Micro Chapter 7 study guide questions

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1 Micro Chapter 7 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A 15 percent increase in the price of beef reduces the quantity of beef consumed by 30 percent. Thus, the demand for beef is, and total consumer expenditure (or total firm revenue) will as a result of the price increase. (Fill in the blanks.) a. elastic; increase b. elastic; decrease c. inelastic; increase d. inelastic; decrease 2. Which of the following is true about marginal benefit? a. A consumer's marginal benefit is equal to the height of her demand curve. b. Consumers will continue to purchase up until the point where marginal benefit equals price. c. Marginal benefit declines as consumption increases because of the law of diminishing marginal utility. d. All of the above are true. 3. Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry a. has an income elasticity of two. b. is a normal good. c. is a luxury good. d. is all of the above. 4. An inferior good is distinguished by a a. negative price elasticity of demand. b. positive price elasticity of demand. c. positive income elasticity of demand. d. negative income elasticity of demand. 5. If Joe's income increased and as a result he purchased more wine and less fast food, a. wine is a normal good and fast food an inferior good for Joe. b. wine is an inferior good and fast food a normal good for Joe. c. both wine and fast food are inferior goods for Joe. d. both wine and fast food are normal goods for Joe. 6. "After eating nothing but fast-food hamburgers on spring break, I was anxious to return home and eat something different." This statement most clearly reflects the law of a. the budget constraint. b. consumer irrationality. c. greater demand elasticity with time. d. diminishing marginal utility. 7. If the price elasticity of demand for grapes was 2.5, a. the demand for grapes would be considered inelastic. b. an increase in the price of grapes would decrease total consumer spending on grapes. c. consumer purchases are less sensitive to a change in the price of grapes than to a change in the price of bananas, which have a price elasticity of 1.6. d. the income elasticity for grapes must also be 2.5.

2 8. If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of hula hoops purchased, the price elasticity of demand is a. 5 and the demand for hula hoops is elastic. b. 0.2 and the demand for hula hoops is elastic. c. 5 and the demand for hula hoops is inelastic. d. 0.2 and the demand for hula hoops is inelastic. 9. "Because of the unseasonably cold weather, Florida orange growers expect (1) fewer bushels of oranges to be harvested, (2) a higher market price for oranges, and (3) larger total revenues from this year's crop." This statement would most likely be correct if the a. demand for Florida oranges was elastic. b. demand for Florida oranges was unitary elastic. c. demand for Florida oranges was inelastic. d. income elasticity of Florida oranges was negative. 10. Which of the following statements is true regarding the price elasticity of supply? a. The price elasticity of supply is always negative. b. The price elasticity of supply is always positive. c. The price elasticity of supply will be greater when suppliers have a shorter time to respond to a price change. d. None of the above statements are true. 11. Coach Ballford: "To increase our revenue from football games, we need to lower ticket prices." University President Smith: "Coach, that would be counterproductive; a reduction in ticket prices would reduce our revenue, not increase it." Which of the following best explains this disagreement? a. The coach thinks that demand is elastic, whereas the university president thinks that demand is inelastic. b. The coach thinks that demand is inelastic, whereas the university president thinks that demand is elastic. c. The coach believes that lower ticket prices will increase attendance, but the university president must not believe attendance will increase when prices are lowered. d. Although both the coach and the president believe demand is of unitary elasticity, they disagree about how much attendance will rise. 12. All else equal, if a firm raises its price by 20 percent and the firm's total revenue falls by 20 percent, a. demand must be elastic. b. demand must be inelastic. c. demand must be unit elastic. d. the price elasticity of demand must be equal to Which of the following is not a fundamental that underlies consumer behavior? a. Goods can be substituted for one another. b. Consumers make decisions purposefully based upon past experience and knowledge. c. The law of diminishing marginal utility applies to all goods. d. Consumers always make choices with perfect information.

3 14. The exhibit illustrates two possible demand curves for a product, D 1 and D 2. Which of the following is true regarding these demand curves? a. Demand curve D 1 represents a demand curve that is relatively more elastic than demand curve D 2. b. Demand curve D 1 represents a demand curve that is relatively more inelastic than demand curve D 2. c. Demand curve D 1 represents a demand curve that shows consumer purchases being more responsive to a change in the price of the good than demand curve D 2. d. Both are examples of unitary elastic demand curves. 15. Making drugs, such as cocaine, illegal results in a higher price than would be present if the drugs were legal. All else constant, the higher price results in drug users spending a. more on drugs if the demand for drugs is inelastic. b. more on drugs if the demand for drugs is elastic. c. less on drugs if the demand for drugs is inelastic. d. more on drugs if the demand for drugs is unitary elastic. 16. When the price elasticity of demand is greater than one, it means that demand is a. inelastic and the percent change in quantity is greater than the percent change in price. b. inelastic and the percent change in quantity is less than the percent change in price. c. elastic and the percent change in quantity is greater than the percent change in price. d. elastic and the percent change in quantity is less than the percent change in price. 17. If Russell values a ticket to a rock concert at $100 and is able to purchase it for only $40, he has received in consumer surplus on his purchase. (Fill in the blank.) a. $40 b. $60 c. $100 d. $ The market demand for a good is a. the horizontal sum of all individual demand curves for the good. b. generally upward sloping, unlike individual demand curves. c. usually a vertical line at a quantity of one hundred. d. the average amount purchased by each individual in the market.

4 19. Bob goes out to dinner three times per week, usually either to the local steak house or a Chinese restaurant in town. If the steak house were to raise its prices, Bob would probably (1) be less inclined to eat at the steak house and more inclined to eat at the Chinese restaurant when he did go out and (2) eat out fewer times per week because at the higher prices he cannot afford to eat out as much. a. Part 1 is an example of the substitution effect, part 2 of the income effect. b. Part 1 is an example of the income effect, part 2 of the substitution effect. c. Part 1 is an example of the law of diminishing marginal utility, part 2 of the substitution effect. d. Part 1 is an example of the proportions hypothesis, part 2 of the income effect. 20. The price elasticity of demand for automobiles measures the responsiveness of a. consumer purchases to a change in the price of automobiles. b. consumer purchases to a change in the quality of automobiles. c. supplier production levels to a change in the price of automobiles. d. consumer purchases of automobiles to a change in their income. Critical Thinking and Application 21. Sally is on her college golf team and only uses Titleist golf balls. She states: "I don't care what the price is, I will only buy Titleists." Is this a believable assertion? 22. John is a well-known consultant who makes $150 an hour and has all the work he can handle. He has a big job in Washington D.C., ten hours away. He can drive at a cost of $80 round trip or take a one-hour flight for $300. Which is he likely to do? Are there circumstances that may lead him to choose otherwise? 23. Fred, a poor college student, states: "I eat tuna sandwiches five times a week. When I graduate and get a real job, I will never purchase tuna again." Is Fred planning on breaking the law of demand? 24. Jack, a music major, is perusing Jill's notes for her economics class, where she has written that "total revenues will rise with price rises only if demand is elastic." Jack tells Jill this is nonsense because firms can always increase their revenues by raising price. How should Jill respond? 25. A question on an economics exam asks: What happens in the market for margarine when income rises? Allison, an excellent student, shows the demand for margarine decreasing. Is she necessarily wrong? Why or why not? 26. A local restaurant offers an "all you can eat" ribs special. If a person pays $11.95, she can eat as many servings as she desires at no additional cost. Can you infer anything about her marginal utility from observing her eating behavior?

5 Micro Chapter 7 Study Guide Questions Answer Section 1. B 2. D 3. D 4. D 5. A 6. D 7. B 8. D 9. C 10. B 11. A 12. A 13. D 14. B 15. A 16. C 17. B 18. A 19. A 20. A