumers can purchase more of all goods. C. The substitution effect describes the situation where more of a good whose price has fallen is purchased and less of all other goods is purchased. D. A price decrease of one good cannot cause the income effect. E. Income and substitution effects are related to diminishing marginal utility and consumer equilibrium. Answer: D 79. Suppose the price of beef declines by $0. 50 per pound at the supermarket. Consumers of beef immediately increase their purchases of beef. This illustrates: A. the fact that beef is an inferior good. B. the cross-elasticity effect of a price decrease. C. the substitution effect of a price decrease. D. the fact that beef is an economic bad. E. the income effect of rise in price. Answer: C 80. The income and substitution effects of a price change occur because: A. consumer incomes are not constant. B. consumer substitution rates are not constant. C. income and substitution effects never occur simultaneously. D. of diminishing marginal utility and the equimarginal principle. E. of increasing marginal utility and the equimarginal principle. Answer: D 81. In labor markets, a change in the wage rate has both an income and a substitution effect. An increase in wages causes an increase in real income but at the same time it increases the relative price of leisure for the worker. If the increase in the wage rate causes an individual to work less: A. the income effect will dominate the substitution effect. B. the substitution effect will dominate the income effect. C. the substitution and the income effects will cancel each other out. D. then leisure will be referred to as an inferior good. E. the increase in wage rates will cause an increase in the supply of labor. Answer: A 82. If the price of videotapes decreases, then the _____. A. marginal utility of videotapes will decrease B. marginal utility of videotapes will increase C. marginal utility per dollar of videotapes will decrease D. marginal utility per dollar of videotapes will increase E. total utility of videotapes will increase Answer: D 83. When a good becomes more expensive, it yields less satisfaction per dollar, so consumers buy less of it and more of other goods. This is called the _____ effect. A. substitution B. income C. replacement D. augmentation E. disbursement Answer: A 84. _____ is the understanding that perfect information is not likely to be available, and that as a result people make decisions that in hindsight look irrational, but in reality are the rational results of a brain that is economizing. A. Reasoning B. Parametric determinism C. Rational ignorance D. Bounded rationality E. Dynamic inconsistency Answer: D 85. The study of decision making that assumes people are rational in a broad sense, even if they do not have complete and perfect information is called _____. A. rational economics B. reasonable economics C. understandable economics D. behavioral economics E. optimal economics Answer: D 86. In effect, people feel that driving is safer than flying and also prefer to do so because of _____. A. anchoring B. overconfidence C. status quo D. loss aversion E. familiarity Answer: B 87. The term _____ refers to the idea that the value people place on money depends on where that money comes from. A. decision making B. psychological pricing C. mental accounting D. marketing mix E. anchoring Answer: C 88. Buyers who are persuaded to take a product home to try it out, _____. A. are likely to return the product later B. are lucky the seller is not concerned about the buyers’ credit ratings C. like to try the product out D. have no money to pay at the time E. will be reluctant to return the product when payment is due Answer: E 89. The principle that people would rather leave things as they are is called _____. A. status quo B. stand still C. stagnation D. pause E. quo warranto Answer: A 90. According to the concept of framing, when a customer calls a hotel regarding a reservation the hotel reservationists generally state room rates as the _____. A. lowest they charge during peak demand periods B. average they charge during peak demand periods C. highest they charge during peak demand periods and then discount those rates D. lowest they charge during off-peak demand periods E. highest they charge during off-peak demand periods and then discount those rates Answer: C 91. “Throwing good money after bad” is also known as the _____ effect. A. anchoring B. sunk cost C. status quo D. familiarity E. overconfidence Answer: B 92. Which of the following sentences based on the findings of neuroeconomics is true? A. Logical decision-making takes place in the limbic system. B. Emotional decision-making takes place in the pre-frontal cortex. C. The pre-frontal cortex confuses the logical side of the brain by bringing in emotions, and in some cases it takes over and demands immediate gratification. D. Adults have greater activity in their frontal lobes and lower activity in their amygdala than do teenagers. E. The amygdala takes a long-term perspective on the decision-making, looking at logical cost-benefit comparisons. Answer: D 93. An indifference curve shows _____. A. the relationship between total and marginal utility B. the relationship between the quantity of a good and the maximum attainable satisfaction C. the various combinations of two goods that give the consumer the same amount of satisfaction D. the relationship between the price and quantity of a good that a consumer is able to purchase E. that the quantities of a good that give the consumer maximum satisfaction are directly related to price Answer: C 94. In an indifference map, one would most likely see indifference curves that: A. are positively sloped. B. intersect at the origin. C. cross at the equilibrium point. D. are bowed inward toward the origin. E. represent greater utility as they approach the origin. Answer: D 95. As one moves downward on an indifference curve, the: A. total utility from the consumption of a good decreases. B. total utility from the consumption of a good increases. C. the total satisfaction from consumption remains the same. D. the marginal utility from the consumption a good increases. E. the total satisfaction from consumption decreases. Answer: C 96. An indifference map shows _____. A. all combinations of two goods that a consumer can afford to purchase B. all combinations of two goods that provide the same level of utility C. a set of indifference curves for a representative consumer D. all combinations of price and quantity that provide the same level of utility E. the combination of goods that a consumer can afford to buy Answer: C NARRBEGIN: Figure 6. 1 The below indifference map shows the various combinations of hours of music and apples that yield different levels of utility. Figure 6. 1 NARREND 97. Which of the following explains why indifference curve I2 should not cross indifference curve I1 as shown in Figure 6. 1? A. The consumer is not indifferent between A and B. B. The consumer is not indifferent between A and C. C. The consumer is not indifferent between B and C. D. The consumer is not indifferent between D and E. E. There is no reason why indifference curve I2 should not cross indifference curve I1 as shown. Answer: A 98. According to indifference curve I1 in Figure 6. 1, for each extra apple the consumer eats, he or she must simultaneously sacrifice ____ of listening to music to keep total utility constant. A. 1 hour B. 2 hours C. 3 hours D. 4 hours E. 5 hours Answer: A 99. According to Figure 6. 1, which of the following is incorrect? A. The consumer prefers B to A B. The consumer is not indifferent between A and B C. The consumer is indifferent between D and E D. Indifference curve I2 should cross indifference curve I1 as shown E. The consumer is indifferent between B and C Answer: D 100. The different combinations of any two goods that an individual can afford to purchase, given his income and prices, is shown by: A. an indifference curve. B. an indifference map. C. a budget line. D. a demand curve. E. a supply curve. Answer: C 101. Suppose a budget line is drawn with X on the horizontal axis and Y on the vertical axis. A decrease in the price of X will cause: A. an increase in the vertical intercept and no change in the horizontal intercept. B. a decrease in the vertical intercept and no change in the horizontal intercept. C. an increase in the horizontal intercept and no change in the vertical intercept. D. a decrease in the horizontal intercept and no change in the vertical intercept. E. a parallel, rightward shift of the budget line. Answer: C 102. When the budget line is just tangent to the highest achievable indifference curve, then _____. A. the consumer is in equilibrium B. the consumer should purchase more of good X C. the consumer should purchase more of good Y D. the consumer cannot afford the combination represented by the tangency point E. the consumer should purchase less of both goods Answer: A 103. Which of the following will most likely happen when a person's income increases, other things equal? A. The budget line will shift outward B. The budget line will become steeper C. The budget line will become flatter D. The indifference curves will shift outward E. The indifference curves will shift downward Answer: A 104. An increase in income _____. A. makes the budget line flatter B. makes the budget line steeper C. makes the consumer worse off D. makes the consumer achieve a higher level of utility E. makes the consumer more selfish Answer: D NARRBEGIN: Figure 6. 2 The figure given below represents two indifference curves I1 and I2 of an individual. Figure 6. 2 NARREND 105. Refer to Figure 6. 2. Which of the following statements is true? A. Point B yields a greater level of satisfaction than point D. B. Points A and E yield the same level of satisfaction. C. Point B yields a greater level of satisfaction than point C. D. I2 represents a greater level of satisfaction than I1. E. Point C yields a lower level of satisfaction than point D. Answer: D 106. Refer to Figure 6. 2. At which point in the figure above will the consumer maximize satisfaction? A. A B. B C. C D. D E. E Answer: C NARRBEGIN: Figure 6. 3 The below figure shows the various combinations of the goods X and Y that yield different levels of utility. Figure 6. 3 NARREND 107. In Figure 6. 3, the consumer is in equilibrium at point: A. A B. B C. C D. D E. E Answer: B 108. In Figure 6. 3, if the price of one unit of good X and good Y is $30 and $20, respectively, the consumer's income is _____. A. $50 B. $150 C. $400 D. $600 E. $900 Answer: D 109. Refer to Figure 6. 3. The consumer prefers _____ to _____. A. A; C B. B; A C. B; D D. D; E E. I1; I2 Answer: B 110. Refer to Figure 6. 3. What combinations of X and Y are attainable by the consumer? A. All combinations that lie on or above I2 B. All combinations that lie above I1 C. All combinations that lie below I3 D. All combinations that lie on or below the budget line. E. Only the combination of 10 units of good X and 15 units of good Y Answer: D TRUE/FALSE 1. Utility is easy to measure in the real world with recent advances in psychometric technology. Answer: False 2. Individuals behave so as to maximize their utility. Answer: True 3. Marginal utility is negative when total utility is increasing. Answer: False 4. If a consumer is buying three goods A, B and C, then she will be in equilibrium when total utility from each good is equal. Answer: False 5. The law of diminishing marginal utility states that as additional units are consumed, satisfaction per unit will decline. Answer: False 6. Marginal utility is total utility divided by the number of units consumed. Answer: False 7. In utility analysis, it is assumed that marginal utility diminishes as consumption of a product decreases. Answer: False 8. In order to have a meaningful measure of marginal utility, we must define the time period during which consumption is occurring. Answer: True 9. A utility-maximizing consumer always purchases a good that yields the greatest average utility per dollar of expenditure. Answer: False 10. The shorter the period of time being considered, the less rapidly will diminishing marginal utility set in. Answer: False 11. If all consumers had identical preferences, then their marginal utility schedules would be the same. Answer: True 12. If a good is free, a rational consumer will continue to consume that good, irrespective of its marginal utility. Answer: False 13. Suppose that apples and bananas both cost the same, but the marginal utility of bananas is twice as high as that for apples. This implies the consumer should purchase more apples and fewer bananas in order to maximize utility. Answer: False 14. If cherries cost twice as much as dates, and the last cherry consumed provides twice as much utility as the last date consumed, the consumer is maximizing utility. Answer: True 15. The law of diminishing marginal utility does not hold good when the good is free or priced at zero dollars. Answer: False 16. Consumer equilibrium exists when the marginal utility per dollar of expenditure is the same for all goods and services. Answer: True 17. As the price of a good increases, the marginal utility per dollar spent on that good will also increase. Answer: False 18. If a consumer is buying only goods A and B, then he or she will be in equilibrium only when MUa = MUb. Answer: False 19. Suppose that apples and bananas both cost the same, but the marginal utility of bananas is twice as high as that for apples. The consumer should purchase more apples and fewer bananas in order to maximize utility. Answer: False 20. If the consumer purchases only two goods, X and Y, and if (MUx/Px) = (MUy/Py) then the consumer cannot reallocate her expenditures on X and Y to increase her utility, unless she has more money to spend. Answer: True 21. As the price of a good declines, a utility-maximizing consumer will respond by purchasing more of that good. Answer: True 22. A price change triggers the income effect but not the substitution effect. Answer: False 23. The substitution effect occurs because when the price of one good increases, consumers will buy fewer substitute goods. Answer: False 24. The theory of bounded rationality states that it is likely for consumers to have perfect information. Answer: False 25. One explanation for the status quo bias is an aversion to loss. Answer: True 26. Neuroeconomics suggests that the frontal lobe carries out most decision making and strategic thinking takes place in the prefrontal cortex. Answer: True 27. According to neuro-economists, our logical brain knows we should spend as much as possible when we have money. Answer: False 28. According to neuro-economists, the limbic portion of the brain called the amygdala is more primitive and deals with emotion. Answer: True 29. Other things equal, if there is a price increase of a good measured on the vertical axis, the budget constraint will shift outward. Answer: False 30. As you move along an indifference curve, your total utility increases or decreases depending on whether it’s an upward or downward movement. Answer: True 31. A consumer is in equilibrium when the slope of his or her indifference curve is equal to his or her budget constraint. Answer: False 32. With an increase in income, the consumer will maximize utility on a new indifference curve that represents a higher level of utility. Answer: True Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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