Part I．Multiple-choice questions
- The equilibrium condition for a consumer who is spending all of his or her budget on two
commodities, A and B, is given by:
- MUA = MUB
/ PB = MUB / PA
/ PA = MUB
- PA = PB
- The marginal utility of a commodity is:
- 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.
- equal to the price of that commodity.
- the ratio of the total utility generated by consuming that commodity to the total utility of all
other commodities that are consumed.
- the extra utility yielded by consuming each successive unit of that commodity.
- the same thing as the total utility derived from consuming that commodity.
- The price elasticity of demand equals the:
- absolute price change divided by the absolute quantity change between two points on a
- percentage change in revenue divided by the percentage decrease in price.
- percentage change in revenue divided by the percentage increase in quantity demanded.
- percentage change in quantity demanded divided by percentage change in price.
- 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.
- At this time, the (arc) price elasticity of demand for popcorn could be estimated to be:
- The Dark Night Movie Theater will see its total revenues from popcorn sales:
- remain the same.
- fall to zero.
The figure below indicates the demand for air travel between New York City and Chicago. Use it to
answer question 6.
- At point B, total revenue is represented by area:
- 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:
- inelastic, although not perfectly so.
- perfectly inelastic.
- Which of the following observations would indicate that demand for a good is price-inelastic?
- The good in question is more of a necessity than a luxury for most people.
- There do not exist good substitutes for this good.
- The time period allowed for responding to a change in price is very small.
- All or any of the above.
- The law of diminishing marginal utility states that:
- as the amount of a good consumed increases, the total utility of that good tends to diminish.
- as the amount of a good consumed decreases, the total utility of that good tends to diminish.
- as income increases, marginal utility tends to diminish.
- as the amount of a good consumed increases, the marginal utility of that good tends to
- when the price of a good increases, marginal utility tends to diminish.
- If total utility reaches its maximum, then:
- marginal utility is at its maximum.
- marginal utility is zero.
- marginal utility is negative.
- this is always the amount the consumer should buy.
- 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?
- Refer to the information in Question 11. When P increases from $4 to $5, what happens to total
- 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:
- 15 utils
- 20 utils
- 30 utils.
- 45 utils.
- The income effect captures which of the following economic phenomena?
- If money incomes fall, people will purchase less of any given commodity.
- 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.
- The quantity of a good purchased may actually decrease as people’s incomes rise.
- As people’s incomes rise, they save proportionately more out of income, so they actually
spend a smaller fraction of their incomes.
- 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.
- As the (relative) price of beef rises, I eat more chicken instead. How do you describe this
- Production effect.
- Substitution effect.
- A change of taste.
- Consumer surplus is defined as the:
- difference between the total utility of a good and the maximum amount that consumers are
willing to pay for it.
- difference between the total utility of a good and the market price.
- sum of the total utility of a good and its market price.
- total revenue that producers receive from selling a particular good.
- sum of the marginal utilities for all consumers of a good.
- The idea of “consumer surplus” reflects the notion that:
- the gain consumers obtain with some purchases exceeds the gain suppliers obtain from
- 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.
- the marginal utility of the first units of a product consumed may exceed the total utility
which the product supplies.
- total utility increases either when consumer incomes rise or when the prices they must pay
for goods fall.
- when demand is price-inelastic, buyers can obtain a larger quantity for the expenditure of less
- 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
- 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
- WYP1 5
Part II. Problem-solving questions
- Refer to the graph below and calculate the arc price elasticity of demand from point A to point
Price Elasticity of Demand
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.)
- 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
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
- 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
- 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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