Question 1

Refer to the graph below. Assume the consumer has an income of $100, the price of X is $2 and the price of Y is $1. According to the graph, the income effect of a decrease in the price of X from $2 to $1 is equal to:

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The answer of Refer to the graph below. Assume the...

Question 2

From the graph given, locate two points on an individual demand curve that you sketch directly below the graph presented

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The answer of From the graph given, locate two points...

Question 3

What is the cross-price elasticity between beef and vegetables for a strict vegan when the price of vegetables increases?

Accepted Answer

The cross-price elasticity between beef and vegetables for a strict vegan is zero because a strict vegan does not consume beef at all, so a change in the price of vegetables does not affect their consumption of beef.

Question 4

On the graph below sketch the income and substitution effects of a price increase for good X.

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The answer of On the graph below sketch the income...

Question 5

Which statement is definitely true about shelter in the above below?

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The answer of Which statement is definitely true about shelter...

Question 6

If there are no costs in selling mineral water what price should a profit maximizer charge?

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The answer of If there are no costs in selling...

Question 7

Refer to the graph below. Assume the consumer has an income of $100, the price of X is $2 and the price of Y is $1. According to the graph below, the total effect of a decrease in the price of X from $2 to $1 is equal to:

Accepted Answer

According to the graph, the initial budget constraint is AB. When the price of X reduces to $1, the budget constraint shifts out to CD.

The substitution effect is the movement from point A to point B', where the consumer substitutes some of Y for X due to the relative price change. The income effect is the movement from point B' to point D, where the consumer can afford to buy more of both goods due to the increase in real income caused by the price decrease of X.

The total effect is the movement from point A to point D. As we can see from the graph, the quantity demanded of X and Y increases, and the consumer reaches a higher indifference curve at point D.

Therefore, the total effect of a decrease in the price of X from $2 to $1 is a budget expansion from AB to CD, resulting in an increase in the quantity demanded of both goods, totaling $25 ($15 more of X and $10 more of Y).

Question 8

Which of the following price-quantity data would not be part of the demand curve derived from the graph below?

Accepted Answer

The point where price is equal to zero is not part of the demand curve as there can be no demand at a price of zero.

Question 9

(Appendix) An income compensated demand curve

Accepted Answer

The income compensated demand curve accounts for changes in consumption as prices change, holding utility constant by adjusting income. For a normal good, it's steeper because it removes the income effect, making it purely about the substitution effect. For an inferior good, it's flatter because the income effect, which normally works against the substitution effect, is removed, emphasizing the substitution effect. A Giffin good, which is a type of inferior good, has a negatively sloped demand curve because as its price increases, people consume more of it due to the income effect overpowering the substitution effect; removing the income effect with compensation highlights this unique behavior.

Question 10

One of the management groups is arguing for a price reduction as a way to sell more gallons and increase income. Is this a good suggestion?

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The answer of One of the management groups is arguing...

Question 11

Other things equal, which of the following goods would have the most inelastic price elasticity of demand?

Accepted Answer

Goods with broader categories, such as "all shirts, of any color, sold in the U.S.," tend to have more inelastic demand because there are fewer substitutes available compared to more specific items.

Question 12

The market demand for a gallon of mineral water is P = 10 - .05Q. The producer wants to produce where the elasticity of demand is unity. What price should she charge and what quantity should be sold to achieve that goal?

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The answer of The market demand for a gallon of...

Question 13

Say a study reveals that price elasticity of demand for teenage smoking was -0.5. If the government imposed a tax on cigarettes the total expenditure teenagers spend on buying cigarettes would

Accepted Answer

Since the price elasticity of demand is -0.5, demand is inelastic. This means that a price increase (due to a tax) would lead to a less than proportionate decrease in quantity demanded, resulting in an increase in total expenditure.

Question 14

Assume that the price-consumption curve is horizontal. What additional information does that tell you about the demand for good X and the amount people spend on it?

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The answer of Assume that the price-consumption curve is horizontal....

Question 15

The following two individual demand curves represent the entire market for a commodity. What is the market demand curve for the commodity? Show the market demand in equation and graphical form. (a) P = 60 - 10Q (b) P = 60 - 15Q

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The answer of The following two individual demand curves represent...

Question 16

(Appendix) A demand function that has a unitary elasticity at every point will

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The answer of (Appendix) A demand function that has a...

Question 17

Based on your sketch, is the good a normal or inferior good?

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The answer of Based on your sketch, is the good...

Question 18

There has been much discussion over whether marijuana should be legalized. Assume that if it becomes legal the price will be cut in half. Given your text estimate of -1.0 price elasticity for marijuana, what would you expect to be the change in marijuana usage?

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The answer of There has been much discussion over whether...

Question 19

Say you own a kiosk where you sell T-shirts to other students. After conducting a quick survey you find that at the current price the price elasticity of demand for your T-shirts is inelastic. Knowing this, if you wanted to increase the total revenue from selling T-shirts you should

Accepted Answer

Since the price elasticity of demand is inelastic, increasing the price of the T-shirts will result in an increase in total revenue. In other words, even though there will be a decrease in the quantity demanded, the increase in price will more than offset the loss in sales volume so that overall revenue will rise.

Question 20

Refer to the graph below. Assume the consumer has an income of $100, the price of X is $2 and the price of Y is $1. According to the graph, the substitution effect of a decrease in the price of X from $2 to $1 is equal to:

Accepted Answer