Q&A Hero

Q: Denise is shopping for lobsters and eclairs. When she faces budget line b1, she chooses market basket A over market basket B. When she faces budget line b2, she chooses basket B over basket C. Which assumption of consumer theory helps us determine Denise's preference ordering over basket A and basket C? A) Completeness B) More is better than less C) Transitivity D) Convexity

Q: The principle of revealed preference would say that if Xavier chooses market basket A over market basket B then: A) if A is more expensive than B, then Xavier must prefer A over B. B) if A is more expensive than B, then Xavier must prefer B over A. C) if A is less expensive than B, then Xavier must prefer A over B. D) if A is less expensive than B, then Xavier must prefer B over A.

Q: Roberta lives alone on a deserted island. She can spend her time gathering coconuts or bananas. She has 16 hours available each day and can gather 4 coconuts in an hour or 8 bananas in an hour. Diagram Roberta's budget constraint. Given that Roberta's Marginal Utility of bananas is always 25 and her Marginal utility of coconuts is always 100, what is her optimal consumption? One day an individual from a neighboring island arrives by boat and offers to exchange any number of fruits at a rate of 1 coconut for 1 banana. Diagram Roberta's budget constraint at this exchange rate assuming she will now spend all her time gathering bananas. Is Roberta better off? What does she consume?

Q: Larry lives with his parents and enjoys listening to jazz. Because of his living arrangements, his only expense is on jazz music. To earn money to buy new albums, Larry must work. Larry has 16 hours per day he could spend listening to jazz or working. Each hour he works he earns $6. Each album costs him $12. Diagram Larry's budget constraint for new jazz albums and time spent listening to jazz. If Larry's parents require him to spend two hours per day doing chores around the house, what happens to his budget constraint? Does the requirement to do chores make Larry worse off?

Q: Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each semester that can only be used to buy books. Diagram Bobby's budget constraint when he has the gift certificate in addition to his $500 income. Is Bobby better-off with the gift certificates?

Q: Suppose that the price of gasoline has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on gasoline? Diagram the impact of the increase in gas prices in a commodity space diagram, and show the relevant indifference curves. Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less gasoline (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of gasoline with the higher income level or the original price of gas and income?

Q: The food stamp program provides low income households with coupons which can be exchanged for some specified dollar value worth of food. Many economists argue that this program is an inefficient means of increasing the well being of low income families. Proponents of this view argue that an equivalent cash subsidy would bring about a greater increase in the well being of the low income families receiving aid. Although many economists hold this view, not all policy analysts agree with the advocates of cash payments instead of food stamps. Advocates of the existing program argue that food stamps provide an incentive for low income families to increase the nutritional quality of their diets. a. Carefully analyze the arguments regarding increases in well being under cash payments and food stamp programs. Use graphical analysis to present your arguments. b. Critically evaluate the pros and cons of the food stamp program. Do food stamps ensure that low income families increase their consumption of food?

Q: Sally consumes two goods, X and Y. Her utility function is given by the expression U = 3 XY2. The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500. a. Sketch a set of two indifference curves for Sally in her consumption of X and Y. b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) (Note: MUY = 6XY and MUX = 3Y2.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

Q: Amy is currently spending her income to maximize her satisfaction. She is renting an apartment for $900 per month as shown in the diagram below (Assume each dollar spent on housing buys 1 unit of housing. H1 represents her $900 per month apartment). a. Suppose that Amy qualifies for a government housing assistance program that will provide her with a $600 per month apartment at no charge. If she accepts the apartment, she cannot augment her expenditure on housing (for example, she cannot add $300 of her income to the $600 per month provided by the government program, and rent the $900 per month apartment), nor can she exchange the apartment for cash or other goods. How does the government program alter Amy's budget line? b. Suppose that Amy is given $600 in cash instead of the $600 per month apartment. How will this alter Amy's budget line? c. Is Amy indifferent between the housing assistance program and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Q: Lisa's budget line and her satisfaction maximizing market basket, A, are shown in the diagram below. a. Suppose that Lisa is given $50 worth of coupons that must be spent on food. How will the coupons alter Lisa's budget line? b. Suppose that Lisa is given $50 in cash instead of $50 in coupons. How will this alter Lisa's budget line? c. Is Lisa indifferent between the food coupon and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Q: Evelyn Lips' preferences are depicted by the set of indifference curves in the diagram below. Her budget line is also shown in the diagram. Use the information in the diagram to answer the following questions. a. Which of the basic assumptions of consumer preferences are violated by E. Lips' indifference curves? Explain. b. The price of food is $5 per unit. What is E. Lips' income and what is the price of clothing? c. Show the market basket of food and clothing that maximizes E. Lips' satisfaction. When satisfaction is maximized, has E. Lips equated the marginal rate of substitution (of food for clothing) to the ratio of the prices (of food to clothing)? If so, explain why. If not, explain why not.

Q: Sheila can watch as many television programs as she wants for free, but she must pay $2 for each video she rents. Draw Sheila's budget line for t.v. shows (T) and videos (V), and identify the set of affordable bundles (be sure to label the axes). At a particular point on Sheila's budget line, her MRS is 1T/2V. Illustrate this situation on your diagram. Has Sheila maximized her satisfaction at this point? If not, identify a change in consumption that will make her better off. Describe her preferences when satisfaction is maximized.

Q: Suppose that the government subsidizes housing expenditures of low-income families by providing a dollar-for-dollar subsidy to a family's housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 which can be used for housing or other goods. Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two.

Q: A consumer decides not to buy a VCR when her income is $20,000. However, when her income rises to $30,000, she decides to buy one. In a single diagram, draw the budget lines and indifference curves to illustrate this situation (assume the VCR costs $300 in both time periods). Be sure to label your diagram completely.

Q: Hulk goes to the gym 20 times a month. His income is $1,000 per month and his visits to the gym cost $4 per visit. a. Draw Hulk's budget line for visits to the gym and all other goods, show the consumption bundle that maximizes his satisfaction, and draw the indifference curve through that point. b. Recently, a new health club opened which offers identical facilities but which charges a flat fee of $60 per month plus $1 per visit. Draw Hulk's budget line if he were to join this new club. c. Would Hulk continue to work out at the gym or would he join the new health club. Why?

Q: George has a fixed income and can afford at most 7 units of X if he spends his entire income on X. Alternatively, if he spends all his income on Y, he can afford at most 6 units of Y. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's?

Q: The local farmer's market sells corn for 20 cents an ear. At this price, Sam buys 6 ears each Thursday. What would happen to Sam's consumption of corn if the market offered corn at 20 cents an ear for the first 6 ears, but 10 cents an ear for each additional ear? Explain your answer.

Q: Which of the following statements is not true? A) If tea and coffee are perfect substitutes in your consumption, then you will only consume the good with the lowest price. B) If tea and coffee are perfect substitutes in your consumption, then you will consume some quantity of both goods if the prices of tea and coffee are equal. C) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. As long as your income and the prices of coffee and donuts are positive, you will not choose a corner solution. D) You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. You will consume coffee and donuts at some point along the 45-degree line where your MRS equals the price ratio for the two goods.

Q: You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted PY for frozen yogurt and PIC for ice cream. Under what condition will you only consume frozen yogurt? A) MRS is greater than PIC/PY B) MRS is less than PIC/PY C) MRS is less than PY/PIC D) MRS is infinite

Q: Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package? A) Sue does not change her consumption because these goods are perfect complements. B) She buys the same amount of hot dog buns and buys more hot dogs. C) She buys the same amount of hot dogs and buys two less packages of hot dog buns. D) She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.

Q: Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. What is her optimal choice under this scenario? A) 8 packages of hot dogs and 6 packages of buns B) 8 packages of hot dogs and 8 packages of buns C) 6 packages of hot dogs and 6 packages of buns D) 6 packages of hot dogs and 8 packages of buns

Q: Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods? A) 4 pounds of apples and 6 pounds of oranges B) 5 pounds of apples and 5 pounds of oranges C) 10 pounds of oranges and no apples D) 15 pounds of apples and no oranges E) none of the above

Q: When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that: A) Joe's preferences are incomplete. B) Joe's preferences are irrational. C) Joe is not consuming good X. D) Joe is not consuming good Y.

Q: The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be: A) 2 lemonades for each popcorn. B) 1 lemonades for each popcorn. C) 1/2 lemonade for each popcorn. D) indeterminate unless more information on Fred's marginal utilities is provided.

Q: The fact that Alice spends no money on travel: A) implies that she does not derive any satisfaction from travel. B) implies that she is at a corner solution. C) implies that her MRS does not equal the price ratio. D) any of the above are possible.

Q: An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket? A) MRSxy is at a maximum. B) Px/Py = money income. C) MRSxy = money income. D) MRSxy = Px/Py. E) all of the above

Q: Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3. Which of the following is true? A) Jack could increase his utility by buying more pens and fewer pencils. B) Jack could increase his utility by buying more pencils and fewer pens. C) Jack could increase his utility by buying more pencils and more pens. D) Jack could increase his utility by buying fewer pencils and fewer pens. E) Jack is at a corner solution and is maximizing his utility.

Q: Which of the following statements is true about a consumer's optimal decision when indifference curves are concave? A) Both goods are consumed. B) No goods are consumed. C) Only one of the goods is consumed. D) It occurs at the point of tangency with the budget line.

Q: A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals: A) the magnitude of the slope of the indifference curve through that point. B) one over the magnitude of the slope of the indifference curve through that point. C) Px/Py D) Py/Px

Q: Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (PF), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case? A) The budget line is a straight line B) The budget line is now concave to (bows out from) the origin C) The budget line is now convex to (bows in toward) the origin D) The budget line will not be a straight line, but it may be concave or convex

Q: The price of coffee is always equal to one-half the price of tea. When we plot the budget line for coffee and tea, coffee is plotted on the horizontal axis. What is the slope of this budget line? A) -1/2 B) 1/2 C) -2 D) 2

Q: To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. Also, suppose that all states initially impose state sales taxes on all goods (including food), but then the states exempt food from the state sales tax. How does this tax policy change alter the consumer's budget line? A) Makes the budget line steeper B) Makes the budget line flatter C) Parallel rightward shift D) Parallel leftward shift E) none of the above

Q: To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer? A) Makes the budget line steeper B) Makes the budget line flatter C) Parallel outward (rightward) shift D) Parallel inward (leftward) shift E) none of the above

Q: Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating: A) counter-clockwise about the fixed vertical axis intercept. B) clockwise about the fixed vertical axis intercept. C) counter-clockwise about the fixed horizontal axis intercept. D) clockwise about the fixed horizontal axis intercept. E) none of the above

Q: Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of clothing increases and the price of food and income do not change, then the budget line changes by rotating: A) counter-clockwise about the fixed vertical axis intercept. B) clockwise about the fixed vertical axis intercept. C) counter-clockwise about the fixed horizontal axis intercept. D) clockwise about the fixed horizontal axis intercept. E) none of the above

Q: The budget constraint for a consumer who only buys apples (A) and bananas (B) is PAA + PBB = I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation: A) A = -I/PA + (PB/PA)B B) A = I/PA - (PB/PA)B C) B = -I/PB + (PA/PB)A D) B = I/PB - (PA/PB)A

Q: If prices and income in a two-good society double, what will happen to the budget line? A) The intercepts of the budget line will increase. B) The intercepts of the budget line will decrease. C) The slope of the budget line may either increase or decrease. D) Insufficient information is given to determine what effect the change will have on the budget line but we know society is worse-off. E) There will be no effect on the budget line.

Q: Which of the following will result in a decrease in a consumer's purchasing power? A) A decrease in the consumer's income B) An increase in the price of the good on the vertical axis C) An increase in the price of the good on the horizontal axis D) all of the above

Q: Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will: A) become flatter. B) become steeper. C) shift outward. D) become steeper or flatter depending on the relationship between prices and income.

Q: An increase in income, holding prices constant, can be represented as: A) a change in the slope of the budget line. B) a parallel outward shift in the budget line. C) an outward shift in the budget line with its slope becoming flatter. D) a parallel inward shift in the budget line.

Q: The endpoints (horizontal and vertical intercepts) of the budget line: A) measure its slope. B) measure the rate at which one good can be substituted for another. C) measure the rate at which a consumer is willing to trade one good for another. D) represent the quantity of each good that could be purchased if all of the budget were allocated to that good. E) indicate the highest level of satisfaction the consumer can achieve.

Q: If the quantity of good A (QA) is plotted along the horizontal axis, the quantity of good B (QB) is plotted along the vertical axis, the price of good A is PA, the price of good B is PB and the consumer's income is I, then the slope of the consumer's budget constraint is ________. A) -QA/QB B) -QB/QA C) -PA/PB D) -PB/PA E) I/PA or I/PB

Q: Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line? A) The price of food and the price of clothing increased. B) The price of food increased, and the price of clothing decreased. C) The price of food decreased, and the price of clothing increased. D) The price of food and the price of clothing decreased. E) none of the above

Q: Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis, A) the budget line will become steeper. B) the budget line will become flatter. C) the slope of the budget line will not change. D) the slope of the budget line will change, but in an indeterminate way.

Q: A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis? A) -7/15 B) -7/100 C) -15/7 D) 7/15

Q: Draw a set of indifference curves for the following pairs of goods: a. Hamburgers and carrots for a vegetarian who neither likes nor dislikes meat. (Vegetarians do not eat meat.) b. Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or jelly sandwiches, but loves peanut butter and jelly sandwiches made with two parts peanut butter and one part jelly. c. Tickets for Knott's Berry Farm (KBF) and Universal Studios (US) for a tourist that believes that KBF and US are perfect substitutes. d. Ice cream and pie if these are goods that you like, but if you consume enough of either, you get sick of them. If you are sick of a good, consuming more of it lowers your utility.

Q: In the field of financial management it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return. a. Draw a set of indifference curves between risk and return for a person that is risk averse (a person that does not like risk). b. Draw a set of indifference curves for a person that is risk neutral (a person that does not care about risk one way or the other). c. Draw a set of indifference curves for a person that likes risk.

Q: In the theory of consumer behavior, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words.

Q: In the theory of consumer behavior, several assumptions are made about the nature of preferences. What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

Q: Consider Gary's utility function: U(X,Y) = 5 XY, where X and Y are two goods. If the individual consumed 10 units of X and received 250 units of utility, how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.

Q: The following combinations of goods X and Y represent various market baskets. Consumption is measured in pounds per month.Market Basket Units of X Units of Y A 4 6 B 16 7 C 15 3 D 3 2 Explain which market basket(s) is(are) preferred to other(s), and if there is any uncertainty over which is preferable, point this out as well.

Q: An island economy produces only two goods, coconuts and pineapples. There are five people (A,B, C, D, and E) living on the island with these preferences: A has a strong preference for pineapples. B has a strong preference for coconuts. C doesn't care for pineapples (assigns no value to them). D doesn't care for coconuts (assigns no value to them) E will only consume pineapples and coconuts in the fixed proportion of one pineapple to one coconut. For each of these five individuals, construct a representative indifference curve with pineapples on the vertical axis and coconuts on the horizontal axis. Discuss the shape of the indifference curves and relate them to the MRS.

Q: Each of the following consumers exhibit behavior that violates one of the basic assumptions of consumer preferences. Identify the assumption that is violated for each individual. Art says that he can watch 2 movies a week but couldn't be paid to watch another movie after that. Alex says that he prefers going to a movie over hiking. He also indicates that he prefers hiking to swimming. Alex then states that he would rather go swimming than go to a movie. Alicia says that she prefers hiking to watching a movie but can't determine her preferences for swimming.

Q: Match the following descriptions of preferences to the indifference curve diagrams that follow. ________ Ann does not care whether she has more diet soft drinks or fewer diet soft drinks. ________ Peter is very picky about his buttered popcorn. He tops every quart of popped corn with exactly one quarter cup of melted butter. ________ Amy likes M&M's, plain and peanut. For Amy, the marginal rate of substitution between plain and peanut M&M's does not vary with the quantities of plain and peanut M&M's she consumes. ________ George dislikes broccoli and would be willing to pay something to not have to eat it. ________ Natalya likes rap and rock music. Natalya's preferences exhibit a diminishing marginal rate of substitution between the two types of music. ________ Matthew knows his limit. He likes beer up to a point, but if he drinks too much he gets sick.

Q: You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point? A) +1 B) -1 C) Zero D) Infinity

Q: Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level? A) 2 units B) 4 units C) 6 units D) 8 units

Q: Consider the indifference map in the figure below: Which of the four basic assumptions about consumer preferences are violated by this indifference map? A) More is better than less B) Transitivity C) Diminishing MRS D) A and B are correct. E) A and C are correct.

Q: If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis), Jill would willingly give up: A) 2, but no more than 2, units of popcorn for an additional unit of candy. B) 2, but no more than 2, units of candy for an additional unit of popcorn. C) 1, but no more than 1, unit of candy for an additional 2 units of popcorn. D) 2, but no more than 2, units of popcorn for an additional 2 units of candy.

Q: The current price charged by a local movie theater is $8 per ticket. The concession stand at the theater averages $5 in revenue for each ticket sold. At the current ticket price, the theater typically sells 300 tickets per showing. If the theater raises ticket prices to $9, the theater will sell 270 tickets. What is the price elasticity of demand at $8? What happens to ticket revenue if the theater increases ticket prices to $9 from $8? What happens to concession revenue if the theater increases ticket prices? If the theater wants to maximize the sum of ticket and concession revenue, should they raise ticket prices to $9?

Q: In a city with a medium sized population, the equilibrium price for a city bus ticket is $1.00, and the number of riders each day is 10,800. The short-run price elasticity of demand is -0.60, and the short-run elasticity of supply is 1.0. a. Estimate the short run linear supply and demand curves for bus tickets. b. If the demand for bus tickets increased by 10% because of a rise in the world price of oil, what would be the new equilibrium price of bus tickets? c. If the city council refused to let the bus company raise the price of bus tickets after the demand for tickets increases (see (b) above), what daily shortage of tickets would be created? d. Would the bus company have an incentive to increase the supply in the long run given the city council's decision in (c) above? Explain your answer.

Q: American Mining Company is interested in obtaining quick estimates of the supply and demand curves for coal. The firm's research department informs you that the elasticity of supply is approximately 7, the elasticity of demand is approximately -0.85, and the current price and quantity are $41 and 1,206, respectively. Price is measured in dollars per ton, quantity the number of tons per week. a. Estimate linear supply and demand curves at the current price and quantity. b. What impact would a 10% increase in demand have on the equilibrium price and quantity? c. If the government refused to let American raise the price when demand increased in (b) above, what shortage is created?

Q: The market for gravel has been estimated to have these supply and demand relationships: Supply P = 10 + 0.01Q Demand P = 100 - 0.01Q, where P represents price per unit in dollars, and Q represents sales per week in tons. Determine the equilibrium price and sales. Determine the amount of shortage or surplus that would develop at P = $40/ton.

Q: The U.S. Department of Agriculture is interested in analyzing the domestic market for corn. The USDA's staff economists estimate the following equations for the demand and supply curves: Qd = 1,600 - 125P Qs = 440 + 165P Quantities are measured in millions of bushels; prices are measured in dollars per bushel. a. Calculate the equilibrium price and quantity that will prevail under a completely free market. b. Calculate the price elasticities of supply and demand at the equilibrium values. c. The government currently has a $4.50 bushel support price in place. What impact will this support price have on the market? Will the government be forced to purchase corn under a program that requires them to buy up any surpluses? If so, how much?

Q: Suppose the supply of coal is perfectly inelastic, and the price elasticity of demand for coal is -0.4. If the government imposes a binding price ceiling for coal at a price that is 20 percent below the market equilibrium price, what is the impact of this policy on the market quantity? A) Excess demand equals 80 percent of the market equilibrium quantity B) Excess demand equals 8 percent of the market equilibrium quantity C) Excess demand equals 16 percent of the market equilibrium quantity D) The policy does not affect the market quantity

Q: A price floor policy establishes a minimum price for a market, and the policy is said to be binding if the market equilibrium price is less than the floor price. What impact does a binding price floor have on the market outcome? A) Excess supply B) Excess demand C) Shortage D) No impact, and the market price and quantity equal their equilibrium values

Q: Which of the following public policies is an example of a price ceiling? A) Support prices for agricultural commodities B) Minimum wage laws C) Rent control program D) all of the above

Q: Suppose the U.S. government imposes a maximum price of $5 per gallon of gasoline, and the current equilibrium price is $3.50 per gallon. This policy represents a: A) binding price floor. B) non-binding price floor. C) binding price ceiling. D) non-binding price ceiling.

Q: Other things being equal, the increase in rents that occurs after rent controls are abolished is smaller when A) the own price elasticity of demand for rental homes is price inelastic. B) the own price elasticity of demand for rental homes is price elastic. C) the own price elasticity of demand for rental homes has unitary price elasticity. D) rented homes and owned homes are complements. E) rented homes and owned homes are substitutes.

Q: A price floor policy establishes a minimum price for a market. Which of the following results from a binding price floor? A) Equilibrium B) Excess demand C) Excess supply D) Shortage

Q: What happens if price falls below the market clearing price? A) Demand shifts out. B) Supply shifts in. C) Quantity demanded decreases, quantity supplied increases, and price falls. D) Quantity demanded increases, quantity supplied decreases, and price rises.

Q: Suppose that, at the market clearing price of natural gas, the price elasticity of demand is -1.2 and the price elasticity of supply is 6. What will result from a price ceiling that is 10 percent below the market clearing price? A) A shortage equal to 1.8 percent of the market clearing quantity B) A shortage equal to 0.6 percent of the market clearing quantity C) A shortage equal to 18 percent of the market clearing quantity D) A shortage equal to 6 percent of the market clearing quantity E) More information is needed.

Q: When the government controls the price of a product, causing the market price to be below the free market equilibrium price, A) some consumers gain from the price controls and other consumers lose. B) all producers gain from the price controls. C) both producers and consumers gain. D) all consumers are better-off.

Q: When the government controls the price of a product, causing the market price to be above the free market equilibrium price, A) all producers gain. B) both producers and consumers gain. C) only consumers gain. D) some, but not all, sellers can find buyers for their goods.

Q: Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 88 billion barrels per year. Derive the linear long-run demand and supply equations. Next, suppose the long-run supply curve you derived above consists of competitive supply and OPEC supply. If the long-run competitive supply equation is: SC = 7.78 + 0.29P, what must be OPEC's level of production in this long-run equilibrium?

Q: Suppose that the short-run world demand and supply elasticities for crude oil are -0.076 and 0.088, respectively. The current price per barrel is $30 and the short-run equilibrium quantity is 23.84 billion barrels per year. Derive the linear demand and supply equations.

Q: Suppose that a small market Major League Baseball team currently charges $12 for a ticket. At this price, they are able to sell 12,000 tickets to each game. If they raise ticket prices to $15, they would sell 11,053 tickets to each game. What is the price elasticity of demand at $12? If the demand curve is linear, what is the algebraic expression for demand?

Q: Midcontinent Plastics makes 80 fiberglass truck hoods per day for large truck manufacturers. Each hood sells for $500.00. Midcontinent sells all of its product to the large truck manufacturers. Suppose the own price elasticity of demand for hoods is 0.4 and the price elasticity of supply is 1.5. a. Compute the slope and intercept coefficients for the linear supply and demand equations. b. If the local county government imposed a per unit tax of $25.00 per hood manufactured, what would be the new equilibrium price of hoods to the truck manufacturer? c. Would a per unit tax on hoods change the revenue received by Midcontinent?

Q: Suppose the observed annual quantity of steel exchanged in the European market is 30 million metric tons, and the observed market price is 90 euros per ton. If the linear demand function for steel takes the form Q = a - 0.9P, what is an appropriate value for the intercept coefficient a? A) a = -51 B) a = 51 C) a = 111 D) a = -111

Q: Suppose the observed annual quantity of steel exchanged in the European market is 30 million metric tons, and the observed market price is 90 euros per ton. If the price elasticity of demand for steel is -0.3 in Europe, what is an appropriate value for the price coefficient (b) in a linear demand function Q = a - bP? A) b = 0.9 B) b = -0.9 C) b = 0.1 D) b = -0.1

Q: A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for b, we can use observed values for Q and P and then set -b(P/Q) equal to the: A) income elasticity of demand. B) cross-price elasticity of demand. C) price elasticity of demand. D) price elasticity of supply.