Deck 4: Individual and Market Demand

Question 1

The curve in the diagram below is called

A) the price-consumption curve.
B) the demand curve.
C) the income-consumption curve.
D) the Engel curve.
E) none of the above

Answer 1

A

Question 2

Use the following statements to answer this question:
I) A price-consumption curve is derived by varying the price of asparagus. If the price-consumption curve is an upward sloping straight line, the demand curve for asparagus must be downward sloping.
II) Fred consumes only food and clothing. Fred's Engel curve traces out the utility maximizing combinations of food and clothing associated with each and every income level.

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

Answer 2

B

Question 3

The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that:

A) good A is a normal good.
B) good B is an inferior good.
C) goods A and B are substitutes.
D) goods A and B are complements.
E) none of the above

Answer 3

D

Question 4

The income-consumption curve for Dana between Qa and Qb is given as: Qa = Qb. His budget constraint is given as:
120 = Qa + 4Qb
How much Qa will Dana consume to maximize utility?

A) 0
B) 24
C) 30
D) 60
E) More information is needed to answer this question.

Question 5

Consider a graph on which one good Y is on the vertical axis and the only other good X is on the horizontal axis. On this graph the income-consumption curve has a positive slope for low incomes, then it takes a zero slope for a higher income, and then it takes a negative slope for even higher incomes (the curve looks like an arc, first rising and then falling as income increases). This curve illustrates that, for all income levels,

A) both X and Y are normal.
B) only Y is normal.
C) both X and Y are inferior.
D) only X is normal.

Question 6

If an Engel curve has a positive slope

A) both goods are normal.
B) the good on the horizontal axis is normal
C) as the price of the good on the horizontal axis increases, more of both goods in consumed.
D) as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed.

Question 7

The curve in the diagram below is called:

A) the price-consumption curve.
B) the demand curve.
C) the income-consumption curve.
D) the Engel curve.
E) none of the above

Question 8

Which of the following claims is true at each point along a price-consumption curve?

A) Utility is maximized but income is not all spent.
B) All income is spent, but utility is not maximized.
C) Utility is maximized, and all income is spent.
D) The level of utility is constant.

Question 9

According to a survey by the U.S. Bureau of Labor Statistics, which of the following statements about annual U.S. household consumer expenditures is false?

A) The income elasticity of demand for entertainment is positive.
B) The income elasticity of demand for owner-occupied housing is positive.
C) The income elasticity of demand for rental housing is positive.
D) The income elasticity of demand for health care is positive.
E) Average family expenditures increase with income.

Question 10

When the income-consumption curve has a positive slope throughout its entire length, we can conclude that

A) both goods are inferior.
B) both goods are normal.
C) the good on the vertical (y) axis is inferior.
D) the good on the horizontal (x) axis is inferior.

Question 11

Which of the following is true regarding utility along a price-consumption curve?

A) It is constant.
B) It changes from point to point.
C) It changes only if income changes.
D) It changes only for normal goods.

Question 12

Which of the following pairs of goods are NOT complements?

A) Hockey sticks and hockey pucks
B) Computer CPUs and computer monitors
C) On-campus student housing and off-campus rental apartments
D) all of the above
E) none of the above

Question 13

An individual demand curve can be derived from the ________ curve.

A) price-consumption
B) price-income
C) income-substitution
D) income-consumption
E) Engel

Question 14

The change in the price of one good has no effect on the quantity demanded of another good. These goods are:

A) complements.
B) substitutes.
C) both inferior.
D) both Giffen goods.
E) none of the above

Question 15

Which of the following is true regarding income along a price-consumption curve?

A) Income is increasing.
B) Income is decreasing.
C) Income is constant.
D) The level of income depends on the level of utility.

Question 16

As we move downward along a demand curve for apples,

A) consumer well-being decreases.
B) the marginal utility of apples decreases.
C) the marginal utility of apples increases.
D) Both A and B are true.
E) Both A and C are true.

Question 17

Which of the following pairs of goods are substitutes?

A) Baseball bats and baseballs
B) Hot dogs and mustard
C) Computer hardware and software
D) Gasoline and motor oil
E) Owner-occupied housing and rental housing

Question 18

Which of the following goods has a low, but positive, income elasticity of demand?

A) furniture.
B) new cars.
C) health insurance.
D) all of the above
E) none of the above

Question 19

Consider two goods X and Y available for consumption. Assume that the price of X changes while the price of Y remains fixed. For these two goods, the price-consumption curve illustrates the

A) relationship between the price of X and consumption of Y.
B) utility-maximizing combinations of X and Y for each price of X.
C) relationship between the price of Y and the consumption of X.
D) utility-maximizing combinations of X and Y for each quantity of X.

Question 20

The income-consumption curve

A) illustrates the combinations of incomes needed with various levels of consumption of a good.
B) is another name for income-demand curve.
C) illustrates the utility-maximizing combinations of goods associated with every income level.
D) shows the utility-maximizing quantity of some good (on the horizontal axis) as a function of income (on the vertical axis).

Question 21

Suppose the income-consumption curve for goods X and Y is upward sloping. If the price of good Y increases and the income-consumption curve rotates in clockwise fashion, then we know that:

A) X and Y are complements.
B) X and Y are both inferior goods.
C) X and Y are substitutes .
D) Y is an inferior good.

Question 22

Melissa's optimal consumption is indicated in the diagram below for three different income levels. For Melissa are park visits a normal or inferior good? Explain your answer.

Question 23

Good A is a normal good. The demand curve for good A:

A) slopes downward.
B) usually slopes downward, but could slope upward.
C) slopes upward.
D) usually slopes upward, but could slope downward.

Question 24

A Giffen good

A) is always the same as an inferior good.
B) is the special subset of inferior goods in which the substitution effect dominates the income effect.
C) is the special subset of inferior goods in which the income effect dominates the substitution effect.
D) must have a downward sloping demand curve.

Question 25

In the diagram below, Marvin's optimal consumption bundles are indicated for five different budget constraints. Sketch the Engel curve for Marvin. Next, use the diagram to sketch Marvin's demand curve for the good on the horizontal axis.

Question 26

Suppose that a consumer regards two types of soap as perfect substitutes for one another. The price consumption path generated by changing the price of one type of soap

A) is always upward sloping.
B) is always horizontal.
C) is always vertical.
D) corresponds with the axis for the cheaper soap.
E) corresponds with the axis for the more expensive soap.

Question 27

Which of the following is true concerning the substitution effect of a decrease in price?

A) It will lead to an increase in consumption only for a normal good.
B) It always will lead to an increase in consumption.
C) It will lead to an increase in consumption only for an inferior good.
D) It will lead to an increase in consumption only for a Giffen good.

Question 28

Your income response for bicycle riding changes with the amount of income you earn. At low levels of income, you view bicycle riding as an inferior good and substitute other types of transportation (e.g., auto travel) as your income rises. However, you view bicycle riding as a normal good after your income rises above a particular level. What shape does your Engel curve for bicycle riding have?

A) Vertical line
B) Horizontal line
C) C-shaped
D) Upward sloping
E) none of the above

Question 29

Using the table below, construct an Engel Curve for each beer type.

Question 30

As a group, U.S. consumers view hamburger as a normal good at low income levels and as an inferior good at high income levels. Based on this information, which of the following statements is NOT true?

A) As income for all consumers rises, the hamburger demand curves of low-income consumers shift rightward, and the demand curves of high-income consumers shift leftward.
B) The aggregate demand curve for hamburger in the U.S. is upward sloping at low prices.
C) The Engel curve for hamburger consumed in the U.S. is upward sloping at low income levels and downward sloping at high income levels.
D) The income-consumption curve for hamburger and all other food products cannot be a straight line.

Question 31

Which of the following is true concerning the income effect of a decrease in price?

A) It will lead to an increase in consumption only for a normal good.
B) It always will lead to an increase in consumption.
C) It will lead to an increase in consumption only for an inferior good.
D) It will lead to an increase in consumption only for a Giffen good.

Question 32

Use the following two statements in answering this question:
I) All Giffen goods are inferior goods.
II) All inferior goods are Giffen goods.

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

Question 33

Which of the following describes the Giffen good case? When the price of the good

A) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls.
B) falls, the income effect is in the same direction as the substitution effect, and consumption rises.
C) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls.
D) falls, the income effect is in opposite direction to the substitution effect and consumption rises.
E) Both A and D are correct.

Question 34

Based on the diagram below it can be inferred that:

A) hot dogs are a normal good for all levels of income.
B) hot dogs are an inferior good, but not a Giffen good, for all levels of income.
C) hot dogs are a Giffen good for all levels of income.
D) hot dogs are an inferior good for low levels of income, but at higher levels of income become a normal good.
E) none of the above

Question 35

Use the following statements to answer this question:
I) The income-consumption curve for perfect complements is a straight line.
II) The price-consumption curve for perfect complements is a straight line.

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

Question 36

Use the following two statements in answering this question:
I) For all Giffen goods the substitution effect is larger than the income effect.
II) For all inferior goods the substitution effect is larger than the income effect.

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

Question 37

For an inferior good, the income and substitution effects

A) work together.
B) work against each other.
C) can work together or in opposition to each other depending upon their relative magnitudes.
D) always exactly cancel each other.

Question 38

The substitution effect of a price change for product X is the change in consumption of X associated with a change in

A) the price of X, with the level of utility held constant.
B) the price of X, with the level of real income not considered.
C) the price of X, with the prices of other goods changing by the same percentage as that for product X.
D) income, with prices of other goods held constant.

Question 39

Jon's income-consumption curve is a straight line from the origin with a positive slope. Now suppose that Jon's preferences change such that his income-consumption curve remains a straight line but rotates 15 degrees clockwise. Jon's demand curve for the good on the horizontal axis

A) will shift left.
B) will shift right.
C) will not change.
D) might do any of the above.

Question 40

The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect.

A) Giffen
B) real price
C) income
D) substitution

Question 41

Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by

A) more than double.
B) exactly double.
C) less than double.
D) Any of the above are possible.
E) none of the above

Question 42

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above?

A) 0
B) 24
C) 40
D) 60
E) none of the above

Question 43

As a group, U.S. consumers have no income response for their consumption of ice cream so that the income elasticity of demand for ice cream equals zero. Does this mean that the change in ice cream consumption that results from a price increase is entirely composed of the substitution effect?

A) Yes, the income effect associated with a price change is zero
B) No, any price change moves the point of consumption to a new indifference curve, so there must be a non-zero income effect
C) No, the income and substitution effects in this case move in opposite directions and completely offset one another, so it only appears that the income effect is zero
D) We need more information about the goods to answer this question

Question 44

Suppose you only consume rice and bananas. Can both of these goods be Giffen goods in your consumption?

A) Yes, this is possible
B) No, at least one of the goods must be normal
C) No, they both can be inferior, but at least one of the goods cannot be a Giffen good
D) We need more information about the goods to answer this question

Question 45

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

A) more, more
B) more, less
C) less, more
D) less, less

Question 46

The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s)?

A) Vodka is an inferior good.
B) Vodka is a normal good.
C) Vodka is an inferior good and the taxes collected from this tax are rebated to consumers.
D) Vodka is a normal good and the taxes collected from this tax are rebated to consumers.
E) both B and C

Question 47

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
Refer to Figure 4.2. The income effect on the quantity of clothing purchased is:

A) the change from C1 to C3.
B) the change from C1 to C2.
C) the change from C2 to C3.
D) the change from C3 to C2.
E) none of the above

Question 48

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

A) more, more
B) more, less
C) less, more
D) less, less

Question 49

You have just won a cash award of $500 for academic excellence.

A) The substitution effect of this award will be larger than its income effect.
B) The income effect of this award will be larger than its substitution effect.
C) The substitution and income effects will be of identical size.
D) It is impossible to know whether the substitution effect is larger than the income effect or vice versa.

Question 50

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
Refer to Figure 4.1. The income effect of the price change in food on the quantity of food purchased is:

A) the change from F3 to F1.
B) the change from F3 to F2.
C) the change from F2 to F1.
D) the change from F1 to F2.
E) none of the above

Question 51

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
Based on Figure 4.1, food is:

A) a normal good.
B) an inferior good, but not a Giffen good.
C) a Giffen good.
D) none of the above

Question 52

Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption.

A) positive, positive
B) positive, negative
C) negative, positive
D) negative, negative

Question 53

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake?

A) Qc = 240 - Pc
B) Qc = 240/Pc
C) Qc = 120/Pc
D) Qc = 240/(3 + Pc)
E) none of the above

Question 54

Your indifference curves for good X (horizontal axis) and good Y (vertical axis) are vertical lines because you do not gain any satisfaction from consumption of Y. As the price of X declines, the change in consumption of X is entirely composed of the:

A) income effect.
B) substitution effect.
C) Giffen effect.
D) independent good effect.

Question 55

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
Refer to Figure 4.1. The substitution effect of the price change in food on the quantity of food purchased is:

A) the change from F3 to F1.
B) the change from F3 to F2.
C) the change from F2 to F1.
D) the change from F1 to F2.
E) none of the above

Question 56

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is:

A) the change from C3 to C1.
B) the change from C3 to C2.
C) the change from C2 to C1.
D) the change from C1 to C2.
E) none of the above

Question 57

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
Based Figure 4.2, clothing is:

A) a normal good.
B) an inferior good, but not a Giffen good.
C) a Giffen good.
D) none of the above

Question 58

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
See Scenario 4.1. What is Daniel's budget constraint?

A) 240 = 3Pc + 3Pd
B) 240 = 3Qc + 3Qd
C) 240 = (Pc)(Qc)
D) 240 = (Qc)(Qd)
E) none of the above

Question 59

Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by

A) more than double.
B) exactly double.
C) less than double.
D) Any of the above are possible.
E) none of the above

Question 60

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
See Scenario 4.1. What is Daniel's income-consumption curve?

A) Pc = Pd
B) Pc = Qc
C) Qd = I - 3Qc
D) Qc = Qd
E) all of the above

Question 61

Use the following two statements to answer this question:
I) The price elasticity of demand is constant along the entire length of a linear demand curve.
II) The price elasticity of demand is the special name that economists give to the slope of a demand curve.

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

Question 62

As the price of good X increases from $5 to $8, quantity demanded falls from 100 to 80. Based upon this information we can conclude that the demand for X is

A) elastic.
B) inelastic.
C) unit inelastic.
D) insufficient information for judgment.

Question 63

If the marginal rate of substitution is infinite or zero, show that the substitution effect of a price change for a good is zero.

Question 64

What is the shape of the marginal revenue curve derived from a linear downward sloping demand curve?

A) Horizontal
B) Vertical
C) U-shaped
D) Downward sloping, with a constant slope

Question 65

The demand for sirloin steak is probably more elastic than the demand for all meat because

A) steak is very expensive.
B) people are worried about cholesterol.
C) cattle raising is not very profitable.
D) there are more substitutes for sirloin steak than for all meats.

Question 66

A consumer spends his income on food and rent. The government places a $1 tax on food. To restore the pre-tax consumption level of food the rebate paid to consumers will be smallest when

A) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 5.
B) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 5.
C) the own price elasticity of demand for food is 2, and the income elasticity of demand for food is 10.
D) the own price elasticity of demand for food is 5, and the income elasticity of demand for food is 10.

Question 67

Recently, Skooterville has experienced a large growth in population. As a result, the demand curve for telephone service in Skooterville:

A) has shifted to the right.
B) has shifted to the left.
C) has shifted down.
D) Both B and C are correct.
E) none of the above

Question 68

When a good has a unitary price elasticity, consumer expenditures for the good

A) change in the same direction as a price change.
B) change in the opposite direction to a price change, but not necessarily by the same percentage as the price change.
C) do not change when the price of the good decreases.
D) change in the opposite direction and by the same percentage as any price change.

Question 69

The diagram below depicts the change in optimal consumption bundles for Marty when the price of shotgun shells fall. Decompose the change into the income and substitution effects.

Question 70

Margaret's optimal consumption is shown in the diagram below for two different prices of Hy-Vee Cola. Decompose the change in Hy-Vee Cola consumption into income and substitution effects. Do the effects work in opposite directions?

Question 71

When a good is price inelastic, consumer expenditures on the good

A) increase when price increases.
B) decrease when price increases.
C) do not change when price increases.
D) are not related to price elasticity of demand.

Question 72

What is the shape of the total revenue curve derived from a horizontal demand curve?

A) Horizontal
B) Vertical
C) U-shaped
D) Upward sloping, with a positive slope

Question 73

The following data pertain to products A and B, both of which are purchased by Madame X. Initially, the prices of the products and quantities consumed are:
P_A = $10, Q_A = 3, P_B = $10, Q_B = 7.
Madame X has $100 to spend per time period. After a reduction in price of B, the prices and quantities consumed are:
P_A = $10, Q_A = 2.5, P_B = $5, Q_B = 15.
Assume that Madame X maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Madame X to put her back on the original indifference curve, she would consume this combination of A and B:
Q_A = 1.5, Q_B = 9
a. Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect.
b. Determine if product B is a normal, inferior, or Giffen good. Explain.

Question 74

Which of the following is true about the demand for gasoline?

A) It is probably more price elastic in the long run because price will increase by a higher percentage.
B) It is probably more price elastic in the long run because it is easier to find substitutes for gasoline in the long run.
C) It is probably more price elastic in the short run because price will increase by a higher percentage.
D) It is probably more price elastic in the short run because it is easier to find substitutes for gasoline in the short run.

Question 75

The demand curves for steak, eggs, and hot dogs are given in the table below. The current price of steak is $5. The price of eggs is $2.50, and the price of hot dogs is $0.75. Fill in the remaining columns of the table using this information. Indicate which goods are substitutes and which goods are complements.

Question 76

In a recent article, two economists estimated that the 37.5% increase in price that would result from a 75 cent tax increase on cigarettes would lead to a decrease in smoking among college students of 30%. What can you conclude about the demand for cigarettes among college students?

A) It is price elastic.
B) It is price inelastic.
C) It is unit elastic.
D) It is perfectly inelastic.

Question 77

Donald derives utility from only two goods, carrots (Qc) and donuts (Qd). His utility function is as follows:
U(Qc,Qd) = (Qc)(Qd)
The marginal utility that Donald receives from carrots (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Donald has an income (I) of $120 and the price of carrots (Pc) and donuts (Pd) are both $1.
a. What is Donald's budget line?
b. What is Donald's income-consumption curve?
c. What quantities of Qc and Qd will maximize Donald's utility?
d. Holding Donald's income and Pd constant at $120 and $1 respectively, what is Donald's demand curve for carrots?
e. Suppose that a tax of $1 per unit is levied on donuts. How will this alter Donald's utility maximizing market basket of goods?
f. Suppose that, instead of the per unit tax in (e), a lump sum tax of the same dollar amount is levied on Donald. What is Donald's utility maximizing market basket?
g. The taxes in (e) and (f) both collect exactly the same amount of revenue for the government, which of the two taxes would Donald prefer? Show your answer numerically and explain why Donald prefers the per unit tax over the lump sum tax, or vice versa, or why he is indifferent between the two taxes.

Question 78

Price elasticity of demand measures the

A) slope of the demand curve.
B) sensitivity of quantity demanded to changes in the price of substitute goods.
C) sensitivity of price to changes in the quantity demanded of substitute goods.
D) sensitivity of quantity demanded to changes in price.

Question 79

What is the shape of the total revenue curve derived from a linear downward sloping demand curve?

A) Horizontal
B) Vertical
C) U-shaped
D) Inverted u-shaped

Question 80

Suppose the marginal rate of substitution is constant at 6 for all possible consumption bundles. Next suppose that the price of good 1 decreases, and the ratio P1/P2 is greater than 6. Show that the income and substitution effects from this price change are both zero.