Q&A Hero

Q: Figure 4.2A 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

Q: Figure 4.1A 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

Q: Figure 4.1A 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

Q: Figure 4.1A 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

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

Q: 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

Q: 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

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: 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

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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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).

Q: 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.

Q: 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.

Q: 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.

Q: An individual demand curve can be derived from the ________ curve. A) price-consumption B) price-income C) income-substitution D) income-consumption E) Engel

Q: 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

Q: 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

Q: 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.

Q: Which of the following statements about the optimal solution to the consumer problem based on the Cobb-Douglas utility function is NOT true? A) The cross-price elasticities of demand are zero. B) Both goods have downward sloping demand curves. C) Both goods are normal goods. D) The marginal utility of income may be negative.

Q: Suppose you solve a utility maximization problem, and the solution value of the Lagrange multiplier equals zero. What does this outcome imply about the problem solution? A) You must have made an error while solving the problem. B) The budget constraint is not binding, and the constrained solution is equal to the solution to the unconstrained utility maximization problem. C) The optimal utility level for the consumer equals zero. D) The consumer's demand curve is upward sloping.

Q: By the method of Lagrange multipliers, the optimal value of the Lagrange multiplier equals the: A) marginal utility of income. B) marginal utility of each good. C) marginal utility per dollar spent on the last unit of each good. D) A and B above E) A and C above

Q: The dual approach to the consumer's problem is to choose: A) the highest indifference curve that just touches the budget line. B) the least-cost budget line required to achieve a given level of utility (satisfaction). C) the maximum income required to achieve a given level of utility (satisfaction). D) all of the above

Q: The Slutsky equation is a mathematical representation of: A) a utility function. B) the marginal utility of income. C) a demand curve. D) the income expansion path. E) the substitution and income effects.

Q: You have just found the consumer's optimal combination of goods using constrained optimization. The marginal utility of income is the: A) Cobb-Douglas statistic. B) Hicks factor. C) Slutsky equation. D) Lagrange multiplier.

Q: A mathematical technique used to solve constrained optimization problems (finding the consumer optimum, for example) is: A) the method of Lagrange multipliers. B) the Cobb-Douglas method. C) the Slutsky method. D) the Hicks substitution method.

Q: The following table gives the current price, quantity, and price elasticities of the linear demand curves for pencils, paper and scissors. The columns Ercunder the Price Elasticities heading are calculated as Erc = (). The terms r and c refer to the row of the table and the column under the price elasticities heading, respectively. For example, if r is one and c is two, the value E12is the responsiveness of pencil demand to changes in the paper price (i.e., a cross-price elasticity). The demand curves for each good are in the form Qr = ar + brP1 + crP2 + drP3 . Using the information in the table, derive the demand curve for each good.Price ElasticitiesDemand ItemOwn PriceQuantityEr1Er2Er3Pencils0.3525,000-1.20.250Paper2.0090,0000.01-0.850.45Scissors3.151,50001.20-1.75

Q: The demand for hamburgers is estimated from this theoretical model:Q = kPaIbAce,where Q = units per day, P = price per unit, A = advertising budget per month by sellers, I = per capita income of consumers, and e = a random error. In a recent study, one researcher estimated the log-linear form of this equation with regression analysis as:log Q = 2.5 - 0.33 log P + 0.15 log I + 0.2 log A.Explain what the coefficients of log P, log I, and log A reveal about this product.

Q: The market demand curve for denim jeans is Q = 231 - 45 P + 23 I where P is the product price and I is per-capita consumer income. Which of the following statements about this demand function is NOT true? A) Denim jeans are normal goods. B) The price elasticity of demand is -45. C) The demand curve is downward sloping. D) The Engel curve for this denim jeans is upward sloping.

Q: Let P be the price of a good and let I represent consumer income. Which of the following demand functions represents a luxury good with inelastic price response? A) log(Q) = 4 " 2 log(P) + 2 log(I) B) log(Q) = 4 - 0.5 log(P) + 0.25 log(I) C) log(Q) = 4 - 0.25 log(P) + 2 log(I) D) log(Q) = 4 + 2 log(P) + 0.2 log(I)

Q: Which of the following demand functions represents a price elasticity of demand equal to -0.33 and an income elasticity of demand equal to 8 at all points along the curve? A) Q = 3 - 0.33P + 0.8I B) Q = 4.5 - 0.33 log(P) + 0.8I C) log(Q) = 1.34 - 0.33 log(P) + 0.8I D) log(Q) = 2.34 - 0.33 log(P) + 0.8 log(I)

Q: Suppose we believe the income response for hamburger consumption is positive (normal) at low income levels but becomes negative (inferior) at high income levels. Is the log-linear demand function a good choice for this particular product? A) Yes, the log-linear model has an income elasticity that can be positive or negative. B) No, the log-linear model has a constant income elasticity that cannot change with the income level. C) No, the Engel curves for this case are vertical lines, and this behavior cannot be represented with the log-linear demand function. D) none of the above

Q: Another commonly used algebraic form for a demand function is the semi-logarithmic functional form, log(Q) = a - bP + cI, where Q is quantity demanded, P is the product price, and I is income. Here, -100b represents the percentage change in quantity demanded given a one unit increase in price. By the Law of Demand, we should expect the value of b to be: A) positive. B) negative. C) positive or negative. D) We do not have enough information to answer this question.

Q: Another commonly used algebraic form for a demand function is the semi-logarithmic functional form, ln(Q) = a - bP + cI, where Q is quantity demanded, P is the product price, and I is income. Here, 100 c represents the percentage change in quantity demanded given a one unit increase in income. For a normal good, we should expect the value of c to be:A) positive.B) negative.C) positive or negative.D) We do not have enough information to answer this question.

Q: Which of the following algebraic forms for a demand curve yields an isoelastic demand curve?A) Q = a - b log(P) + c log(I)B) Q = a - bP + cIC) log(Q) = a - b log(P) + c log(I)D) log(Q) = bP + cI

Q: Scenario 4.5:The demand curve for grilled cheese sandwiches has been estimated using statistical techniques as follows:log(Q) = -1.10 - 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph)where Q is the quantity of grilled cheese sandwichesP is the price of grilled cheese sandwichesI is incomePh is the price of hamburgersScenario 4.5 indicates that grilled cheese sandwiches and hamburgers are:A) substitutes.B) complements.C) independent goods.D) none of the above

Q: Scenario 4.5:The demand curve for grilled cheese sandwiches has been estimated using statistical techniques as follows:log(Q) = -1.10 - 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph)where Q is the quantity of grilled cheese sandwichesP is the price of grilled cheese sandwichesI is incomePh is the price of hamburgersSee Scenario 4.5. The Engel curve for grilled cheese sandwiches is:A) downward sloping.B) horizontal.C) upward sloping.D) none of the above

Q: Scenario 4.5:The demand curve for grilled cheese sandwiches has been estimated using statistical techniques as follows:log(Q) = -1.10 - 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph)where Q is the quantity of grilled cheese sandwichesP is the price of grilled cheese sandwichesI is incomePh is the price of hamburgersSee Scenario 4.5. As the price of grilled cheese sandwiches decreases, the price elasticity of demand:A) increases.B) does not change.C) decreases.D) none of the above

Q: Scenario 4.5:The demand curve for grilled cheese sandwiches has been estimated using statistical techniques as follows:log(Q) = -1.10 - 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph)where Q is the quantity of grilled cheese sandwichesP is the price of grilled cheese sandwichesI is incomePh is the price of hamburgersSee Scenario 4.5. If P = $1,000, the price elasticity of demand:A) is 0,B) is negative infinity.C) is -0.18.D) cannot be determined without knowing I and Ph.

Q: Assume that we have a demand curve of the form:log(Q) = a - b log(P) + c log(I)where Q = quantity, P = price, I = income, and a, b, and c are positive constants. The income and price elasticities for the demand curve represented above are alwaysA) equal to one.B) equal to zero.C) equal (i.e., income elasticity always equals price elasticity).D) constant but not necessarily equal to one another.

Q: If an Engel curve has a negative slope, A) the good is inferior. B) the good is normal. C) the good has no substitutes. D) the good has no complements.

Q: Laser disc players have been around for 10 years, but in the last several years, the sales have skyrocketed. Manufacturers attribute the increase in sales to lower prices, increased availability of movies on laser disk, and the appearance of laser disks for rent in video cassette rental stores. Describe this market using the concept of network externalities.

Q: Software companies continually work to develop new features of their products that make it easier for users to interact and share their work. As more of these features are embedded in the software, what happens to the individual demand curve for the software products? A) Demand curve becomes more elastic due to the bandwagon effect B) Demand curve becomes less elastic due to the snob effect C) Demand curve shifts, but its degree of elasticity does not change D) There is no change in the individual demand curve

Q: Which of the following statements concerning utility as a measure for well being are false? A) There is generally a positive relationship between income and utility. B) It is possible to determine which of two individuals is made happier by consuming a particular market basket. C) Utility is an abstract representation of an individual's degree of happiness. D) Cross country studies suggest that citizens in wealthier countries are happier than citizens in poorer countries.

Q: Use the following two statements to answer this question: I. Consumer theory can determine whether giving an individual a more preferred basket of goods doubles her overall level of satisfaction, less than doubles her satisfaction, or more than doubles her satisfaction. II. There is not much empirical evidence to support the assumption that higher incomes result in higher levels of satisfaction. A) Both I and II are true. B) I is true and II is false. C) I is false and II is true. D) Both I and II are false.

Q: Use the following two statements to answer this question: I. According to the three basic assumptions regarding people's preferences, a person will always prefer to earn a living through honest work rather than a life of crime. II. When we say that preferences are complete, we mean that if a consumer prefers market basket A to market basket B, and prefers market basket B to market basket C, then the consumer prefers market basket A to market basket C. A) Both I and II are true. B) I is true and II is false. C) I is false and II is true. D) Both I and II are false.

Q: Consider the following three market baskets: Cheese Crackers A 5 8 B 15 6 C 10 7 If baskets A and B are on the same indifference curve and if indifference curves exhibit diminishing MRS: A) C is preferred to both A and B. B) A and B are both preferred to C. C) C is on the same indifference curve as A and B. D) There is not enough information to determine preferences for C relative to the other goods.

Q: If a consumer is always indifferent between an additional one grapefruit or an additional two oranges, then when oranges are on the horizontal axis the indifference curves: A) will be straight lines with a slope of -1/2. B) will be straight lines with a slope of -1. C) will be straight lines with a slope of +1/2. D) will be right angles whose corners occur on a ray from the origin with a slope of +2. E) none of the above

Q: If X and Y are perfect substitutes, which of the following assumptions about indifference curves is not satisfied? A) Completeness B) Transitivity C) More is preferred to less D) Diminishing MRS E) none of the above (All of the above assumptions are satisfied.)

Q: Use the following two statements to answer this question: I. If utility is ordinal, a market basket that provides 30 utils provides twice the satisfaction of a market basket that provides 15 utils. II. When economists first studied utility it was believed that utility was cardinal, but it was later discovered that ordinal preferences are sufficient to explain how most individual decisions are made. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Q: The magnitude of the slope of an indifference curve is: A) called the marginal rate of substitution. B) equal to the ratio of the total utility of the goods. C) always equal to the ratio of the prices of the goods. D) all of the above E) A and C only