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Elasticity – Utility

I. Elasticity Questions:

1) Elasticity measures the


A) percentage change in a variable.
B) slope of a curve.
C) change in a variable.
D) responsiveness of a variable to a change in another variable.

2) A decrease in the price of eggs from $1.50 to $1.30 per dozen resulted in an
increase in egg purchases in two cities. In Philadelphia, daily egg purchases increased
from 6000 to 8000 dozens; in nearby Dover, Delaware, daily egg purchases increased
from 300 to 400 dozens. The price elasticity of demand is therefore
A) lower in the smaller city as would be expected.
B) greater in the smaller city as would be expected.
C) certainly affected by population differences in different markets.
D) the same in Philadelphia as in Dover.

3) Suppose that the quantity of root beer demanded declines from 103,000 gallons per
week to 97,000 gallons per week as a consequence of a 10 percent increase in the
price of root beer. The price elasticity of demand is
A) 0.60.
B) 1.40.
C) 1.66.
D) 6.00.

4) The price elasticity of demand for DVDs is 2. If the price of a DVD increased by 2
percent, the quantity demanded will ________.
A) decrease by 2 percent
B) not change
C) decrease by 4 percent
D) decrease by 1 percent

5) Because of an increase in the price of leather, the price of a pair of women's dress
shoes increased 12 percent. If the price elasticity of demand for women's dress shoes
is 0.85, which of the following will happen?
A) Total expenditure on women's dress shoes decreases.
B) The number of pairs of women's dress shoes demanded decreases by 10.2 percent.
C) Total revenue from the sale of women's dress shoes decreases.
D) none of the above

6) If the quantity demanded changes by a relatively small amount for a given change
in price, then demand is
A) perfectly inelastic.
B) perfectly elastic.
C) elastic.
D) inelastic.
7) If the demand for a good is elastic, when the price increases, the
A) demand will decrease.
B) quantity demanded will increase.
C) quantity demanded will decrease by a smaller percentage than the price increased.
D) quantity demanded will decrease by a greater percentage than the price increased.

8) At a local ice cream parlor, when the price of half-gallons of chocolate ice cream
was lowered by fifty cents per half-gallon, total revenue from the sale of chocolate ice
cream decreased. This result indicates that
A) there are more people who like vanilla ice cream than there are people who like
chocolate ice cream.
B) the demand for chocolate ice cream is inelastic.
C) the demand for chocolate ice cream is elastic.
D) None of the above answers is correct.

9) In 1973 and again in 1979, the Organization of Petroleum Exporting Countries


(OPEC) raised the world price of crude oil and increased their revenue as well. Which
of the following is a true statement regarding these OPEC price hikes?
A) Their revenue increased because the demand for oil was income inelastic.
B) Their revenue increased because the demand for oil was price inelastic.
C) Their revenue would have increased regardless of income elasticity or price
elasticity because oil is an imported product for most nations.
D) Their revenue only increased because oil was already very expensive.

10) In the above figure, at which point on the demand curve is the price elasticity of
demand equal to 1?
A) a
B) b
C) c
D) It is impossible to say at which point the elasticity equals one.

11) For electricity, natural gas, or other forms of energy, it is very likely that the price
elasticity of demand
A) is zero.
B) is infinite.
C) will decrease in magnitude as more time passes after a price change.
D) will increase in magnitude as more time passes after a price change.

12) If a good is inferior, its income elasticity will be


A) 0.
B) 1.0.
C) negative.
D) positive.
13) Peter's monthly income increases from $1,500 to $1,600. As a result, he increases
the number of DVDs he buys per month from 2 to 3. Peter's demand for DVDs is
A) price elastic.
B) price inelastic.
C) income elastic.
D) income inelastic.

14) A fall in the price of X from $12 to $8 causes an increase in the quantity of Y
demanded from 900 to 1,100 units. What is the cross elasticity of demand between X
and Y?
A) 0.5
B) -0.5
C) 2
D) -2

15) Suppose Target decided to lower the price on all shirts as part of its Back to
School promotion. The cross elasticity of demand between pants and shirts is
negative. Lowering the price on shirts will ________ the demand for pants because
shirts and pants are ________.
A) increase; substitutes
B) decrease; substitutes
C) increase; complements
D) decrease; complements

16) If at a given moment, no matter what the price, producers cannot change the
quantity supplied, the momentary supply
A) has zero elasticity.
B) has unit elasticity.
C) has infinite elasticity.
D) does not exist.

17) Which of the following leads a good to have a high elasticity of supply?
I. The good must be produced using unique resources.
II. The good is produced using commonly available resources.
A) I only
B) II only
C) I and II
D) neither I nor II
18) The figure above shows the demand curve for pizza. Using the midpoint method
and moving from point A to point B, calculate the
a) percentage change in price.
b) percentage change in quantity demanded.
c) price elasticity of demand.

Price Total revenue


(dollars) (dollars)
1.00 110
1.25 125
1.50 125
1.75 100

19) Steve sells hotdogs from a vending cart downtown. The table above shows his
total revenue per day at four different prices. Between which two prices is the demand
for hotdogs
a) elastic?
b) unit elastic?
c) inelastic?

II. Utility and choice:

20) A person's consumption possibilities is defined by the budget line because


A) it marks the boundary between what is affordable and unaffordable.
B) it represents the individual's preference for different combinations of goods.
C) it marks the boundary between what can be produced and what is unattainable
given the current state of technology and resources.
D) all consumers must consume on their budget line.

21) For a consumer, a budget line shows the boundary between


A) what is desired and what is not desired.
B) what is needed and what is not needed.
C) what is affordable and what is not affordable.
D) what is available and what is not available.
22) Jordan has two goods that he consumes this week. He can choose to go to the
arcade and play video games or he can purchase baseball cards. The price of each
video game is $.50 and each pack of baseball cards is $1. Jordan will spend all his
allowance this week on these two goods. Jordan's consumption possibilities are listed
in the table above. Which of the following combinations of video games and baseball
cards is not attainable for Jordan?
A) 10 video games and 3 sets of baseball cards
B) 8 video games and 1 set of baseball cards
C) 0 video games and 5 sets of baseball cards
D) 3 video games and 3 sets of baseball cards

23) Consider the budget line in the above figure. If the consumer's income is $120,
then the price of a book is
A) $10 per book.
B) $12 per book.
C) $6 per book.
D) More information is needed to determine the price of a book.

24) Ernie has an income of $40 which he plans to spend on cookies and milk. The
price of milk is $1 per gallon, and the price of cookies is $2 per dozen. If Ernie buys
12 gallons of milk, how many dozens of cookies will he buy if he spends all of his
income?
A) 28
B) 20
C) 14
D) 12
25) Sam buys gasoline and coffee each week. In order to draw his budget line
between gasoline and coffee, Sam would have to know
A) only how much income he has available to spend on gasoline and coffee.
B) only the prices of one gallon of gasoline and one pound of coffee.
C) only how much gasoline he wants to buy and how much coffee he wants to drink.
D) both how much income he has to spend and the prices of one gallon of gasoline
and one pound of coffee.

26) In the above figure, the budget line would rotate in the direction indicated as a
result of a
A) rise in the price of a book.
B) fall in the price of a book.
C) rise in the price of a movie.
D) decrease in income.

27) When your income increases,


A) your budget line shifts rightward and its slope does not change.
B) your budget line shifts leftward and its slope does not change.
C) the slope of your budget line increases.
D) the slope of your budget line decreases.
28) In the above figure, a shift in the budget line in the direction indicated would
occur as a result of
A) a decrease in money income.
B) an increase in money income.
C) a fall in the price of a movie.
D) a rise in the price of movie.

29) Utility is best defined as


A) the amount one is willing to pay for a good.
B) the price of a good.
C) the satisfaction from consuming a good.
D) the practical usefulness of a good.
Answer: C

30) A measure of all the satisfaction you receive from all the coffee that you consume
is your
A) marginal utility of coffee.
B) marginal utility per dollar spent on coffee.
C) total utility from coffee.
D) marginal utility per dollar spent on coffee when you are in your consumer
equilibrium.

31) As an individual's consumption of a good increases,


A) his or her total utility increases.
B) his or her marginal utility increases.
C) the price of the good increases.
D) All of the above answers are correct.
32) Mark's marginal utility from reading books is the ________ when he reads
________.
A) change in his total utility; one additional book
B) total utility he gets; one more book
C) change in his total utility; more books
D) consumer surplus he gets; books

33) Diminishing marginal utility means that


A) Ralph will enjoy his second hamburger less than the first.
B) the total utility from one hamburger exceeds the total utility from two hamburgers.
C) the price of two hamburgers is twice the price of one.
D) beyond a certain point, total utility decreases as income rises.

Cookies Homer's total


(pounds per week) utility
0 0
1 5
2 3
3 12
4 14
5 15

34) The above table gives the total utility that Homer obtains from consuming various
quantities of chocolate chip cookies. The marginal utility from the fifth pound of
cookies is
A) 1.
B) 2.
C) 3.
D) 15.

35) Danny has $12 to spend on two goods: pies and soda. The price of a pie is $4, and
the price of a can of soda is $2. To maximize his utility, Danny buys ________.
A) the combination that gives him equal total utility from pies and soda
B) 2 pies and 2 cans of soda
C) only sodas because they are less expensive
D) the combination that gives him the same marginal utility per dollar spent on pies as
on soda
Quantity Marginal utility Quantity Marginal utility
of DVDs from DVDs of pizza from pizza
1 150 1 200
2 120 2 180
3 100 3 150
4 90 4 120
5 60 5 100
6 40 6 60

36) Lisa spends all her income on pizzas and DVDs. The above table shows Lisa's
marginal utility for pizza and marginal utility for DVDs. If the price of a pizza is $10,
the price of a DVD is $5, and Lisa has $40 to spend on the two goods, what
combination of pizza and DVDs will maximize her utility?
A) 6 DVDs and 1 pizza
B) 4 DVDs and 2 pizzas
C) 2 DVDs and 3 pizzas
D) 5 DVDs and 4 pizzas

37) Let MUa and MUb stand for the marginal utilities of apples and bagels. Let Pa
and Pb stand for their prices. The general necessary condition for consumer
equilibrium is
A) MUa = MUb.
B) MUa = MUb and Pa = Pb.
C) MUa/Pa = MUb/Pb.
D) MUa/MUb = Pb/Pa.

38) Bobby consumes only chocolate ice cream and vanilla ice cream. He is spending
all of his income. His marginal utility of chocolate is 100 and his marginal utility of
vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is
$2.00 per scoop. To maximize his utility, Bobby should
A) buy more chocolate ice cream and less vanilla ice cream.
B) buy more vanilla ice cream and less chocolate ice cream.
C) not change his purchases between chocolate ice cream and vanilla ice cream.
D) buy no chocolate ice cream.

39) Sam spends all of his income on textbooks and hot dogs. The price of a textbook
is $40 and the price of a hot dog is $0.50. If Sam is maximizing his utility and the
marginal utility he derives from the last textbook he purchases is 400, then the
marginal utility he derives from his last hot dog purchased must be
A) 400.
B) 10.
C) 5.
D) 20.
40) Usharani consumes 35 apples a week and 14 loaves of bread. Apples cost $1 each
and bread costs $2 per loaf. Usharani is maximizing his utility and finds that the
marginal utility from his 35th apple
A) equals his marginal utility from his 14th loaf of bread.
B) is twice his marginal utility from his 14th loaf of bread.
C) is half his marginal utility from his 14th loaf of bread.
D) is such that his total utility from apples equals his total utility from bread.

Total Total
Quantity Quantity
utility utility
1 95 1 170
2 180 2 320
3 255 3 450
4 320 4 560
5 375 5 650

41) Bobby spends $100 per month on pizza and CDs. His utility from these goods is
shown in the table above. The price of a pizza is $10 and the price of a CD is $20.
Which of the following combinations of the two goods maximizes Bobby's utility?
A) 2 pizzas and 4 CDs
B) 6 pizzas and 2 CDs
C) 4 pizzas and 3 CDs
D) 8 pizzas and 1 CDs

42) Patty spends $10 a week on bagels and soda. The price of a bagel is $2 and the
price of soda is $1 a can. Patty buys 2 bagels and 6 cans of soda. Her marginal utility
from bagels is 20 units. The price of a bagel rises to $3 and the price of a can of soda
rises to $1.50. Patty now buys ________ bagels and her marginal utility from bagels
________. She buys ________ cans of soda and her marginal utility from soda
________.
A) fewer than 2; increases; fewer than 6; increases
B) 2; is 20 units; 6; is 10 units
C) fewer than 2; is 20 units; fewer than 6; is 10 units
D) fewer than 2; decreases; fewer than 6; decreases
Quantity
Marginal
(cones per Total utility
utility
week)
0 0 X
1 22 ____
2 38 ____
3 ____ 11
4 56 ____
5 ____ 4
6 62 ____
7 63 ____

43) The table above gives the utility Andy receives from different quantities of vanilla
ice cream cones. Complete the table.

Quantity Total utility Quantity Total utility


0 0 0 0
1 126 1 54.0
2 243 2 103.5
3 342 3 145.5
4 414 4 177.0
5 441 5 196.5

44) The table gives the total utility Jamal derives from the consumption of eclairs and
cream puffs. Jamal has $12 to spend on these two confectionery goods. The price of
an eclair is $3 and the price of a cream puff is $1.50.
a) Jamal's budget is $12. In order for Jamal to maximize his utility, how many eclairs
and cream puffs should he buy?
b) Suppose the price of an eclair increase to $6. Jamal's income does not change and
neither does the price of a cream puff. What combination of eclairs and cream puffs
will Jamal buy now?
c) Using your answers to parts (a) and (b), derive two points on Jamal's demand
curve for eclairs.

45) An indifference curve shows combinations of goods ________.


A) which the consumer prefers equally
B) that are affordable
C) that are inside or on the budget line
D) that have the same relative price
46) The above figure shows one of Sam's indifference curves between gasoline and
coffee. Which of the following about a movement along Sam's indifference curve is
correct?
A) As he moves leftward along the curve, he likes the combinations of gasoline and
coffee better and better.
B) As he moves rightward along the curve, he likes the combinations of gasoline and
coffee better and better.
C) He likes all combinations of gasoline and coffee along the curve equally well.
D) None of the above is true.

47) All points below a given indifference curve are


A) less preferred to any point on the indifference curve.
B) preferred to any point on the indifference curve.
C) definitely affordable.
D) Both answers A and C are correct.
48) Given the indifference curve in the above figure, which point is preferred to point
a?
A) point b
B) point c
C) point d
D) point e
49) The indifference curves in the figure above (I1, I2, and I3) reflect Peter's
consumption preferences. If Peter consumes 24 slices of pizza and 24 chocolate bars
per month, he as satisfied as he would be consuming ________ slices of pizza and
________ chocolate bars per month.
A) 48; 12
B) 40; 20
C) 32; 8
D) 16; 16

50) The above figure shows Sam's budget line and one of his indifference curves.
What combination of coffee and gasoline will Sam select?
A) Combination a because that contains all the gasoline he needs and still has some
coffee.
B) Combination c because that contains all the coffee he needs and some gasoline.
C) Combination b because it is on his budget line and on the highest attainable
indifference curve.
D) None of the above
51) The figure illustrates Sally's budget line and her preferences. Point ________ is
Sally's best affordable point, and Sally prefers point ________ to point ________.
A) A; B; A
B) E; C; B
C) B; A; B
D) B; B; D

52) Jane spends her monthly dining-out budget of $300.00 on either steak or lobster
dinners. Using the above figure, what is the price of a steak dinner?
A) $10.00
B) $15.00
C) $20.00
D) $30.00
53) Jane spends her monthly dining-out budget of $300.00 on either steak or lobster
dinners. Using the above figure, what is the price of a lobster dinner?
A) $10.00
B) $15.00
C) $20.00
D) $30.00

54) The above figure shows Jane's budget line and two of her indifference curves.
How many steak dinners will Jane purchase each month?
A) 4 steak dinners
B) 6 steak dinners
C) 8 steak dinners
D) 10 steak dinners