CHAPTER 15: Market Demand
TRUE/FALSE
1. The inverse demand curve P(x) for a good x measures the price per unit at which the quantity x would
be demanded.
2. In general, aggregate demand depends only on prices and total income and not on income distribution.
3. If consumer 1 has the demand function x1 = 1,000 − 2p and consumer 2 has the demand function x2 =
500 − p, then the aggregate demand function for an economy with just these two consumers would be
x = 1,500 − 3p for p 500.
4. If a consumer has to pay his reservation price for a good, then he gets no consumer surplus from
purchasing it.
5. If a price changes, then changes in consumption at the intensive margin are changes that happen
because consumers alter the amounts that they consume but do not either stop consuming or start
consuming the good.
6. If the demand curve is a linear function of price, then the price elasticity of demand is the same at all
prices.
7. If the demand function is q = 3m/p, where m is income and p is price, then the absolute value of the
price elasticity of demand decreases as price increases.
8. If the elasticity of demand curve for barley is −1.50 at all prices higher than the current price, we
would expect that when bad weather reduces the size of the barley crop, total revenue of barley
producers will fall.
9. If the elasticity of demand curve for buckwheat is −1.25 at all prices higher than the current price, we
would expect that when bad weather reduces the size of the buckwheat crop, total revenue of
buckwheat producers will fall.
10. If the equation for the demand curve is q = 20 − 2p, then the ratio of marginal revenue to price is
constant as price changes.
11. If the equation for the demand curve is q = 50 − 4p, then the ratio of marginal revenue to price is
constant as price changes.
12. If a rational consumer must consume either zero or one unit of a good, then an increase in the price of
that good with no change in income or in other prices can never lead to an increase in the consumer’s
demand for it.
13. In the reservation price model, either aggregate demand is zero or everyone demands one unit of the
good.
14. The Laffer effect occurs only if there is a backward-bending labor supply curve.
15. If the demand curve were plotted on graph paper with logarithmic scales on both axes, then its slope
would be the elasticity of demand.
16. The market demand curve is simply the horizontal sum of the individual demand curves.
17. The demand curve is inelastic for inferior goods and elastic for normal goods.
18. Marginal revenue is equal to price if the demand curve is horizontal.
19. If the amount of money that people are willing to spend on a good stays the same when its price
doubles, then demand for that good must have a price elasticity of demand smaller in absolute value
than 1.
20. If the price elasticity of demand for a normal good is constant, then a price increase of 10A2 will
reduce demand by more if the original price is $1 than if the original price is $2.
21. The demand function for potatoes has the quantity q = 1,000 − 10p. As the price of potatoes changes
from 10A2 to 20A2, the absolute value of the price elasticity of demand for potatoes increases.
22. If the demand curve for a good is given by the equation q = 2/p, where q is quantity and p is price, then
at any positive price, the elasticity of demand will be −1.
23. If consumer 1 has the inverse demand function given by p = 15 − x and consumer 2 has the inverse
demand function given by p = 20 − 3x, then the total quantity demanded by the two consumers is x = 7
when the price p, is 11.
24. The inverse demand for a good is given by p = 60 − 2q. Suppose that the number of consumers
doubles. (For each consumer in the market another consumer with an identical demand function
appears.) The demand curve shifts to the right, doubling demand at every price, while the slope of the
demand curve stays unchanged.
25. If Castor’s demand curve is described by q = 40 − p and Pollux’s demand curve is given by q = 60 −
2p, then each of their demand curves will pass through the point q = 20, p = 20. Therefore if they are
the only two consumers in a market, the market demand curve will also pass through q = 20, p = 20.
26. If the price of cucumbers falls by $2 per pound, then the demand for cucumbers will rise by 10 pounds.
Therefore we can conclude that the demand for cucumbers is elastic.
27. If the price of leeks falls by $2 per pound, then the demand for leeks will rise by 10 pounds. Therefore
we can conclude that the demand for leeks is elastic.
MULTIPLE CHOICE
1. A peck is 1/4 of a bushel. If the price elasticity of demand for oats is −0.60 when oats are measured in
bushels, then when oats are measured in pecks, the price elasticity of demand for oats will be
a.
20.15.
b.
22.40.
c.
20.30.
d.
21.20.
e.
none of the above.
2. A peck is 1/4 of a bushel. If the price elasticity of demand for peas is −0.10 when peas are measured in
bushels, then when peas are measured in pecks, the price elasticity of demand for peas will be
a.
−0.10.
b.
−0.40.
c.
−0.03.
d.
−0.20.
e.
none of the above.
3. The demand function is described by the equation q(p) = 30 − p/3. The inverse demand function is
described by the equation
a.
q(p) = 30 − 3p.
b.
p(q) = 90 − 3q.
c.
q(p) = 1/(30 − p/3).
d.
p(q) = 1/30 − q/3.
e.
p(q) = 30 − q/3.
4. The demand function is described by the equation q(p) = 130 − p/5. The inverse demand function is
described by the equation
a.
p(q) = 650 − 5q.
b.
p(q) = 1/130 − q/5.
c.
q(p) = 130 − 5p.
d.
q(p) = 1/(130 − p/5).
e.
p(q) = 130 − q/5.
5. If the demand function is q = m − 2(ln p) over some range of values of p, then at all such values of p,
the absolute value of the price elasticity of demand
a.
increases as p increases.
b.
decreases as p increases.
c.
is constant as p changes.
d.
increases with p at small values and decreases with p at large values.
e.
decreases with p at large values and increases with p at small values.
6. If the demand function for tickets to a play is q = 3,800 − 95p, at what price will total revenue be
maximized?
a.
$80
b.
$40
c.
$20
d.
$10
e.
none of the above.
7. If the demand function for tickets to a play is q = 7,500 − 75p, at what price will total revenue be
maximized?
a.
$100
b.
$200
c.
$50
d.
$25
e.
none of the above.
8. Rollo would love to have a Mercedes. His preferences for consumption in the next year are represented
by a utility function U(x, y), where x = 0 if he has no Mercedes and x = 1 if he has a Mercedes for the
year and where y is the amount of income he has left to spend on other stuff. If U(0, y) = the square
root of y and U(1, y) = (10/9)(y.5) and if Rollo’s income is $50,000 a year, how much would he be
willing to pay per year to have a Mercedes?
a.
$5,555.55
b.
$5,000
c.
$12,200
d.
$9,500
e.
$10,000
9. In Ozone, California, people all have the same tastes and they all like hot tubs. Nobody wants more
than one hot tub but a person with wealth $W will be willing to pay up to $.01W for a hot tub. The
number of people with a wealth greater than $W for any given W in Ozone is approximately
1,000,000/W. The price elasticity of demand for hot tubs in Ozone, California, is
a.
−0.1.
b.
−0.01.
c.
−1.
d.
−0.4.
e.
none of the above.
10. In Manifold, Missouri (pop. 1,000), people all have the same tastes and they all like Buicks. Nobody
wants more than one Buick, but a person with income $M is willing to pay about $.10M per year to
have a Buick. Nobody in Manifold has an income greater than $50,000 and nobody has an income less
than $10,000. For incomes, $M, between $10,000 and $50,000, the number of people with incomes
greater than $M is about 1,250 − .025M. If it costs $2,000 a year to have a Buick, how many people in
Manifold will demand Buicks?
a.
500
b.
750
c.
100
d.
600
e.
800
11. Rod cares about the number of cars he has and the amount of money he has to spend on other stuff.
The only possibilities of interest for Rod are having 0, 1, or 2 cars. Where x is the number of cars he
has and y is the money he has per year for other stuff, Rod’s utility is U(0, y) = y.5, U(1, y) = (15/14)y.5,
and U(2, y) = (10/9)y.5. Rod’s income is $25,000 a year. It would cost Rod $2,500 a year to have 1 car
and $3,500 a year to have 2 cars. How many cars will he choose?
a.
0
b.
1
c.
2
d.
He is indifferent between buying 1 and buying 2 cars.
e.
He is indifferent between buying 2 and buying 3 cars.
12. Dr. Social Science has recently figured out how to clone consumers. His first effort was done on the
population of Walla, Washington. Each original citizen got a clone who had exactly the same income
and preferences. Which of the following statements describes what happened to the demand function
for tuna-fish casseroles in Walla?
a.
The elasticity doubled and the slope remained constant.
b.
The elasticity did not change at any price.
c.
The elasticity of demand doubled and the slope doubled.
d.
The elasticity halved and the slope remained constant.
e.
none of the above.
13. At the price of $100, tourists demand 267 airplane tickets. At the same price, business travelers
demand 237. At the price $110, tourists demand 127 tickets and business travelers demand 127.
Assuming that the demand curves of business travelers and tourists are both linear over this price
range, what is the price elasticity of demand at the price $100?
a.
−4.96
b.
−25
c.
−5.46
d.
−0.05
e.
none of the above.
14. At the price of $100, tourists demand 237 airplane tickets. At the same price, business travelers
demand 247. At the price $110, tourists demand 127 tickets and business travelers demand 127.
Assuming that the demand curves of business travelers and tourists are both linear over this price
range, what is the price elasticity of demand at the price $100?
a.
−4.75
b.
−5.23
c.
−23
d.
−0.05
e.
none of the above.
15. The inverse demand function for grapes is described by the equation p = 518 − 5q, where p is the price
in dollars per crate and q is the number of crates of grapes demanded per week. When p = $38 per
crate, what is the price elasticity of demand for grapes?
a.
−190/96
b.
−5/518
c.
−5/96
d.
−96/38
e.
−38/480
16. The inverse demand function for grapes is described by the equation p = 676 − 9q, where p is the price
in dollars per crate and q is the number of crates of grapes demanded per week. When p = $28 per
crate, what is the price elasticity of demand for grapes?
a.
−9/676
b.
−9/72
c.
−72/28
d.
−252/72
e.
−28/648
17. If there are only two goods, an increase in the price of good 1 will increase the demand for good 2
a.
if and only if the price elasticity of demand for good 2 is greater than 1 in absolute value.
b.
whenever both goods are normal goods.
c.
only if the two goods are perfect substitutes.
d.
never.
e.
none of the above.
18. The demand function for small business computers in the United States is given by x = 200 − 10p,
where x is annual sales measured in thousands of computers and p is the price of a computer measured
in thousands of dollars. Japanese firms supply a big share of these computers. They measure prices in
yen where 150 yen equal 1 dollar. The price of 1 computer is $10,000. Let Eu be the price elasticity of
demand at this price as calculated by US firms who measure in dollars, and let Ej be the price elasticity
of demand at the same $10,000 price but measured in yen by the Japanese firms. Which of the
following are the values of Eu and Ej, respectively?
a.
−1, 2150
b.
−1, 21
c.
−2, 22
d.
−2, 2300
e.
−2, 20.0133
19. An economy has 100 consumers of type 1 and 200 consumers of type 2. If the price of the good is less
than $10, then each type 1 consumer demands 10 − p units of the good; otherwise each type 1 demands
zero. If the price of the good is less than 8, then each type 2 demands 24 − 3p; otherwise each type 2
demands zero. If the price of the good is 6, then the total amount of the good demanded will be
a.
1,600 units.
b.
1,800 units.
c.
2,000 units.
d.
420 units.
e.
1,200 units.
20. Harry’s demand function for blueberries is x = 20 − p, where p is the price and x is the quantity
demanded. If the price of blueberries is 3, then what is Harry’s price elasticity of demand for
blueberries?
a.
−6/14
b.
−2/20
c.
−2
d.
−14/6
e.
none of the above.
21. The inverse demand function for soybeans is p = 30,000 − 6q. Total revenue in this market will be
maximized when the quantity of soybeans produced is
a.
3,611 bushels.
b.
5,000 bushels.
c.
1,250 bushels.
d.
2,500 bushels.
e.
none of the above.
22. The inverse demand function for soybeans is p = 68,000 − 5q. Total revenue in this market will be
maximized when the quantity of soybeans produced is
a.
3,400 bushels.
b.
7,911 bushels.
c.
6,800 bushels.
d.
13,600 bushels.
e.
none of the above.
23. When the price of bananas is 50 cents a pound, the total demand is 100 pounds. If the price elasticity
of demand for bananas is −2, what quantity would be demanded if the price rose to 60 cents a pound?
a.
50 pounds
b.
90 pounds
c.
60 pounds
d.
80 pounds
e.
70 pounds
24. The inverse demand function for coffee is p = 50,000 − 2q, where q is the number of tons produced
and p is the price per ton. Total revenue from coffee sales be maximized when the output level is
a.
25,000 tons.
b.
15,000 tons.
c.
17,500 tons.
d.
12,500 tons.
e.
none of the above.
25. Jen, Eric, and Kurt are all buyers of chain saws. Jen’s demand function is Qj = 520 − 13P, Eric’s
demand function is Qe = 40 − P, and Kurt’s demand function is Qk = 200 − 5P. Together, these three
constitute the entire demand for chainsaws. At what price will the price elasticity of market demand be
21?
a.
$19
b.
$20
c.
$25
d.
$15
e.
none of the above.
26. Given his current income, Rico’s demand for bagels is related to the price of bagels by the equation Q
= 540 − 16P. Rico’s income elasticity of demand for bagels is known to be equal to 0.5 at all prices
and incomes. If Rico’s income quadruples, his demand for bagels will be related to the price of bagels
by the equation
a.
Q = 540 − 16P.
b.
Q = 2,160 − 64P.
c.
Q = 540 − 32P.
d.
Q = 1,080 − 32P
e.
Q = 1,080 − 16P.
27. Given his current income, Rico’s demand for bagels is related to the price of bagels by the equation Q
= 520 − 12P. Rico’s income elasticity of demand for bagels is known to be equal to 0.5 at all prices
and incomes. If Rico’s income quadruples, his demand for bagels will be related to the price of bagels
by the equation
a.
Q = 520 − 24P.
b.
Q = 1,040 − 24P.
c.
Q = 2,080 − 48P.
d.
Q = 520 − 12P.
e.
Q = 1,040 − 12P.
28. A person with a quasilinear utility function will
a.
have a price elasticity of demand equal to zero for some goods.
b.
have an income elasticity of demand equal to one for some goods.
c.
necessarily consume zero quantity of some good.
d.
necessarily consume positive amounts of every good.
e.
none of the above.
29. In the village of Frankfurter, the demand function for sausages per person is D(p) = 20 − 1.5p, where p
is the price of a single sausage. The present population of Frankfurter is 100 persons. Suppose that 10
more people move into town, each of whom has the same demand function as the old residents. At a
price of $2, the price elasticity of demand for sausages in Frankfurter is
a.
increased by 10%.
b.
decreased by 10%.
c.
unchanged.
d.
increased by 15%.
e.
none of the above.
30. A firm faces a demand function D(p), for which the revenue-maximizing price is $16. The demand
function is altered to 2D(p). What is the new revenue-maximizing price?
a.
$8
b.
$16
c.
$32
d.
There is insufficient information to determine this.
e.
none of the above.
31. A firm faces a demand function D(p), for which the revenue-maximizing price is $10. The demand
function is altered to 2D(p). What is the new revenue-maximizing price?
a.
$5
b.
$20
c.
$10
d.
There is insufficient information to determine this.
e.
none of the above.
32. If the supply curve for x is given by x = 100p2, then the inverse supply curve is given by
a.
100/p2.
b.
x2/100.
c.
x1/2/10.
d.
p-2/100.
e.
none of the above.
33. Ed has 100 tons of manure. The lowest price at which he is willing to sell it is $10 per ton. Fred wants
to buy 100 tons of manure. The most he is willing to pay is $8 per ton. The federal government offers
to subsidize manure sales at a rate of $1 per ton. If Ed and Fred are the only people who deal in
manure, then the deadweight loss caused by the subsidy is
a.
$100.
b.
$50.
c.
$0.
d.
$200.
e.
none of the above.
34. Fred’s price elasticity of demand for milk is −2 at today’s prices when we measure price in dollars and
quantity of milk in quarts. If the price per quart of milk stays the same but we measure quantity of milk
in gallons and price in dollars, then what will be the elasticity of demand for gallons of milk? (A
gallon is four quarts.)
a.
−1
b.
−1/2
c.
−8
d.
−4
e.
−2
35. In a small Kansas town, there are two kinds of gasoline consumers: 100 Buick owners and 50 Dodge
owners. Each Buick owner has the demand function Db(p) = max0, 20 − 5p and each Dodge owner
has the demand function Dd = max0, 15 − 3p. In this town, the market demand curve has
a.
no kinks but gets steeper as price rises.
b.
no kinks but gets flatter as price rises.
c.
constant slope since individual demand curves have constant slope.
d.
a kink at p = 4 and another at p = 5.
e.
a kink at p = 35/8.
36. In a certain city, the demand function for crack cocaine is q = 1,000 − p, where p is the street price.
The cocaine industry is competitive. Cocaine distributors can buy as much cocaine as they wish at a
price of $50 per unit from Colombian sources. Whenever the city narcotics police catch a cocaine
dealer, they confiscate all the cocaine that he has. The jails are full so they do not imprison the dealers.
The police are able to catch the dealers about half the time, so they get about half the cocaine that
enters the city. Instead of destroying confiscated crack, the police simply resell it on the street. If the
original supply curve of cocaine on the streets was horizontal, what is the net effect of police activities
on the market for crack in this city?
a.
The amount purchased on the street is about 50 units smaller than it would be with no
enforcement.
b.
There is no effect, since all of the drugs reach consumers anyway.
c.
Crack dealers will stop dealing in this city altogether, since they can make more money
elsewhere.
d.
The amount of crack purchased on the street decreases by about half.
e.
The quantity purchased by dealers rises to make up for the amount that is confiscated.
37. If at current prices, the demand for a good is price-elastic, then for movements along the demand
curve,
a.
increasing the price will increase revenue.
b.
decreasing the price will decrease revenue.
c.
increasing the quantity sold will increase revenue.
d.
increasing the quantity sold will decrease revenue.
e.
More than one of the above statements are true.
38. The demand curve for a good is given by p = 160 − 6q, where p is the price and q is the quantity of the
good. Suppose that the number of consumers in the economy doubles; a “clone” of each consumer,
who has exactly the same demand curve as the original consumer, appears. The demand curve for the
doubled economy is described by
a.
p = 320 − 6q.
b.
p = 320 − 12q.
c.
p = 160 − 12q.
d.
p = 160 − 3q.
e.
p = 80 − 3q.
39. The demand curve for a good is given by p = 60 − 8q, where p is the price and q is the quantity of the
good. Suppose that the number of consumers in the economy doubles; a “clone” of each consumer,
who has exactly the same demand curve as the original consumer, appears. The demand curve for the
doubled economy is described by
a.
p = 60 − 16q.
b.
p = 120 − 8q.
c.
p = 60 − 4q.
d.
p = 120 − 16q.
e.
p = 30 − 4q.
40. The demand for drangles is given by D(p) = (p + 1)-2, where p is the price of drangles. If the price of
drangles is $20, then the price elasticity of demand for drangles is
a.
−7.62.
b.
−3.81.
c.
−5.71.
d.
−3.81.
e.
−1.90.
41. The demand for drangles is given by D(p) = (p + 1)-2, where p is the price of drangles. If the price of
drangles is $19, then the price elasticity of demand for drangles is
a.
−3.80.
b.
−7.60.
c.
−5.70.
d.
−3.80.
e.
−1.90.
42. The only quantities of good 1 that Irene can buy are 1 unit or 0 units. For all positive values of x2,
Irene’s preferences are represented by the utility function (x1 + 10)(x2 + 2). If her income is $8 and the
price of good 2 is $1, then Irene’s reservation price for good 1 is
a.
$1.82.
b.
$1.50.
c.
$.91.
d.
$5.
e.
$.10.
43. The only quantities of good 1 that Tomoko can buy are 1 unit or 0 units. For all positive values of x2,
Tomoko’s preferences are represented by the utility function (x1 + 14)(x2 + 16). If her income is $20
and the price of good 2 is $1, then Tomoko’s reservation price for good 1 is
a.
$.88.
b.
$8.50.
c.
$2.40.
d.
$4.80.
e.
$1.04.
44. In Gas Pump, South Dakota, every Buick owner’s demand for gasoline is 20 − 5p for p less than or
equal to 4 and 0 for p 4. Every Dodge owner’s demand is 15 − 3p for p less than or equal to 5 and 0
for p 5. Suppose that Gas Pump has 100 Buick owners and 100 Dodge owners. If the price of
gasoline is $4.50, what is the total amount of gasoline demanded in Gas Pump?
a.
300 gallons
b.
75 gallons
c.
225 gallons
d.
150 gallons
e.
none of the above.
45. In Gas Pump, South Dakota, every Buick owner’s demand for gasoline is 20 − 5p for p less than or
equal to 4 and 0 for p 4. Every Dodge owner’s demand is 15 − 3p for p less than or equal to 5 and 0
for p 5. Suppose that Gas Pump has 100 Buick owners and 50 Dodge owners. If the price of gasoline
is $4.25, what is the total amount of gasoline demanded in Gas Pump?
a.
112.50 gallons
b.
225 gallons
c.
168.75 gallons
d.
56.25 gallons
e.
none of the above.
46. The only quantities of good 1 that Barbie can buy are 1 unit or 0 units. For x1 equal to 0 or 1 and for all
positive values of x2, suppose that Barbie’s preferences were represented by the utility function (x1 +
8)(x2 + 16). Then if her income were $4, her reservation price for good 1 would be
a.
$4.44.
b.
$8.50.
c.
$2.22.
d.
$.50.
e.
$1.90.
47. The only quantities of good 1 that Barbie can buy are 1 unit or 0 units. For x1 equal to 0 or 1 and for all
positive values of x2, suppose that Barbie’s preferences were represented by the utility function (x1 +
4)(x2 + 18). Then if her income were $16, her reservation price for good 1 would be
a.
$13.60.
b.
$6.80.
c.
$9.50.
d.
$0.22.
e.
$4.40.
48. At a large institution of higher learning, the demand for football tickets at each game is
100,000 − 8,000p. If the capacity of the stadium at that university is 60,000 seats, what is the revenue
maximizing price for this university to charge per ticket?
a.
$6.25
b.
$5
c.
$12.50
d.
$3.13
e.
$18.75
49. At a large institution of higher learning, the demand for football tickets at each game is
100,000 − 6,000p. If the capacity of the stadium at that university is 60,000 seats, what is the revenue
maximizing price for this university to charge per ticket?
a.
$16.67
b.
$8.33
c.
$6.67
d.
$4.17
e.
$25
50. The demand for tickets to a rock concert is given by D(p) = 200,000 − 10,000p, where p is the price of
tickets. If the price of tickets is $17, then the price elasticity of demand for tickets is
a.
−11.33.
b.
−8.50.
c.
−17.
d.
−2.83.
e.
−5.67.
51. The demand for tickets to a rock concert is given by D(p) = 200,000 − 10,000p, where p is the price of
tickets. If the price of tickets is $17, then the price elasticity of demand for tickets is
a.
−2.83.
b.
−11.33.
c.
−17.
d.
−8.50.
e.
−5.67.
52. The demand for watches is Q = 1,000P -0.50I-1. Assume that per capita income I is $5,000. At a price P
of $50, the price elasticity of demand is
a.
2.50.
b.
1.0.
c.
−1.
d.
−1.50.
e.
0.50.
53. The demand for watches is Q = 1,000P -2.50I2. Assume that per capita income I is $6,000. At a price P
of $45, the price elasticity of demand is
a.
1.0.
b.
2.25.
c.
2.
d.
−0.50.
e.
2.50.
54. The demand for voice mail is Q = 1,000 − 150P + 20I. Assume that per capita disposable income I is
$900. At a price P of $40, the income elasticity of demand is
a.
2.
b.
4.
c.
1.0.
d.
20.
e.
1.38.
55. The demand for voice mail is Q = 1,000 − 150P + 25I. Assume that per capita disposable income I is
$900. At a price P of $50, the income elasticity of demand is
a.
1.0.
b.
5.
c.
2.50.
d.
25.
e.
1.41.
56. If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 2.50, the
profit-maximizing price is
a.
3 cents.
b.
3.33 cents.
c.
4 cents.
d.
5 cents.
e.
6 cents.
57. If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 3, the
profit-maximizing price is
a.
5 cents.
b.
4 cents.
c.
3.33 cents.
d.
3 cents.
e.
6 cents.
58. If the marginal cost of brewing beer is 40 cents and the profit-maximizing price is 90 cents, then the
price elasticity of demand is
a.
−0.66.
b.
−1.8.
c.
−2.
d.
−2.33.
e.
−3.
59. If the marginal cost of brewing beer is 40 cents and the profit-maximizing price is 90 cents, then the
price elasticity of demand is
a.
−2.
b.
−1.8.
c.
−2.33.
d.
−0.66.
e.
−3.
60. The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reduce smoking by
75%, approximately how much tax needs to be added to a $1 pack?
a.
$.38.
b.
$.75.
c.
$1.50.
d.
$2.25.
e.
$4.
61. The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reduce smoking by
25%, approximately how much tax needs to be added to a $1 pack?
a.
$.50.
b.
$.75.
c.
$.25.
d.
$.13.
e.
$4.
62. The demand for cable television hookups is Q = 100 − 10P0.5 + 2I2, where P is price and I is per capita
income. Cable TV is
a.
a normal good.
b.
a natural monopoly.
c.
an inferior good.
d.
a substitute good.
e.
a complement good.
63. The demand for cable television hookups is Q = 100 − 10P0.5 + 2I2, where P is price and I is per capita
income. Cable TV is
a.
a substitute good.
b.
a normal good.
c.
an inferior good.
d.
a natural monopoly.
e.
a complement good.
64. If the demand for the Weekly World News at a local grocery store is described by Q = 2,500 − 400P −
I/10for I = $15,000 and P = $1.50, the marginal revenue of an additional paper sold at this store is
a.
$1.50.
b.
$.38.
c.
$.50.
d.
$.15.
e.
$1.
65. If the demand for the Weekly World News at a local grocery store is described by Q = 2,500 − 400P −
I/10for I = $15,000 and P = $1.50, the marginal revenue of an additional paper sold at this store is
a.
$.15.
b.
$.38.
c.
$.50.
d.
$1.50.
e.
$1.
66. Demand for Barbara Streisand CDs is equal to Qs = P2.50sI1.80P0.60c, where Qs is the number of CDs, Ps
is the price of a Streisand CD, I is per capita income, and Pc is the price of a Karen Carpenter CD.
Streisand and Carpenter CDs
a.
are inferior goods.
b.
are substitutes.
c.
are complements.
d.
have diminishing returns to scale.
e.
are not as good as the original 8-track tapes.
67. Demand for Barbara Streisand CDs is equal to Qs = P1.70sI2.20P1.80c, where Qs is the number of CDs, Ps
is the price of a Streisand CD, I is per capita income, and Pc is the price of a Karen Carpenter CD.
Streisand and Carpenter CDs
a.
are inferior goods.
b.
are complements.
c.
are substitutes.
d.
have diminishing returns to scale.
e.
are not as good as the original 8-track tapes.
PROBLEM
1. Suppose that the inverse demand function for wool is p = A/q for some constant A. Suppose that 1/4 of
the world’s wool is produced in Australia.
a. If Australian wool production increases by 1% and the rest of the world holds its output constant,
what will be the effect on the world price of wool?
b. How does the marginal revenue to Australia from an extra unit of wool relate to the price of wool?
2. Bart Wurst runs the only hot-dog stand in a large park in a large boring town. On Sundays people in
this town all sit in the park and sunbathe. For any t between 0 and 30, the number of people who are
sitting within t minutes of Bart’s stand is 10t2. People in Bart’s town are lazy and hate to walk. They
think that every minute of walking they do is as bad as spending $.10. Everybody in the park has a
reservation price of $1 for a hot dog, where the cost of a hot dog includes the subjective cost of
walking as well as the money price they have to pay when they get there. (Nobody has ever thought of
fetching a hot dog for someone else.) Find a formula for the demand curve for Bart’s hot dogs. Explain
how you got it.
3. In Tassel, Illinois (pop. 20,000), there are two kinds of families, those who like swimming pools and
those who don’t. Half of the population is of each type. Families who like swimming pools are willing
to spend up to 5% of their income each year on a swimming pool. Families who don’t like them would
pay nothing for a swimming pool. Nobody wants more than one swimming pool and nobody has
thought of sharing a swimming pool. Incomes in Tassel range between $10,000 and $110,000. For
incomes M in this range, the number of families in Tassel with income greater than M is about 22,000
− .2M. (The two types of families have the same income distribution.) Find the aggregate demand
function for swimming pools in Tassel (demand for swimming pools as a function of the annual cost of
having one).
4. Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and
y is the amount of money she has per year to spend on other stuff, Ethel’s utility function is U(x, y),
where U(0, y) = y1/2, U(1, y) = (15/14)y1/2, and U(2, y) = (10/9)y1/2. Suppose that it costs $2,000 a year
to have 1 car and $4,000 a year to have 2 cars. Ethel finds that the right thing to do depends on her
income.
a. What is her willingness to pay for 1 car if her income is M?
b. What is the lowest income at which she would have a car?
c. What is the lowest income at which she would have 2 cars?
5. Using the graph of a demand curve, explain why marginal revenue is less than price.
6. The demand for Craftmatic Adjustable Beds is described by Qc = P-1.40cI-0.60P0.20mA0.25, where Qc is the
number of Craftmatic Adjustable Beds demanded, Pc is the price of a Craftmatic Adjustable Bed, I is
per capita income, Pm is the price of a battery-powered massage pillow, and A is the advertising
budget.
a. If the marginal cost of producing a Craftmatic Adjustable Bed is $200, what is the
profit-maximizing price?
b. Per capita income in the United States is forecast to rise by 3% next year. How will this impact
Craftmatic’s sales?
c. The price of battery-powered massage pillows suddenly fell by 10%. How will this impact
Craftmatic’s sales?
7. The demand for Craftmatic Adjustable Beds is described by Qc = P-1.60cI-0.80P1.20mA0.25, where Qc is the
number of Craftmatic Adjustable Beds demanded, Pc is the price of a Craftmatic Adjustable Bed, I is
per capita income, Pm is the price of a battery-powered massage pillow, and A is the advertising
budget.
a. If the marginal cost of producing a Craftmatic Adjustable Bed is $200, what is the
profit-maximizing price?
b. Per capita income in the United States is forecast to rise by 3% next year. How will this impact
Craftmatic’s sales?
c. The price of battery-powered massage pillows suddenly fell by 10%. How will this impace
Craftmatic’s sales?