Deck 3: Demand Theory

Question 1

Hamburger University is losing $4 million dollars per year. The trustees of the university want to increase fees to cover the deficit. The president of the student body wants to decrease fees to cover the deficit. On the basis of this information, which of the following is true?

A)The trustees think demand is price elastic, and the president of the student body thinks it is price inelastic.
B)Both the trustee and president of the student body think the price elasticity of demand is one.
C)The trustees think demand is price inelastic, and the student body president thinks it is price elastic.
D)There is no disagreement with respect to elasticity.

Answer 1

The trustees think demand is price inelastic, and the student body president thinks it is price elastic.

Question 2

Joseph's utility function is given by x_A + 2x_B, where x_A denotes his consumption of apples and x_B his consumption of bananas. Suppose a banana cost 50 cents and an apple costs also 50 cents. If his income is $10, then his consumption bundle (x_A,x_B)is:

A)(20,40).
B)(20,20).
C)(0,20).
D)(20,0).

Answer 2

(0,20).

Question 3

Figure 3A

This consumer's utility maximizing consumption bundle is what point in Figure 3A?

A)A
B)B
C)C
D)D

Answer 3

A

Question 4

If two linear demand functions intersect the quantity axis at the same point, then:

A)when prices are equal, so are the elasticities.
B)when quantities are equal, so are the price elasticities.
C)when prices are equal, so are the quantities.
D)at the point of intersection the two elasticities are equal to one.

Question 5

A negative sloped income consumption line indicates that:

A)one of the goods is a Giffen good
B)the two goods are substitutes
C)the two goods are complements
D)one of the goods is normal and the other is inferior.

Question 6

A budget constraint defines the:

A)odds of earning a particular income.
B)consumer's preference ordering.
C)funds allocated for a particular purpose.
D)attainable consumption bundles.

Question 7

Along an individual demand curve for food, which one of the following is not held constant?

A)the consumer's utility function
B)the consumer's level of utility
C)the consumer's income
D)the price of all other goods

Question 8

If good x₁ is a substitute for good x_2, then the cross price elasticity of demand for x₁ with respect to the price of x₂ is:

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

Question 9

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of x₂ is $5. If her indifference curves exhibit a diminishing marginal rate of substitution and if her marginal rate of substitution at bundle (7, 10)is 1, then her utility maximizing bundle is:

A)(7, 10).
B)(6, 12).
C)on the budget line to the left of (7, 10).
D)on the budget line to the right of (7, 10).

Question 10

Figure 3B

Which of the following is the excise budget line in Figure 3B?

A)BF
B)AG
C)AH
D)IJ

Question 11

Excise taxes are imposed when society's primary objective is to:

A)encourage behaviour.
B)change preferences.
C)raise revenue.
D)discourage behaviour.

Question 12

Figure 3A

This consumer's utility maximizing consumption bundle is illustrated in Figure 3A. Which assumption about consumer preferences guarantees it is not point B?

A)continuity
B)transitivity
C)nonsatiation
D)completeness

Question 13

Mr. Inflexible's utility function is U(x₁,x₂)= min(x₁,x₂). The price of x₁ is $1, the price of x₂ is $2, and Mr. Inflexible's budget is $120. His utility maximizing consumption bundle is:

A)(20, 40).
B)(20, 50).
C)(40, 40).
D)(60, 30).

Question 14

Figure 3A

Which of the following is true about the goods in Figure 3A?

A)x₁ is an inferior and x₂ is a normal good.
B)x₁ is a normal and x₂ is an inferior good.
C)Both x₁ and x₂ are normal goods.
D)Both x₁ and x₂ are inferior goods.

Question 15

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of
X₂ is $5. Her budget line intersects the x₂ axis at consumption bundle:

A)(0, 24).
B)(0, 12).
C)(24, 0).
D)(12, 0).

Question 16

Price elasticity of demand for a product tends to be greater:

A)the lower its price.
B)the more broadly the product is defined.
C)the closer substitutes are for it.
D)the less close substitutes are for it.

Question 17

Bonnie spends her entire income, $200 on 3 goods, x₁, x₂ and x₃. When p₁ = $1, p₂ = $3, and p₃ =
$5, she buys the following consumption bundle: (15, 20, 25). The price of x₁ increases by 25%, and she now buys 15 units of x₂ and 28 units of x₃. Which of the following is not true?

A)the price elasticity of demand for x₁ is one
B)x₁ is a Giffen good
C)total revenue for x₁ is maximized
D)total expenditure on x₁ is unchanged

Question 18

Joseph's utility function is given by x_A + 2x_B, where x_A denotes his consumption of apples and x_B his consumption of bananas. If a banana cost 50 cents and an apple costs also 50 cents, how many apples will he buy if his income is $10?

A)20
B)10
C)0
D)5

Question 19

Richie's demand function for comic books is x = 30 - 10p where p is the price in dollars and x is the quantity he demands. If the price of comic books is $0.5, what is Richie's price elasticity of demand for comic books?

A)- 10
B)- 1/3
C)- 1/10
D)- 1/5

Question 20

In January a severe frost destroyed 1/3 of the American orange crop, and growers anticipated bankruptcy. By year's end, however, they realized that their profits were larger than ever. Which of the following could not explain this curious result?

A)There was a similar frost in exporting countries.
B)The demand for oranges shift to the left.
C)The demand for oranges shifted to the right.
D)The demand for oranges is price inelastic.

Question 21

If good x₁ is a substitute for good x₂, then an increase in the price of x₂ causes the demand of x₁ to:

A)be indeterminate.
B)increase.
C)decrease.
D)remain unchanged.

Question 22

When consumers join a club, or a cooperative pays for a project, the individuals involved:

A)move to a higher indifference curve.
B)move to a lower indifference curve.
C)may move or remain depending on the prices of other goods.
D)remain on the same indifference curve.

Question 23

If some constraint is relaxed or alleviated:

A)preferences likewise will be relaxed or alleviated.
B)a consumer will be worse off.
C)a consumer's behaviour will not change.
D)a consumer will have more options available.

Question 24

A negative sloped income consumption line indicates that:

A)both goods are normal.
B)both goods are inferior.
C)one of the goods is normal and the other is inferior.
D)the goods may be normal or inferior.

Question 25

For an inessential good, which of the following is true?

A)Quantity demanded is always zero.
B)Quantity demanded is negative.
C)Quantity demanded is always positive.
D)Quantity demanded can be either positive or zero.

Question 26

Ron's utility function is given by U(x,y)= min[x,y]. If the price of x is 2 and the price of y is 1 and if Ron's preferred consumption bundle is [4,4], then his income is:

A)16.
B)10.
C)14.
D)12.

Question 27

If goods A and B are complements:

A)the own price elasticity may be superior.
B)a decrease in the price of B causes the demand for A to increase.
C)they are also substitutes.
D)an increase in the price of A causes the demand for B to increase.

Question 28

Constraints in the theory of consumer behaviour:

A)have no bearing on choices individuals make.
B)are the only influence on consumer choices.
C)are measurable in principle.
D)restrict choices.

Question 29

Marc consumes apples (x)and oranges (y). If Marc's demand function for apples is given by: x =
Mp_y/2p_x and Marc's demand for oranges is given by: x = Mp_x/2p_y, then apples and oranges are:

A)inferior goods.
B)inessential goods.
C)complements.
D)substitutes.

Question 30

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of
X₂ is $5. The consumption bundle (4, 18)is:

A)well defined.
B)an unattainable bundle.
C)an attainable bundle.
D)on the budget line.

Question 31

Which of the following is true?

A)Individuals prefer excise taxes.
B)Individuals prefer lump- sum taxes.
C)Lump- sum taxes give individuals fewer choices than excise taxes.
D)Excise taxes impose smaller individual costs than lump- sum taxes.

Question 32

When the price elasticity of demand for x is greater than one:

A)total revenue is negative.
B)the slope of the total revenue function is positive.
C)the slope of the total revenue function is negative.
D)the slope of the total revenue function is zero.

Question 33

Joe consumes just two goods, x₁ and x₂ and both are inessential. His indifference curves are convex. Joe will buy a positive quantity of x₁ if:

A)MRS(0, M/p₂)> p₁/p₂.
B)MRS(0, M/p₂)= p₁/p₂.
C)MRS(0, M/p₂)< p₁/p₂.
D)MRS(M/p₁, 0)< p₁/p₂.

Question 34

Suppose your income doubled and, at the same time, the prices of all goods doubled. Suppose you continue to purchase exactly the same bundle as before. What would the law of demand suggest about this behaviour?

A)Reasonable, because the relative price did not change.
B)Uncertain, because we don't know if the goods you purchase are normal or not.
C)Once you have a chance to adjust, you will purchase the low cost goods.
D)Not possible, because when the price goes up the quantity demanded always falls.

Question 35

Given that the government wishes to raise a certain amount of tax revenue, individuals prefer:

A)a 100% lump sum tax.
B)a combination of a 70% excise tax and a 30% lump sum tax.
C)a combination of a 30% excise tax and a 70% lump sum tax.
D)a 100% excise tax.

Question 36

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of
X₂ is $5. The opportunity cost of x₂ is:

A)0.25 units of x₁.
B)2 units of x₁.
C)1 unit of x₁.
D)0.5 units of x₁.

Question 37

A price consumption path is derived by:

A)connecting all of the tangency points as the price of a good changes.
B)connecting all of the tangency points as the price of both goods change proportionately.
C)connecting all of the tangency points holding real income constant as the price of a good changes.
D)connecting all of the tangency points holding utility constant as the price of a good changes.

Question 38

A temporal choice problem involves:

A)two goods.
B)given income and prices.
C)imperfect information.
D)intertemporal choices.

Question 39

Mr. Inflexible's utility function is U(x₁,x₂)= min(x₁,x₂). The price of x₁ is $1, the price of x₂ is $2, and Mr. Inflexible's budget is $120. If an excise tax of $1 per unit is placed on x₁, the utility maximizing bundle is:

A)(40, 20).
B)(50, 25).
C)(30, 30).
D)(20, 40).

Question 40

Mr. Inflexible's utility function is U(x₁,x₂)= min(x_1,x₂). The price of x₁ is $1, the price of x₂ is $2, and Mr. Inflexible's budget is $120. If Mr. Inflexible were given the choice between a lump- sum tax and an excise tax which raised the same amount of tax revenue, then:

A)he would prefer the excise tax.
B)he would prefer the lump- sum tax.
C)he would be indifferent between them.
D)one cannot say which tax he would prefer.

Question 41

Which of the following is not a constraint on choice?

A)self- interest
B)time
C)income
D)endowed resources

Question 42

Figure 3A

The Engel curves associated with the indifference map in Figure 3A are:

A)upward sloping.
B)downward sloping.
C)vertical.
D)horizontal.

Question 43

Imagine an excise tax and a lump- sum tax which would raise the same revenue from an individual Ms. Arbitrary who has convex preferences. If she was given a choice between the two taxes, then:

A)she would prefer the excise tax.
B)she would be indifferent between the two taxes.
C)we cannot know Ms. Arbitrary's preferences regarding the taxes.
D)she would prefer the lump- sum tax.

Question 44

Which of the following assumptions about consumer behaviour implies that the utility maximizing choice will be on the budget constraint.

A)non- satiation
B)transitivity
C)continuity
D)completeness

Question 45

Own price elasticity of demand is defined as:

A)the change in quantity demanded divided by the change in price.
B)the percentage change in quantity demanded divided by the percentage change in price.
C)the change in price divided by the change in quantity demanded.
D)the percentage change in price divided by the percentage change in quantity demanded.

Question 46

Given the choice between a lump- sum tax and an excise tax that raises the same revenue, a consumer:

A)will be hard- pressed to choose one option over the other.
B)will choose the the excise tax.
C)will choose the lump- sum tax.
D)is indifferent between the two.

Question 47

Carol experiences a 4% increase in income this year. She is:

A)perhaps better or worse off.
B)unambiguously no better or worse off.
C)unambiguously worse off.
D)unambiguously better off.

Question 48

In order for a maker of cellophane not to be charged with monopolizing the market, the cross- price elasticity of cellophane and other packaging products has to be:

A)high.
B)low.
C)not defined.
D)zero.

Question 49

If goods A and B are complements

A)the price- consumption path is downward sloping
B)the price- consumption path is upward sloping
C)the income- consumption line is downward sloping
D)the income- consumption line is upward sloping

Question 50

Percy currently buys soup at $4 per bowl, and tea at $2 per cup. His marginal utility from soup is 12 and his marginal utility from tea is 8. The opportunity cost of purchasing one more cup of tea is:

A)1.5
B)2
C)0.66
D)0.5

Question 51

Tammy spent all of the money in her purse to buy 5 plates of spaghetti and 6 burgers. Spaghetti costs $8 per plate and she had $82 in her purse. If s denotes the number of plates of spaghetti and b denotes the number of burgers purchased, which equation describes the budget line of Tammy?

A)5s+6b = 164
B)5s+6b = 82
C)6s+8b = 82
D)16s +14b = 164

Question 52

Mr. Inflexible's utility function is U(x₁,x₂)= min(x₁,x₂). The price of x₁ is $2 including a $1 excise tax, the price of x₂ is $2, and Mr. Inflexible's budget is $120. Imagine substituting a lump- sum tax for the excise tax. If both taxes leave Mr. Inflexible on the same indifference curve, then the
Lump- sum tax is:

A)$30.
B)$10.
C)$20.
D)$50.

Question 53

Figure 3A

As the consumer's income changes (while prices remain constant), the consumer would be most likely to choose which points in Figure 3A?

A)A, B, and C
B)B, D, and E
C)A, D, and E
D)E, D, and F

Question 54

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of
X₂ is $5. If her utility function is U(x₁,x₂)= x₁ + x₂, her utility maximizing bundle is:

A)(12, 0).
B)(7, 10).
C)(0, 24).
D)(8, 8).

Question 55

By "real" price, an economist means:

A)what an individual seriously pays for a good.
B)not the artificial price.
C)the dollar amount of money required to buy the good.
D)the price in terms of other goods.

Question 56

If the price of the house you just bought went up:

A)you are worse off because you pay higher taxes for the same house.
B)you are better off because you can substitute among a wide variety of items in your consumption bundle.
C)you are better off because you made a quick capital gain.
D)you are worse off because you face higher prices in the economy.

Question 57

Joseph's utility function is given by x_A + 2x_B, where x_A denotes his consumption of apples and x_B his consumption of bananas. Suppose apples and bananas have the same price, 50 cents. If his income is $10, then Joseph will consume:

A)no apples.
B)twice as many bananas than apples.
C)twice as many apples than bananas.
D)same quantity of apples and bananas.

Question 58

If an individual's Engel curve for a good is negatively sloped, then the good is:

A)a normal good.
B)an Engel good.
C)a Giffen good.
D)an inferior good.

Question 59

Fred's demand for beer is given by x = M/2p_x. For Fred, beer is a(n):

A)inessential good.
B)normal good.
C)inferior good.
D)Giffen good.

Question 60

If an excise tax on good x and a lump- sum tax put Ms. Arbitrary on the same indifference curve, she would:

A)have identical budget lines under the two taxes.
B)consume more of x given the excise tax than given the lump- sum tax.
C)prefer the lump- sum tax.
D)consume no more of x given the excise tax than given the lump- sum tax.

Question 61

Ron's utility function is given by U(x,y)= min[x,y]. If the price of x is 2 and the price of y is 1, Ron spends his $12 income on:

A)4 units of x and 2 units of y.
B)4 units of x and 4 units of y.
C)2 units of x and 4 units of y.
D)2 units of x and 2 units of y.

Question 62

Beth consumes two goods, x₁ and x₂, and her income is $120. The price of x₁ is $10, and the price of
X₂ is $5. If her utility function is U(x₁,x₂)= min(x₁,x₂), her utility maximizing bundle is:

A)(7, 10).
B)(12, 0).
C)(8, 8).
D)(0, 24).

Question 63

Ron's utility function is given by U(x,y)= min[2x,y]. If the price of x is 1 and the price of y is 1, Ron spends his $12 income on:

A)4 units of x and 4 units of y.
B)8 units of x and 8 units of y.
C)4 units of x and 8 units of y.
D)8 units of x and 4 units of y.

Question 64

Joseph's utility function is given by x_A +2x_B, where x_A denotes his consumption of apples and x_B his consumption of bananas. If a banana cost 50 cents and an apple costs also 50 cents, how many bananas will he buy if his income is $10?

A)0
B)10
C)20
D)5

Question 65

A utility maximizing bundle is:

A)the bundle which satiates the consumer's desires.
B)inside the budget line and on an indifference curve.
C)on a budget line tangent to an indifference curve.
D)at the origin of the indifference map.

Question 66

The fact that most bundles of goods purchased at a given store are more expensive if bought elsewhere:

A)is a sign of deeply discounted prices.
B)can be interpreted in a wide variety of ways.
C)is a clear proof that this store is cheaper on average than other stores.
D)is an illustration of the maximization process.

Question 67

Figure 3B

Which of the following is the lump- sum budget line in Figure 3B?

A)AH
B)BF
C)IJ
D)AG

Question 68

When Netscape took Microsoft to court for using anti- competitive practices, the contention was that the Internet Explorer, a browser, and Windows, the operating system, were:

A)not working properly.
B)incompatible.
C)substitutes.
D)complements.

Question 69

If Mary always spends 10% of her income on records, regardless of the prices of records or other goods, then:

A)Mary could not be a utility maximizer.
B)records are inferior goods.
C)Mary's income elasticity of demand for records is one.
D)records are abnormal goods.

Question 70

Which of the following statements is false on theoretical grounds?

A)It is possible that all goods are normal.
B)It is possible that all goods are inferior.
C)It is possible that all goods are essential.
D)It is possible that all goods are inessential.

Question 71

Which of the following will not cause a change in the demand for butter?

A)a new disease strikes milk cows
B)the price of butter falls
C)a frost hits Florida
D)dairy workers get a wage increase

Question 72

Which of the following statements accurately reflects the money illusion?

A)Consumers care only about relative prices, not money prices.
B)Pure inflation does not change the budget constraint.
C)A change in money prices changes the indifference curves.
D)Money has no intrinsic value and therefore is essentially worthless.

Question 73

If the market demand for oranges is relatively inelastic with respect to price, orange consumers:

A)will buy fewer oranges at any higher price but will spend more money on oranges.
B)will buy fewer oranges at any higher price and will spend less money on oranges.
C)will buy more oranges at any higher price.
D)pay no attention to price in their purchasing decisions.

Question 74

A consumer's demand functions depend on:

A)her income and the prices of goods and services.
B)the supply of goods and services.
C)weakly convex indifference curves.
D)careful mathematical analysis.

Question 75

Income elasticity of demand for an inferior good is:

A)not properly defined.
B)negative.
C)positive.
D)zero.

Question 76

Quantity demanded of good x does not increase as the price of x increases if x is:

A)a Giffen good.
B)an inferior good whose income effect dominates its substitution effect.
C)a normal good.
D)an Engel good.

Question 77

Elasticity is an attractive measure of comparative static responses for all of the following reasons except, elasticities:

A)relate changes in price to changes in total revenue.
B)are directly observable.
C)are units- free.
D)relate %- changes in one variable to %- changes in other variables.

Question 78

Figure 3B

Which of the following is the pretax budget line in Figure 3B?

A)AG
B)BF
C)IJ
D)AH

Question 79

Suppose that p_x = 2 and p_y = 5. Jane spends her $100 income on 25 units of x and 10 units of y. When the price of x doubled to $10 per unit, Jane's father gave her an extra $50 so that she could buy the same bundle that she did before the price change. Assuming convex indifference curves, which of the following statements is true?

A)No conclusions can be drawn regarding Jill's welfare unless we know her utility function
B)Jill is just as well off as before the price change
C)Jill is actually better off now than she was before
D)Jill is worse off now than she was before

Question 80

Mr. Inflexible's utility function is U(x₁,x₂)= min(x₁,x₂). The price of x₁ is $2 including a $1 excise tax, the price of x₂ is $2, and Mr. Inflexible's budget is $120. Imagine substituting a lump- sum tax for the excise tax. If both taxes raise the same amount of tax revenue, the lump- sum tax is:

A)$20.
B)$30.
C)$10.
D)$50.