Deck 4: Consumers in the Marketplace

Question 1

The income elasticity of demand is equal to the slope of the Engel curve.

Answer 1

False

Question 2

An ordinary demand curve contains both substitution and income effects,while a compensated demand curve contains only income effects.

Answer 2

False

Question 3

The income and substitution effect always go in opposite directions.

Answer 3

False

Question 4

The Engel curve contains information that is not found in the indifference curve diagram.

Question 5

The substitution and income effects are in opposition when the price of an inferior good changes.

Question 6

A parallel shift in the budget line is caused by changes in the relative prices of the two goods.

Question 7

When the price of a good rises,the income effect always reduces the quantity demanded of the good.

Question 8

An Engel curve shows the relationship between price and quantity demanded.

Question 9

If an Engel curve is downward sloping,then one of the two goods must be inferior.

Question 10

In a two-good world,one good-but not both-can be inferior.

Question 11

The Law of demand can only be violated if a good is inferior.

Question 12

Normal goods have upward-sloping Engel curves.

Question 13

An inferior good is one for which the substitution effect is relatively large.

Question 14

The (ordinary)demand curve for a normal good must be downward sloping.

Question 15

The substitution effect insures that anytime there is a change in the price of a good,the quantity demanded along a compensated demand curve also changes.

Question 16

An inferior good is only Giffen when the substitution effect exceeds the income effect.

Question 17

An inferior good is one that is of lower quality than a substitute.

Question 18

If the price of a non-Giffen good falls,then the income effect causes a rise in the quantity demanded.

Question 19

Parallel shifts in the budget line are considered when deriving the demand curve for a good.

Question 20

All Giffen goods must be inferior goods,but not all inferior goods are Giffen goods.

Question 21

Which of the following is not held constant when we use indifference-curve analysis to derive the Engel curve for good X?

A) The price of good X.
B) The price of good Y.
C) The consumer's income.
D) The consumer's tastes.

Question 22

If the cross-price elasticity for oranges with respect to apples is 1.2 and the price of apples increase by 5%,then we can expect the quantity demanded of oranges to decrease by 6%.

Question 23

Estimates of the price elasticity of demand depend,in part,on the units used to measure price and quantity.

Question 24

An outward,parallel shift in the budget line indicates that a .
The consumer's income has risen.
B) the consumer's demand for the good on the horizontal axis has risen.
C) the price of the good on the horizontal axis has fallen.
D) all commodity prices have simultaneously risen.

Question 25

The cross elasticity of demand will be positive when goods are substitutes and negative when goods are complements.

Question 26

On average over all goods,it has been found that as people become wealthier,expenditures for higher quality grow more rapidly than expenditures for increased quantity.

Question 27

If a consumer demands the same (positive)amount of a good no matter what their income,then the income elasticity is also positive.

Question 28

If the price of goods X and Y change proportionally,then which of the following is true?

A) The budget line will not change because the prices have changed proportionally.
B) It is not clear what happens to the budget line because too many factors have changed.
C) It will appear as if the budget line has shifted even though income has not changed.
D) It will appear as if the budget line pivoted and the slope will change because prices changed.

Question 29

An upward-sloping Engel curve indicates that

A) the good is normal.
B) the good is inferior.
C) demand for this good is elastic.
D) demand for this good is inelastic.

Question 30

With an increase in income,a consumer can increase the quantity consumed of

A) only good Y.
B) only good X.
C) either good,but not both.
D) either or both.

Question 31

The cross elasticity between California and Florida oranges is likely to be negative because they are substitutes for one another.

Question 32

Normal goods have income elasticities greater than 1,while inferior goods have income elasticities less than 1.

Question 33

If the cross price elasticity of demand is negative,then the two goods under consideration must be complements.

Question 34

Economists use the term normal good to refer to goods that

A) you consume on a daily basis.
B) you consume more of when your income falls.
C) you consume more of when your income rises.
D) consumers choose the same quantities of regardless of income.

Question 35

Suppose that good X is on the horizontal axis and all other goods (measured in dollars)are on the vertical axis in the consumer-choice diagram.If the consumer gains $10 in income,then

A) the new budget line is parallel to and lies 10 units to the left of the old budget line.
B) the budget line shifts up by 10 dollars,with no change in the slope.
C) the vertical intercept of the budget line shifts up by $10,but the horizontal intercept remains unchanged.
D) the slope of the budget line increases by 10 percent.

Question 36

What types of goods have downward-sloping Engel curves?

A) Normal goods only.
B) Inferior goods only.
C) Giffen goods only.
D) All types of goods.

Question 37

When deriving an Engel curve,if the optimum point for good X lies to the left as income increases,good X is

A) a normal good.
B) an inferior good.
C) a Giffen good.
D) a substitute for good Y.

Question 38

The set of income-quantity pairs showing the amount of a good the consumer buys at various levels of income is called

A) a compensated demand curve.
B) a budget line.
C) an income-elasticity curve.
D) an Engel curve.

Question 39

With an increase in income,we can predict that a consumer will choose a new market basket

A) on a lower indifference curve.
B) on the same indifference curve but the new budget line.
C) on a higher indifference curve that passes through the new budget line.
D) on a higher indifference curve that is tangent to the new budget line

Question 40

An inferior good is one for which

A) the compensated demand curve fails to be downward sloping.
B) higher prices have relatively little effect on the quantity demanded.
C) the income elasticity is positive but less than 1.
D) increases in income result in lower quantities demanded.

Question 41

As the price of good X increases,the budget line

A) makes a parallel shift outward.
B) makes a parallel shift inward.
C) pivots inward.
D) pivots outward.

Question 42

Suppose the price of a good rises.When will the resulting income effect reduce the quantity demanded of the good?

A) Always.
B) Whenever the good is a non-Giffen good.
C) Only when the good is normal.
D) Only when the good is inferior.

Question 43

In order to isolate the substitution effect of a price increase,a consumer

A) must be given a lower price on the other good so that he can achieve his original indifference curve.
B) must be given enough of the other good so that his consumption of that good is not influenced.
C) must be given enough additional income to allow him to achieve his original indifference curve.
D) must be given enough additional income to allow him to purchase the original quantity of the good.

Question 44

Suppose we examine how the consumer's optimum changes when the price of good X changes,while the consumer's tastes,income,and the price of all other goods are held constant.This procedure is used to derive

A) the Engel curve for good X.
B) the (ordinary)demand curve for good X.
C) the compensated demand curve for good X.
D) the substitution and income effects for good X.

Question 45

Suppose the price of a good rises.When will the resulting substitution effect reduce the quantity demanded of the good?

A) Always.
B) Whenever the good is a non-Giffen good.
C) Only when the good is normal.
D) Only when the good is inferior.

Question 46

Consider the income and substitution effects corresponding to an increase in the price of X.Which of the following are not possible?

A) The substitution effect on X is positive and the income effect is negative.
B) The substitution effect on X is positive and the income effect is negative.
C) The substitution effect on Y is negative and the income effect on X in negative.
D) The income effect on both goods is positive.

Question 47

Consider the ordinary and compensated demand curves for a normal good.If the price of the good falls,then

A) the ordinary demand curve will show the larger increase in quantity demanded.
B) the compensated demand curve will show the larger increase in quantity demanded.
C) the increase in quantity demanded will be the same for the ordinary and compensated demand curves.
D) we cannot predict whether ordinary or compensated demand will show the larger response in quantity demanded.

Question 48

Elasticity measures are preferred by economists to measures of slope when analyzing changes in the quantity of a good consumers purchase because

A) they are harder to calculate.
B) the measure of slope is dependent upon the units of measurement,elasticity is not.
C) the measure of slope does not have any units of measurement,elasticity does.
D) elasticity measures depend upon the type of currency,slope does not.

Question 49

If a rise in the price of good X causes the quantity demanded of good X to fall,then

A) the Engel curve for good X is downward sloping.
B) the (ordinary)demand curve for good X is downward sloping.
C) the demand for good X is elastic.
D) good X must be a Giffen good.

Question 50

c. 0.4.
D) 0.25.

Question 51

If a person's income rises and they do not increase their consumption,we can conclude that

A) the good is not inferior.
B) their income elasticity of demand is zero.
C) the good is not normal.
D) no conclusions can be made without knowing the person's initial income and consumption levels.

Question 52

An inferior good is ordinary:

A) always.
B) if the substitution effect exceeds the income effect.
C) if the income effect exceeds the substitution effect.
D) never.

Question 53

If the income elasticity of demand for a good is zero,then

A) the goods inferior.
B) the good is normal.
C) the good violates the Law of Demand.
D) consumption of the good does not change as income changes.

Question 54

When the price of a good rises,the resulting change in quantity demanded due solely to the decline in your income's purchasing power is called the

A) Giffen-good phenomenon.
B) law of demand.
C) substitution effect.
D) income effect.

Question 55

In the example of good and bad cigarettes,the authors found that bad cigarettes where inferior because

A) they are an economic bad.
B) second hand smoke is an economic bad.
C) they comprised a large portion of the smokers budget.
D) many more useful goods are also inferior.

Question 56

When the price of a good rises,the resulting change in relative price causes the consumer to reduce his quantity demanded of that good,even when the consumer is income-compensated so that he remains indifferent about the price change.This observation is known as the

A) Giffen good phenomenon.
B) law of demand.
C) substitution effect.
D) income effect.

Question 57

What types of goods have compensated demand curves that slope downwards?

A) Normal goods only.
B) Inferior goods only.
C) Giffen goods only.
D) All types of goods.

Question 58

A compensated demand curve contains no

A) income effects.
B) substitution effects.
C) price elasticity.
D) income compensation.

Question 59

Which of the following best describes the substitution effect caused by a price increase?

A) A change in consumption due to the fact that you will not buy goods whose marginal value is below the new price.
B) A change in consumption due to the fact that you cannot afford your original market basket.
C) A smaller percentage change in quantity than in price.
D) A larger percentage change in quantity than in price.

Question 60

To construct an ordinary demand curve for good X,

A) change the price of good X in the consumer choice diagram and observe the change in the quantity of good X among the optimum market baskets.
B) change the prices of both goods in the consumer choice diagram and observe the change in the quantity of good X among the optimum market baskets.
C) change the price of good Y in the consumer choice diagram and observe the change in the quantity of good X among the optimum market baskets.
D) change the consumer's income in the consumer choice diagram and observe the change in the quantity of good X.

Question 61

You are an economist for the City Subway Commission.Presently,the price of a subway ride is 80¢,and 200,000 seats are filled weekly.The price elasticity of demand for subway rides is -0.40,and the income elasticity of demand is -0.60.

Question 62

A market with demand Q = 100 - 3P is currently in equilibrium with 40 units being sold.It follows that the current price elasticity of demand

A) is zero.
B) is -1.5.
C) is -6.
D) cannot be calculated with the information given.

Question 63

Define the term normal good.How can a normal good be recognized from

Question 64

How is a compensated demand curve different from an ordinary demand curve? Why must the law of demand always hold for one while it may be violated for the other?

Question 65

Suppose the demand curve for bus travel is downward sloping,and the income elasticity of demand for bus travel is negative.

Question 66

The price elasticity of demand for potatoes is estimated to be -1.3,and the quantity demanded of potatoes is 3,000 bushels per week.In this situation,a 4% rise in the price of potatoes would reduce the quantity demanded by

A) 92 bushels per week.
B) 120 bushels per week.
C) 156 bushels per week.
D) 975 bushels per week.

Question 67

If the income elasticity of a good is negative,then

A) the good must be a Giffen good.
B) the substitution and income effects must be moving in the same direction.
C) the Engel curve for this good must be downward sloping.
D) the law of demand must be satisfied for this good.

Question 68

For each of the following pairs of products,discuss which of the two would be expected to be more price elastic and explain why.

Question 69

Assume that there are only two good for a consumer to purchase.Explain why a consumer can not be maximizing utility if both goods are inferior.

Question 70

Suppose that the local utility regulators have recently approved an increase in the price of electricity from 10¢ per kilowatt-hour to 10.5¢ per kilowatt-hour.The long-run price elasticity of demand for electricity is estimated to be -1.2.

Question 71

The price of a California orange is $2.00 and the price of a Florida orange is $1.00.If the price of California oranges goes down by one cent and the quantity demanded of Florida oranges goes up by one thousand,then

A) the cross elasticity is 0.4.
B) these goods are substitutes.
C) the price elasticity of demand for California oranges is 0.4.
D) these goods are complements.

Question 72

The demand curve for hotel rooms is Q = 1100 - 2P.If the price of a hotel room is $50,then the price elasticity of demand for hotel rooms is

A) -0.1
B) -1.0
C) -10
D) zero

Question 73

The cross elasticity of demand between DVDs and DVD players is likely to be

A) zero.
B) positive.
C) negative.
D) undefined.

Question 74

One defense Microsoft can use to argue that it does not have monopoly power in the market for operating systems,is to show that

A) demand for operating systems is highly elastic.
B) many other commodities have higher income elasticities of demand than operating systems.
C) the cross elasticity of demand between Microsoft's operating system and other operating systems is large and positive.
D) many of its competitors' products are complements for its service.

Question 75

The price elasticity of demand for electricity is -0.40.By how much must the price of the electricity decrease in order for sales to rise by 12%?

A) 3%.
B) 4.8%.
C) 12.4%.
D) 30%.

Question 76

Consider the following:

Question 77

The price elasticity of cigarettes has been estimated as -0.5.The government has decided that they want to decrease the amount that people in the United States smoke by 10%.It follows that they must institute measures that would raise the price of cigarettes by

A) 5%
B) 10%
C) 15%
D) 20%