Deck 5: Consumer Welfare and Policy Analysis

Question 1

You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?

A)Yes,because you wouldn't buy the soda if your willingness to pay would be less than the price.
B)Yes,because you are thirsty.
C)No,because you value other drinks more.
D)No,because you have less money after the transaction.

Answer 1

Yes,because you wouldn't buy the soda if your willingness to pay would be less than the price.

Question 2

Sarah and David both have linear demand curves for lemonade.Sarah's demand is more elastic than David's.At the current price of $0.50 per glass,they both choose to buy 5 glasses.A change in the price of lemonade to $0.75 per glass will

A)decrease Sarah's consumer surplus more than David's.
B)decrease David's consumer surplus more than Sarah's.
C)increase Sarah's consumer surplus more than David's.
D)increase David's consumer surplus more than Sarah's.

Answer 2

decrease David's consumer surplus more than Sarah's.

Question 3

As the price of a good increases,the loss in consumer surplus is larger,

A)the more elastic demand is.
B)the more money previously spent on the good.
C)the less money previously spent on the good.
D)the smaller the price increase.

Answer 3

the more money previously spent on the good.

Question 4

Shin's uncompensated demand for widgets is given by Q = 10/p.According to this demand,Shin's Marginal Willingness to Pay function is

A)10/Q.
B)10/p.
C)10Q.
D)-10/p².

Question 5

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).The current price is 35¢ per minute.What is the consumer surplus at the current price?

A)924.5
B)1075
C)301
D)1250

Question 6

Suppose consumers of cigarettes can be classified into two groups: heavy users and light users.Heavy users purchase more cigarettes and are less sensitive to price changes relative to light users.To determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of cigarettes increases,one would need to know

A)each group's average income.
B)the actual quantities purchased by each.
C)each individual's price elasticity of demand.
D)no additional information.

Question 7

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).At the current price of 35¢ per minute,consumer surplus equals

A)$301.
B)$924.50.
C)$1,225.50.
D)$1,250.

Question 8

Mary purchased a stuffed animal toy for $5.After a few weeks,someone offered her $100 for the toy.Mary refused.One can conclude that Mary's consumer surplus from the toy is

A)less than $5.
B)at least $95.
C)at least $100.
D)$105.

Question 9

Sarah's demand curve for whiskey has the same slope as Pete's;however,it lies to the right of Pete's.An increase in the price of whiskey will cause

A)Sarah to incur a greater loss of consumer surplus than Pete will.
B)Pete to incur a greater loss of consumer surplus than Sarah will.
C)Sarah and Pete to incur the same loss of consumer surplus.
D)Sarah's demand curve to shift closer to Pete's.

Question 10

Sandy's current consumer surplus for candy is 20.Candy is a normal good for her.When her income increases and the price of candy remains unchanged,her consumer surplus will

A)increase.
B)decrease.
C)remain the same.
D)Not enough information.

Question 11

Sandy's current consumer surplus for candy is 20.Candy is an inferior good for her.When her income increases and the price of candy remains unchanged,her consumer surplus will

A)increase.
B)decrease.
C)remain the same.
D)Not enough information.

Question 12

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Smith's consumer surplus is

A)$5,000.
B)$15,000.
C)$20,000.
D)not able to be calculated from the information given.

Question 13

Jeong's uncompensated demand for gizmos is given by Q = 30 - 2p.Jeong's marginal willingness to pay function is

A)30-2p.
B)15-.5Q.
C)30-2Q.
D)-2.

Question 14

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).The current price is 35¢ per minute.If the price were to increase by ten cents per minute,consumer surplus would

A)fall to $820.
B)fall by $84.
C)fall by $58.
D)fall to $369.

Question 15

Assume a consumer has a horizontal demand curve for a product.His consumer surplus from buying the product

A)is maximized.
B)can't be calculated.
C)equals zero.
D)Need more information.

Question 16

You pay $15 for an all-you-can-eat buffet.The food isn't so good,but definitely edible.When you finish eating,what is the marginal value of the last bite of food you consumed?

A)zero
B)$15
C)positive
D)negative

Question 17

Sarah and David both have linear demand curves for lemonade.Sarah's demand curve for lemonade intersects David's demand curve at a price of 50 cents per glass.Sarah's demand curve is more inelastic than David's.A change in the price of lemonade from 50 cents to 25 cents per glass will

A)decrease Sarah's consumer surplus more than David's.
B)decrease David's consumer surplus more than Sarah's.
C)increase Sarah's consumer surplus more than David's.
D)increase David's consumer surplus more than Sarah's.

Question 18

Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in $/gallon and Q is measured in gallons).He recently discovered a spring where water can be obtained free of charge.His consumer surplus from this water is

A)$0.
B)$50.
C)$100.
D)unknown based upon the information provided.

Question 19

Sandy's uncompensated demand for candy is given by the equation Q = 15/p,where Q is the quantity of candy and p is the price.When the price of candy rises from $1 to $3,the change in consumer surplus is

A)$16.5.
B)-$20.
C)-$15.
D)$15.

Question 20

If lower-income households spend a greater share of their income on cigarettes than do higher-income households,then a tax that raises the price of cigarettes will

A)cause lower-income households to incur a greater loss of consumer surplus than that incurred by higher-income households.
B)cause higher-income households to incur a greater loss of consumer surplus than that incurred by lower-income households.
C)raise consumer surplus among higher-income households.
D)cause consumer surplus to decline among smokers,but the relative impact cannot be determined from the given information.

Question 21

The compensation variation and equivalent variation will be closer to each other when

A)the income elasticity is greater.
B)the budget share is greater.
C)the price change is smaller.
D)the income elasticity is smaller.

Question 22

Ralf's uncompensated demand function for shoes is given by Q = 100/p.What is the change in consumer surplus when the price of shoes rises from p = 20 to p = 25?

Question 23

Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack.Draw a graph to illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus when the price of cigarettes increases.Explain and label the figure.

Question 24

Ed's utility from vacations (V)and meals (M)is given by the function U(V,M)= V²M.Last year,the price of vacations was $200 and the price of meals was $50.This year,the price of meals rose to $75,the price of vacations remained the same.Both years,Ed had an income of $1500.
a.Calculate the change in consumer surplus from meals resulting from the change in meal prices.
b.What is the compensating variation for the price change in meals?
c.Calculate the equivalent variation for the price change in meals.

Question 25

The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.

Question 26

Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the price of childcare by measuring the amount of income that can be taken away from the consumer (at the new price)such that they can just afford their original bundle of goods.Is this correct? If not,is it more or less than the true compensating variation? Explain with a graph.

Question 27

Kisa consumes the same amount of cigarettes each week regardless of her income (assume that her income is sufficiently large such that the quantity is affordable).The Equivalent Variation equals the Compensating Variation.

Question 28

Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the price of childcare.The willingness to pay should be measured as

A)BC_after to BC_A.
B)BC_after to BC_B.
C)BC_after to BC_before.
D)BC_A to BC_B.

Question 29

Ted's uncompensated demand function for bacon is given by Q = 15/p.What is Ted's change in consumer surplus when the price of bacon rises from p = 3 to p = 5?

Question 30

Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of playing Wartcraft).Currently,sodas are $1 each and Wartcraft costs $1 per hour.Ian has $12 of income.
a.Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.
b.Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.
c.Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to $2.

Question 31

The equivalent variation is always less than the consumer's income

Question 32

The difference between the equivalent variation and compensating variation is greater for goods with large income elasticities.

Question 33

Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any given price increase.

Question 34

The above figure shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone. )A car phone is useless except for talking with somebody who is not in the car.If calls are priced at ten cents per minute,what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

Question 35

Jeremy derives all of his utility from consuming milk shakes;he devotes his entire $20 allowance to milk shakes each week.Suppose the price of milk shakes rise from $2 to $4.Compute Jeremy's Compensating Variation and Equivalent Variation.

Question 36

The Compensating Variation for an increase in the price of a good is

A)the minimum amount of money a consumer would accept to voluntarily accept the price increase.
B)the maximum amount of money a consumer would pay to avoid the price increase.
C)the change in consumer surplus resulting from a price increase.
D)the change in utility resulting from the increase in price.

Question 37

The Equivalent Variation for an increase in the price of a good is

A)the reduction in a consumer's income necessary to harm the consumer by as much as the price increase.
B)the increase in a consumer's income necessary to eliminate the consumer's harm from a price increase.
C)the change in consumer surplus resulting from a price increase.
D)the amount of money a consumer would accept to be subject to a price increase.

Question 38

Suppose a victim of an accident brings the injurer to court.You are hired to determine the amount of damages.You are specifically asked to find a measure of the amount of money needed to restore the victim to the position he was in prior to the accident.What welfare measure will provide the most accurate measure of this amount?

A)compensating variation
B)equivalent variation
C)consumer surplus
D)the loss of utility

Question 39

Consumer surplus from a given purchase is the difference between what one was willing to pay for that purchase and what was actually paid.

Question 40

Suppose you work for a government agency that is considering removing certain agricultural subsidies.The removal of these subsidies will increase the price,thus lowering consumers' welfare.Because only aggregate market data is available,you are unable to measure the exact values for the compensated and equivalent variation by consumer.However,you are able to estimate the change in market consumer surplus.Assuming agricultural products are normal goods,how does your estimate of consumer surplus compare to the unknown EV and CV? Explain.Under what conditions will the three measures of welfare be close to one another?

Question 41

If Bobby thinks that leisure is an inferior good,then his labor supply curve

A)is backward bending.
B)is always negatively sloped.
C)is always positively sloped.
D)does not exist.

Question 42

A consumer has $100 of income to spend on books and other goods (a composite good).Books cost $20 each and the consumer's optimal bundle is to consume purchase three books while spending the rest of the income on the composite good.The consumer is then given a gift of a book.Assume the consumer is unable to sell the book.Use two separate graphs to demonstrate each of the two possible scenarios:
i.A consumer that is indifferent between the book gift and a cash gift of $20.
ii.A consumer that strictly prefers a $20 cash gift to a book.
To get full credit,accompany each graph with a brief explanation and draw your graphs clearly and well labeled.

Question 43

A study of the benefits of television asked consumers two questions: (1)How much would you pay to watch TV (versus no TV watching),and (2)How much would you have to be paid to voluntarily stop watching TV.Show how these are found with two separate graphs of indifference curves and budget constraints.Are these values likely to be equal? Discuss briefly.

Question 44

Empirical studies have found that the labor supply curves for most parts of the population are

A)backward bending.
B)upward sloping.
C)downward sloping.
D)nearly vertical.

Question 45

Julia is offered two options of government subsidies: $100 food stamp or $100 cash.If she receives $100 cash,she will spend $80 on food.If equivalent evaluation is measured for the situation when only $100 is available to her,the equivalent evaluation is

A)greater than $100.
B)equal to $100.
C)less than $100.
D)Not enough information.

Question 46

A quota will reduce consumer welfare when

A)the quota is less than the amount purchased without the quota.
B)the quota is greater than the amount purchased without the quota.
C)the quota is on a good with high income elasticity.
D)Quotas always reduce consumer welfare.

Question 47

If a person supplies fewer hours of labor in response to a wage increase,then

A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)the income effect equals the substitution effect.
D)the person is not maximizing utility.

Question 48

Suppose a consumer purchases Food (F)and other goods (X)with their income of $100.For simplicity,suppose that food and other goods are measured in $1 units,so the price of each is $1.Currently,the consumer can purchase unlimited food stamps by paying 10¢ for $1 of food.With this,the consumer purchases 500 food stamps (for 500 units of food)and 50 units of X.As a result,the government must pay 90¢ towards food,for a total cost of $450.Using a graph of budget constraints and indifference curves,show that the consumer prefers to receive a cash gift of $450 over the food stamp option.

Question 49

During droughts,cities often impose water use restrictions on consumers.Suppose a representative consumer has preferences for Water (W)and other goods (X)given by the utility function:
U(W,X)= WX.
Suppose the price of other goods is $1 and the price of water is initially 50¢.The consumer has a budget of $50/week.
a.How much water will the consumer purchase each week?
b.Suppose the government imposes a quota on water use of 50 units/week.Show that the quota reduces the representative consumer's utility.
c.By how much does the quota harm the representative consumer? Specifically,compute the equivalent variation of the quota.

Question 50

The Equivalent Variation resulting from a quota is best defined as

A)the amount a consumer would pay to have the quota removed.
B)the amount the consumer would need to voluntarily accept the quota.
C)the amount a consumer would pay for the quantity specified by the quota.
D)the loss in utility resulting from the quota.

Question 51

A consumer has the quasi-linear utility function
U(q₁,q₂)= 64q₁^1/2 + q₂
Assume p₂ = 1 and Y = 100.Find the consumer's compensating and equivalent variations for an increase in p₁ from 1 to 2.

Question 52

Job is a smoker.He has a utility function for cigarettes smoked in bars (q₁)and a composite good (q₂)given by
U(q₁,q₂)= 10q₁^.5 + q₂
Job's income is $100 and faces prices p₁ = 5 and p₂ = 1.The government is planning to ban smoking in bars.Compute the compensating variation.

Question 53

The price of leisure

A)is the same for everyone.
B)depends on the number of hours worked.
C)is measured as foregone earnings.
D)is immeasurable.

Question 54

If workers are in the backward-bending section of their labor supply curves,than an increase in the income tax rate will

A)increase the tax revenue and increase the number of hours worked.
B)increase the tax revenue and decrease the number of hours worked.
C)decrease the tax revenue and increase the number of hours worked.
D)decrease the tax revenue and decrease the number of hours worked.

Question 55

Rachel has an income of $10 which she spends on burritos and other goods ("other goods" represents a composite of all other goods).The price of burritos is $1 as is the price of other goods.
a.Suppose the government agrees to pay half of Rachel's burrito bill,so burritos now cost her $.50 apiece.She now chooses to buy eight burritos.On a graph with Burritos on the x-axis and other goods on the y-axis,draw Rachel's budget constraints before and after the subsidy program.Also include an indifference curve and the coordinates of Rachel's optimal bundle with the subsidy.
b.Now,suppose the government ends the program in part a.and replaces it with a new and simpler program: Rachel just gets a cash gift of $4.Show his new budget line.Is Rachel still able to afford her optimal bundle that she chose with the subsidy?
c.How much does each program cost the government? Which program does Rachel prefer? Explain.

Question 56

A tax cut that raises the after-tax wage rate will most likely result in more hours worked if

A)tax rates were low already.
B)the relevant portion of the labor supply curve is upward sloping.
C)the relevant portion of the labor supply curve is downward sloping.
D)workers can be easily fooled.

Question 57

A backward-bending labor supply curve implies that

A)the substitution effect dominates the income effect at higher wage rates but not at lower wage rates.
B)the substitution effect dominates the income effect at lower wage rates but not at higher wage rates.
C)leisure is an inferior good.
D)workers are irrational.

Question 58

Steve's utility for socks (q₁)and other goods (q₂)is given by
U(q₁,q₂)= 10q₁^.1 q₂^.9
The price of the composite good is p₂ = 1 and the price of a pair of socks is p₁ = 2.Steve's income is Y = 100.Every year,Steve's mom buys him 20 pairs of socks.Find the equivalent variation of the gift.What is the difference between the cost of the gift and the equivalent valuation cash amount?

Question 59

A backward-bending labor supply curve could possibly imply which of the following cases?

A)Leisure is an inferior good.
B)Leisure is a normal good.
C)Leisure is a normal good at low wages and inferior at high wages.
D)None of the above.

Question 60

If a person supplies more hours of labor in response to a wage increase,then

A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)the income effect equals the substitution effect.
D)the person is not maximizing utility.

Question 61

The graph below shows George's indifference curves and budget lines.From A to B,we can conclude

A)leisure is a normal good.
B)leisure is an inferior good.
C)George will increase his working time with a higher wage.
D)the substitution effect is greater than the income effect.

Question 62

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as
U = Y + L^0.5.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day.

Question 63

In response to an increase in the wage rate,the substitution effect will cause a person to

A)supply fewer hours of labor.
B)supply more hours of labor.
C)supply the same hours of labor.
D)have a backward bend in her labor supply curve.

Question 64

The above figure shows an indifference map for a person's choices between leisure and consumption.Derive this person's labor supply curve for wage rates of $5,$10,and $15.

Question 65

If the marginal tax rate rises above t * = 63%,tax revenue will decrease because

A)workers refuse to pay taxes since the tax rate is too high.
B)workers are in the downward-sloping portion of labor supply.
C)workers reduce working hours in response to the wage loss.
D)None of the above.

Question 66

A tax cut will unambiguously lower income-tax revenue.

Question 67

In response to an increase in the wage rate,the income effect will usually cause a person to

A)supply fewer hours of labor.
B)supply more hours of labor.
C)supply the same hours of labor.
D)have a horizontal labor supply curve.

Question 68

An increase in unearned income always creates a disincentive to work

Question 69

What does it mean to say the labor supply is backwards bending? How does this relate to the direction and magnitude of the income and substitution effects? Will the labor supply be backwards bending if leisure is a normal good? Will it be backwards bending if leisure is an inferior good?

Question 70

Consider a consumer with preferences for consumption of a composite good (C)and leisure (L)given by the following utility function:
U(C,L)= 2C^1/2 + L
Denote the consumer's wage rate by w and total time available for labor and leisure is normalized to one.The price of consumption is one.Denote the amount of labor supplied as N,so that
N + L = 1.The consumer also earns non-labor income ("allowance")of 0.
a.Write out the budget constraint determining feasible allocations of leisure and consumption.
b.Compute the optimal bundle of leisure and optimal bundle of consumption.
c.Derive the consumer's labor supply function: N*(w,).
d.Determine the effect of increasing non-labor income on the supply of labor (that is,compute the relevant partial derivative).
e.How does non-labor income affect the consumption of the composite good,C?
f.Compute the effects of an increase in wage on consumption and labor supply.Is leisure a normal good?

Question 71

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as
U = Y + L^0.5.Show what happens to the person's labor supply curve when the income tax is cut from 70 % to 30 %.Denote hours worked as H and wage per hour as w.

Question 72

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis.Show that a person who works can work fewer hours and increase utility when the wage rate increases.

Question 73

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.