Deck 6: Demand and Welfare

Question 1

Suppose Eddie's demand curve for text messages is T = 150 - 500P_t,where T stands for the number of text messages and P_t represents the price of text messages.What is Eddie's consumer surplus if P_t = $0.20 per message?

A) $0.50
B) $1.00
C) $2.00
D) $2.50

Answer 1

$2.50

Question 2

Refer to Figure 6.1.Assume that L1 represents the budget line before a price change.Point B represents the:

A) uncompensated effect of an increase in the price of bread.
B) uncompensated effect of a decrease in the price of soup.
C) uncompensated effect of an increase in the price of soup.
D) compensated effect of an increase in the price of soup.

Answer 2

uncompensated effect of an increase in the price of soup.

Question 3

According to Figure 6.1:

A) soup is a normal good.
B) soup is an inferior good.
C) soup is a Giffen good.
D) bread is an inferior good.

Answer 3

soup is a normal good.

Question 4

Suppose Eddie's demand curve for text messages is T = 150 - 500P_t,where T stands for the number of text messages and P_t represents the price of text messages.What is Eddie's consumer surplus if P_t = $0.05 per message?

A) $5.00
B) $7.81
C) $15.63
D) $31.25

Question 5

When the price of a good decreases:

A) the good becomes less expensive relative to other goods and the consumer's purchasing power increases.
B) the good becomes less expensive relative to other goods and the consumer's purchasing power decreases.
C) the good becomes more expensive relative to other goods and the consumer's purchasing power increases.
D) the good becomes more expensive relative to other goods and the consumer's purchasing power decreases.

Question 6

Consumer surplus is:

A) the amount of purchasing power a consumer receives when the price of a good falls.
B) the amount of money that exactly compensates a consumer for a change in circumstances.
C) the net benefit a consumer receives from participating in the market for some good.
D) negative whenever the price of a good increases.

Question 7

Refer to Figure 6.3.Suppose the price of pizza is $8.50.Then the consumer will purchase _____ pizzas and the net benefit is ______.

A) 5; $9.50
B) 4; $8.00
C) 5; $3.50
D) 4; $9.50

Question 8

Which of the following does NOT describe a compensating variation?

A) The amount of money that exactly compensates a consumer for a change in economic circumstances
B) The amount of money that produces an equivalent effect on a consumer's well-being
C) The most someone is willing to pay to experience something beneficial
D) The least someone is willing to receive to experience something harmful

Question 9

Refer to Figure 6.4.If the price of computers is $1,000,then consumer surplus is given by the area represented by:

A) c + d.
B) b.
C) b + c.
D) a + b + e.

Question 10

Which of the following does NOT occur when the price of a good increases?

A) The good becomes more expensive relative to all other goods.
B) The consumer's purchasing power increases.
C) Consumers shift their purchases away from the more expensive good.
D) The consumer is effectively poorer than before the increase in price.

Question 11

The amount of compensation associated with the income effect of a price change is called:

A) a compensation variation.
B) an income effect.
C) consumer surplus.
D) a subsidy.

Question 12

Suppose Eddie's demand curve for text messages is T = 150 - 500P_t,where T stands for the number of text messages and P_t represents the price of text messages.What is Eddie's consumer surplus if P_t = $0.10 per message?

A) $5
B) $10
C) $20
D) $50

Question 13

Refer to Figure 6.3.Suppose the price of pizza is $9.75.Then consumer surplus is:

A) $3.75.
B) $3.50.
C) $29.25.
D) $33.00.

Question 14

Refer to Figure 6.4.What area represents the decrease in consumer surplus when the price of computers increases from $1,000 to $1,500?

A) b
B) b + e
C) b + c
D) a + b

Question 15

Refer to Figure 6.1.Assume that L1 represents the budget line before a price change.The income effect is shown by the movement:

A)from bundle A to bundle C.
B)from bundle A to bundle B.
C)from bundle B to bundle C.
D)from bundle C to bundle B.

Question 16

Refer to Figure 6.1.Assume that L1 represents the budget line before a price change.The substitution effect is shown by the movement:

A)from bundle A to bundle C.
B)from bundle A to bundle B.
C)from bundle B to bundle C.
D)from bundle C to bundle B.

Question 17

Refer to Figure 6.4.If the price of computers is $1,500,then consumer surplus is equal to:

A) $175,000.
B) $535,000.
C) $1,000.
D) $262,500.

Question 18

Refer to Figure 6.4.If the price of computers is $1,000,then expenditures on computers is represented by the area:

A) c + d
B) c
C) b + c
D) a + b + c

Question 19

Refer to Figure 6.1.Assume that L1 represents the budget line before a price change.Point C represents the:

A) uncompensated effect on an increase in the price of soup.
B) compensated effect on a decrease in the price of soup.
C) uncompensated effect on a decrease in the price of soup.
D) compensated effect on an increase in the price of soup.

Question 20

Refer to Figure 6.1.Assume that L1 represents the budget line before a price change.Which change in budget lines represents compensation?

A) L1 to L2
B) L2 to L3
C) L3 to L2
D) L1 to L3

Question 21

The demand curve for leisure will slope upward if leisure is a ______ good and the income effect of a wage change is relatively _______.

A) normal; large
B) inferior; large
C) normal; small
D) inferior; small

Question 22

Because individuals initially own more time than they consume and sell the difference to their employers:

A) the direction of the income effect is the opposite than it is for other goods.
B) the direction of the income effect is the same as it is for other goods.
C) there is no income effect resulting from a change in the individual's wage rate.
D) the income effect of a wage change is relatively small.

Question 23

For what type of good do the substitution and income effects work in opposite directions?

A) Normal goods
B) Inferior goods
C) Giffen goods
D) The substitution and income effects never work in opposite directions.

Question 24

Which of the following is correct?

A) The effect of a compensated price change equals the effect of an uncompensated price change plus the effect of providing compensation.
B) The effect of a compensated price change equals the effect of an uncompensated price change plus the effect of removing compensation.
C) The effect of an uncompensated price change equals the effect of an uncompensated price change plus the effect of providing compensation.
D) The effect of a compensated price change equals the substitution effect of the price change plus the income effect of the price change.

Question 25

What effect does a compensated price change have on a consumer's well-being?

A) The consumer's well-being increases.
B) The consumer's well-being decreases.
C) The consumer's well-being is unaffected.
D) The effect on the consumer's well-being cannot be determined without knowing the direction of the price change.

Question 26

A change in price that is accompanied by a change in income sufficient to leave a consumer's well-being unchanged is called:

A) an uncompensated price change.
B) a compensated price change.
C) an income adjusted price change.
D) the income effect.

Question 27

The demand curve for a normal good will:

A) slope downward only if the income effect dominates the substitution effect.
B) slope downward only if the substitution effect dominates the income effect.
C) slope downward.
D) slope upward if the good is also a Giffen good.

Question 28

What must occur for a good to violate the Law of Demand?

A) The good must be normal and the income effect must be larger than the substitution effect.
B) The good must be normal and the substitution effect must be larger than the income effect.
C) The good must be inferior and the income effect must be larger than the substitution effect.
D) The good must be inferior and the substitution effect must be larger than the income effect.

Question 29

Which of the following statements is true?

A) The effect of a compensated price change = the substitution effect of the price change + the income effect of the price change.
B) The effect of an uncompensated price change = the substitution effect of the price change - the income effect of the price change.
C) The effect of an uncompensated price change = the income effect of the price change - the substitution effect of the price change.
D) The effect of an uncompensated price change = the substitution effect of the price change + the income effect of the price change.

Question 30

For low wages,the leisure demand curve slopes ______; for higher wages it slopes ______.

A) upward; downward
B) downward; upward
C) downward; downward
D) upward; upward

Question 31

Which of the following statements about the income effect of a price change is NOT true?

A) It affects consumption by removing compensation.
B) It always involves a parallel shift in the budget line.
C) It isolates the influence of a change in relative prices.
D) It reflects the fact that a price change affects a consumer's purchasing power.

Question 32

The effect of a compensated price change is known as:

A) the price effect of a price change.
B) the income effect of a price change.
C) the substitution effect of a price change.
D) the replacement effect of a price change.

Question 33

If a good is _______,the income effect is negative for a price increase and positive for a price decrease.

A) inferior
B) superior
C) normal
D) Giffen

Question 34

The income effect of a price change is:

A) always consistent with the Law of Demand.
B) never consistent with the Law of Demand.
C) consistent with the Law of Demand only for normal goods.
D) consistent with the Law of Demand only for inferior goods.

Question 35

Figure 6.2 illustrates a change in the price of soup.From the graph,we can conclude that:

A) the price of soup has increased and soup is a Giffen good.
B) the price of soup has fallen and soup is a Giffen good.
C) the price of soup has fallen and soup is a normal good.
D) the price of soup has fallen and bread is a Giffen good.

Question 36

A compensated increase in the price of a good:

A) causes the consumer to buy more of the good if the income effect is larger than the substitution effect.
B) causes the consumer to buy more of the good if the income effect is smaller than the substitution effect.
C) always causes the consumer to buy more of that good.
D) always causes the consumer to buy less of that good.

Question 37

The substitution effect of a price change ________ consistent with the Law of Demand.

A) is always
B) is never
C) is usually
D) for inferior goods is not

Question 38

If a good is normal,then the income effect is _____ for a price increase and _____ for a price decrease.

A) positive; negative
B) positive; positive
C) negative; negative
D) negative; positive

Question 39

For low wages,the labor supply curve slopes ______; for higher wages it slopes ______.

A) upward; downward
B) downward; upward
C) downward; downward
D) upward; upward

Question 40

If leisure is drawn on the horizontal axis and labor is drawn on the vertical axis,then a person who attaches more importance to leisure than to labor will have indifference curves that:

A) tend to be steeper.
B) tend to be flatter.
C) will be positively-sloped.
D) will be L-shaped.

Question 41

The relative cost of achieving a fixed standard of living in different situations is called:

A) a cost of living index.
B) compensating variation.
C) real income.
D) consumer surplus.

Question 42

Suppose that an individual has chosen not to work.Then a change in the wage rate:

A) creates a substitution effect, but no income effect.
B) creates an income effect, but no substitution effect.
C) creates both and income and substitution effect.
D) creates neither an income effect nor a substitution effect.

Question 43

A demand curve that shows the relationship between the price of a good and the amount of the good consumed holding the consumer's well-being fixed and allowing their to income vary is called:

A) an uncompensated demand curve.
B) a compensated demand curve.
C) a Marshallian demand curve.
D) a derived demand curve.

Question 44

For a normal good,the income and substitution effects work in the ______ direction.Therefore,a change in price produces a ______ change in uncompensated demand than in compensated demand.

A) opposite; smaller
B) opposite; larger
C) same; smaller
D) same; larger

Question 45

A consumer's ______ determines the location of their uncompensated demand curve,while the level of their ______ determines the location of their compensated demand curve.

A) income; well-being
B) well-being; income
C) indifference curves; income
D) preferences; well-being

Question 46

Which of the following best describes labor force participation rates for men and women over the period 1960 to 2000?

A) Labor force participation rates for both men and women increased.
B) Labor force participation rates for both men and women decreased.
C) Labor force participation rates for men increased while labor force participation rates for women decreased.
D) Labor force participation rates for men declined while labor force participation rates for women increased.

Question 47

A Marshallian,or uncompensated,demand curve reflects:

A) only the substitution effect of a price change.
B) only the income effect of a price change.
C) both the income and substitution effects of a price change.
D) neither the income nor the substitution effects of a price change.

Question 48

Refer to Figure 6.6.What area represents the compensation for an increase in the price of gasoline from $1.75 to $3.00 per gallon?

A) a + b + c + d + e
B) f + g + h
C) a + b + c
D) d + e

Question 49

When income effects are small:

A) there is no difference between the uncompensated demand curve and the uncompensated demand curve.
B) the uncompensated demand curve will be relatively far from the compensated demand curve.
C) the compensated demand curve will intersect the uncompensated demand curve.
D) the uncompensated demand curve lies close to the compensated demand curve.

Question 50

If a good is inferior,then whenever the compensated demand curve intersects the uncompensated demand curve:

A) the uncompensated demand curve is steeper than the compensated demand curve.
B) the compensated demand curve is steeper than the uncompensated demand curve.
C) both curves will have the same slope.
D) the compensated demand curve will be upward-sloping.

Question 51

Refer to Figure 6.6.What area represents the compensation for reduced consumption that results from an increase in the price of gasoline from $1.75 to $3.00 per gallon?

A) a + b
B) a + b + e
C) c + d + e
D) d + e

Question 52

The amount of money actually received in a particular period is called:

A) nominal income.
B) real income.
C) a cost-of-living index.
D) consumer surplus.

Question 53

Which of the following statements is true,assuming leisure is a normal good?

A) If the income effect is sufficiently large, the labor supply curve will bend backwards.
B) If the income effect is sufficiently small, the labor supply curve will bend backwards.
C) If the income effect is sufficiently large, the labor supply curve will slope down.
D) If the income effect is sufficiently large, the labor supply curve will shift to the left.

Question 54

Refer to Figure 6.5.The substitution effect is shown by the movement:

A)from point A to point B.
B)from point A to point C.
C)from point B to point C.
D)from point B to point A.

Question 55

Refer to Figure 6.5.By how many hours does leisure change as a result of the income effect of the wage change?

A) 2
B) 3
C) 4
D) 5

Question 56

Suppose a consumer's nominal income is $50,000 and the cost-of-living index is 1.3.The consumer's real income is:

A) $50,000.
B) $65,000.
C) $57,500.
D) $38,462

Question 57

A demand curve that shows the relationship between the price of a good and the amount of the good consumed holding the consumer's income fixed and allowing their well-being to vary is called:

A) an uncompensated demand curve.
B) a compensated demand curve.
C) a Hicksian demand curve.
D) a derived demand curve.

Question 58

The amount of money received in a particular period adjusted for changes in purchasing power is called:

A) nominal income.
B) real income.
C) a cost-of-living index.
D) consumer surplus.

Question 59

A Hicksian,or compensated,demand curve reflects:

A) only the substitution effect of a price change.
B) only the income effect of a price change.
C) both the income and substitution effects of a price change.
D) neither the income nor the substitution effects of a price change.

Question 60

What is the difference between approximate and exact consumer surplus?

A) Approximate consumer surplus is calculated using an uncompensated demand curve, while exact consumer surplus is calculated using a compensated demand curve.
B) Approximate consumer surplus is calculated using a compensated demand curve, while exact consumer surplus is calculated using an uncompensated demand curve.
C) There is no difference between approximate and exact consumer surplus.
D) Approximate consumer surplus can be measured, while exact consumer surplus cannot be measured.

Question 61

Using a graph,explain both the substitution effect and income effect that result from an increase in the price of a normal good.

Question 62

Suppose that Amber's demand for gasoline is given by G = 1000 - 200P_G,where G stands for gallons of gas and P_G represents the price of gas.
(a)Suppose gas sells for $2 per gallon.What is Amber's consumer surplus? Illustrate your answer graphically.
(b)Suppose the price of gas rises to $3 per gallon.What is the change in Amber's consumer surplus? Illustrate this change in your graph.

Question 63

Suppose an individual consumes just pizza and soda.Using a graph,explain how the substitution bias causes the Lespeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.

Question 64

Suppose the base year for a Lespeyres index is 2001.The value of the index is 1.3 in 2004 and 1.6 in 2006.By how much did the cost of the bundle increase between 2004 and 2006?

A) 0.3%
B) 23%
C) 0.23%
D) 60%

Question 65

Suppose that high-definition television sets (HDTVs)are normal goods.Would the compensated demand curve for HDTVs be flatter or steeper than the uncompensated demand curve? Explain your answer using a carefully-labeled graph.

Question 66

Constructing an accurate cost-of-living index is difficult because:

A) consumers have different tastes.
B) prices of different goods change by different proportions.
C) prices of different goods change by the same proportions.
D) real and nominal income tend to move together.

Question 67

______ is a fixed-weight index that is based on a consumption bundle actually purchased in the base year.

A) A Lespeyres price index
B) Compensating variation
C) Real income
D) The inflation rate

Question 68

______ measures the percent change in the cost of a fixed consumption bundle.

A) A fixed-weight price index
B) Substitution bias
C) Compensating variation
D) Real income

Question 69

Define consumer surplus.Using a graph,explain the change in consumer surplus that would result from a decrease in the price of a gasoline.

Question 70

Assume an individual has 14 hours per day for either work or leisure.Using an indifference curve graph,derive an individual's labor supply curve.In your answer,explain what might cause the individual's labor supply curve to eventually bend backwards.

Question 71

When prices are rising:

A) the Lespeyres index tends to overstate the increase in the cost of living because of the substitution bias.
B) the Lespeyres index tends to understate the increase in the cost of living because of the substitution bias.
C) the Lespeyres index tends to overstate the increase in the cost of living because of the compensating variation bias.
D) the Lespeyres index tends to understate the increase in the cost of living because of the consumer preference bias.

Question 72

The change in the cost of living over time is referred to as:

A) inflation.
B) substitution bias.
C) a fixed-weight price index.
D) real income.

Question 73

Madison has an income of $50,which she spends on Pizza (P)and soft drinks (S).Her marginal rate of substitution is MRS_PS = S/P.The price of pizza (P_P)is $5 and the price of soft drinks (P_S)is $2.50.Finally,the formula for her indifference curves is given by
S = 2U/P
(a)Find Madison's uncompensated demand curve for pizza.
(b)Find Madison's compensated demand curve for pizza.

Question 74

The substitution bias refers to:

A) the failure of the Lespeyres index to capture a consumer's tendency to purchase the same bundle of goods as prices change.
B) the substitution effect is positive for a price increase.
C) the substitution effect is negative for an inferior good.
D) the failure of the Lespeyres index to capture a consumer's tendency to substitute away from goods that have become more expensive.