Deck 4: Demand Analysis

Question 1

A utility function is a descriptive statement that relates total utility to:

A) income.
B) the production of goods and services.
C) the consumption of goods and services.
D) prices.

Answer 1

C

Question 2

Given limited budgets, consumers obtain the most satisfaction if they purchase goods and services that:

A) provide the highest level of marginal utility.
B) provide the highest level of total utility.
C) provide the highest level of marginal utility per dollar spent.
D) cost the least.

Answer 2

C

Question 3

The utility derived from consumption is:

A) tangible.
B) revealed through purchase decisions for goods and services.
C) measured directly.
D) inversely related to the number of market baskets considered.

Answer 3

B

Question 4

Point elasticity measures elasticity:

A) is measured over a given range of a function.
B) at a spot on a function.
C) over a given range along a function.
D) before non-price effects.

Question 5

When preferences are transitive, consumers are able to:

A) understand how much more one product is preferred over another product.
B) rank order the desirability of various goods and services.
C) need not know that one product is preferred to another product.
D) understand how much less preferred one product is versus another product.

Question 6

The increase in overall consumption made possible by a price cut is the:

A) income effect.
B) substitution effect.
C) income and substitution effect.
D) consumption effect.

Question 7

An increase in the quantity purchased following a price cut is:

A) unrelated to the law of diminishing marginal utility.
B) inconsistent with the law of diminishing marginal utility.
C) inconsistent with utility-maximizing behavior.
D) consistent with the law of diminishing marginal utility.

Question 8

With inelastic demand, a price increase produces:

A) higher profits.
B) lower profits.
C) lower marginal revenue.
D) lower total revenue.

Question 9

All combinations of goods and services that provide the same utility are identified by the:

A) law of diminishing marginal utility.
B) law of constant marginal utility.
C) law of increasing marginal utility.
D) indifference curve.

Question 10

A utility function is:

A) additive, by definition.
B) a descriptive statement that relates satisfaction or well-being to the consumption of goods and services.
C) multiplicative, by definition.
D) can be neither additive nor multiplicative.

Question 11

A direct relation exists between the price of one product and the demand for:

A) complements.
B) substitutes.
C) normal goods.
D) inferior goods.

Question 12

If the quantity of X is measured on the horizontal axis and the quantity of Y is measured on the vertical axis, the slope of the budget constraint will decrease if the:

A) price of X decreases.
B) price of Y decreases.
C) marginal utility of X decreases.
D) budget decreases.

Question 13

An indifference curve is a set of market baskets that:

A) provide the same utility.
B) contain the same goods.
C) have identical marginal rates of substitution.
D) can be obtained for the same cost.

Question 14

According to the law of diminishing marginal utility:

A) as the consumption of a given product rises, the added benefit eventually diminishes.
B) as the production cost for a given product rises, the added benefit eventually diminishes.
C) the demand curve for some products is upward-sloping.
D) as the price of a given product rises, the added benefit eventually diminishes.

Question 15

A product that enjoys rapidly growing demand over time is likely to be:

A) a noncyclical normal good.
B) a cyclical normal good.
C) neither a normal nor an inferior good.
D) an inferior good.

Question 16

Arc elasticity is measured:

A) over a given range of a function.
B) at a spot on a function.
C) over a given range along a function.
D) before non-price effects.

Question 17

The marginal rate of substitution is always equal to:

A) minus one times the ratio of marginal utilities for each product.
B) the marginal utility of either product.
C) the total utility of either product.
D) the slope of the budget constraint.

Question 18

If two services provide the same amount of satisfaction or utility, the consumer is said to display:

A) constant marginal utility.
B) indifference.
C) cardinal utility.
D) ordinal utility.

Question 19

The demand for a product tends to be inelastic if:

A) it is expensive.
B) a small proportion of consumer's income is spent on the good.
C) consumers are quick to respond to price changes.
D) it has many substitutes.

Question 20

If the income elasticity of demand for a good is greater than one, the good is:

A) a noncyclical normal good.
B) a cyclical normal good.
C) neither a normal nor an inferior good.
D) an inferior good.

Question 21

Consumer Preferences. Indicate whether each of the following statements is true or false. Explain why.
A. According to the more is better principle, all goods and services are desirable in the sense of being able to satisfy consumer wants.
B. When preferences are complete, consumers know how much a given good or service is preferred compared to another good or service.
C. The nonsatiation principle dictates that each incremental unit of consumption causes marginal utility to rise.
D. If two services provide the same amount of satisfaction or utility, the consumer is said to display indifference between the two.
E. The consumer's understanding of cardinal utility makes possible a rank ordering of preferred goods and services.

Question 22

Demand Analysis. The CSI DVD (season four) has been a hot seller during recent weeks. An analysis of weekly demand shows:
where Q is DVD sales and P is price.

Question 23

Demand Analysis. Aspen, Colorado is engaging in a bumper-sticker advertising campaign. Monthly sales data from ski shops selling the "Don't Worry-Be Happy (in Aspen)" bumper-stickers indicate that:
where Q is bumper-sticker sales and P is price.

Question 24

Utility Theory. Determine whether each of the following statements is true or false. Explain why.
A. According to the theory of consumer behavior, more is not always better.
B. Consumers must know how much one product is preferred over another in order to make informed consumption decisions.
C. A utility function is a descriptive statement that relates satisfaction or well-being to the consumption of goods and services.
D. The nonsatiation principle is specific to a given time and place.
E. Total utility measures the consumer's overall level of satisfaction derived from consumption activities

Question 25

Demand Analysis. The Crank Yankers DVD (season two) has been a hot seller during recent weeks. An analysis of weekly demand shows:
where Q is DVD sales and P is price.

Question 26

Elasticity. The demand for Penn's Oil motor oil can be characterized by the following point elasticities: price elasticity = -2.5, cross-price elasticity with Value Lean motor oil = 1.5, and income elasticity = 0.75. Indicate whether each of the following statements is true or false, and explain your answer.
A. A price increase for Penn's Oil will decrease both the number of units demanded and the total revenue of sellers.
B. The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a 3% increase in Penn's Oil demand.
C. Demand for Penn's Oil is price elastic and the motor oil is a cyclical, normal good.
D. Falling Value Lean prices will definitely increase revenues received by manufacturers of both brands of oil.
E. A 0.9% price reduction for Penn's Oil would be necessary to overcome the effects of a 3% decline in income.

Question 27

Goods for which e_I > 1 are often referred to as:

A) cyclical normal goods.
B) noncyclical normal goods.
C) being relatively unaffected by changing income.
D) inferior goods.

Question 28

Consumer Surplus. Explain why each of the following statements is true or false.
A. Consumer surplus exists if an individual consumer is able to buy something for less than the maximum amount they are willing to pay.
B. Consumer surplus is the value of purchased goods and services and equals the amount paid to sellers.
C. A firm can enhance profits by charging each customer a per-unit fee equal to marginal cost, plus a fixed fee equal to the amount of consumer surplus generated at that per-unit fee.
D. The optimal bundle price is a single lump sum amount equal to the total area under the demand curve at that point.
E. If exact information about the value of each individual product for each individual consumer was available, the firm could earn maximum profits by precisely tying the price charged to the marginal value derived by each customer.

Question 29

Indifference Curves. Confirm that each of the following statements is true or false. Explain why.
A. Intersecting indifference curves would reflect a violation of the "more is better" principle.
B. Indifference curves must have positive slope.
C. Higher indifference curves are better.
D. The law of diminishing marginal utility gives indifference curves a bowed outward, or convex to the origin, appearance
E. Indifference curves represents all market baskets that provide a given consumer the same amount of utility or satisfaction.

Question 30

When the product demand curve is Q = 140 - 10P, and price is decreased from P₁ = $10 to P₂ = $9, the arc price elasticity of demand is:

A) -0.1
B) -3
C) -4
D) -10

Question 31

Demand Analysis. The San Diego Zoo is contemplating a stuffed panda bear advertising promotion. Annualized sales data from local shops marketing the "Can't Bear it When You're Away" bear indicate that:
where Q is Panda bear sales and P is price.

Question 32

If e_P = -3 and MC = $0.66, the profit-maximizing price is:

A) $3
B) $0.99
C) $0.66
D) $1.98

Question 33

Elasticity. The demand for mini cassette players can be characterized by the following point elasticities: price elasticity = -2, cross-price elasticity with AA Alkaline batteries = -1.5, and income elasticity = 3. Indicate whether each of the following statements is true or false, and explain your answer.
A. A price increase for cassette players will decrease both the number of units demanded and the total revenue of sellers.
B. The cross-price elasticity indicates that a 2% reduction in the price of cassette players will cause a 3% increase in battery demand.
C. Demand for cassette players is price elastic and they are cyclical normal goods.
D. Falling battery prices will definitely increase revenues received by sellers of both cassette players and batteries.
E. A 3% price reduction in cassette players would be necessary to overcome the effects of a 2% decline in income.

Question 34

With elastic demand:

A) a given percentage increase in price causes quantity to decrease by a larger percentage.
B) |e_P| > 1 and the relative change in quantity is smaller than the relative change in price.
C) a price increase raises total revenue
D) A price decrease causes total revenues to fall.

Question 35

Optimal Price. Last week, Wally's Burgers, Inc. reduced the average price on the 1/2-pound Papa burger by 1%. In response, sales jumped by 2%.
A. Calculate the point price elasticity of demand for Papa burgers.
B. Calculate the optimal price for Papa burgers if marginal cost is $1 per unit.

Question 36

Demand Analysis. The South Park DVD (season three) has been a slow seller during recent months. An analysis of monthly demand shows:
where Q is DVD sales and P is price.

Question 37

When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must be:

A) greater than zero but less than one.
B) equal to one.
C) greater than one.
D) equal to zero.

Question 38

Optimal Price. Last week, Discount Food Stores, Inc. reduced the average price on the 22 ounce size of Dishwashing Liquid by 1%. In response, sales jumped by 8%.

Question 39

Substitutes and Complements. Determine whether each of the following statements is true or false. Indicate why.
A. Substitutes are goods and services that become more desirable when consumed together.
B. Complements are goods and services that can be used to fulfill a similar need or desire.
C. When goods and service can be freely but imperfectly substituted, indifference curves have a U-shape.
D. Perfect substitutes are goods and services that satisfy the same need or desire and have a L-shaped appearance..
E. Perfect complements are goods and services consumed together in the same combination and have a straight-line appearance.

Question 40

Demand Analysis. KRDY-FM is contemplating a T-shirt advertising promotion. Monthly sales data from T-shirt shops marketing the "Listen to KRDY-FM" design indicate that:
where Q is T-shirt sales and P is price.

Question 41

Arc Income Elasticity. The Omaha Best Buy sells seventy-five 50" HDTVs per week whereas the Des Moines store sells only fifty 50" HDTVs per week. Based upon data obtained in the financing process, Omaha customers earn an average income of $55,000 per year, while Des Moines customers earn $45,000 per year.
A. Calculate the implied arc income elasticity of demand.
B. How would you characterize demand for these 50" HDTVs?

Question 42

Optimal Price. Last month, Forest Lumber, Inc. reduced the average price on the eight-foot pine 2´4s by 1%. In response, sales jumped by 4%.
A. Calculate the point price elasticity of demand for eight-foot 2´4s.
B. Calculate the optimal price for eight-foot 2´4s if marginal cost is $1.50 per unit.

Question 43

Arc Income Elasticity. Glenco Motors sells an average of 20 Toyota Camry XLE four-door sedans per month. Evanston Toyota sells twice as many. Based upon data obtained in the financing process, Glenco customers earn an average household income of $100,000 per year, while Evanston customers earn $125,000 per year.
A. Calculate the implied arc income elasticity of demand.
B. How would you characterize demand for these Toyota Camrys?

Question 44

Price Elasticity. Z-Best Pizza recently decided to raise its regular price on medium pizzas from $9 to $12 following increases in the costs of labor and materials. Unfortunately, sales dropped sharply from 8,100 to 4,500 pizzas per month. In an effort to regain lost sales, Z-Best ran a coupon promotion featuring $5 off the new regular price. Coupon printing and distribution costs totaled $100, and caused only a modest increase in the typical advertising budget of $2,400 per month. The promotion was judged a success as it proved highly popular with consumers. In the period prior to expiration, coupons were used on 40% of all purchases and monthly sales rose to 7,500 pizzas.
A. Calculate the arc price elasticity implied by the initial response to Z-Best's price increase.
B. Calculate the effective price reduction resulting from the coupon promotion.
C. In light of this price reduction, and assuming no change in the price elasticity of demand, calculate Z-Best's arc advertising elasticity.
D. Why might the true arc advertising elasticity differ from that calculated in Part C?

Question 45

Income Elasticity. The Electronics Warehouse, Inc. is a leading retailer of home theater systems. Demand for home theater systems is sensitive to changes in national income. Electronics retailing is highly competitive, so retail demand for home theater systems is also very price-sensitive. During the past year, the Electronics Warehouse sold 550,000 home theater systems at an average retail price of $4,000 per unit. This year, GDP per household is expected to fall from $58,800 to $53,200 as the nation enters a steep recession. Without any price change, the Electronics Warehouse expects current-year sales to fall to 450,000 units.
A. Calculate the implied arc income elasticity of demand.
B. Given the projected fall in income, the sales manager believes that current volume of 550,000 units could only be maintained with a price cut of $500 per unit. On this basis, calculate the implied arc price elasticity of demand.
C. Holding all else equal, would a further increase in price result in higher or lower total revenue?

Question 46

Income Elasticity. Deluxe Carpeting, Inc., is a leading manufacturer of stain-resistant carpeting. Demand for Deluxe products is tied to the overall pace of building and remodeling activity and, therefore, is sensitive to changes in national income. The carpet manufacturing industry is highly competitive, so Deluxe demand is also very price-sensitive.
During the past year, Deluxe sold 28 million square feet of carpeting at an average wholesale price of $16 per square foot. This year, GDP per capita is expected to fall from $57,000 to $51,000 as the nation enters a steep recession. Without any price change, Deluxe expects current-year sales to fall to 20 million units.
A. Calculate the implied arc income elasticity of demand.
B. Given the projected fall in income, the sales manager believes that current volume of 28 million units could only be maintained with a price cut of $2 per unit. On this basis, calculate the implied arc price elasticity of demand.
C. Holding all else equal, would a further increase in price result in higher or lower total revenue?