The equilibrium condition for a consumer who is spending all of his or her budget on two commodities, A and B, is given by

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Part I.Multiple-choice questions

  1. The equilibrium condition for a consumer who is spending all of his or her budget on two

commodities, A and B, is given by:

  1.  MUA = MUB
  2.  MUA

/ PB = MUB / PA

  1.   MUA

/ PA = MUB

/PB

  1.   PA = PB
  2. The marginal utility of a commodity is:
  3. an indication of the last use to which the commodity has been put or the use to which it

would next be put if more were available.

  1. equal to the price of that commodity.
  2. the ratio of the total utility generated by consuming that commodity to the total utility of all

other commodities that are consumed.

  1. the extra utility yielded by consuming each successive unit of that commodity.
  2. the same thing as the total utility derived from consuming that commodity.

 

  1. The price elasticity of demand equals the:

 

  1. absolute price change divided by the absolute quantity change between two points on a

demand curve.

  1. percentage change in revenue divided by the percentage decrease in price.
  2. percentage change in revenue divided by the percentage increase in quantity demanded.
  3. percentage change in quantity demanded divided by percentage change in price.
  4. slope of the demand curve.

 

Use the following information to answer questions 4 and 5:  The Dark Night Movie Theater raised

the price of popcorn from $2.00 per barrel to $2.30 per barrel.  This caused the quantity of barrels

sold to fall from 100 per day to 80 per day.

 

  1. At this time, the (arc) price elasticity of demand for popcorn could be estimated to be:

 

  1. -.52.
  2. -1.
  3. -1.59.
  4. -1.9.
  5. -66.67.

 

 

 

 

 

2

 

  1. The Dark Night Movie Theater will see its total revenues from popcorn sales:

 

  1. rise.
  2. fall.
  3. double.
  4. remain the same.
  5. fall to zero.

 

The figure below indicates the demand for air travel between New York City and Chicago.  Use it to

answer question 6.

 

  1. At point B, total revenue is represented by area:

 

  1.  EBGO.
  2.   AOD.
  3. FCHO.
  4.  AEB.
  5.  EBIF.

 

  1. If a 10 percent reduction in price causes a 5 percent increase in the quantity of a commodity that

people buy, then in this region of the demand curve, price elasticity of demand is:

 

  1. elastic.
  2. unit-elastic.
  3. inelastic, although not perfectly so.
  4. perfectly inelastic.

 

  1. Which of the following observations would indicate that demand for a good is price-inelastic?

 

  1. The good in question is more of a necessity than a luxury for most people.
  2. There do not exist good substitutes for this good.
  3. The time period allowed for responding to a change in price is very small.
  4. All or any of the above.

 

  1. The law of diminishing marginal utility states that:

 

  1. as the amount of a good consumed increases, the total utility of that good tends to diminish.
  2. as the amount of a good consumed decreases, the total utility of that good tends to diminish.
  3. as income increases, marginal utility tends to diminish.
  4. as the amount of a good consumed increases, the marginal utility of that good tends to

diminish.

  1. when the price of a good increases, marginal utility tends to diminish.

3

 

  1. If total utility reaches its maximum, then:

 

  1. marginal utility is at its maximum.
  2. marginal utility is zero.
  3. marginal utility is negative.
  4. this is always the amount the consumer should buy.

 

  1. A demand function for a good is given by Q = 100 – 10P, where Q = quantity demanded per

unit of time and P = the price per unit. At a price of $4, the absolute value of the price

elasticity of demand is approximately equal to which of the following?

 

  1.   ∞
  2. 2/5
  3. 2/3
  4. 1/15
  5. 3/2

 

  1. Refer to the information in Question 11. When P increases from $4 to $5, what happens to total

revenue?

 

  1. Increase
  2. Decrease
  3. Unchanged

 

  1. The price of good X is $1.50 and that of good Y is $1.00.If a consumer considers the marginal

utility of Y to be 30 utils, and is maximizing utility with respect to purchases of X and Y, then he

or she must consider the marginal utility of X to be:

 

  1. 15 utils
  2. 20 utils
  3. 30 utils.
  4. 45 utils.

 

  1. The income effect captures which of the following economic phenomena?

 

  1. If money incomes fall, people will purchase less of any given commodity.
  2. A decrease in the price of a major purchase has an effect similar to an increase in income,

and this may prompt people to buy more of that good.

  1. The quantity of a good purchased may actually decrease as people’s incomes rise.
  2. As people’s incomes rise, they save proportionately more out of income, so they actually

spend a smaller fraction of their incomes.

  1. If the price of a good drops, it is as though the prices of all other goods have risen, in

relative terms, so smaller quantities of those other goods will tend to be bought.

 

  1. As the (relative) price of beef rises, I eat more chicken instead. How do you describe this

consumer behavior?

 

  1. Production effect.
  2. Substitution effect.
  3. A change of taste.

 

 

4

 

  1. Consumer surplus is defined as the:

 

  1. difference between the total utility of a good and the maximum amount that consumers are

willing to pay for it.

  1. difference between the total utility of a good and the market price.
  2. sum of the total utility of a good and its market price.
  3. total revenue that producers receive from selling a particular good.
  4. sum of the marginal utilities for all consumers of a good.

 

  1. The idea of “consumer surplus” reflects the notion that:

 

  1. the gain consumers obtain with some purchases exceeds the gain suppliers obtain from

selling.

  1. purchasing many goods is a real bargain for consumers, because they would have been

willing to pay more than they actually do in order to get them.

  1. the marginal utility of the first units of a product consumed may exceed the total utility

which the product supplies.

  1. total utility increases either when consumer incomes rise or when the prices they must pay

for goods fall.

  1. when demand is price-inelastic, buyers can obtain a larger quantity for the expenditure of less

money.

 

  1. In a graph of a consumer’s budget constraint, the amount of good X is measured along the

horizontal axis, while the amount of good Y is measured along the vertical axis. The unit prices

of good X and Y are Px and Py, respectively. The slope of the budget constraint is

 

  1.   ΔX/ΔY
  2. -X/Y
  3. -Y/X
  4. -Py/Px
  5. -Px/Py

 

  1. According to the diagram below depicting a consumer’s demand for knishes, if the price of a

knish is P1, the consumer’s surplus will be equal to the area

 

  1. XYQ1Q2
  2. XZP1P2
  3. XYP1P2
  4. WXP2
  5. WYP1 5

 

Part II.    Problem-solving questions

  1. Refer to the graph below and calculate the arc price elasticity of demand from point A to point

Price Elasticity of Demand

P

Q O

4

20

1

80

3

2

70 60

A

C

B

 

Your Answer:     Arc price elasticity of demand:   ______

(Round your answer to two decimal places if it is not an integer. Please

include the sign of your answer if it is a negative number.)

 

  1. Refer to the graph below.  Initially the price of a particular product was $3 and consumption

was 800.  Now because of an increase in raw material cost, the price increases to $6 and

consumption drops to 600.  Did the consumers gain or lose from this price increase?  By how

much?  (Hint: use the consumer surplus concept to answer this question.)

Calculating Consumer Surplus

P

Q O

D

D

P=3

P=6

800 600

 

Your Answer:     Gain or Loss:          __________

By how much:        __________

(Round your answer to two decimal places if it is not an integer. Please do

NOT include $ in your answer.) 6

 

  1. Numerical problem on consumer surplus: Assume that the demand for travel over a bridge

takes the form Y = 1,000,000 – 50,000P, where Y is the number of trips over the bridge and P

is the bridge toll (in dollars). Calculate the consumer surplus if the bridge toll is $1 and $20.

You Answer:       Bridge toll is $1:       __________

Bridge toll is $20:     __________

(Round your answer to two decimal places if it is not an integer. Please do

NOT include $ or words like “million” in your answer.)

 

Part III.    Essay

  1. Mr. Economist says, “Consumers always find their optimal bundle of consumer goods when

the marginal utility of the last unit of each good is equal.”  Do you agree or disagree? Explain.

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