Deck 4: Individual and Market Demand

Question 1

Figure 4.1.4
Refer to Figure 4.1.4 above. Which of the following goods is an inferior good?

A) Steak
B) Hamburger
C) Clothing
D) Food

Answer 1

Hamburger

Question 2

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.

Answer 2

Utility is maximized, and all income is spent.

Question 3

An Engel curve shows combinations of:

A) income and prices.
B) two goods, for different levels of income.
C) two goods, for different levels of prices.
D) income and the quantity consumed of one good.

Answer 3

income and the quantity consumed of one good.

Question 4

Figure 4.1.2
Refer to Figure 4.1.2. From the information on the figure, we can obtain:

A) an upward-sloping demand curve.
B) two points on a downward-sloping individual demand curve.
C) a downward-sloping market demand curve.
D) a demand curve for food and clothing.

Question 5

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 6

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 7

If an increase in the price of one good leads to an increase in the quantity demanded of another, the two goods are:

A) substitutes.
B) complements.
C) independent.
D) unrelated.

Question 8

Figure 4.1.3
Refer to Figure 4.1.3 above. From the information on the figure we can derive:

A) a price-consumption curve.
B) two points on an individual demand curve.
C) a shifting demand curve.
D) an upward-sloping demand curve.

Question 9

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 10

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 11

Which of the following goods is an inferior good in the United States?

A) Health care
B) Entertainment
C) Rental housing
D) all of the above.

Question 12

Figure 4.1.3
Refer to Figure 4.1.3 above. The connection of points A and B on the graph yields:

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

Question 13

Figure 4.1.5
Refer to Figure 4.1.5 above. In the upward-sloping portion of the curve that connects points A, B and D, the two goods, food and clothing, are:

A) substitutes.
B) complements
C) independent
D) unrelated

Question 14

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 15

An Engel curve:

A) slopes upward for normal goods and downward for inferior goods.
B) slopes upward for inferior goods and downward for normal goods.
C) slopes upward for both normal and inferior goods.
D) slopes downward for both normal and inferior goods.

Question 16

Figure 4.1.2
Refer to Figure 4.1.2. The connection of points B and D forms:

A) a demand curve.
B) an income-consumption curve.
C) a price-consumption curve.
D) a shift from one demand curve.to another.

Question 17

Figure 4.1.5
Refer to Figure 4.1.5 above. In the downward-sloping portion of the curve that connects points A, B and D, the two goods, food and clothing, are:

A) substitutes.
B) complements.
C) independent.
D) unrelated.

Question 18

Figure 4.1.4
Refer to question 4.1.4 above. Which goods are normal goods?

A) Steak and hamburger
B) Clothing, food and hamburger
C) Clothing, food and steak
D) Clothing and food

Question 19

Figure 4.1.4
Refer to Figure 4.1.4 above. The curves that connect points A and B on both graphs are:

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

Question 20

An Engel curve is backward-bending when:

A) the good is inferior after a certain level of income.
B) the good is inferior at low levels of income.
C) the good is inferior for all levels of income.
D) the good is normal above a certain level of income.

Question 21

Figure 4.2.1
Refer to Figure 4.2.1 above. Starting at point A, which of the following moves represents the total effect of a price change?

A) The move from F₁ to E
B) The move from E to F₂
C) The move from F₁ to F₂
D) A move from F₁ to F₂ and then to E

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

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 24

Figure 4.2.2
Refer to Figure 4.2.2 above. Starting at point A, which of the following represents the substitution effect of an increase in the price of food?

A) The move from A to B
B) The move from A to C
C) The move from A to B, and then to C
D) The move from A to C, and then to B

Question 25

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

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

Question 26

The response to a change in the relative prices of goods is called:

A) the income effect.
B) the substitution effect.
C) the wealth effect.
D) the price effect.

Question 27

Figure 4.2.1
Refer to Figure 4.2.1 above. Which of the following moves represents the substitution effect?

A) The move from F₁ to E
B) The move from E to F₂
C) The move from F₁ to F₂
D) A move from F₁ to F₂ and then to E

Question 28

Figure 4.2.2
Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

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

Question 29

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 30

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 31

The change in demand resulting from this change in real purchasing power is called:

A) the income effect.
B) the substitution effect.
C) the wealth effect.
D) the price effect.

Question 32

Figure 4.2.2
Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases,, the quantity of food purchased:

A) increases, due to the income effect but decreases due to the substitution effect.
B) increases, due to the substitution effect but decreases due to the income effect.
C) increases from A to B due to the income effect, and then to C due to the substitution effect.
D) decreases.

Question 33

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

Question 34

After a good falls in price, consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called:

A) the income effect.
B) the substitution effect.
C) the wealth effect.
D) the price effect.

Question 35

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 36

After a good falls in price, consumers are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. This fact is called:

A) the income effect.
B) the substitution effect.
C) the wealth effect.
D) the price effect.

Question 37

Figure 4.2.3
Refer to Figure 4.2.3 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

A) food is an inferior good and clothing a Giffen good.
B) food is a normal good and clothing a Giffen good.
C) food is a Giffen good and clothing a normal good.
D) food is a Giffen good and clothing an inferior good.

Question 38

Figure 4.2.1
Refer to Figure 4.2.1 above. Which of the following moves represents the income effect?

A) The move from F₁ to E
B) The move from E to F₂
C) The move from F₁ to F₂
D) A move from F₁ to F₂ and then to E

Question 39

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 40

A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as:

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

Question 41

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 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 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 43

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 44

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 45

When demand is elastic, an increase in price causes the seller's total revenue to:

A) increase.
B) decrease.
C) remain the same.
D) fall to zero.

Question 46

Figure 4.3.1
Refer to Figure 4.3.1 above. The figure depicts the individual demands of the only three consumers in the market for good X. After constructing the market demand curve, we determine that quantity demanded at a price of $10.000 is:

A) 15 units.
B) 17 units.
C) 30.000 units.
D) none of the above

Question 47

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 48

The horizontal summation of the demands of each consumer at different price levels is called:

A) the market demand curve.
B) the price elasticity of market demand.
C) speculative demand.
D) consumer surplus.

Question 49

Scenario 4.2:
Suppose that the demand for artichokes (Qa) is given as:
Qa = 200 - 4P
Use the information in Scenario 4.2. Suppose that the price of artichokes is increased slightly from $10. The total expenditure by consumers on artichokes will ________ and the number of artichokes sold will ________.

A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question 50

Figure 4.3.2
Refer to Figure 4.3.2 above. How do total expenditures on movie tickets vary along the demand curve?

A) Since quantity demanded increases as price decreases, total expenditures increase.
B) Since the quantity is sold at lower and lower prices, total expenditures decrease as quantity demanded increases.
C) Total expenditures remain the same between points along the demand curve.
D) Total expenditures increase through the upper portion of the curve and then decrease at low price levels.

Question 51

Figure 4.3.1
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 52

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 53

When demand is inelastic, an increase in price causes the seller's total revenues to:

A) increase.
B) decrease.
C) remain the same.
D) fall to zero.

Question 54

Figure 4.3.2
Refer to Figure 4.3.2 above. The elasticity of the demand for the curve in the figure can be described as:

A) elastic in the upper portions of the curve and inelastic in the lower portions.
B) a special case of an isoelastic curve called the unit-elastic demand curve.
C) elastic throughout the curve.
D) inelastic throughout the curve.

Question 55

Figure 4.3.1
Aggregation examples of market demand could include:

A) the demand for home computers by households with or without children.
B) the domestic and foreign demand for wheat.
C) the demands of different demographic groups.
D) all of the above

Question 56

When demand is elastic, an increase in price leads to:

A) an increase in total expenditures.
B) a decrease in total expenditures.
C) no change in total expenditures.
D) an undetermined change in expenditures.

Question 57

The domestic demand for wheat is Q_DD = 1000 - 25P, and the export demand is Q_DE = 500 - 25P. Graph the domestic, export, and total demand curves for wheat.

Question 58

Scenario 4.2:
Suppose that the demand for artichokes (Qa) is given as:
Qa = 200 - 4P
Use the information in Scenario 4.2. What is the price elasticity of demand if the price of artichokes is $10?

A) 0
B) -0.25
C) -1
D) -4
E) negative infinity

Question 59

When demand is inelastic, an increase in price leads to:

A) an increase in total expenditures.
B) a decrease in total expenditures.
C) no change in total expenditures.
D) an undetermined change in expenditures.

Question 60

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 61

The demand for telephone wire can be expressed as:
Q = 6000 - 1,500P,
where Q represents units, in pounds per day, and P represents price, in dollars per pound. Determine the price elasticity of demand at per pound.

Question 62

The table below lists the demand curve for sleeves of tennis balls for each member of the Parker family. Use this information to determine the Parker's aggregate family demand for tennis balls. What is the price elasticity of demand for each member of the family at $2.00? What is the price elasticity of family aggregate demand at $2.00?

Question 63

General Motors estimates that U.S. demand for its newest product will be: Export demand will be The total market demand curve for this product will be a:

A) straight line with a slope of -0.5.
B) straight line with a slope of -1.0.
C) kinked line with the kink at Q = 25,000.
D) kinked line with the kink at P = 50,000.
E) none of the above

Question 64

Fill in the blanks. Poorer countries have a ________ demand for U.S. wheat because they usually ________.

A) less elastic; find other substitutes
B) less elastic; can't find other substitutes
C) more elastic; can't find other substitutes
D) more elastic; find other substitutes

Question 65

Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax?

A) Consumer expenditures on gasoline increase over the short run and long run.
B) Consumer expenditures on gasoline decline over the short run and increase over the long run.
C) Consumer expenditures on gasoline increase over the short run and decline over the long run.
D) Consumer expenditures on gasoline decrease over the short run and long run.

Question 66

Sally Henin has a price elasticity of demand for gasoline of -0.8. Her income elasticity for gasoline is 0.5. Sally's current income is $40,000 per year. Sally currently spends $800 per year on gasoline. The price of gasoline is currently $1.00 per gallon.
a. A contemplated excise tax on gasoline will cause the price of gasoline to rise to $1.40. What impact will the tax have on Sally's consumption of gasoline?
b. Since the purpose of the tax is only to discourage gasoline consumption, Congress is considering a $200 income tax rebate to lessen the burden of the gasoline tax. What impact will the rebates have on Sally's consumption of gasoline?
c. Assume that both the tax and rebate are implemented. Will Sally be worse off or better off?

Question 67

Figure 4.4.2
Refer to Figure 4.4.2 above. The consumer surplus derived from pizza consumption is:

A) $1500.
B) $2000.
C) $3000.
D) $3500.

Question 68

Harding Enterprises has developed a new product called the Gillooly shillelagh. The market demand for this product is given as follows:
Q = 240 - 4P
a. If the shillelagh is priced at $40, what is the point price elasticity of demand? Is demand elastic or inelastic?
b. If the shillelagh price is increased slightly from $40, what will happen to the total expenditure on the Gillooly shillelagh?

Question 69

A local retailer has decided to carry a well-known brand of shampoo. The marketing department tells them that the quarterly demand by an average man is: Qd = 3 - 0.25P
And the quarterly demand by an average woman is:
Qd = 4 - 0.5P
The market consists of 10,000 men and 10,000 women. How may bottles of shampoo can they expect to sell if they charge $6 per bottle?

A) 20,000
B) 33,000
C) 25,000
D) 10,000
E) none of the above

Question 70

A study of the per capita consumption of gasoline: in 10 countries demonstrates that:

A) the consumption of gasoline does not appear to be related to the price of gasoline.
B) higher gasoline prices do result in lower consumption of gasoline.
C) higher gasoline prices actually increase the consumption of gasoline.
D) higher gasoline prices reduce consumption in some of those countries, but not in others.

Question 71

Figure 4.4.2
Refer to Figure 4.4.2 above. The total weekly expenditure on pizza is:

A) $1500.
B) $2000.
C) $3000.
D) $3500.

Question 72

The world demand for power transmission wire is made up of both domestic and foreign demands. Thus, the total demand is the sum of the two sub-demands, which are given as:
Domestic demand: P_d = 5 - 0.005Q_d
Foreign demand: P_f = 3 - 0.00075Q_f,
where P_d and P_f are in dollars per pound, and Q_d and Q_f are in pounds per day.
a. Determine the world demand for power transmission wire.
b. Determine the prices at which domestic and foreign buyers would enter the market.
c. Determine the domestic and foreign quantities at per pound. Check to see if the sum of Q_d and Q_f equals Q.
d. Determine total rate of purchases at per pound.

Question 73

The area below the demand curve and above the price line measures:

A) consumer surplus.
B) economic profit.
C) elasticity of demand.
D) the total value obtained from consuming the good or service.

Question 74

Figure 4.4.1
Refer to Figure 4.4.1 above. The value of consumer surplus when price is $4 equals:

A) $21.
B) $24.
C) $45.
D) none of the above

Question 75

Which of the following is an example of speculative demand?

A) When the actual price of housing increases, the quantity demanded of housing decreases.
B) When the expected price of housing increases, the demand for housing increases.
C) When the price of home ownership increases, the demand for rental housing increases.
D) When the demand for housing increases, the demand for house insurance increases.

Question 76

Joe's Pig Palace sells barbecue plates for $4.50 each, and serves an average of 525 customers per week. During a recent promotion, Joe cut his price to $3.50 and observed an increase in sales to 600 plates per week.
a. Calculate Joe's arc price elasticity of demand.
b. Joe is considering permanently lowering his price to $4.00 to increase revenue. How many plates should Joe expect to sell at the new price? Does the move make sense in the light of Joe's desire to increase revenue?

Question 77

The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called:

A) producer surplus.
B) consumer surplus.
C) cost benefit analysis.
D) net utility.

Question 78

Figure 4.4.3
Refer to Figure 4.4.3 above. When the price of pizza is $20, total expenditure and consumer surplus are, respectively:

A) $2000; $2000.
B) $1000; $2000.
C) $2000; $1000.
D) $1000; $1000.

Question 79

Suppose that the demand for artichokes (Q_a) is given as:
Q_a = 120 - 4P
a. What is the point price elasticity of demand if the price of artichokes is $10?
b. Suppose that the price of artichokes increases to $12. What will happen to the number of artichokes sold and the total expenditure by consumers on artichokes?
c. At what price if any is the demand for artichokes infinitely elastic?

Question 80

Answer both parts of the following question.
a. The San Francisco Chronicle reported that the toll on the Golden Gate Bridge was raised from $2 to $3. Following the toll increase, traffic fell by 5 percent. Based on this information, calculate the point price elasticity of demand. Is demand elastic or inelastic? Explain.
b. Stephen Leonoudakis, chairman of the bridge's finance auditing committee, warned that the toll increase could cause toll revenues to decrease by $2.8 million per year. Is this statement consistent with economic theory? Explain.