Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

The answer of Steve's utility for socks (q₁)and other goods...

Question 6

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

Accepted Answer

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

Question 7

The price of leisure

Accepted Answer

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

Question 8

Consider a consumer with preferences for consumption of a composite good (C)and leisure (L)given by the following utility function:
U(C,L)= 2C¹/² + L
Denote the consumer's wage rate by w and total time available for labor and leisure is normalized to one.The price of consumption is one.Denote the amount of labor supplied as N,so that N+L= 1.The consumer also earns non-labor income ("allowance")of 0.
a.Write out the budget constraint determining feasible allocations of leisure and consumption.
b.Compute the optimal bundle of leisure and optimal bundle of consumption.
c.Derive the consumer's labor supply function: N*(w,).
d.Determine the effect of increasing non-labor income on the supply of labor (that is,compute the relevant partial derivative).
e.How does non-labor income affect the consumption of the composite good,C?
f.Compute the effects of an increase in wage on consumption and labor supply.Is leisure a normal good?

Accepted Answer

The answer of Consider a consumer with preferences for consumption...

Question 9

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

Accepted Answer

The answer of Suppose you work for a government agency...

Question 10

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

Accepted Answer

The answer of Ann and Bill each spend $30 per...

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

The answer of Rachel has an income of $10 which...

Question 13

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

Accepted Answer

The answer of 
-The above figure shows an indifference map...

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

The answer of A study of the benefits of television...

Question 16

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

Accepted Answer

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

Question 17

For the following, please answer "True" or "False" and explain why.
-The difference between the equivalent variation and compensating variation is greater for goods with large income elasticities.

Accepted Answer

A) True 
 B)False

Question 18

A backward-bending labor supply curve implies that

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

For the following, please answer "True" or "False" and explain why.
-An increase in unearned income always creates a disincentive to work

Accepted Answer