Question 1

An interest rate increase to 4 percent will cause you to
A)save more of your income.
B)save less of your income.
C)be more time patient.
D)be more time impatient.

Accepted Answer

When interest rates increase, the cost of borrowing money (e.g., taking out loans, using credit cards) becomes more expensive. As a result, people tend to save more of their income rather than spend it, as saving becomes more attractive than borrowing. Therefore, an interest rate increase would cause you to save more of your income.

Question 2

Suppose your university decides to increase parking fees in order to deal with the shortage of parking spaces. Nevertheless, the president of your student body convinces the university to pay back the amount spent on higher parking fees to students in the form of a rebate at the end of the school year. Therefore, the increase in parking fees will
A)not solve the parking shortage.
B)reduce demand for parking and hence alleviate the parking shortage.
C)will have no effect since it will be offset entirely by the rebate.
D)make the parking shortage even worse.

Accepted Answer

The answer of Suppose your university decides to increase parking...

Question 3

Suppose an individual demand curve is given by P = 100 - 5Q, where P is the price of smoothies and Q is the quantity she consumes. Assuming her income per week is $1,000 and the current price of smoothies is $5 each, by how much will her consumer surplus decline if the price of smoothies increased to $10 each?
A)$92.5
B)$810
C)$950
D)$25

Accepted Answer

To calculate the consumer surplus decline, first find the quantity demanded at both prices. At $5, Q = (100 - 5)/5 = 19. At $10, Q = (100 - 10)/5 = 18. The consumer surplus is the area of the triangle above the price line and below the demand curve. Initially, at $5, the maximum price she's willing to pay for the 19th smoothie is $5, so the height of the triangle is 100 - 5*19 = 5, and the base is 19. The area (consumer surplus) is 0.5*19*5 = $47.5. After the price increase to $10, for the 18th smoothie, the maximum price she's willing to pay is 100 - 5*18 = $10, so the new consumer surplus is 0.5*18*10 = $90. The decline in consumer surplus is $90 - $47.5 = $42.5, but since none of the options match this calculation, it seems there was a mistake in the calculation process. Correctly, at $5, the consumer surplus is the area under the demand curve from 0 to 19 minus the rectangle of spending (19*$5), and at $10, it's the area under the curve from 0 to 18 minus the rectangle of spending (18*$10). The correct approach involves finding the initial and new consumer surplus correctly and calculating the difference. The mistake was in the interpretation of how consumer surplus is calculated, leading to an incorrect conclusion. The correct calculation should consider the total area under the demand curve up to the quantity consumed minus the actual amount spent at both prices, and then find the difference between these two consumer surpluses to find the decline.

Question 4

According to the Life-cycle hypothesis, if a person received a payment roughly equals to her current income her consumption would:
A)roughly double.
B)increase, but not by as much as the increase in income.
C)increase by more than the increase in income.
D)would not increase at all.

Accepted Answer

The Life-cycle hypothesis suggests that individuals plan their consumption and savings behaviour over their life-cycle. They aim to smooth consumption over their lifetime, so if a person receives a payment roughly equal to their current income, they would spread this additional income over many periods. Therefore, their consumption would increase, but not by as much as the increase in income, as they save some of the windfall for future consumption.

Question 5

Say the bus authority in your city increased the typical bus fare from $1.00 to $1.50 and that due to this increase total revenue increased by 20%. Based on this we know that the price elasticity of bus rides in your neighborhood is (assume demand curve is linear):
A)0.4.
B)0.8.
C)1.
D)1.5.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the price increased by 50% (from $1.00 to $1.50), and revenue increased by 20%, indicating that the quantity demanded decreased but not proportionally to the price increase. This suggests inelastic demand, and a price elasticity of 0.4 indicates that the percentage change in quantity demanded is less than the percentage change in price.

Question 6

You have $20,000 of current income and $45,000 of future income. The interest rate between the current and future period is 2 percent. When you allocate consumption optimally between the two periods the marginal rate of time preference between the two periods is
A)-1.02.
B)-1.00.
C)-1.80.
D)0.80.

Accepted Answer

The marginal rate of time preference is equal to the negative of the interest rate when consumption is optimally allocated. Since the interest rate is 2 percent, the marginal rate of time preference is -1.02.

Question 7

Which of the following would be but best item for the local government to tax if its goal was to raise revenue?
A)Water supply
B)Outdoor concert provided by the city
C)Weather reports on your phone
D)Leaf collection

Accepted Answer

Taxing the water supply is the most effective option for raising revenue because it is a basic necessity that everyone uses, ensuring a broad and consistent tax base.

Question 8

In a diagram, consumer surplus is always represented by the area:
A)between the demand curve and the supply curve.
B)between the demand curve and the price.
C)below the demand curve.
D)above the demand curve.

Accepted Answer

Consumer surplus is represented by the area between the demand curve and the price, as it reflects the difference between what consumers are willing to pay and what they actually pay.

Question 9

If you get great pleasure from anticipating a fun event which of the following is true?
A)You have a higher marginal rate of time preference than if you didn't get that pleasure.
B)Your intertemporal indifference curve is steeper than it would be without that pleasure.
C)You likely have more savings than you would have without the anticipatory pleasure.
D)All of these are true.

Accepted Answer

Anticipatory pleasure can lead to increased savings as individuals may delay gratification to enhance future enjoyment, reflecting a lower marginal rate of time preference.

Question 10

If the demand function for city bus rides is P = 100 - 10Q and the present price of a ride is 50, then
A)raising prices will increase city revenue.
B)raising prices will decrease city revenue.
C)raising prices will not change city revenue.
D)from the information given it is not clear what would happen to city revenue if price is increased.

Accepted Answer

The demand function for city bus rides is P = 100 - 10Q. We can calculate the current quantity demanded by substituting P=50 into the equation:
50 = 100 - 10Q
10Q = 50
Q = 5
The current quantity demanded is 5.

If the price is raised, the quantity demanded will decrease according to the law of demand. This will affect the total revenue earned by the city. 
Total Revenue = Price x Quantity Demanded

Let's consider what would happen if the price is increased from 50 to 60:
New Quantity Demanded:
60 = 100 - 10Q
10Q = 40
Q = 4
The new quantity demanded is 4.

New Total Revenue:
Total Revenue = Price x Quantity Demanded
Total Revenue = 60 x 4
Total Revenue = 240

Comparing the new total revenue of 240 to the previous revenue of 50 x 5 = 250, we see that the revenue has decreased. Therefore, raising prices in this case will decrease city revenue.

Question 11

According to the analysis in your text, the school voucher program would
A)increase the quality of education.
B)decrease the quality of education.
C)not affect education quality, but would make lower income families better off.
D)increase the quality of education, but not improve the welfare of low income families.

Accepted Answer

The analysis suggests that the school voucher program would increase the quality of education by introducing competition among schools, which can lead to improvements in educational standards.

Question 12

Colin's demand for golf at his local club each season is P = 50 - 2Q. If the golf course charges $26 dollars per round of golf, how much could it charge Colin in a membership fee before he would not play there?
A)$1,250
B)$144
C)$288
D)$312

Accepted Answer

The answer of Colin's demand for golf at his local...

Question 13

In analyzing the gasoline tax and subsidy policy discussed in the text, the final solution illustrates that
A)consumers are worse off than they were before the policy began.
B)consumers do not cut back on fuel consumption.
C)the government is made better off financially.
D)social welfare increases.

Accepted Answer

Consumers are worse off than they were before the policy began because the gasoline tax increases the price they pay for fuel, reducing their consumer surplus.

Question 14

If you had a windfall of $5,000 in the present time period and you save some of it, your saving behavior would likely be due to the fact that
A)your marginal utility of present income falls as your income goes up.
B)the extra income changes the slope of your time preference indifference curves making then steeper.
C)your indifference curves for present and future income are vertical.
D)your indifference curves for present and future are horizontal.

Accepted Answer

According to the concept of diminishing marginal utility, as our income increases, the marginal utility of each additional unit of income decreases. Therefore, the marginal utility of present income falls as income goes up, which could make individuals more likely to save some of a windfall rather than spend it all immediately.

Question 15

One thousand dollars given to you a year from now is worth __________ to you today if the relevant discount rate is 10%.
A)$1,000
B)$1,100
C)$909
D)$900

Accepted Answer

The present value of $1,000 received in one year with a discount rate of 10% can be calculated using the formula: PV = FV / (1+r)^t, where PV is the present value, FV is the future value, r is the discount rate and t is the time period. Plugging in the values, we get PV = $1,000 / (1+0.10)^1 = $909.09, which is closest to option C. Therefore, the best choice is C, $909.

Question 16

When a product depicted on the horizontal axis of a typical indifference curve model of behavior is taxed
A)the budget line becomes steeper.
B)the budget line becomes flatter.
C)the indifference curve of the consumer shifts right.
D)all the indifference curves of the consumer become steeper.

Accepted Answer

When a product depicted on the horizontal axis of a typical indifference curve model of behavior is taxed, the price of the product increases, which means the consumer has to give up more of the other product to purchase the same amount of the taxed product. This results in a steeper budget line, which represents the new feasible consumption options for the consumer.

Question 17

Say an individual demand curve was given by P = 50 - 5Q. When the price is $25, consumer surplus is around
A)$63.
B)$188.
C)$125.
D)$100.

Accepted Answer

The answer of Say an individual demand curve was given...

Question 18

You have $20,000 of current income and $45,000 of future income. The interest rate between the current and future period is 2 percent. What is the maximum amount you could consume in the future?
A)65,400
B)69,000
C)20,400
D)65,000

Accepted Answer

To find the maximum future consumption, calculate the future value of the current income: $20,000 * 1.02 = $20,400. Add this to the future income: $20,400 + $45,000 = $65,400.

Question 19

If the demand function for apples is P = 1 - Q, how much consumer surplus does the consumer gain when the price of the apples equals 5?
A)25
B)5
C)20
D)12.5

Accepted Answer

Consumer surplus is the area of the triangle formed by the demand curve, the price axis, and a line at the price level where the product is purchased. Here, when P = 5, the demand function P = 1 - Q gives a negative quantity, which doesn't make sense in this context. It seems there might be a misunderstanding in the question setup as the given demand function and price level do not align logically for calculating consumer surplus. However, if we consider a typical approach to finding consumer surplus with a correctly aligned demand function and price, it involves finding the area of the triangle under the demand curve above the price paid. Assuming a typo in the price given, and if we were to consider a price where the calculation is feasible, the formula for consumer surplus is 1/2 * base * height, where the base is the quantity and the height is the difference between the maximum price willing to be paid (where quantity is zero) and the actual price paid. Without the correct price that aligns with the demand function, we cannot accurately calculate consumer surplus. The answer provided as D (12.5) would be correct in a scenario where the price and demand function align such that the calculation of a triangular area is applicable.

Question 20

According to the analysis in your textbook, the school voucher program would
A)increase the level of spending on education.
B)decrease the level of spending on education.
C)leave the level of spending on education the same.
D)force some people to leave the public school system.

Accepted Answer

The school voucher program would increase the level of spending on education because it would allow parents to use public funds to send their children to private schools. This would increase the demand for private education, which would lead to higher tuition rates and increased spending on education overall.

Quiz 5: Applications of Rational Choice and Demand Theories

An interest rate increase to 4 percent will cause you to

According to the Life-cycle hypothesis, if a person received a payment roughly equals to her current income her consumption would:

Say the bus authority in your city increased the typical bus fare from $1.00 to $1.50 and that due to this increase total revenue increased by 20%. Based on this we know that the price elasticity of bus rides in your neighborhood is (assume demand curve is linear) :

You have $20,000 of current income and $45,000 of future income. The interest rate between the current and future period is 2 percent. When you allocate consumption optimally between the two periods the marginal rate of time preference between the two periods is

Which of the following would be but best item for the local government to tax if its goal was to raise revenue?

In a diagram, consumer surplus is always represented by the area:

If you get great pleasure from anticipating a fun event which of the following is true?

If the demand function for city bus rides is P = 100 - 10Q and the present price of a ride is 50, then

According to the analysis in your text, the school voucher program would

Colin's demand for golf at his local club each season is P = 50 - 2Q. If the golf course charges $26 dollars per round of golf, how much could it charge Colin in a membership fee before he would not play there?

In analyzing the gasoline tax and subsidy policy discussed in the text, the final solution illustrates that

If you had a windfall of $5,000 in the present time period and you save some of it, your saving behavior would likely be due to the fact that

One thousand dollars given to you a year from now is worth __________ to you today if the relevant discount rate is 10%.

When a product depicted on the horizontal axis of a typical indifference curve model of behavior is taxed

Say an individual demand curve was given by P = 50 - 5Q. When the price is $25, consumer surplus is around

You have $20,000 of current income and $45,000 of future income. The interest rate between the current and future period is 2 percent. What is the maximum amount you could consume in the future?

If the demand function for apples is P = 1 - Q, how much consumer surplus does the consumer gain when the price of the apples equals 5?

According to the analysis in your textbook, the school voucher program would