Deck 7: Consumer Choice and Elasticity

Question 1

A local restaurant offers an "all you can eat" ribs special. You pay $11.95, and then you can eat as many servings as you desire at no additional cost. It would follow that you will stop eating when

A)your marginal utility (or value) derived from eating another serving is zero.
B)your total utility (or value) derived from all of the servings consumed just equals $11.95.
C)your marginal utility (or value) derived from another serving equals $11.95.
D)it is physically impossible for you to eat any more.

Answer 1

A

Question 2

If Sarah's income rises by 20 percent, and, as a result, she purchases 40 percent more designer clothing, her income elasticity for designer clothing is

A)0.5.
B)1.0.
C)2.0.
D)Not enough information is given to answer this question.

Answer 2

C

Question 3

The marginal value of a commodity to a consumer

A)increases as more of the good is consumed.
B)is exactly equal to price for all units purchased by the consumer.
C)is measured by the height of the individual consumer's demand curve.
D)is equal to the area above the price and below the individual consumer's demand curve.

Answer 3

C

Question 4

Marginal utility is the change in

A)total utility when an extra unit of output is produced.
B)total utility when an extra unit of output is consumed.
C)marginal utility when an extra unit of output is produced.
D)average utility when an extra unit of output is consumed.

Question 5

Which of the following most directly reflects the law of diminishing marginal utility?

A)After watching two football games, Terry decides to watch a third game.
B)A sports fan enjoys watching Monday night football rather than going to the theater.
C)After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth disc.
D)A musician receives the biggest ovation of the evening after playing the final number of a recital.

Question 6

If Mr. Smith thinks the last dollar spent on shirts yields less satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should

A)decrease his spending on cola.
B)decrease his spending on cola and increase his spending on shirts.
C)increase his spending on shirts.
D)increase his spending on cola and decrease his spending on shirts.

Question 7

After eating six chocolate candy bars in ten minutes, Jody says, "You would have to pay me to eat another chocolate candy bar!" This statement best illustrates

A)the law of demand.
B)the substitutability among goods.
C)the law of diminishing marginal utility.
D)that chocolate candy bars are an inferior good.

Question 8

The fact that a gallon of gasoline commands a higher market price than a gallon of water indicates that

A)gasoline is an economic good but water is not.
B)the marginal utility of gasoline is greater than the marginal utility of a gallon of water.
C)the average utility of a gallon of gasoline is greater than the average utility of a gallon of water.
D)the total utility of gasoline exceeds the total utility of water.

Question 9

Which of the following would be the best example of consumer surplus?

A)Jane does not get cell-phone service because she feels that it is worth less than the $30 a month fee.
B)Sam pays $8 for a haircut that is worth $10 to him.
C)Ralph buys a house for $104,000, the maximum amount that he would be willing to pay for it.
D)Sue purchases a book for $20 and uses a credit card to pay for it.

Question 10

The principle of diminishing marginal utility says that

A)as more of a good or service is consumed, demand will decrease.
B)as more of a good or service is consumed, the price will rise.
C)the marginal utility of additional units consumed will increase.
D)the marginal utility of additional units consumed will decline.

Question 11

If a Krispy Kreme doughnut shop near campus increases its prices by 5 percent, but revenues from its sales are unchanged, the price elasticity of demand for the services offered by the doughnut shop must be

A)elastic.
B)of unitary elasticity.
C)inelastic.
D)equal to 0.5.

Question 12

If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more on gas, this would best be explained by

A)the substitution effect.
B)the income effect.
C)the highly elastic demand for gasoline.
D)all of the above.

Question 13

Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her marginal utility is equal to

A)$.50, the value of her last cup of coffee.
B)$1.00, the value of her first cup of coffee.
C)$2.25.
D)$1.50.

Question 14

Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt. These findings reflect that

A)tomatoes are a necessity while salt is a luxury.
B)it takes longer for consumers to adjust to a change in the price of salt than to a change in the price of tomatoes.
C)salt will not spoil as easily as fresh tomatoes.
D)more good substitutes exist for fresh tomatoes than for salt.

Question 15

If the price of a good is $0, a consumer will

A)consume an infinite quantity.
B)consume all units with positive marginal utility.
C)consume the entire amount supplied.
D)consume until total utility becomes 0.

Question 16

Diminishing marginal utility means that

A)as you consume more of a good, other things constant, the total satisfaction you obtain from consuming this good tends to fall.
B)as you hire more labor, other things constant, the total amount produced begins to fall.
C)as you consume more of a good, other things constant, the additional satisfaction you obtain from each additional unit of the good tends to fall.
D)as you consume more of a good, other things constant, the extra satisfaction you obtain from each additional unit becomes negative.

Question 17

A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The increase causes households to

A)spend more on sugar.
B)spend less on sugar.
C)spend the same amount on sugar.
D)consume more goods like coffee and tea that are complements of sugar.

Question 18

Suppose that the quantity of DVD players sold increased from 200 to 400 when the price fell from $225 to $175. Over this price range, the absolute value of the price elasticity of demand for DVD players is

A)0.25.
B)0.375.
C)1.0.
D)2.67.
E)4.0.

Question 19

"I like ice cream, but after eating homemade ice cream last night, I want to have something else for dessert today." This statement most clearly reflects

A)the budget constraint.
B)consumer irrationality.
C)the second law of demand: Price elasticity increases with time.
D)the law of diminishing marginal utility.

Question 20

Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price elasticity of demand for cigarettes is equal to

A)-0.20.
B)-0.67.
C)-1.50.
D)-3.00.

Question 21

Table 7-1

Refer to Table 7-1. Whose demand does not conform to the law of demand?

A)Aaron's
B)Angela's
C)Austin's
D)Alyssa's

Question 22

If Jane's marginal benefit as a consumer in the jeans market is larger than the price of a pair of jeans,

A)Jane will not purchase any more jeans.
B)Jane can benefit by purchasing more jeans.
C)the opportunity cost of a pair of jeans is lower than the price.
D)Jane will decrease her total utility by purchasing more jeans.

Question 23

John's demand schedule for pizza is indicated below. If the current price of pizza is $1.10 per slice, what is John's consumer surplus if he buys five slices of pizza?

A)$0
B)$1.00
C)$1.10
D)$6.50

Question 24

Assume that a college student purchases only coffee and Snickers. The substitution effect associated with a decrease in the price of a Snickers will result in

A)an increase in the consumption of coffee only.
B)a decrease in the consumption of coffee only.
C)an increase in the consumption of Snickers and a decrease in the consumption of coffee.
D)a decrease in the consumption of Snickers and an increase in the consumption of coffee.

Question 25

If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should

A)bowl less, so the marginal satisfaction from expenditures in this area will increase.
B)spend more on hamburgers, so total satisfaction from that activity will increase.
C)eliminate spending on hamburgers.
D)bowl more and spend less on hamburgers.

Question 26

Ceteris paribus, an increase in the price of a good will cause the

A)quantity demanded of the good to increase.
B)quantity supplied of the good to decrease.
C)consumer surplus derived from the good to decrease.
D)demand of the good to increase.

Question 27

Jeff likes Pepsi and pizza. When the price of pizza rises, the substitution effect causes Pepsi to be relatively

A)more expensive, so Jeff buys more Pepsi.
B)more expensive, so Jeff buys less Pepsi.
C)less expensive, so Jeff buys more Pepsi.
D)less expensive, so Jeff buys less Pepsi.

Question 28

Scenario 7-1
Use the information below to answer the following question(s).
JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls.
Refer to Scenario 7-1. According to the substitution effect, which of the following is most likely to occur?

A)JoAnn will purchase less cola and more sparkling water.
B)JoAnn will purchase more cola and less sparkling water.
C)JoAnn will purchase more of all goods due to her higher real income.
D)JoAnn's demand curve will decrease (shift in), causing her to purchase less cola.

Question 29

If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should

A)decrease his spending on cola.
B)decrease his spending on cola and increase his spending on shirts.
C)increase his spending on shirts.
D)increase his spending on cola and decrease his spending on shirts.

Question 30

Scenario 7-1
Use the information below to answer the following question(s).
JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls.
Refer to Scenario 7-1. According to the income effect, which of the following is most likely to occur?

A)JoAnn will purchase less cola and more sparkling water.
B)JoAnn will purchase more cola and less sparkling water.
C)JoAnn will purchase more of most goods due to her higher real income.
D)JoAnn's demand curve will decrease (shift in), causing her to purchase less cola.

Question 31

Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will

A)cause the consumer to buy more of good Y and less of good X.
B)cause the consumer to buy more of good X and less of good Y.
C)not affect the amount of goods X and Y that the consumer buys.
D)result in an upward-sloping demand for good Y because of the substitution effect.

Question 32

According to the income effect, when the price of automobiles rises, people buy fewer automobiles because

A)they substitute other forms of transportation for driving.
B)the nominal amount of their paychecks is smaller.
C)the purchasing power of their income is reduced.
D)their demand for automobiles is very elastic.

Question 33

Table 7-1

Refer to Table 7-1. When the price of the good is $1.00, the quantity demanded in this market would be

A)42 units.
B)31 units.
C)24 units.
D)14 units.

Question 34

If the price of hamburger increases, the substitution effect works to

A)decrease the quantity of hamburger supplied.
B)increase the number of hamburger buns demanded.
C)decrease the quantity of hamburger demanded.
D)increase the number of hamburger buns supplied.

Question 35

When the price of a good falls, consumers buy more of the good because it is cheaper relative to competing goods. This statement describes the

A)consumer equilibrium effect.
B)price effect.
C)income effect.
D)substitution effect.

Question 36

Which of the following is the best example of the substitution effect?

A)Joe buys fewer apples and more oranges as the result of an increase in the price of apples.
B)Joe buys more apples when his income increases.
C)Joe buys an apple slicer when the price of apples decreases.
D)Joe buys less sugar as the result of an increase in price of apples.

Question 37

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called

A)price elasticity of demand.
B)consumer surplus.
C)the substitution effect.
D)income elasticity of demand.

Question 38

Table 7-1

Refer to Table 7-1. If the price increases from $1.00 to $1.50,

A)the market demand decreases by 20 units.
B)individual demand curves, when drawn, will shift to the left.
C)the quantity demanded in the market decreases by 2 units.
D)the quantity demanded in the market decreases by 7 units.

Question 39

Suppose there are only two goods, apples and oranges. What happens if the price of each good increases by 15 percent?

A)The consumer will substitute apples for oranges.
B)The consumer will substitute oranges for apples.
C)There is no substitution effect because relative prices have remained constant.
D)Demand for both goods increases.
E)Demand for both goods decreases.

Question 40

If John's marginal benefit derived from the consumption of another candy bar is greater than the price of the candy bar,

A)John will not purchase any more candy bars.
B)John will increase his total satisfaction by purchasing the candy bar.
C)the opportunity cost of the candy bar is lower than the price.
D)John will decrease his total utility if he purchases the candy bar.

Question 41

If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ____, indicating the demand is ____.

A)2; elastic
B)2; inelastic
C)0.5; elastic
D)0.5; inelastic

Question 42

Other things equal, the demand for a good tends to be more inelastic when

A)there are fewer available substitutes.
B)a longer time period is considered.
C)the good is considered a luxury good.
D)the market for the good is more narrowly defined.

Question 43

Mr. Jones always buys gasoline at the corner station with his credit card. Now a new station (that does not accept credit cards) is built on the other corner and offers the same quality of gasoline for $.05 less per gallon. Is Jones irrational if he continues to buy gasoline at the old station?

A)Yes; such action would clearly violate the law of demand. If the price is lower across the street, Jones should go there.
B)Not necessarily; he may think the ease and convenience of using the credit card is worth the extra cost.
C)Yes; his actions imply that the law of diminishing returns does not apply to gasoline.
D)Not enough information is given to determine if his actions are rational.

Question 44

A good that takes up a very large percentage of the consumer's budget will tend to have

A)an elastic demand.
B)a perfectly elastic demand.
C)an inelastic demand.
D)an upward-sloping demand curve.
E)very many substitutes.

Question 45

How does the concept of elasticity allow us to improve upon our understanding of supply and demand?

A)Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept.
B)Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus.
C)Without elasticity, we would not be able to address the direction in which price is likely to move in response to a shortage.
D)Without elasticity, it is very difficult to assess the degree of competition within a market.

Question 46

For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

A)The relevant time horizon is short.
B)The good is a necessity.
C)The market for the good is broadly defined.
D)There are many close substitutes for this good.

Question 47

If the elasticity of demand for cigarettes is 0.4, then an increase in the price of a pack of cigarettes from $1.00 to $1.30 would reduce quantities demanded by about

A)27 percent.
B)40 percent.
C)12 percent.
D)95 percent.

Question 48

The demand for salt is

A)inelastic because there are few substitutes for salt and it represents a large percentage of a consumer's budget.
B)inelastic because there are many substitutes for salt and it represents a large percentage of a consumer's budget.
C)inelastic because there are few substitutes for salt and it represents a small percentage of a consumer's budget.
D)elastic because there are no substitutes for salt and it represents a large percentage of a consumer's budget.
E)elastic because there are many substitutes for salt and it represents a large percentage of a consumer's budget.

Question 49

When a good is more broadly defined,

A)the more substitutes it has so the more elastic is its demand.
B)the fewer substitutes it has so the more elastic is its demand.
C)the more substitutes it has so the less elastic is its demand.
D)the fewer substitutes it has so the less elastic is its demand.

Question 50

When a good is more broadly defined,

A)the more substitutes it has, so demand will be more price-elastic.
B)the less substitutes it has, so demand will be more price-elastic.
C)the more substitutes it has, so demand will be less price-elastic.
D)the less substitutes it has, so demand will be less price-elastic

Question 51

A successful advertising campaign would likely

A)increase price elasticity of demand by stressing the uniqueness of the product.
B)reduce price elasticity of demand by stressing the uniqueness of the product.
C)reduce price elasticity of demand by informing consumers of the availability of substitutes.
D)not alter the demand curve.
E)generally make the demand curve shift inward.

Question 52

The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because

A)ice cream must be eaten quickly.
B)this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
C)the market is broadly defined.
D)other flavors of ice cream are good substitutes for this particular flavor.

Question 53

Along the inelastic portion of a demand curve,

A)the change in price will always be less than the change in quantity demanded.
B)the percentage change in price will be less than the percentage change in quantity demanded.
C)the change in price will always be more than the change in quantity demanded.
D)the percentage change in price will be more than the percentage change in quantity demanded.

Question 54

An increase in the consumption of a good resulting from a reduction in price that makes the good cheaper in relation to other goods is called the

A)substitution effect.
B)income effect.
C)real balance effect.
D)inelasticity effect.

Question 55

An individual's demand curve for a good is derived by

A)varying the income level and observing the resulting total utility derived from both goods.
B)varying the price of one good and observing the resulting quantities of the other good.
C)shifting the budget line to the left and calculating the loss in total utility.
D)varying the price of one good and observing the resulting quantities demanded of that good.

Question 56

The market demand for an item is

A)the sum of individual demands.
B)steeper for any given price change than the individual demand curves.
C)independent of the number of individuals in the market.
D)determined by dividing the quantity demanded by each individual by the number of individuals in the market.

Question 57

If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,

A)demand is elastic.
B)demand is inelastic.
C)elasticity of demand is unitary.
D)None of the above is correct.

Question 58

Which of the following statements is true?

A)The demand curve for a group of consumers in a market is simply the horizontal summation of each individual's demand.
B)The single demand curve shows the quantity of a good that people will buy, allowing all factors (price, income, expected future prices, etc.) to vary.
C)An increase in income will cause a person to move down and to the right along her demand curve.
D)All of the above are true.

Question 59

The schedule of the amount of a product that consumers would be willing to purchase at alternative prices during a specific time period is the

A)total utility schedule.
B)marginal utility schedule.
C)supply schedule.
D)demand schedule.

Question 60

In economic theory, the word "demand" refers to

A)the amount people are willing to purchase at various prices.
B)those wants or needs that are urgent or pressing.
C)wants that are economic in character rather than social, cultural, or spiritual.
D)the desire of persons for a good, regardless of whether they're willing to purchase the good.

Question 61

If demand price elasticity measures 2, this implies that consumers would

A)buy twice as much of the product if the price drops 10 percent.
B)require a 2 percent drop in price to increase their purchases by 1 percent.
C)buy 2 percent more of the product in response to a 1 percent drop in price.
D)require at least a $2 increase in price before showing any response to the price increase.
E)buy twice as much of the product if the price drops 1 percent.

Question 62

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase in football ticket prices would be expected to cause a

A)4.5 percent decrease in quantity demanded.
B)4.5 percent increase in quantity demanded.
C)45 percent decrease in quantity demanded.
D)45 percent increase in quantity demanded.
E)450 percent increase in quantity demanded

Question 63

If the quantity demanded of a product fell from 11,000 to 10,000 when price rose from $9 to $10, the price elasticity of demand over this range is equal to approximately

A)-0.1.
B)-0.05.
C)-0.9.
D)-1.1.

Question 64

A local Krispy Kreme doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the price elasticity of demand for the doughnuts was

A)elastic.
B)inelastic.
C)of unitary elasticity.
D)indeterminate; more information is needed to determine the price elasticity of demand.

Question 65

If a 20 percent reduction in the price of airline tickets between Chicago and New York leads to a 50 percent increase in the quantity of tickets purchased, the price elasticity of demand for the tickets is

A)-0.20.
B)-0.40.
C)-0.50.
D)-2.50.

Question 66

If an increase in the excise tax imposed on cigarettes pushes the price per pack up by 20 percent, and the quantity sold declines by 8 percent as a result, the price elasticity of demand for cigarettes is equal to

A)-0.2.
B)-0.4.
C)-0.8.
D)-5.

Question 67

If a demand curve for a good were completely vertical, it would be considered

A)perfectly elastic.
B)perfectly inelastic.
C)of unitary elasticity.
D)relatively inelastic.

Question 68

When the price of designer jeans goes from $85 to $60, the quantity demanded increases from 100,000 to 120,000. Over this price range, the

A)demand for the jeans is elastic.
B)demand for the jeans is inelastic.
C)demand for the jeans is of unitary elasticity.
D)arc elasticity of demand for the jeans is -4.

Question 69

A recent increase in the supply of oranges caused the price to drop from $5 to $3 per bushel, and quantity demanded to rise from 10,000 bushels to 25,000 bushels. This indicates that the price elasticity of demand for oranges in this price range is

A)-0.33.
B)-0.58.
C)-1.
D)-1.71.

Question 70

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the absolute value of the price elasticity of demand for Starbucks coffee is

A)0.40.
B)0.80.
C)1.25.
D)2.50.
E)4.

Question 71

As people have more time to adjust to a price change,

A)demand becomes more elastic, and supply becomes less elastic.
B)demand becomes less elastic, and supply becomes more elastic.
C)both supply and demand become less elastic.
D)both supply and demand become more elastic.
E)elasticity of both demand and supply tends toward unity.

Question 72

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then:

A)product A is more price elastic than product B.
B)product B is more price elastic than product A.
C)consumers are more sensitive to price changes in product A than in product B.
D)product B is more price inelastic than product A.
E)products A and B must be substitutes.

Question 73

When the price of Nike tennis shoes goes from $100 to $80, the quantity demanded increases from 20 to 30 million. Over this price range, the absolute value of the price elasticity of demand is

A)0.55.
B)1.
C)1.25.
D)1.80.
E)2.50.

Question 74

The price of product X increases from $35 to $40, and as a result, the quantity demanded decreases from 250 to 200. Over this price range,

A)demand is elastic.
B)demand is inelastic.
C)demand is of unitary elasticity.
D)there is insufficient information to determine the price elasticity of demand.

Question 75

A local Krispy Kreme doughnut shop reduced its prices by 10 percent, and as a result, the quantity of doughnuts sold increased by 25 percent. Over this range, the absolute value of the price elasticity of demand was

A)0.4.
B)1.
C)2.
D)2.5

Question 76

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is

A)2.5.
B)0.4.
C)0.5.
D)5.
E)inelastic.

Question 77

If the quantity of oranges purchased decreases by 30 percent as the result of a 15 percent increase in the price of oranges, the price elasticity of demand for oranges is

A)-0.25.
B)-0.50.
C)-1.25.
D)-2.

Question 78

If the price of tickets to Disney World increases 10 percent, and as a result, attendance falls by 15 percent, the demand for the tickets is

A)elastic.
B)inelastic.
C)of unitary elasticity.
D)indeterminate.

Question 79

Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is -.25, by how much would you have to raise the price of water?

A)10 percent
B)25 percent
C)40 percent
D)100 percent

Question 80

If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as

A)unstable.
B)relatively inelastic.
C)relatively elastic.
D)of unitary elasticity.