Table 6–2
Quantity of
Soup (cups) Total Utility Quantity of
Sandwiches Total Utility
140 145
260 275
372 3102
482 4120
588 5135
690 6145
Table 6–2 shows Keira‘s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3.
Keira has $18 to spend on these two goods.
113)
Refer to Table 6–2. Suppose Keira’s income increases from $18 to $23 but prices have not changed.
What is her utility–maximizing combination of soup and sandwiches now?
113)
A)
4 cups of soup and 5 sandwiches
B)
5 cups of soup and 5 sandwiches
C)
5 cups of soup and 4 sandwiches
D)
6 cups of soup and 5 sandwiches
114)
Which of the following statements about the price elasticity of demand is correct?
114)
A)
The absolute value of the elasticity of demand ranges from zero to one.
B)
Demand is more elastic the smaller percentage of the consumer’s budget the item takes up.
C)
Demand is more elastic in the long run than it is in the short run.
D)
The elasticity of demand for a good in general is equal to the elasticity of demand for a
specific brand of the good.
115)
Consider a downward–sloping demand curve. When the price of an inferior good increases, the
income and substitution effects
115)
A)
work in the same direction to decrease quantity demanded.
B)
work in opposite directions and quantity demanded decreases.
C)
work in opposite directions and quantity demanded increases.
D)
work in the same direction to increase quantity demanded.
116)
What is the endowment effect?
116)
A)
the tendency of people to be unwilling to sell something they already own because of its
sentimental value
B)
the tendency of people to be unwilling to sell something they already own even if they are
offered a price that is greater than what they would be willing to pay to buy the good if they
did not already own it
C)
the tendency of people to overstate the value of a good they already own even though similar
items can be purchased at a lower price
D)
the sum total of assets that a person has acquired over the years
117)
For which of the following products is social influence likely to have the greatest impact?
117)
A)
toothpaste
B)
school textbooks
C)
high blood pressure medication
D)
restaurants
118)
Refer to Figure 6–2. At the midpoint of the demand curve, in absolute value,
118)
A)
the price elasticity coefficient equals zero.
B)
the price elasticity coefficient is at a minimum.
C)
the price elasticity coefficient equals one.
D)
the price elasticity coefficient is at a maximum.
119)
If Ewan is consuming his utility maximizing combination of two goods and the price of one good
falls, what happens to the marginal utility per dollar spent on this good (MU/P), and what should
Ewan do?
119)
A)
MU/P has decreased and Ewan should buy more of this good.
B)
MU/P has decreased and Ewan should buy less of this good.
C)
MU/P has increased and Ewan should buy more of this good.
D)
MU/P has increased and Ewan should buy less of this good.
120)
Which of the following statements is correct?
120)
A)
Firms will always take advantage of opportunities to raise prices to increase profit.
B)
Short–run profits may be given up to increase long run profits.
C)
Firms raise prices whenever demand increases.
D)
Potential buyers who see long lines at a theater will likely go somewhere else.
121)
Firms pay famous individuals to endorse their products because
121)
A)
famous people obviously know what are the best goods and services.
B)
apparently demand is affected not just by the number of people who use a product but also
by the type of person that uses the product.
C)
famous people only consume high quality products.
D)
the firms are irrational and are wasting advertising expenditures.
Table 6–2
Quantity of
Soup (cups) Total Utility Quantity of
Sandwiches Total Utility
140 145
260 275
372 3102
482 4120
588 5135
690 6145
Table 6–2 shows Keira‘s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3.
Keira has $18 to spend on these two goods.
122)
Refer to Table 6–2. Holding prices constant, if Keira’s income changed from $18 to $23, what
would happen to her total utility and to the marginal utilities of the last cup of soup and the last
sandwich purchased?
122)
A)
Her total utility increases but the marginal utilities of the last cup of soup and the last
sandwich consumed decrease.
B)
Her total utility and the marginal utility of the last cup of sandwich consumed increase but
the marginal utility of the last cup of soup consumed decreases.
C)
Her total utility decreases but the marginal utilities of the last cup of soup and the last
sandwich consumed increase.
D)
Her total utility and the marginal utility of the last cup of soup consumed increase but the
marginal utility of the last sandwich consumed decreases.
E)
Her total utility, the marginal utility of the last cup of soup consumed and the marginal utility
of the last sandwich consumed, all increase.
123)
If 20 units of a good are sold at a price of $50 and 30 units are sold at a price of $40, what is the
absolute value of the price elasticity of demand? Use the midpoint formula.
123)
A)
1.8.
B)
0.56.
C)
2.5
D)
1.
124)
Behavioral economics refers to the study of situations
124)
A)
where consumers and firms appear to make choices that are appropriate to reach their goals.
B)
where consumers and firms do not appear to be making choices that are economically
rational.
C)
where consumers and firms appear to value fairness when they make choices.
D)
where consumers and firms disobey the laws of demand and supply.
125)
Consider a downward–sloping demand curve. When the price of a normal good decreases, the
income and substitution effects
125)
A)
work in opposite directions and quantity demanded decreases.
B)
work in opposite directions and quantity demanded increases.
C)
work in the same direction to increase quantity demanded.
D)
work in the same direction to decrease quantity demanded.
Table 6–2
Quantity of
Soup (cups) Total Utility Quantity of
Sandwiches Total Utility
140 145
260 275
372 3102
482 4120
588 5135
690 6145
Table 6–2 shows Keira‘s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3.
Keira has $18 to spend on these two goods.
126)
Refer to Table 6–2. If Keira maximizes her utility, how many units of each good should she buy?
126)
A)
1 cup of soup and 5 sandwiches
B)
4 cups of soup and 3.5 sandwiches
C)
6 cups of soup and 2 sandwiches
D)
3 cups of soup and 4 sandwiches
127)
Economists David Laibson and Xavier Gabaix examined the behavior of consumers when buying
products that consist of a “base good” and “add–ons.” Firms typically compete on the price of the
base good (for example, a printer) rather than an add–on (for example, ink cartridges). They found
that firms are often successful in hiding the prices of add–ons from consumers. What explanation
do Laibson and Gabaix offer for why some firms do not offer lower–priced add–ons and advertise
the higher prices of rival firms?
127)
A)
Firms fear that competition for add–ons would force them to also lower the prices of their
base goods.
B)
Firms fear that an ad campaign could lead to competition that would force all firms to lower
the prices of their add–ons.
C)
The demand for add–ons is very inelastic. Lowering the price of add–ons would reduce total
revenue.
D)
Using advertising to inform consumers who typically ignore the price of ad–ons is not a
profitable strategy.
128)
The income effect of an increase in the price of salmon
128)
A)
is the change in the demand for other types of fish that results from a decrease in purchasing
power.
B)
refers to the effect on consumer purchasing power which causes the consumer to buy less
salmon, holding all other factors constant.
C)
is the change in the demand for salmon when income increases.
D)
refers to relative price effect – salmon is more expensive compared to other types of fish –
which causes consumers to buy less salmon.
B
129)
An article in the Wall Street Journal noted the following: Instead of relying on a full–coach,
round–trip unrestricted fare of about $2,000 between Cleveland and Los Angeles …Continental
[Airlines] since June has offered a $716 unrestricted fare in that market …. Through October, the test
resulted in about the same revenue that Continental thinks it would have collected with its higher
fare.
Source: Scott McCartney, “Airlines Try Cutting Business Fares, Find They Don’t Lose Revenue,” Wall Street
Journal, November 22, 2002.
What is the absolute value of the price elasticity of demand on this airline route?
129)
A)
greater than 1
B)
approximately 1
C)
0
D)
less than 1
B
D
130)
Most people would prefer to drive a luxury car that has all the options, but more people buy less
expensive cars even though they could afford the luxury car because
130)
A)
the total utility of less expensive cars is greater than that of luxury cars.
B)
car buyers are irrational.
C)
luxury cars cost a lot more than non–luxury cars.
D)
the marginal utility per dollar spent on the less expensive car is higher than that spent on
luxury cars.
131)
When the price of audio books, a normal good, falls causing your purchasing power to rise you buy
more audio books due to
131)
A)
the deadweight loss effect.
B)
the elasticity effect.
C)
the income effect.
D)
the substitution effect.
132)
Economists assume that the goal of consumers is to
132)
A)
consume as much as possible.
B)
make themselves as well off as possible.
C)
spend all their income.
D)
do as little work as possible to survive.
133)
According to an article in the Wall Street Journal, unlike airlines, even elite hotels don’t have
sophisticated systems that can react quickly to changes in demand. Even if they could, many
hoteliers say people don’t respond that much to lower rates. “We’ve tested this, cutting our rates by
$50 [per night], and we didn’t see an appreciable response in occupancy,” says Jim Schultenover, a
vice president for Ritz–Carlton.
Source: Jesse Drucker, “In Times of Belt–Tightening, We Seek Reasonable Rates,” Wall Street Journal, April 6, 2001.
Based on the information above, the demand for hotel rooms
133)
A)
is elastic.
B)
is inelastic.
C)
is perfectly elastic.
D)
is perfectly inelastic.
Table 6–4
The publisher of a magazine gives his staff the following information:
Current price $2.00 per issue
Current sales 150,000 copies per month
Current revenue $300,000 per month
Current total costs $450,000 per month
He tells the staff, “Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem
by raising the price of the magazine to $3.00 per issue. This will result in our revenue being exactly equal to our cost.”
134)
Refer to Table 6–4. Which of the following statements is correct?
134)
A)
The publisher’s analysis is correct only if the demand is perfectly elastic.
B)
The publisher’s analysis is correct only if the demand is inelastic.
C)
The publisher’s analysis is correct only if the demand is elastic.
D)
The publisher’s analysis is correct only if the demand is unit–elastic.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
135)
Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15 million gallons a
day were sold. In October 2004, the price averaged $2.15 a gallon and 14 million gallons
were sold. If the demand for gasoline did not shift between these two months, use the
midpoint formula to calculate the price elasticity of demand. Indicate whether demand
was elastic or inelastic.
135)
136)
Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were
sold. Without calculating the price elasticity value, can you determine whether it is elastic,
unit elastic, or inelastic? Explain your answer.
136)
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
137)
The demand curve for a luxury good is upward–sloping.
137)
138)
The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior
good.
138)
139)
Each point on a consumer’s demand curve shows the utility–maximizing quantity at the given
price.
139)
140)
If the demand for a product is price inelastic, the quantity demanded changes by a smaller
percentage than the percentage change in price.
140)
141)
A common mistake made by consumers is the failure to take into account the monetary costs of
their actions.
141)
142)
If the demand for a product is price elastic, the quantity demanded changes by a smaller
percentage than the percentage change in price.
142)
143)
A Giffen good could be either a normal good or an inferior good.
143)
144)
One reason college students do not study enough to get high grades is that they are unrealistic
about their future behavior.
144)
145)
If the market for a product is narrowly defined, then there are likely to be many substitutes for the
product and the demand for the product is relatively elastic.
145)
146)
The income effect of a price increase causes a decrease in the quantity demanded of a normal good.
146)
147)
When demand is price inelastic, a fall in price causes total revenue to fall because the increase
in quantity sold is not large enough to offset the drop in price.
147)
148)
If you received negative marginal utility from consuming the 4th slice of pizza, then your total
utility from 4 slices of pizza must be less than your total utility from 3 slices of pizza.
148)
149)
The demand for gasoline is perfectly inelastic because most people need gasoline to drive their cars.
149)
150)
If demand is inelastic, the absolute value of the price elasticity coefficient is greater than one.
150)
151)
The income effect of a price increase for a Giffen good outweighs the substitution effect.
151)
152)
The price elasticity of demand measures how much the demand shifts when the price changes.
152)
153)
When diminishing marginal utility sets in, total utility must be negative.
153)
154)
When there are few substitutes available for a good, demand tends to be
relatively inelastic.
154)
155)
The economic model of consumer behavior explains how consumers’ tastes and preferences are
formed.
155)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
156)
Behavioral economists examine choices that consumers make that are not economically rational. Economists
generally assume that people are rational; that is, they weigh the benefits and costs of an action and choose an
action only if the benefits outweigh the costs. Why do consumers not act rationally when the result is that they
make themselves worse off?
157)
A construction project in Congressman Foghorn’s district is unfinished. Foghorn has asked that a new
appropriations bill include funds to complete the project, despite a report by an independent agency that the
project is a waste of taxpayer money. Foghorn’s project is a bridge that crosses a river between two cities in his
district. The press has criticized Foghorn and dubbed the project “a bridge too far” since another bridge, located
closer to the same two cities Foghorn’s bridge will connect, already exists and can accommodate all traffic
between the two cities. Foghorn argues that if the bridge project is not completed, the $50 million already spent
will have been wasted. Is Foghorn’s argument economically rational? Explain your answer.