Deck 4: More Demand Theory

Question 1

Carl has the utility function U(x,y)= x² + y. The price of x is 1 and the price of y is 1. Carl's income is $10. When Carl's income increases by $10, his consumption of x will be:

A)1/2.
B)2.
C)1.
D)4.

Answer 1

1/2.

Question 2

The fewest and the most suicides happen in the 11th and 13th month of a life insurance policy. To an economist, this occurrence:

A)is just a fluke.
B)is not related to the relative cost of suicide.
C)is an illustration of the law of demand.
D)is proof that most people committing suicide are also superstitious.

Answer 2

is an illustration of the law of demand.

Question 3

Carl has the utility function U(x,y)= x² + y. He consumes 4 units of x and 10 units of y. If both goods are normal goods and if the price of x increases, then:

A)Carl will reduce his consumption of x to zero.
B)Carl will consume more x.
C)Carl will reduce his consumption of x to a positive amount.
D)Carl will consume the same amount of x.

Answer 3

Carl will consume the same amount of x.

Question 4

Assume convex preferences and a negative cross price elasticity. If the price of good 1 increases, the substitution effect causes

A)consumption of good 1 to rise and good 1 to fall
B)consumption of good 2 to rise and good 1 to fall
C)consumption of good 2 to fall and good 1 to fall
D)consumption of good 1 to fall and good 2 to remain unchanged

Question 5

Which of the following will change the quantity demanded for coffee?

A)a change in the price of sugar
B)a change in the quality of coffee beans
C)a change in the income of coffee drinkers
D)a change in the price of coffee

Question 6

The compensated demand curves reflects:

A)the substitution effect.
B)the relative effect.
C)the income effect.
D)the total effect.

Question 7

You find a treasure chest with a big lock on it. After rushing to the local hardware store you find a sledge hammer for $9.49. You say out loud, "Wow I would have paid $500 for this!" This statement is an illustration of:

A)total value.
B)marginal cost.
C)consumer surplus.
D)marginal value.

Question 8

Income has proven to be an important factor predicting church attendance. Richer individuals spend less time in church because:

A)they cannot afford it.
B)they feel immortal.
C)are anchored strongly in the more worldly concerns.
D)they can "buy" their way out by donating above average amounts of money.

Question 9

If a good is neither normal nor inferior, then:

A)EV is larger than CV.
B)there is no CS.
C)EV is smaller than CS.
D)EV, CV, and CS are the same.

Question 10

Joe's demand for manna is independent of his income, and his demand function is p = $10 - x, where p is the price of manna and x is quantity demanded. Alph has a very large supply of manna, and Joe has asked Alph to propose a deal. Joe is the only person who places any value on manna. Which of the following deals is best for Alph? Caution-Joe must, of course, accept the deal.

A)Joe must pay $5 for each unit of manna that he wants.
B)For a lump- sum payment of $50, Joe can buy manna at $5 per unit.
C)Joe must pay $8 for each unit of manna that he wants.
D)For a lump- sum payment of $45, Joe can have all of Alph's manna.

Question 11

The phenomenon of "shipping the good apples out" occurs because:

A)shipping implies a fixed charge is included in the price.
B)people prefer high quality goods to low quality.
C)the relative price of high and low quality goods is too low.
D)people buy the lowest price goods locally.

Question 12

If the Laspeyres quantity index is less than 1, then:

A)the consumption bundle in period 1 is preferred to that of period 0.
B)the consumption bundles cannot be compared.
C)both consumption bundles are equally preferred.
D)the consumption bundle in period 0 is preferred to that of period 1.

Question 13

The percentage change in consumer price index is a:

A)real- time measurement.
B)quantity index.
C)measure of improved social welfare.
D)price index.

Question 14

A consumer's surplus is her:

A)benefit from paying the market price for a good.
B)bank balance.
C)contribution to a seller's profit.
D)marginal utility.

Question 15

If a good is neither normal nor inferior, then:

A)there are no substitution effects.
B)the income effect is larger than the substitution effect.
C)the income effect is smaller than the substitution effect.
D)there are no income effects.

Question 16

The cost of living adjustments (COLA)are featured in many labour contracts and pension plans. They:

A)mandate adjusting income upwards by half the increase in prices over the respective period.
B)naturally lead to both income and substitution effects being present.
C)lead to a substitution effect and no income effect.
D)lead to an increase in compensation via a substitution effect.

Question 17

There is some evidence that the introduction of mandatory seat belts while driving has led to more accidents. If this is the case, it must be that:

A)substitution is not involved in this outcome.
B)the economists making this case believe there are many drivers deciding to have an accident on purpose.
C)there is no parallel between this effect and the similar one offered by the advent of air bags.
D)seat belts offered some perverse incentives to drivers.

Question 18

Better apples tend to get shipped out because:

A)nonlocals tend to demand better apples.
B)better apples keep better.
C)better apples fall in relative price as they travel further.
D)better apples are normal goods.

Question 19

Religions tend to stress the importance of education to different degrees. Those placing a higher importance on education:

A)enjoy a larger following.
B)have younger members.
C)score poorly in terms of participation.
D)tend to receive more in terms of financial giving.

Question 20

For a Giffen good:

A)the income effect is positive and is dominated by the substitution effect
B)the income effect is negative and dominates the substitution effect
C)the income effect is positive and dominates the substitution effect
D)the income effect is negative and is dominated by the substitution effect

Question 21

Speculation is an example of the law of demand because:

A)speculators expect the price to go down.
B)the price today relative to the price tomorrow is higher.
C)prices are the same in all time periods.
D)the price today relative to the price tomorrow is lower.

Question 22

Homesteading:

A)represented a wasteful system of allocating property rights over land.
B)was an efficient way of colonizing the West.
C)delayed the successful deployment of settlers by several years.
D)insured that the land was obtained for free.

Question 23

The opportunity cost of time is:

A)the price marked on a product.
B)the wage rate.
C)the product of the wage rate and the time required for consumption.
D)the sum of the wage rate and the time required for consumption.

Question 24

For normal goods the substitution effect is:

A)unrelated to the price.
B)negatively related to the price.
C)positively related to the price.
D)ambiguously related to the price.

Question 25

Which of the following is a false statement about the substitution effect associated with an increase in the price of good x?

A)operates in the same direction as the income effect if it is normal
B)is dominated by the income effect if it is a Giffen good
C)dominates the income effect if x is a Giffen good
D)does not lead the individual to buy more x

Question 26

Figure 4A

The substitution effect in Figure 4A is from:

A)point A to point C.
B)point F to point H.
C)point E to point F.
D)point E to point H.

Question 27

Consumer's surplus is:

A)the difference between what one would pay and what one does pay.
B)the total gains from exchange.
C)the total expenditure.
D)equal to the profit derived by the consumer.

Question 28

The law of demand:

A)applies only at prices where all individuals are already consuming the good.
B)does not apply at prices above the lowest individual reservation price.
C)applies to market demand curves.
D)is not applicable to market demand curves.

Question 29

Suppose Ada's inverse demand for good x is given by: p = 10 - x. If the price increases from $3 to
$2, the change in consumer surplus is:

A)7.5.
B)2.5.
C)10.
D)5.

Question 30

If a good is inferior, then:

A)the income effect moves in the opposite direction of the substitution effect.
B)the income effect is larger than the substitution effect.
C)the income and substitution effects are ambiguous.
D)the income effect moves in the same direction as the substitution effect.

Question 31

Giffen goods are goods for which the price and quantity:

A)move in the same direction.
B)move in separate directions.
C)are independent of each other.
D)move in opposite directions.

Question 32

Suppose a good is underpriced, and a line forms to allocate the good. A politician notices that there are pregnant women in line and a law is passed stating that they are allowed to move to the front of any line. This will result in:

A)no significant change in the number of pregnant women in line, but they will always be first in line.
B)more pregnant women in lines.
C)fewer pregnant women in front.
D)economics can't answer this kind of question.

Question 33

For inferior goods the substitution effect is:

A)unrelated to the price.
B)negatively related to the price.
C)positively related to the price.
D)ambiguously related to the price.

Question 34

In a model where we take into account the full cost of a good in terms of time, rich people:

A)tend to overconsume time- intensive goods.
B)tend to consume relatively fewer time- intensive goods.
C)tend to underconsume time- intensive goods.
D)tend to consume relatively more time- intensive goods.

Question 35

The total value associated with a good is:

A)the amount of money paid for it.
B)the sum of all the marginal values of the good.
C)society's value of a good.
D)the production cost of making a good.

Question 36

For a normal good:

A)the income effect is negative when the price decreases.
B)the income effect is zero when the price increases.
C)the income effect is positive when the price increases.
D)the income effect is negative when the price increases.

Question 37

Joe's utility function is given by U(x,y)= min[x,y] .If the price of x increases but Joe's income stays constant, then:

A)the total effect is zero.
B)the substitution effect exceeds the income effect.
C)the income effect is zero.
D)the substitution effect is zero.

Question 38

Costco typically has lower prices than its competitors and charges a membership fee. The membership fee is an example of

A)substitution effect
B)consumer surplus
C)compensating variation
D)equivalent variation

Question 39

The percentage change in disposable income is a:

A)real- time measurement.
B)quantity index.
C)measure of improved social welfare.
D)price index.

Question 40

CV, EV and the change in consumer's surplus are all illustrated as the trapezoid to the left of the demand curve between the new and old prices. Which of the following statements is correct?

A)EV is measured from the uncompensated demand
B)the change is CS is measured from the uncompensated demand
C)CV is measured from the compensated demand with the higher level of utility
D)the change in CS is measured from the compensated demand with the lower level of utility

Question 41

If the Laspeyres quantity index exceeds 1, then:

A)the consumption bundle in period 1 is preferred to that of period 0.
B)both consumption bundles are equally preferred.
C)the consumption bundles cannot be compared.
D)the consumption bundle in period 0 is preferred to that of period 1.

Question 42

The compensated demand curve is obtained by:

A)minimizing expenditure.
B)maximizing utility.
C)keeping the money income constant.
D)compensating the consumer from the loss in utility.

Question 43

Figure 4A

The income effect in Figure 4A is from:

A)point F to point H.
B)point A to point C.
C)point E to point F.
D)point E to point H.

Question 44

For a normal good the total effect is given by:

A)the income effect.
B)the income effect plus the substitution effect.
C)the substitution effect.
D)the income effect minus the substitution effect.

Question 45

Speculation:

A)is just an example of law of demand at work.
B)makes output fluctuate wildly.
C)is bad because it makes prices higher.
D)always lead to someone losing.

Question 46

If the prices of two goods are equal then, for a utility maximizer:

A)the demand curves for the two goods are identical.
B)the quantity consumed of the two goods is equal.
C)the marginal values of the two goods are equal.
D)the total values of the two goods are equal.

Question 47

A time constraint defines:

A)all of the feasible allocations of time between leisure and work.
B)all of the optimal allocation of time between leisure and work.
C)all the foregone allocations of time between leisure and work.
D)all of allocations of time between leisure and work for which the individual is indifferent.

Question 48

The law of demand holds when:

A)income elasticity is negative.
B)other prices are not held constant.
C)speculators enter the market.
D)tastes are changing.

Question 49

If a good is inferior and demand is downward sloping, then:

A)the substitution effect is equal to the income effect.
B)the substitution effect is larger than the income effect.
C)price and quantity demanded move in the same direction.
D)the substitution effect is smaller than the income effect.

Question 50

Joe's utility function is given by U(x,y)= min[x,y] . The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:

A)the substitution effect is zero.
B)the substitution effect exceeds the income effect.
C)the income effect is zero.
D)the total effect is zero.

Question 51

If a good is neither normal nor inferior, then:

A)there is no EV.
B)EV is larger than CV.
C)EV is smaller than CV.
D)EV and CV are the same.

Question 52

For inferior goods the income effect is:

A)unrelated to the price.
B)negatively related to the price.
C)positively related to the price.
D)ambiguously related to the price.

Question 53

If a good is normal, then:

A)the income effect is larger than the substitution effect.
B)the income effect moves in the same direction as the substitution effect.
C)the income effect moves in the opposite direction of the substitution effect.
D)the income and substitution effects are ambiguous.

Question 54

When people spend their time standing in line- ups to acquire such things as a racquetball court, they are:

A)paying for an underpriced good with time rather than money.
B)spending more than the good is worth.
C)wasting the scarce resource of time.
D)just hanging around.

Question 55

When a fixed charge is included in the price of high and low quality goods, more high quality goods are consumed because:

A)high quality just got more expensive.
B)people like high quality.
C)the relative price of high quality goods is higher.
D)the relative price of high quality goods is lower.

Question 56

For normal goods the income effect is:

A)ambiguously related to the price.
B)positively related to the price.
C)negatively related to the price.
D)unrelated to the price.

Question 57

A round of golf at the Capilano Golf Club costs $75, and consumes four hours of the golfer's time. If the golfer has $100 of non- labour income per day and a wage rate equal to $50 per hour, the full price of a round of golf is:

A)$275.
B)$300.
C)$75.
D)$375.

Question 58

For an inferior good:

A)the income effect is positive when the price decreases.
B)the income effect is negative when the price increases.
C)the income effect is zero when the price increases.
D)the income effect is positive when the price increases.

Question 59

When EV = CV = CS:

A)the good is Giffen.
B)the good is neither normal nor inferior.
C)the good is inferior.
D)the good is normal.

Question 60

Joe's utility function is given by U(x,y)= min[x,y]. The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:

A)the substitution effect is equal to 3.
B)the substitution effect is equal to 2.
C)the substitution effect is zero.
D)the substitution effect is equal to 1.

Question 61

Joe's utility function is given by U(x,y)= min[x,y]. The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:

A)the income effect is zero.
B)the income effect is equal to 2.
C)the income effect is equal to 1.
D)the total effect is zero.

Question 62

Figure 4A

The indifference map in Figure 4A illustrates the effect of a:

A)price decrease in x₁.
B)price increase in x₂.
C)change in the consumer's income.
D)price decrease in x₂.

Question 63

The income effect is:

A)the change in utility caused by a price change
B)represented by a parallel shift of the budget constraint
C)the result of a change in nominal income
D)the change in real income caused by a price change

Question 64

If the Paasche quantity index is less than 1, then:

A)the consumption bundles cannot be compared.
B)both consumption bundles are equally preferred.
C)the consumption bundle in period 1 is preferred to that of period 0.
D)the consumption bundle in period 0 is preferred to that of period 1.

Question 65

The compensated budget line:

A)is parallel with the new budget line.
B)is identical to the compensated demand function.
C)is parallel with the old budget line.
D)is tangent to the new indifference curve.

Question 66

The Paasche and the Laspeyres indexes:

A)give the same qualitative values.
B)always agree with each other.
C)may contradict each other.
D)give the same numerical values.

Question 67

When the price of a good changes, the income effect can found by comparing the equilibrium quantities purchased:

A)the new budget line and a line parallel to the new budget line tangent to the old indifference curve.
B)on the old budget line and on the new budget line.
C)on the new budget line and a line parallel to the old budget line tangent to the new indifference curve.
D)on the old budget line and a line parallel to the old budget line tangent to the new indifference curve.

Question 68

If the Paasche quantity index exceeds 1, then:

A)both consumption bundles are equally preferred.
B)the consumption bundle in period 0 is preferred to that of period 1.
C)the consumption bundles cannot be compared.
D)the consumption bundle in period 1 is preferred to that of period 0.

Question 69

The compensated budget line represents:

A)the change in income required to move the individual to the new consumption point.
B)the change in income required to move the individual to the old indifference curve.
C)the change in income required to move an individual back to the old consumption point.
D)the change in income required to move the individual to the new indifference curve.

Question 70

A Giffen good:

A)is a theoretical impossibility.
B)is an inferior good.
C)is a normal good.
D)is an essential good.

Question 71

An inferior good:

A)has an upward sloping demand function.
B)has a negative income elasticity of demand.
C)has a positive income elasticity of demand.
D)is a Giffen good.

Question 72

Suppose Ada's inverse demand for good x is given by: p = 10 - x. If the price increases from $2 to
$3, the change in consumer surplus is:

A)2.5.
B)5.
C)7.5.
D)10.

Question 73

When the price of a good changes, the substitution effect can found by comparing the equilibrium quantities purchased:

A)on the new budget line and a line parallel to the old budget line tangent to the new indifference curve.
B)on the old budget line and on the new budget line.
C)the new budget line and a line parallel to the new budget line tangent to the old indifference curve.
D)on the old budget line and a line parallel to the new budget line tangent to the old indifference curve.

Question 74

The ordinary demand curves reflects:

A)the income effect.
B)the substitution effect.
C)the total effect.
D)the compensated demand.

Question 75

The water diamond paradox illustrates that:

A)diamonds are more abundant than water.
B)water is more abundant than diamonds.
C)people foolishly waste water.
D)diamonds are more important than water.

Question 76

The full price of a good includes:

A)the cost of the middleman.
B)the profit made by the seller.
C)the time spent waiting for the good.
D)all hidden charges and taxes.

Question 77

Bonnie spends her entire income, $200 on 3 goods, x₁, x₂ and x₃. When p₁x₁ = $1, p₂x₂ = $3, and p₃x₃ = $5, she buys the following consumption bundle: (15, 20, 25). The price of x₁ increases by 25%, and she now buys 15 units of x₂ and 28 units of x₃. Which of the following is not true:

A)Total revenue for x₁ is maximized.
B)The price elasticity of demand for x₁ is one.
C)Total expenditure on x₁ is unchanged.
D)x₁ is a Giffen good.

Question 78

The more of a good that an individual has:

A)the higher is the marginal value.
B)the lower their level of satisfaction.
C)the lower is the total value.
D)the lower is the marginal value.

Question 79

The substitution effect is always:

A)non- negatively related to the price change.
B)negative.
C)positive.
D)non- positively related to the price change.

Question 80

When moving along a compensated demand curve, the income effect is

A)positive for an inferior good
B)positive for a normal good
C)negative for a normal good
D)zero for both normal and inferior goods