Exam 7: Consumer Choice and Elasticity

Suppose the price of gasoline in July 2017 averaged $2.35 a gallon and 15 million gallons a day were sold.In October 2017,the price averaged $3.05 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.

Maurice Allais,Reinhard Selten,and Vernon Smith all were awarded the Nobel Prize in Economics in part because

What is a Giffen good?

Table 7-2 Quantity of Soup (cups) Total Utility Quantity of Sandwiches Total Utility 1 40 1 45 2 60 2 75 3 72 3 102 4 82 4 120 5 88 5 135 6 90 6 145 Table 7-2 above 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. -Refer to Table 7-2.Holding prices constant,when Keira's income changed from $18 to $23,her utility maximizing bundle changed.Based on your answers to her optimal choices at the two income levels,what type of goods are soup and sandwiches?

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions,yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions.Which of the following could explain this observation?

A consumer maximizes her total utility from a bundle of goods when her marginal utility from each good is equal.

Economists usually assume that people act in a rational,self-interested way.In explaining how consumers make choices this means that economists believe

The choice of a good is path dependent when

If the demand for a life-saving drug was perfectly inelastic and the price doubled,the quantity demanded would

The use of celebrities endorsements can be a good way to promote a brand, as long as the brand fits the celebrity. The article discusses three reasons why a company should use celebrity endorsements: 1. Celebrities have a large range of followers, giving them the ability to build brand equity which created product differentiation to consumers. 2. Companies can reach a global audience since celebrities have worldwide fan bases, and an endorsement can link the product to a celebrity's skills, making fans feel closer to and more like the celebrity. 3. Celebrity endorsements increase consumers' awareness of a product, since consumers are more likely to remember an ad linked to a celebrity. However, not all celebrities are the right fit for all products. Endorsements can backfire if the celebrities are promoting something they would never use, giving the impression of nothing more than a sponsored advertisement. Source: Erika Warne, "Why Brands Should Use Celebrity Endorsements," weareanthology.com, April 20, 2017. -Refer to the Article Summary.Economists refer to an increase in sales due to celebrity endorsements as being the result of

Figure 7-3 Bettye Babylon does not charge admission to her arboreal estate, the Hanging Gardens. Due to space limitations, Bettye only allows 200 visitors per day at her estate. The figure represents the supply and demand for admission to the Hanging Gardens. -Refer to Figure 7-3.At a price of ________,there is a shortage of tickets.

What is marginal utility and what is the law of diminishing marginal utility?

If Ewan is consuming his utility maximizing bundle 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?

A sunk cost is a cost that has already been paid and cannot be recovered.

Eliza consumes 12 cappuccinos and 8 apple turnovers per week.The price of a cappuccino is $4 each and apple turnovers are $1 each. a.What is the amount of income allocated to cappuccino and apple turnover consumption? b.What is the price ratio (the price of cappuccinos relative to the price of apple turnovers)? c.Explain the meaning of the price ratio you computed. d.If Eliza maximize utility,what is the ratio of the marginal utility of cappuccinos to the marginal utility of apple turnovers? e.If the price of apple turnovers falls,will Eliza consume more apple turnovers,fewer apple turnovers,or the same amount of apple turnovers? Explain your answer using the rule of equal marginal utility per dollar.

Which of the following statements about the price elasticity of demand is correct?

What is the endowment effect?

The price elasticity of demand for Kellogg's Raisin Bran is larger in absolute value than the price elasticity of demand for all breakfast cereals.

Suppose a decrease in the supply of wheat results in an increase in revenue.This indicates that

Firms pay famous individuals to endorse their products because