Exam 7: Consumer Choice and Elasticity

The U.S.government's focus on supply reduction efforts in its "war on drugs" has been relatively unsuccessful at addressing illegal drug use.Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example,through drug education and voluntary treatment programs for addicts. a.Suppose the price elasticity of demand for cocaine is -0.5.What will happen to the equilibrium price,quantity and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine? b.Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine.As a result of the reduction in supply the price of cocaine increases by 25 percent.If the price elasticity of demand is -0.5,what is likely to happen to the incentive to sell cocaine? c.Based on your answers,explain why one approach might be preferred over the other.

If total utility increases at a decreasing rate as a consumer consumes more coffee,then marginal utility must

One reason that consumers and businesses might not act rationally is

The highest-valued alternative that must be given up to engage in an activity is the definition of

The Mass Rapid Transit (MRT)System in Hong Kong has been running significant losses.Transport Ministry officials have argued over whether to raise fares to combat the losses.One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours.Suppose that the current fare is $4 and the government is considering raising it to $6.Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day. a.What is the estimated elasticity of demand for MRT rides? b.What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system? c.Last year,the MRT system incurred a loss of $50,000 per day.Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded,then the demand for golf balls is

To calculate the price elasticity of demand we divide

Carolyn spends her income on popular magazines and music CDs.If the price of a CD is four times the price of a magazine and if Carolyn is maximizing her utility,she buys

A common mistake made by consumers is the failure to take into account the monetary costs of their actions.

In the ultimatum game,allocators usually offer recipients at least a 40 percent share of the money,and recipients almost always reject offers of less than a 10 percent share.Which of the following does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers?

List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic.

Carrie Bradshaw claims that when it comes to buying shoes,"price is no object." If this is true,then her demand for shoes is

Marginal utility can be

Suppose the governor of California has proposed increasing toll rates on California's toll roads,and has presented two possible scenarios to implement these increases.Following are projected data for the two scenarios for the California toll roads: Scenario 1: Toll rate in 2012: $10.00.Toll rate in 2016: $22.50 For every 100 cars using the toll roads in 2012,only 81.6 cars will use the toll roads in 2016. Scenario 2: Toll rate in 2012: $10.00.Toll rate in 2016: $17.50 For every 100 cars using the toll roads in 2012,only 96.2 cars will use the toll roads in 2016. a.Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. b.Assume 10,000 cars use California toll roads every day in 2012.What would be the daily total revenue received for each scenario in 2012 and in 2016? c.Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic.Briefly explain. (For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

If the demand for a product is elastic,the quantity demanded changes by a larger percentage than the percentage change in price.

Table 7-6 Quantity of Beer (glasses) Total Utility Quantity of Pizza (slices) Total Utility 1 25 1 20 2 45 2 35 3 60 3 45 4 65 4 50 5 69 5 52 6 70 6 52 Table 7-6 shows Antonio's utility from beer and pizza. -Refer to Table 7-6.Suppose Antonio has $10 to spend and the price of beer = $2 per glass and the price of pizza = $2 per slice.How many of each good will he consume when he maximizes his utility?

Explain the relationship between price elasticity of demand and total revenue.

To maximize utility consumers should buy goods and services to the point where the marginal utility of each item consumed is equal.

Article Summary The article describes three key ways startup companies can get the most benefit from celebrity endorsements. One way is choosing a celebrity that can bring credibility to the company and then incorporating the celebrity into the company's marketing strategy. Second, get public relations value from the celebrity by offering exclusive interviews, contests, and photos and videos of the celebrity with the product. Finally, make sure to choose a celebrity who will represent the product at all times, giving the product maximum exposure. -Refer to the Article Summary.One explanation for the increase in product sales because of celebrity endorsements is that people seem to receive ________ from goods they believe are popular.

The Wong family consumes 3 pounds of fish and 5 pounds of chicken per month.The price of fish is $8 per pound and chicken is $4 per pound. a.What is the amount of income allocated to fish and chicken consumption? b.What is the price ratio (the price of fish relative to the price of chicken)? c.Explain the meaning of the price ratio you computed. d.If the Wongs maximize utility,what is the ratio of the marginal utility of fish to the marginal utility of chicken? e.If the price of chicken rises,will the Wong family consume more chicken,less chicken or the same amount of chicken? Explain your answer using the rule of equal marginal utility per dollar.