Test bank for Microeconomics 2nd Edition

Goolsbee Levitt Syverson 1464187029

9781464187025

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Use the following to answer question 1:

Figure 5.1

1. (Figure 5.1) Francis spends his income on fishing charters and jumping out of airplanes.
Which of the following statements is TRUE?
A) Fishing charters are an inferior good.
B) An increase in income could cause the optimal consumption bundle to move from
point A to point B.
C) Parachute jumps are an inferior good.
D) An increase in the price of parachute jumps could cause the optimal consumption
bundle to move from point A to point B.

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Use the following to answer question 2:

Figure 5.2

2. (Figure 5.2) Hamburger meat is a(n) _____ good and canned tuna is a(n) _____ good.
A) normal; normal
B) inferior; normal
C) inferior; inferior
D) normal; inferior

3. When Logan earned $1,000 per week, he purchased 5 karate lessons and 40 gallons of
gasoline. When his earnings increased to $1,100 per week, he purchased 6 karate
lessons and 43 gallons of gasoline. The income elasticity of karate lessons and gasoline
are _____ and _____, respectively.
A) 0.50; 1.33
B) 0.10; 1.6
C) 2.00; 0.75
D) 0.85; 0.15

4. Suppose that Seth's income increases from $400 to $500 per week, so Seth increases his
purchases of movies from 3 to 4. The income elasticity of movies is:
A) 1.33.
B) 0.25.
C) 0.75.
D) 1.00.

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Use the following to answer questions 5-6:

Figure 5.3

5. (Figure 5.3) The curve that goes through the points A, B, C, and D is called the:
A) income elasticity curve.
B) optimal consumption path.
C) Engel curve.
D) income expansion path.

6. (Figure 5.3) Which of the following statements is TRUE?

A) Books are an inferior good at income levels greater than those associated with
bundle B.
B) Books are an inferior good at income levels greater than those associated with
bundle C.
C) Both books and paintings are normal goods up to the income level corresponding
to bundle D.
D) Paintings are an inferior good at income levels higher than those associated with
these bundles.

7. Ryan's Engel curve for potato chips is I = 300C, where I is weekly income and C
measures the number of bags of potato chips. Ryan considers potato chips a(n):
A) inferior good.
B) normal good.
C) inferior good at income levels above $60,000.
D) inferior good at income levels above $30,000.

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Use the following to answer question 8:

Figure 5.4

8. (Figure 5.4) Which of the following statements is TRUE?

A) Fruitcake is an inferior good regardless of income level.
B) Fruitcake is a normal good regardless of income level.
C) Fruitcake is a normal good until income reaches $120, and then it becomes an
inferior good.
D) Fruitcake is an inferior good until income reaches $120, and then it becomes a
normal good.

9. Julie spends all of her income on gasoline and pizza. Gasoline costs $4 per gallon and
pizza costs $2 per slice. When Julie's income is $50 per week, she purchases 5 gallons
of gasoline and 15 slices of pizza. When her income rises to $80 per week, she buys 15
gallons of gasoline and 10 slices of pizza. Which of the following statements is true?
A) Both gasoline and pizza are normal goods.
B) Gasoline is a luxury good.
C) Pizza is a luxury good.
D) Both gasoline and pizza are inferior goods.

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Use the following to answer question 10:

Figure 5.5

10. (Figure 5.5) Suppose the consumer has $10 to spend on energy drinks and coffee.
Which of the following figures represents the consumer's demand curve for energy
drinks?

A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)

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Use the following to answer question 11:

Figure 5.6

11. (Figure 5.6) Garth spends his income on ice cream and coffee, and coffee sells for $1 a
cup. If ice cream sells for $1.50 per gallon, Garth will purchase:
A) 2 gallons.
B) 8 gallons.
C) 1 gallon.
D) 6 gallons.

Use the following to answer question 12:

Figure 5.7

Page 6
12. (Figure 5.7) Based on the consumer's indifference curves and budget constraints, which
of the following demand curves reflects the consumer's demand for water park tickets?
Assume the consumer has income of $100.

A) Demand curve A
B) Demand curve B
C) Demand curve C
D) Demand curve D

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Use the following to answer question 13:

Figure 5.8

13. (Figure 5.8) Refer to Figure 5.8, depicting the consumer's indifference curves and
budget constraints. Suppose the consumer has $20 of income to spend on apple and
prune juice. Which of the following statement(s) is (are) TRUE?
I. At $2 per quart, the consumer buys 3 quarts of apple juice.
II. At $4 per quart, the consumer buys 3 quarts of apple juice.
III. At $1.33 per quart, the consumer buys 6 quarts of apple juice.
IV. At $0.75 per quart, the consumer buys 6 quarts of apple juice.
A) I and II
B) II and III
C) II and IV
D) I

14. What is the substitution effect of a price change?

A) Consumers will buy more of the good whose relative price has risen and less of the
good whose relative price has fallen.
B) When prices fall, consumers will have more purchasing power and buy more of the
good whose price has fallen.
C) When prices fall, consumers will have more purchasing power and buy more of all
goods.
D) Consumers will consume less of the good whose relative price has risen and more
of the good whose relative price has fallen.

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 15. The income effect of a price change predicts that a _____ in a good's price will _____
consumer purchasing power, leading to a(n) _____ in consumption of _____ goods.
A) fall; increase; increase; normal
B) fall; decrease; decrease; normal
C) rise; increase; increase; inferior
D) rise; increase; decrease; inferior

Use the following to answer question 16:

Figure 5.9

16. (Figure 5.9) When the price of milk drops, the substitution effect _____ the quantity of
milk consumed from _____.
A) increases; 2 to 6 gallons
B) increases; 4 to 6 gallons
C) decreases; 6 to 2 gallons
D) increases; 2 to 4 gallons

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Use the following to answer question 17:

Figure 5.10

17. (Figure 5.10) When the price of milk drops, the income effect _____ the quantity of
milk consumed from _____.
A) increases; 2 to 6 gallons
B) increases; 4 to 6 gallons
C) decreases; 6 to 2 gallons
D) increases; 2 to 4 gallons

Use the following to answer questions 18-19:

Figure 5.11

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 18. (Figure 5.11) When the price of football tickets increases, the substitution effect
decreases the number of tickets bought from:
A) 4 to 3.
B) 6 to 3.
C) 6 to 4.
D) 20 to 8.

19. (Figure 5.11) When the price of football tickets increases, the income effect decreases
the number of tickets bought from:
A) 4 to 3.
B) 6 to 3.
C) 6 to 4.
D) 20 to 8.

Use the following to answer question 20:

Figure 5.12

20. (Figure 5.12) The substitution effect will be largest for indifference curve:
A) U1.
B) U2.
C) U3.
D) U4.

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 21. In 2010, the average household spent $1,178 on telephone services and $333 on
nonalcoholic drinks. From this information, we can conclude that:
A) the substitution effect of a price change will be larger for telephone services than
for nonalcoholic drinks.
B) an increase in the price of telephone services will cause a larger income effect than
a similar increase in the price of nonalcoholic drinks.
C) an increase in the price of nonalcoholic drinks will cause a larger income effect
than a similar increase in the price of telephone services.
D) the substitution effect of a price change will be larger for nonalcoholic drinks than
for telephone services.

22. Which of the following statements are TRUE?

I. The substitution effect of a wage decrease means that people will work more hours.
II. The income effect of a wage decrease means that people will take more leisure.
III. If wages fall and people work fewer hours, the substitution effect dominates the income
effect.
IV. If wages increase and people work fewer hours, the income effect dominates the
substitution effect.
A) I, II, and IV
B) I and IV
C) II and III
D) III and IV

Use the following to answer question 23:

Figure 5.13

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 23. (Figure 5.13) Which of the following statements is (are) TRUE?
I. At a wage above $18, the income effect dominates the substitution effect.
II. At a wage below $18, the substitution effect dominates the income effect.
III. At a wage above $18, the substitution effect dominates the income effect.
IV. At a wage below $18, the income effect dominates the substitution effect.
A) I and II
B) II and III
C) III and IV
D) I

Use the following to answer questions 24-25:

Figure 5.14

24. (Figure 5.14) Because of the income effect associated with the decrease in the price of
good X, the quantity of good X purchased:
A) increases from 3 to 4.
B) increases from 4 to 5.
C) decreases from 5 to 4.
D) increases from 3 to 5.

25. (Figure 5.14) Good X is a(n) _____ good, and good Y is a(n) _____ good.
A) normal; inferior
B) normal; normal
C) inferior; inferior
D) inferior; normal

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Use the following to answer questions 26-28:

Figure 5.15

26. (Figure 5.15) Because of the substitution effect associated with the decrease in the price
of good X, the quantity of good X purchased:
A) increases from 3 to 5.
B) decreases from 3 to 2.
C) increases from 2 to 3.
D) increases from 2 to 5.

27. (Figure 5.15) Because of the income effect associated with the decrease in the price of
good X, the quantity of good X purchased:
A) increases from 3 to 5.
B) decreases from 5 to 2.
C) decreases from 3 to 2.
D) decreases from 5 to 3.

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 28. (Figure 5.15) What type of good is good X?
I. a normal good
II. an inferior good
III. a Giffen good
A) I and III
B) III
C) II and III
D) I

Use the following to answer questions 29-30:

Figure 5.16

29. (Figure 5.16) The substitution effect of the price increase causes consumption of
baseball hats to:
A) decrease by 1.
B) decrease by 3.
C) decrease by 4.
D) increase by 1.

30. (Figure 5.16) The income effect of the price increase causes consumption of baseball
hats to:
A) decrease by 1.
B) decrease by 3.
C) decrease by 4.
D) increase by 1.

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31. A consumer's bundle includes two normal goods, X and Y. According to the income
effect, a(n) _____ in the price of good X or a(n) _____ in the price of good Y will cause
the consumer to buy less of good X.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

32. A consumer's bundle includes the inferior good X and the normal good Y. According to
the income effect, a(n) _____ in the price of good X or a(n) _____ in the price of good Y
will cause the consumer to buy more of good X.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

33. The substitution effect of a price increase:

A) causes the consumer to purchase less of the good that is now relatively more
expensive.
B) causes the consumer to purchase more of the good whose price has risen.
C) can cause the consumer to purchase either more or less of the good.
D) has no effect on the amount purchased of either good.

34. For Sara, ramen noodles are a normal good, however Sean considers ramen noodles to
be inferior. If Sara and Sean have the same amount of income:
A) Sean's income effect will be stronger than Sara's income effect.
B) Sean's substitution effect will be stronger than Sara's substitution effect.
C) Sean's demand for ramen noodles will be more price elastic than Sara's.
D) Sean's demand for ramen noodles will be less price elastic than Sara's.

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Use the following to answer question 35:

Figure 5.17

35. (Figure 5.17) Given the change in the budget constraint, which of the following
statements is TRUE?
A) The demand curve for good Y shifted inward.
B) The demand curve for good X shifted outward.
C) Good X is an inferior good.
D) Good X and good Y are complements.

Use the following to answer questions 36-37:

Figure 5.18

Page 17
36. (Figure 5.18) Good X and good Y are:
A) perfect complements.
B) Giffen goods.
C) complement goods.
D) substitute goods.

37. (Figure 5.18) Which of the following statements are TRUE?

I. The demand curve for good Y shifted outward.
II. The demand curve for good Y shifted inward.
III. The demand curve for good X shifted inward.
IV. The price of good Y decreased, causing an increase in the quantity demanded of good Y.
A) II and III
B) I, III, and IV
C) III and IV
D) I and IV

38. Suppose the price of good X, a Giffen good, increases. Which of the following
statements are TRUE?
I. The substitution effect of the price increase causes consumers to buy less of good X.
II. The substitution effect of the price increases causes consumers to buy more of good X.
III. The income effect of the price increase causes consumers to buy more of good X.
IV. The income effect of the price increase causes consumers to buy less of good X.
A) I and IV
B) II and IV
C) I and III
D) II and III

Page 18
Use the following to answer questions 39-40:

Figure 5.19

39. (Figure 5.19) The price of good Y _____, increasing the consumption of both good Y
and good X, which are _____.
A) increased; complements
B) decreased; substitutes
C) increased; substitutes
D) decreased; complements

40. (Figure 5.19) Given the change in the budget constraint, the demand curve for _____
shifted _____.
A) good X; inward
B) good Y; outward
C) good X; outward
D) both good X and good Y; outward

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Use the following to answer question 41:

Figure 5.20

41. (Figure 5.20) The cross-price elasticity of demand for good X with respect to good Y is
_____ in panel (a) and _____ in panel (b).
A) zero; negative
B) negative; positive
C) positive; negative
D) negative infinity; positive

42. Suppose that good X and good Y are substitutes and good X and good Z are
complements. When the price of a good Y _____ or the price of good Z _____, the
demand for good X shifts outward.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases

43. Suppose the demand for good X shifts in. Which of the following statements is (are)
TRUE?

I. The price of good X increased.

II. The price of a substitute good decreased.
III. The price of a complement good increased.
A) I, II, and III
B) II and III
C) I
D) II

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44. Which of the following statements is TRUE?
I. Movies in a theater and movies at home could be substitute goods if the falling price of
home entertainment equipment causes people to watch more movies at home and fewer in
the theater.
II. Movies in a theater and movies at home could be complement goods if watching a lot of
movies at home causes people to become more interested in movies, increasing their
demand for movies in a theater.
III. If the cross-price elasticity of demand between movies in a theater and movies at home is
0.33, the two goods are complements.
A) I only
B) II only
C) I, II, and III
D) I and II

45. To calculate the market demand curve from individual demand curves:
A) vertically sum the individual demand curves.
B) horizontally sum the individual demand curves.
C) exponentiate the individual demand curves.
D) add up the prices of the individual demand curves, holding the quantities constant.

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Use the following to answer question 46:

Figure 5.21

46. (Figure 5.21) Suppose Milli and Vanilli are the only two customers in the market for
voice lessons. Milli's demand is QM = 40 – 4P, and Vanilli's demand is QV = 75 – 5P.
Which panel represents the market demand for vocal lessons?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)

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 47. There are 10 consumers in the market, each with the following demand curve: Q = 100
– 0.5P. In a graph of the market demand curve, its slope (P/Q) would equal:
A) –0.50.
B) –0.20.
C) –1.50.
D) –2.25.

48. There are only three consumers in the market, and their demand equations are as
follows: (1) Q = 5 – 0.5P, (2) Q = 10 – P, and (3) Q = 2 – 0.2P. What is the equation for
the market demand curve?
A) P = 30 – 8Q
B) Q = 3.75 – 0.125P
C) Q = 17 – 1.7P
D) Q = 30 – 2P

49. Suppose the market for a good is composed of 1,000 identical consumers. The market's
demand curve is given by QM = 150,000 – 25P. What is the equation for an individual
consumer's demand curve?
A) Q = 150,000,000 – 25,000P
B) Q = 6,000,000 – 40P
C) Q = 6 – 4P
D) Q = 150 – 0.025

Use the following to answer question 50:

Figure 5.22

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50. (Figure 5.22) Suppose there are only two consumers in the market for good X. The total
quantity demanded in the market at a price of $3 is _____, and the total quantity
demanded in the market at a price of $12 is _____.
A) 20; 2
B) 20; 5
C) 6; 3
D) 18; 0

51. The market for good X consists of only two consumers; their demand curves are given
by Q = 10 – 0.10P and Q = 5 – 0.10P. What is the market demand curve?
A) QM = 15 – 0.2P if P  $50, and QM = 5 – 0.10P if P < $50
B) QM = 15 – 0.2P if P  $50, and QM = 10 – 0.10P if P < $50
C) QM = 15 – 0.2P if P < $50, and QM = 10 – 0.10P if P > $50
D) QM = 15 – 0.2P

52. Sally is one of many consumers in the yellow onion market. Which of the following
statements is (are) TRUE?

I. Sally's demand curve must have the same slope as that of the market demand curve.
II. Sally's demand curve must be to the right of the market demand curve.
III. Sally's demand curve is either as flat as or flatter than the market demand curve.
A) II and III
B) I
C) II
D) III

53. There are 100 consumers in the market for good X, each with a demand curve given by
Q = 2/P. What is the market demand curve for good X?
A) QM = 0.5P
B) QM = 200 – 200P
C) QM = 1/50P
D) QM = 200/P

Page 24
54. The market for macaroni and cheese has only two consumers, David and Wallace.
Market demand for macaroni and cheese will tend to be more elastic if:
A) David and Wallace consider macaroni and cheese to be a necessity good rather
than a luxury good.
B) David and Wallace consider macaroni and cheese to be an inferior good rather than
a normal good.
C) David and Wallace consider macaroni and cheese to be a normal good rather than
an inferior good.
D) David and Wallace consider macaroni and cheese to be an economic “bad.”

55. Eugene has $100 to spend on video blackjack at $1 per game and French fries at $1 per
basket.
a. Graph Eugene's budget constraint, putting video games on the vertical axis and French fries
on the horizontal axis. Using an indifference curve, show Eugene's optimal consumption
bundle at 20 blackjack games and 80 baskets of fries.
b. Suppose that Eugene's income increases by $50. Adding a new budget constraint and
indifference curve to your original graph, show Eugene's new optimal consumption bundle,
assuming blackjack and fries are normal goods.

56. Blaze has $200 to spend on fishing equipment and fast-food burgers. Fishing equipment
is priced at $10 per unit and fast-food burgers are priced at $4 per burger.
a. Graph Blaze's budget constraint, placing fishing equipment on the vertical axis and fast-food
burgers on the horizontal axis. Using an indifference curve, show Blaze's optimal
consumption bundle at 10 units of fishing equipment and 25 burgers.
b. Suppose that Blaze's income increases by $50. Adding a new budget constraint and
indifference curve to your original graph, show Blaze's new optimal consumption bundle,
assuming fishing equipment is a normal good and fast-food hamburgers are an inferior good.

Page 25
Use the following to answer question 57:

Figure 5.23

57. (Figure 5.23) In panel (a), the price of good X is $1.50 per unit and the price of good Y
is $3 per unit. In panel (b), the consumer's income increased from $400 to $480.
a. Using panel (a), calculate the income elasticity of demand for good X. What type of good is
X?
b. Using panel (b), calculate the income elasticity of demand for good X. What type of good is
X?

Use the following to answer question 58:

Figure 5.24

Page 26
 58. (Figure 5.24) Answer the following questions:
a. What is the income expansion path?
b. What quantities of good X does the income expansion path go through?
c. Draw the Engel curve for good X. Assume that the price of good X is $100 per unit and the price of g
d. What is the income elasticity of demand for good X if income increases from $1,200 to $1,600?

Use the following to answer question 59:

Figure 5.25

59. (Figure 5.25) Answer the following questions:

a. At BC1, the consumer has $40 of income to spend on goods X and Y. What changed the
budget constraint from BC1 to BC2?
b. Graph the consumer's demand curve for good X, being sure to illustrate two price–quantity
combinations along the demand curve.
c. What happens to the demand for good Y as the budget constraint pivots from BC1 to BC2?

60. Alec has $40 weekly to spend on restaurant meals (priced at $10 per meal) and bowling
(priced at $2 per game).
a. Graph Alec's budget constraint, placing restaurant meals on the vertical axis and bowling games on th
Illustrate Alec's optimal consumption bundle, composed of 1 restaurant meal and 15 games of bowlin
b. Suppose that the price of bowling increases to $4 per game. Illustrate Alec's new budget constraint al
optimal consumption bundle, composed of 2 restaurant meals and 5 games of bowling.
c. Draw Alec's demand curve for bowling, indicating his quantities demanded at $2 and $4.

Page 27
Use the following to answer question 61:

Figure 5.26

61. (Figure 5.26) This graph shows the demand curve for skirts. Suppose the consumer has
$500 to spend on skirts and handbags, and the price of handbags remains unchanged at
$100. Using budget constraints and indifference curves, placing skirts on the horizontal
axis and handbags on the vertical axis, illustrate two of the consumer's optimal
consumption bundles of skirts and handbags.

62. Bob's utility function for black (B) and white (W) socks is U = 10B + 10W, where MUB
= 10 and MUW = 10. Suppose that Bob has $40 to spend on socks. With the price of
white socks held constant at $10, graph Bob's demand curve for black socks at $2, $4,
$5, $8, $10, and $20.

63. For the following scenarios, explain the direction of the substitution effect, income
effect, and total effect.

I. The price of good X, a normal good, increases.

II. The price of good X, an inferior good, decreases.
III. The price of good X, a Giffen good, increases.

Page 28
Use the following to answer question 64:

Figure 5.27

64. (Figure 5.27) Illustrate the substitution effect and income effect associated with the
decrease in the price of milk. Label the substitution effect A to A and the income effect
A to B.

Use the following to answer question 65:

Figure 5.28

65. (Figure 5.28) Answer the following questions.

a. What are the income effect and substitution effect of the price change?
b. Are scallops a normal good or an inferior good?
c. Is beef jerky a normal good or an inferior good?

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 66. Suppose a consumer spends her income on lobster and frozen pizza. Assume that the
consumer has an income of $60, the price of lobster is $6, and the price of frozen pizza
is $6.
a. Using indifference curves and budget constraints, show the income and substitution effects
associated with a decrease in the price of frozen pizza. Assume frozen pizza is an inferior
good and lobster is a normal good.
b. Using indifference curves and budget constraints, show the income and substitution effects
associated with a decrease in the price of frozen pizza. Assume frozen pizza is a Giffen good
and lobster is a normal good.

67. A consumer's bundle includes good X and good Y. Determine whether the following
statements are true, false, or uncertain.
a. If good X is a normal good and its price rises, the consumer will buy more of it.
b. If good X is an inferior good and its price rises, the consumer will buy less of it.
c. If good X is a Giffen good and its price falls, the consumer will buy less of it.

Use the following to answer question 68:

Figure 5.29

68. (Figure 5.29) The price of good Y decreased from $20 to $10.
a. Are goods X and Y complements or substitutes? Explain.
b. Calculate the cross-price elasticity of demand for good X with respect to good Y.

69. Suppose a consumer spends $100 of income on two goods: buying 4 units of good X
(priced at $10) and 3 units of good Y (priced at $20). Both are substitute goods. Using
indifference curves and budget constraints, illustrate the effect of a $10 decrease in the
price of good Y on the consumer's optimal consumption bundle.

Page 30
Use the following to answer question 70:

Figure 5.30

70. (Figure 5.30) The price of good Y increased from $1.00 to $5.00.
a. Explain whether goods X and Y are complements or substitutes.
b. Calculate the cross-price elasticity of demand for good X with respect to good Y.
c. What happened to the demand curve for good X?

Use the following to answer question 71:

Figure 5.31

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 71. (Figure 5.31) Assume that Roscoe and Roland comprise the entire market of buyers.

a. Complete the following table.

Roscoe's Quantity Roland's Quantity Market Quantity

Price Demanded Demanded Demanded
$10
20
30
40

b. What are Roscoe's and Roland's inverse demand equations?

Use the following to answer question 72:

Figure 5.32

72. (Figure 5.32) Graph the market demand curve for bumper stickers, assuming that Neal
and Vince are the only two consumers in the market for bumper stickers. On your graph,
show the quantity demanded at $10, $7.50, $5, $2.50, and $0.

73. Ricki, CC, and Brett are the only consumers in the market for leather jackets; their
inverse demand curves, respectively, are as follows:
P = 200 – 10QR
P = 200 – 50QCC
P = 200 – 20QB
What is the equation for the market demand curve for leather jackets?

Page 32
 74. Suppose there are 100 consumers in the computer speaker market, each with an identical
demand curve given by Qi = 10 – 0.1P, where P is the price per pair of speakers and Qi
measures the quantity demanded of computer speakers by each person. The market
supply for computer speakers is given by QS = 20P – 200. What are the equilibrium
price and quantity in the computer speaker market?

75. The utility function for a consumer is U = min{0.25X, Y}. What is the equation for the
consumer's income expansion path?

76. A consumer has the following utility function: U = 4X + 2Y, where X is the number of
slices of plain pizza and Y is the number of slices of pepperoni pizza. Given this person's
preferences, what is the demand curve for slices of plain pizza?

Use the following to answer question 77:

Figure 5.33

77. (Figure 5.33) The consumer has an income of $15 and the utility function U = 5X + 5Y.
Before the price change the consumer will consume _____units of Y and _____units of
X. After the change, she will consume _____units of Y and _____units of X.

Page 33
Use the following to answer question 78:

Figure 5.34

78. (Figure 5.34) For an income of $15, the price of Y falls by _____, leading to a
substitution effect of _____and an income effect of _____ .

Use the following to answer question 79:

Figure 5.35

79. For a constant income, the cross-price elasticity of demand between good X and Y in
figure A is _____. In figure B it is _____

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 80. Abby's utility function is given by U = X2Y2. For this utility function, MUx = 2XY2 and
MUy = 2X2Y. If good X costs $10 and good Y costs $5, what share of Abby's utility-
maximizing bundle is made up of good X?

Use the following to answer question 81:

Figure 5.36

81. (Figure 5.36) The figure shows two budget lines for a consumer whose preferences are
represented by the utility function U = 2G + F, where G represents the number of video
games and F represents the number of baskets of fries. What is the demand equation for
this consumer?

Use the following to answer question 82:

Figure 5.37

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 82. (Figure 5.37) What is the demand equation?

Use the following to answer question 83:

Figure 5.38

83. (Figure 5.38) Cameron, Gillian, Bob, and Peter are the only consumers in the market for
kayaks; their inverse demand curves, respectively, are as follows:

P = 5,000 – 1,000QC
P = 4,000 – 1,000QG
P = 3,000 – 500QB
P = 3,000 – 1,500QP

What is the market demand curve for kayaks based on these four individuals?

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Answer Key
1. B
2. B
3. C
4. A
5. D
6. C
7. B
8. C
9. B
10. B
11. A
12. A
13. B
14. D
15. A
16. D
17. B
18. C
19. A
20. A
21. B
22. D
23. A
24. C
25. D
26. A
27. B
28. C
29. A
30. B
31. B
32. B
33. A
34. D
35. B
36. D
37. C
38. C
39. D
40. C
41. B
42. A
43. B
44. D

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45. B
46. B
47. B
48. C
49. D
50. A
51. C
52. D
53. D
54. C
55. a. b.

(Note: The location of point B and indifference curve U2 will vary in students' answers.)

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56. a. b.

57. a. The consumer's income increased by 33.33%, most easily calculated as the percentage increase in th
quantity demanded of good X increased from 2 to 10, a 400% increase. The income elasticity of dem
Because the income elasticity exceeds 1, X is a luxury good.
b. The consumer's income increased by 20%, calculated as the percentage increase in the vertical interc
increase in income. The quantity demanded of good X decreased from 7 to 5, a 28.6% decrease. The
is –28.6%/20% = –1.43. The negative income elasticity shows that X is an inferior good.

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58. a. The income expansion path is a curve that shows the utility-maximizing consumption
bundles for different levels of income.
b. 2, 5, 7, and 8
c.

d. The change in income from $1,200 to $1,600 is 33.33%, and the change in good X from 7 to 8
is 14.3%. The income elasticity is 14.3%/33.33% = 0.43.
59. a. The price of good X decreased, falling from $20 ($40/2) to $10 ($40/4).

b.

c. The demand for good Y shifts inward.

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60. a. and b.

c.

61.

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62. Bob will purchase the color sock that gives him the most marginal utility per dollar
(MU/P). Once the price of black socks rises above $10, the marginal utility per dollar of
black socks will be less than the marginal utility per dollar of white socks, and Bob will
buy only white socks.

When black socks cost $10, their marginal utility per dollar (10/10 = 1) equals the
marginal utility per dollar of white socks (10/10 = 1). In this case, Bob is indifferent
between white socks and black socks because each item gives the same marginal utility
per dollar. If Bob decides to spend all his money on black socks, he can purchase 4 pairs
(40/10). If, however, Bob spends his entire $40 on 4 pairs of white socks, he has no
money to buy black socks. This explains why the demand curve for black socks is
horizontal between 0 and 4 pairs when the price of black socks is $10.

63. In the first scenario, the substitution effect causes the consumer to purchase fewer units
of good X. The income effect of the price increase also causes the consumer to purchase
fewer units of good X. The total effect is that consumption of good X decreases.

In the second scenario, the substitution effect leads the consumer to buy more units of
good X, while the income effect causes the consumer to buy fewer units of good X. The
total effect is that the consumption of good X increases, given that the substitution effect
dominates the income effect. (Note: If the income effect dominated the substitution
effect, X would be a Giffen good.)

In the third scenario, the substitution effect leads to decreased consumption of good X.
The income effect causes the consumer to buy more units of good X. For a Giffen good,
the income effect outweighs the substitution effect, and the consumption of good X
increases.

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64.

The substitution effect is given by the move from point A to point A, and the income
effect is given by the move from point A to point B.
65. a. The income effect reflects the movement from A to B, or a 3-unit decrease in
consumption of scallops. The substitution effect reflects the movement from A to A, or
a 1-unit decrease in the consumption of scallops.
b. Scallops are a normal good because a decrease in purchasing power caused the
consumer to buy fewer scallops.
c. Beef jerky is an inferior good because the decrease in purchasing power caused the
consumer to buy more beef jerky.

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66. a.

For an inferior good, the income effect of a price decrease is negative and is dominated
by the positive effect of the substitution effect.

b.

For a Giffen good, the income effect of a price decrease is negative and dominates the
positive effect of the substitution effect.
67. a. False. The substitution effect leads the consumer to buy less of good X, and the
income effect leads the consumer to buy less of good X because it is a normal good.
b. True. The substitution effect leads the consumer to buy less of good X, but the income
effect leads the consumer to buy more of good X because it is an inferior good. Overall,
the substitution effect dominates the income effect.
c. True. The substitution effect leads the consumer to buy more of good X, but the
income effect leads the consumer to buy less of it. With a Giffen good the income effect
dominates the substitution effect.
68. a. Goods X and Y are complements: the fall in the price of good Y leads to an increase in
the quantity purchased of good X.
b. The price of good Y decreased by 50% and the quantity purchased of good X
increased by 25%. The cross-price elasticity is 25/–50 = –0.5.

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69.

70. a. Goods X and Y are substitutes because the rise in the price of good Y led to an
increase in the quantity purchased of good X.
b. The price of good Y increased by 400%, and the quantity purchased of good X
increased by 150%. The cross-price elasticity is 150/400 = 0.375.
c. The demand curve for good X shifted outward.
71. a.

Roscoe's Quantity Roland's Quantity Market Quantity

Price Demanded Demanded Demanded
$10 6 3 9
20 4 1 5
30 2 0 2
40 0 0 0

b. Roland: P = 40 – 5Q; Roscoe: P = 25 – 5Q.

72.

73. First, solve for each person's demand curve:

QR = 20 – 0.1P, QCC = 4 – 0.02P, and QB = 10 – 0.05P.
The market demand curve is Q = QR + QCC + QB = 34 – 0.17P.
74. The market demand curve = QD = 100 × Qi = 100(10 – 0.1P) = 1,000 – 10P.
Set QD = QS and solve for P:
1,000 – 10P = 20P – 200
P = $40
Q = 600

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75. The consumer's utility function represents prefect complements in a 4:1 ratio. This
implies that the consumer's equilibrium will lie on a ray from the origin with equation Y
= 1/4x.
76. The two types of pizza are perfect substitutes in a 2:1 ratio. In other words, to keep
utility constant this consumer will trade 1 slice of plain pizza for 2 slices of pepperoni
pizza. This implies that the consumer will be indifferent between the two types of pizza
whenever the price ratio is equal to 2, will choose only pepperoni when the price ratio is
above 2, and will choose only plain when it is below 2. The leads to the demand curve
for plain pizza:

QDPlain = 0 if PX/PY>2
2x + U/2 if PX/PY = 2
U/2 if PX/PY < 2
77. BC1 shows that the price of X is $1 ($15/15) and the price of Y is $1.80 ($15/8). For BC2
the price of X remains at $1 and the price of Y falls to $1. This means that on BC1 the
price of Y is greater than the price of X, so the consumer will buy 15 units of X and 0
units of Y. Once the price of Y falls, making the prices equal, the consumer will be
indifferent between any combination of X and Y that totals 15 units. (The indifference
curve and budget line will be the same line.)
78. $0.80_80 cents
79. 2.5; –1.67

Since income does not change and the amount of good Y doubles as a result of its price
falling, we can conclude that the price has fallen by 50% in panel (a) but has risen by
100% in panel (b). The amount of good X rises by (9 – 4)/4 = 125%; in panel (b) it rises
by 167%. Since cross elasticity is the percent change in the quantity of X due to a
percent change in the price of Y, we can conclude that the cross-price elasticity of
demand in panel (a) is 125/50 = 2.5, and in panel (b) it is –167/100 = –1.67. The
products are complements in panel (a) but substitutes in panel (b).
80. The marginal rate of substitution (MRS) for Abby will be MUx/MUy = 2XY2/2 X2Y = Y/X.
In equilibrium, MRS = the price ratio, or Y/X = 10/5 = 2, which implies that she will
spend twice as much on Y as she does on X.
81. The consumer's utility function represents perfect substitutes in a 2:1 ratio (1 basket of
fries to 1 video game) for a marginal rate of substitution (MRS) of –0.5. The price ratio
for both budget lines is PF/PG = –1. This implies that when the indifference curves are
flatter than the budget lines, the result is a corner solution: this consumer purchases 150
video games for total utility of 300. If the price ratio were larger than the MRS, then the
consumer would purchase only fries. If the price ratio equaled the MRS, the consumer
would be indifferent between the two products. This leads to the following demand
equation for video games:
If PF/PG > 0.5, then G = 0
If PF/PG < 0.5, then G = Income/PG
If PF/PG = 0.5, then G = Income/PG – 0.5F
82. Note the kink at a price of $5 and a quantity of 2 units. This will lead to a two-segment
demand curve with price ranges of $5 < P < $10 and P < $5. The segment above $5 will
be Q = 4 – 0.4P and below $4 it will be Q = 14 – 2.4P.

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83. To find the market demand curve, first find each inverse demand curve:
P = 5,000 – 1,000QC, or QC = 5 – 0.001P
P = 4,000 – 1,000QG, or QG = 4 – 0.001P
P = 3,000 – 500QB, or QB = 6 – 0.002P
P = 3,000 – 1,500QP, or QP = 2 – 0.0007P

From the inverse demand curves we can see that Cameron has the highest demand
choke price, followed by Gillian and then both Bob and Peter. If the price is in the
$4,000 to $5,000 range, only Cameron will buy. From $3,000 to $4,000, both Gillian
and Cameron will buy. Finally, when the price falls below $3,000, everyone will buy.
This means that the demand equation for P > $4,000 is QC = 5 – 0.001P; for $4,000 < P
< $5,000, it is Q = 9 – 0.002P; for $3,000 < P < $4,000 it is Q = 17 – 0.0047P.

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