Deck 5: The Theory of Demand

Question 1

Suppose the consumer's utility function is given by where The equation for this consumer's demand curve for is

A)
B)
C)
D)

Answer 1

B

Question 2

The consumer's demand curve can be obtained analytically by solving which two equations?

A) ; where is the initial level of utility.
B) ;
C) ; where is the initial level of utility.
D) ; where is the final level of utility.

Answer 2

B

Question 3

On a typical optimal choice diagram,with budget lines and indifference curves,the line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the consumer's

A) income-consumption curve.
B) price-consumption curve.
C) demand curve.
D) Engel curve.

Answer 3

B

Question 4

If a consumer's preferences for two goods,say food and clothing,are such that as income decreases,consumption of food increases but consumption of clothing decreases,we can say that

A) food and clothing are inferior goods.
B) food is a normal good and clothing is an inferior good.
C) food is an inferior good and clothing is a normal good.
D) food and clothing are both normal goods.

Question 5

A curve that represents the consumer's "willingness to pay" is the consumer's

A) Exchange curve
B) Demand curve
C) Supply curve
D) None of the above

Question 6

Suppose when the consumer's income rises by 100%,the consumer's consumption of good falls by 1%.We can infer that the consumer's income elasticity for good is

A) -1
B) -0.01
C) 1
D) 0.01

Question 7

In order to identify a consumer's demand curve from an optimal choice diagram we

A) change the consumer's income, holding the prices of both goods constant, and identify the baskets the consumer chooses with each income level.
B) change the price's of both goods, holding income constant, and identify the baskets the consumer chooses with each price level.
C) change the price of one good, holding income and the price of the other good constant, and identify the baskets the consumer chooses with each price level.
D) change the price of one good and then change the income level so that the consumer achieves the same level of utility as before the price change and then identify the optimal consumption baskets at each price level.

Question 8

Suppose the consumer's income elasticity for good is -0.10 when monthly income is $1,000,and the consumer's income elasticity for good is 0.10 when monthly income is $2,000.From this information we can infer that

A) good is an inferior good for low levels of income and a superior good for high levels of income.
B) good is a normal good for low levels of income and an inferior good for high levels of income.
C) good in an inferior good for low levels of income and a normal good for high levels of income.
D) good is a Giffen good.

Question 9

On a typical optimal choice diagram,with budget lines and indifference curves,the line that connects the consumer's optimal baskets as the consumer's income changes holding the prices of the goods constant is called the consumer's

A) income-consumption curve.
B) price-consumption curve.
C) demand curve.
D) Engel curve.

Question 10

An Engel curve for good describes

A) how the consumption of good varies as the price of good changes.
B) how the consumption of good varies as the consumer's income changes.
C) how the consumption of good varies as the consumption of good changes.
D) how the consumption of good varies as price-consumption curve changes.

Question 11

Suppose when the consumer's income rises by 100%,the consumer's consumption of good falls by 1%.We can infer that good is a(n)

A) normal good.
B) inferior good.
C) Giffen good.
D) marginal good.

Question 12

If a consumer's preferences for two goods,say food and clothing,are such that as income increases,consumption of food and clothing both increase,we can say that

A) food and clothing are inferior goods.
B) food is a normal good and clothing is an inferior good.
C) food is an inferior good and clothing is a normal good.
D) food and clothing are both normal goods.

Question 13

Which of the following is held constant along an income-consumption curve?

A) Income.
B) Consumption of all goods.
C) The price of all goods other than the good of interest.
D) The prices of all goods.

Question 14

As the price of a good whose units are measured along the x-axis increases,holding the consumer's income and the price of the other good constant,the budget line will

A) shift inward toward the origin.
B) shift outward away from the origin.
C) rotate such that the y-intercept stays the same and the x-intercept shifts toward the origin.
D) rotate outward away from the origin.

Question 15

Suppose when the consumer's income rises by 100%,the consumer's consumption of good only increases 1%.We can infer that good is a(n)

A) normal good.
B) inferior good.
C) Giffen good.
D) marginal good.

Question 16

Suppose when the consumer's income rises by 100%,the consumer's consumption of good only increases by 1%.We can infer that the consumer's income elasticity for good is

A) -0.01
B) -1
C) 0.01
D) 1

Question 17

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)

A) price-consumption curve.
B) Engel curve.
C) demand curve.
D) good-consumption curve.

Question 18

A negatively-sloped Engel curve implies a(n)

A) inferior good.
B) normal good.
C) Giffen good.
D) marginal good.

Question 19

Evaluate the truthfulness of the following statements. I.The Engel curve for a normal good is upward-sloping.
II)The Engel curve for an inferior good is downward-sloping.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 20

The type of elasticity of demand that is most commonly positively valued but that can be negative at times is called

A) income elasticity of demand and it is negative when the good is a normal good.
B) income elasticity of demand and it is negative when the good is an inferior good.
C) price elasticity of demand and it is negative when the slope of the demand curve is negatively sloped.
D) None of the above.

Question 21

The substitution effect graphically is always denoted

A) by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line.
B) by moving in the direction of the item that is becoming relatively more expensive.
C) by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line.
D) by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line.

Question 22

The substitution effect is

A) the change in the amount of the good consumed holding the level of income constant.
B) the change in the amount of the good consumed as the price of the good changes holding income constant.
C) the change in the amount of the good consumed as the price of the good changes holding utility constant.
D) the change in the amount of the good consumed holding relative prices constant and changing the level of income.

Question 23

Suppose the consumer's utility function is given by U(x,y) = x^1/4y^3/4 where The equation for this consumer's demand curve for is

A)
B)
C)
D)

Question 24

A positively-sloped Engel curve implies a(n)

A) inferior good.
B) normal good.
C) Giffen good.
D) marginal good.

Question 25

Which of the following statements is false?

A) If the price of a good falls, the substitution effect will always induce the consumer to consume at least as much of the good as before the price change.
B) All Giffen good are inferior goods.
C) As the price of an inferior good increases, the income effect will induce the consumer to consume less of the good.
D) As the price of a normal good falls, the income effect will result in an increase in consumption of the good.

Question 26

Suppose the consumer's utility function is given by U(x,y) = xy + y where MU_x = y MU_y = x+1
The equation for this consumer's demand curve for y when I < P_x is

A) y^d = 0
B) y^d =
C) y^d =
D) y^d = 1/2

Question 27

Identify the truthfulness of the following statements.
I)It is possible for an Engel curve to be positively sloped for a certain region of income and negatively sloped for another region.
II)The income elasticity of demand for a normal good is negative.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 28

Identify the truthfulness of the following statements. I.For normal goods,the income and substitution effects work in the same direction.
II)Some normal goods are Giffen goods.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 29

Giffen goods probably occur most frequently when the good in question is a

A) luxury item like jewelry or yachts.
B) low-priced item that is insignificant relative to a person's total consumption.
C) a staple of a person's consumption pattern or represents a big share of a person's total expenditures.
D) technology-related item.

Question 30

If is an inferior good and the price of rises

A) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase more .
B) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase less .
C) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase more .
D) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase less .

Question 31

Suppose the consumer's utility function is given by U(x,y) = xy + y where MU_x = y MU_y = x+1
The equation for this consumer's demand curve for when I < P_x is

A) x^d = 0
B) x^d =
C) x^d = -
D) x^d = 1/2

Question 32

If is an inferior good and the price of falls

A) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase more .
B) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase less .
C) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase more .
D) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase less .

Question 33

Under what circumstances is the demand curve downward-sloping?

A) When the good is not a Giffen good.
B) When the good is a Giffen good.
C) When the good is an inferior good and the income effect outweighs the substitution effect.
D) The demand curve is always downward-sloping.

Question 34

The income effect associated with a change in the price of good x

A) describes the change in the level of consumption as a result of the consumer's change in utility, holding price constant.
B) describes the change in the level of consumption, holding utility constant.
C) describes the change in relative purchasing power.
D) can be either negative or positive.

Question 35

Identify the statement that is false.Assume that the price of good increases.

A) The substitution effect shows that the consumption of good falls, regardless of whether is a normal or inferior good.
B) The income effect shows that the consumption of good rises if good is an inferior good.
C) The overall effect shows that the consumer purchases more of good if good is a Giffen good.
D) The overall effect shows that the consumer purchases more of good if good is an inferior good.

Question 36

Suppose the consumer's utility function is given by U(x,y) = xy + y where MU_x = y MU_y = x+1
The equation for this consumer's demand curve for when I > P_x is

A) x^d = 0
B) x^d =
C) x^d = -
D) x^d = 1/2

Question 37

As the price of a good increases,holding the consumer's income and the price of the other good constant,the budget line will

A) shift inward toward the origin.
B) shift outward away from the origin.
C) rotate the budget line inward toward the origin.
D) rotate the budget line outward away from the origin.

Question 38

The income effect is

A) the change in the amount of the good consumed holding the level of income constant.
B) the change in the amount of the good consumed as the price of the good changes holding income constant.
C) the change in the amount of the good consumed as the price of the good changes holding utility constant.
D) the change in the amount of the good consumed as the consumer's utility changes holding the price of the good constant.

Question 39

Identify the truthfulness of the following statements. I.The substitution effect is unambiguous in its direction.
II)Direction of the income effect depends on whether the good is a normal or an inferior good.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 40

Under what circumstances is the demand curve upward-sloping?

A) When the good is a normal good.
B) When the good is an inferior good and the substitution effect outweighs the income effect.
C) When the good is an inferior good and the income effect outweighs the substitution effect.
D) The demand curve can never be upward-sloping.

Question 41

Consider a market with and .Suppose that initially income is I = 60,and that income then increases to I = 80.What is the increase in consumer surplus from this increase in income?

A) 1300
B) 1368
C) 1421
D) 1472

Question 42

In this chapter,the term positive network externality describes

A) the positive effect of consuming chocolate as income rises.
B) the snob effect.
C) the bandwagon effect.
D) the impact of a polluting firm on its local environment.

Question 43

The concept of compensating variation means

A) the change in income necessary to hold the consumer at the final level of utility as price changes.
B) the change in income necessary to restore the consumer to the initial level of utility as price changes.
C) the income effect.
D) the substitution effect.

Question 44

The method for finding the substitution effect of a price change on consumption of good x is to:

A) Find the initial optimal consumption basket before the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets.
B) Find the initial optimal consumption basket before the price change, then find the final optimal consumption basket after the price change and measure the change in consumption of the good between the two baskets.
C) Find the final optimal consumption basket after the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets.
D) Find the initial and final optimal consumption baskets, before and after the price change, find the decomposition basket, and add up the total changes between the two optimal baskets and the decomposition basket.

Question 45

The concept of equivalent variation means

A) the change in income necessary to hold the consumer at the final level of utility as price changes.
B) the change in income necessary to restore the consumer to the initial level of utility as price changes.
C) the income effect.
D) the substitution effect.

Question 46

Giffen goods

A) are normal goods with a negative income effect.
B) are inferior goods with an income effect that is smaller in magnitude than the substitution effect.
C) are inferior goods with an income effect that is greater in magnitude than the substitution effect.
D) have downward sloping demand curves.

Question 47

We could use the term "snob effect" to describe which of the following situations?

A) I get great satisfaction from collecting Soviet-era posters because few people have them.
B) I purchase the same e-mail software package as all of my friends and family so that we can exchange both mail and advice on technical information.
C) I purchase more chocolate bars when the price of chocolate bars falls.
D) I decide to purchase a good because a politician suggests it.

Question 48

Identify which of the following statements is false.

A) The market demand curve is the horizontal sum of the individual demands, once we sum the price vertically.
B) The market demand curve is the horizontal sum of the individual demands for each price.
C) The market demand curve maintains the properties of the individual demand curves.
D) All of the above statements are true.

Question 49

If is a normal good and the price of falls

A) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase more .
B) the substitution effect will induce the consumer to purchase more and the income effect will induce the consumer to purchase less .
C) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase more .
D) the substitution effect will induce the consumer to purchase less and the income effect will induce the consumer to purchase less .

Question 50

We can derive a market demand curve for an item by

A) multiplying each individual's demand curve by the number of consumers in the marketplace.
B) summing all of the quantities that would be demanded by individual consumers at different prices for that good and plotting the total quantities against price.
C) looking at how the equilibrium changes when we shift each individual's supply curve.
D) subtracting the price of an item from the supply curve.

Question 51

Let U(x,y) = with MU_x = and MU_y = .Let I = $100,P_x = $10 and P_y = $10 be the initial set of prices and income.Now,let P_x rise to $25.What are the (approximate) substitution and income effects of this change in prices?

A) Income effect = -3.3; Substitution Effect = -2.1
B) Income effect = -2.3; Substitution Effect = -1.7
C) Income effect = -1.3; Substitution Effect = -1.7
D) Income effect = -1.7; Substitution Effect = -1.3

Question 52

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Q^d. Suppose that the market is initially in equilibrium at a price of $10.What is the consumer surplus at the original equilibrium price?

A) 100.
B) 150
C) 200
D) 250.

Question 53

One way of thinking of consumer surplus might be described as

A) the total value of the sum of the difference of all consumers' willingness to pay for an item relative to the actual cost of the item in the market.
B) the excess amount that consumers earn relative to the poverty line.
C) the level of satisfaction that consumers reach from consuming an item.
D) the excess of consumer demand relative to supply.

Question 54

Consumer surplus is defined as

A) The difference between the discounted amount and the original amount purchased of a good.
B) The difference between the maximum amount a consumer is willing to pay for a good and the amount he or she must actually pay when purchasing
C) The difference between the cost of producing a good and its purchase price.
D) The amount of the good purchased by a consumer over and above the minimum amount that the customer wanted of the good.

Question 55

Let U(x,y) = with MU_x = and MU_y = .Let I = $100,P_x = $25 and P_y = $10 be the initial set of prices and income.Now,let P_x fall to $10.What is the approximate compensating variation for this change in prices?

A) 24
B) 30
C) 34
D) 40

Question 56

Compensating variation is

A) the change in income necessary to hold the consumer at the final level of utility as price changes.
B) always the area under the demand curve and above the price paid.
C) the change in income necessary to restore the consumer to the initial level of utility.
D) the difference in the consumer's income between the purchase of the original basket and the new basket at the old prices.

Question 57

We could use the term "bandwagon effect" to describe which of the following situations?

A) I get great satisfaction from collecting Soviet-era posters because few people have them.
B) I purchase the same e-mail software package as all of my friends and family so that we can exchange both mail and advice on technical information.
C) I purchase more chocolate bars when the price of chocolate bars falls.
D) I decide to purchase a good because a politician suggests it.

Question 58

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Q^d. Suppose that the market is initially in equilibrium at a price of $10.Now suppose that the price rises to $14.What is the change in consumer surplus?

A) An increase of 38.
B) A decrease of 38.
C) A decrease of 42.
D) A decrease of 36.

Question 59

Identify the statement that is true.Assume that the price of good increases.

A) If x is a normal good, both the income and substitution effects lead to a fall in consumption of x.
B) The substitution effect leads to a decrease in consumption of x only if x is an inferior good.
C) If x is a normal good, the substitution effect alone leads to a decrease in consumption of x.
D) If x is an inferior good, the income effect alone leads to a decrease in consumption of good x.

Question 60

Consider a market with and Q^s = 2P_. What is the consumer surplus in this market?

A) 1,000
B) 300
C) 750
D) 500

Question 61

A network externality can be said to exist when

A) a recording artist appears on a popular TV show leading to an increase in popularity and record sales; this is called the "snob effect".
B) a recording artist appears on a popular TV show leading to an increase in popularity and record sales; this is called the "bandwagon effect".
C) many people try to access the internet at the same time leading to a system crash.
D) two television networks decide to merge.

Question 62

One way to measure the opportunity cost of an hour of leisure is

A) the wage rate that an individual could earn for that hour.
B) the cost of going to a restaurant every evening to eat.
C) the cost of visiting a museum just for fun.
D) the cost of the cleaning service that I hire to clean my house because I work 50 hours per week.

Question 63

Which of the following statements describes a backward-bending labor supply curve?

A) Every hour that I work represents a loss of an hour of leisure.
B) I asked for extra hours this month to pay for a new bicycle.
C) When I received my last raise, I cut back on my overtime hours so that I could work fewer hours but earn the same amount of money per week.
D) I worked more hours when I was younger.

Question 64

Identify which of the following statements is false.The "substitution bias" of the CPI

A) means that the CPI can either understate or overstate the actual change in cost of living faced by consumers.
B) refers to the fact that the CPI measures the change in expenditures necessary to consume a fixed basket of goods, whereas in reality the optimal consumption basket changes as prices change.
C) can be corrected partially by periodically updating the fixed basket of goods used in calculations.
D) refers to the fact that those who construct the CPI are biased away from including certain types of goods in the fixed basket of goods used in their calculations.

Question 65

In this chapter,the term negative network externality describes

A) the positive effect of consuming chocolate as income rises.
B) the snob effect.
C) the bandwagon effect.
D) the impact of a polluting firm on its local environment.

Question 66

Leisure can be

A) either a normal good or an inferior good.
B) only a normal good.
C) considered to be an inferior good when a parallel outward shift of the budget line leads to an increase in leisure .
D) considered to be a normal good when a parallel outward shift of the budget line leads to a decrease in leisure.