Professional Documents
Culture Documents
https://testbankpack.com/p/test-bank-for-microeconomics-theory-and-
applications-with-calculus-3rd-edition-perloff-0133019934-9780133019933/
https://testbankpack.com/p/solution-manual-for-microeconomics-theory-and-
applications-with-calculus-3rd-edition-perloff-0133019934-9780133019933/
1) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no
less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith's
consumer surplus is
A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.
Answer: D
Topic: Consumer Welfare
Status: Old
2) Shin's uncompensated demand for widgets is given by Q = 10/p. According to this demand, Shin's
Marginal Willingness to Pay function is
A) 10/Q.
B) 10/p.
C) 10Q.
D) -10/p2.
Answer: A
Topic: Consumer Welfare
Status: Old
3) Jeong's uncompensated demand for gizmos is given by Q = 30 - 2p. Jeong's marginal willingness to pay
1
Copyright © 2014 Pearson Education, Inc.
function is
A) 30-2p.
B) 15-.5Q.
C) 30-2Q.
D) -2.
Answer: B
Topic: Consumer Welfare
Status: Revised
4) You enter a store and buy a bottle of soda. Do you usually receive consumer surplus?
A) Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B) Yes, because you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.
Answer: A
Topic: Consumer Welfare
Status: Old
2
Copyright © 2014 Pearson Education, Inc.
5) You pay $15 for an all-you-can-eat buffet. The food isn't so good, but definitely edible. When you finish
eating, what is the marginal value of the last bite of food you consumed?
A) zero
B) $15
C) positive
D) negative
Answer: A
Topic: Consumer Welfare
Status: Old
6) Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy.
Mary refused. One can conclude that Mary's consumer surplus from the toy is
A) less than $5.
B) at least $95.
C) at least $100.
D) $105.
Answer: B
Topic: Consumer Welfare
Status: Old
7) Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in $/gallon and Q
is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His
consumer surplus from this water is
A) $0.
B) $50.
C) $100.
D) unknown based upon the information provided.
Answer: B
Topic: Consumer Welfare
Status: Old
8) Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying
the product
A) is maximized.
B) can't be calculated.
C) equals zero.
D) Need more information.
Answer: C
Topic: Consumer Welfare
Status: Old
3
Copyright © 2014 Pearson Education, Inc.
9) The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). The current price is 35¢ per minute. If the price were to increase by ten cents per
minute, consumer surplus would
A) fall to $820.
B) fall by $84.
C) fall by $58.
D) fall to $369.
Answer: B
Topic: Consumer Welfare
Status: Old
10) The above figure shows the market demand curve for telecommunication while driving one's car
(time spent on the car phone). The current price is 35¢ per minute. What is the consumer surplus at the
current price?
A) 924.5
B) 1075
C) 301
D) 1250
Answer: A
Topic: Willingness to Pay
Status: New
4
Copyright © 2014 Pearson Education, Inc.
11) Sandy's uncompensated demand for candy is given by the equation Q = 15/p, where Q is the quantity
of candy and p is the price. When the price of candy rises from $1 to $3, the change in consumer surplus
is
A) $16.5.
B) -$20.
C) -$15.
D) $15.
Answer: A
Topic: Consumer Welfare
Status: Old
12) Sandy's current consumer surplus for candy is 20. Candy is a normal good for her. When her income
increases and the price of candy remains unchanged, her consumer surplus will
A) increase.
B) decrease.
C) remain the same.
D) Not enough information.
Answer: A
Topic: Willingness to Pay
Status: New
13) Sandy's current consumer surplus for candy is 20. Candy is an inferior good for her. When her income
increases and the price of candy remains unchanged, her consumer surplus will
A) increase.
B) decrease.
C) remain the same.
D) Not enough information.
Answer: B
Topic: Willingness to Pay
Status: New
For the following, please answer "True" or "False" and explain why.
14) Consumer surplus from a given purchase is the difference between what one was willing to pay for
that purchase and what was actually paid.
Answer: True. This is the definition of consumer surplus.
Topic: Consumer Welfare
Status: Old
5
Copyright © 2014 Pearson Education, Inc.
15) The above figure shows an individual's demand curve for time per month spent telecommunicating
while driving (talking on the car phone.) A car phone is useless except for talking with somebody who is
not in the car. If calls are priced at ten cents per minute, what is the consumer surplus derived from
talking? What is the most this person would pay for the car phone? Explain.
Answer: The consumer surplus from talking on the car phone is ($2.90 ∗ 20)/2 = $29. This person would
pay up to $29 per month to have the phone. Having the phone is worth $29 per month to this person
because that is the value this person places on calls from the car phone over and above what is paid just
for the calls. The phone has no other value to the person except to make the calls. If the phone cost more
than $29 per month this person would feel better off without the phone.
Topic: Consumer Welfare
Status: Old
16) Ted's uncompensated demand function for bacon is given by Q = 15/p. What is Ted's change in
consumer surplus when the price of bacon rises from p = 3 to p = 5?
Answer: Integrate the area under the uncompensated demand:
= 15ln(p)
Evaluate between p = 3 and p = 5:
15ln(5) - 15ln(3) = 7.66
Topic: Consumer Welfare
Status: Old
6
Copyright © 2014 Pearson Education, Inc.
17) Ralf's uncompensated demand function for shoes is given by Q = 100/p. What is the change in
consumer surplus when the price of shoes rises from p=20 to p=25?
Answer: Integrate the area under the uncompensated demand:
= 100 ln(p)
3) Suppose a victim of an accident brings the injurer to court. You are hired to determine the amount of
damages. You are specifically asked to find a measure of the amount of money needed to restore the
victim to the position he was in prior to the accident. What welfare measure will provide the most
accurate measure of this amount?
A) compensating variation
B) equivalent variation
C) consumer surplus
D) the loss of utility
Answer: A
Topic: Expenditure Function and Consumer Welfare
Status: Old
7
Copyright © 2014 Pearson Education, Inc.
4) The compensation variation and equivalent variation will be closer to each other when
A) the income elasticity is greater.
B) the budget share is greater.
C) the price change is smaller.
D) the income elasticity is smaller.
Answer: D
Topic: Comparing the Three Welfare Measures
Status: New
5) Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the
price of childcare. The willingness to pay should be measured as
A) BCafter to BCA.
B) BCafter to BCB.
C) BCafter to BCbefore.
D) BCA to BCB.
Answer: B
Topic: Indifference Curve Analysis
Status: New
For the following, please answer "True" or "False" and explain why.
6) The equivalent variation is always less than the consumer's income
Answer: True. The amount a person will pay to prevent a price change (EV) cannot exceed their available
income.
Topic: Expenditure Function and Consumer Welfare
Status: Old
8
Copyright © 2014 Pearson Education, Inc.
7) The difference between the equivalent variation and compensating variation is greater for goods with
large income elasticities.
Answer: True. According to the Slutsky equation, the difference between the compensated demand and
uncompensated demand elasticity is given by the product of budget share and income elasticity. For
larger income elasticities, the difference between these measures will also be larger.
Topic: Expenditure Function and Consumer Welfare
Status: Old
8) Ed's utility from vacations (V) and meals (M) is given by the function U(V,M) = V2M. Last year, the
price of vacations was $200 and the price of meals was $50. This year, the price of meals rose to $75, the
price of vacations remained the same. Both years, Ed had an income of $1500.
a. Calculate the change in consumer surplus from meals resulting from the change in meal prices.
b. What is the compensating variation for the price change in meals?
c. Calculate the equivalent variation for the price change in meals.
Answer:
a. Ed's optimization problem is
Max V2M
Subject to pMM + 200V = 1500
where pM is the price of meals. Using the Lagrangian, we derive the demand for meals:
M* = 500/pM
The change in consumer surplus is found from the integral:
∆CS = ∫50 75 500/pMdpM = -500 ln(pM)| 50 75 = -500 [ln(75) – ln(50)] = –202.7
So the change in consumer surplus is –$202.7.
b. The CV is the amount of money needed to offset a consumer's harm from a price increase. Ed's utility
before the price change is based on his optimal consumption bundle.
M1 = 500/50 = 10
and V1 = 1000/200 = 5. His utility is U(5,10) = 5210 = 250. Now we look at the expenditure function when
pM = 75. The Lagrangian is:
L = 75M + 200V + [250 – V2M]
The optimization conditions are:
LM = 75 – V2 = 0
LV = 200 – 2MV = 0
L = 250 – V2M = 0
The first two conditions yield
3/4 = V/M
So V = 3M/4. Plug into the utility function
250 = (3M/4)2M
Solving for M = 7.63. Solve for V = 5.72. The expenditure required to purchase this bundle is:
75M + 200V = 75(7.63) + 200 (5.72) = 1717.25
Thus the CV is $1,500 - $1,717.25 = $217.25.
9
Copyright © 2014 Pearson Education, Inc.
c. The EV is the amount of money Ed will pay to prevent the price increase. To find this, we start by
finding his utility after the price change with an income of $1500. From above, V = 5 and M = 500/75 =
6.67. His utility from this bundle is U = (5)2(6.67) = 166.75. The Lagrangian to find the expenditure
function is:
L = 50M + 200V + [166.75 – V2M]
The optimization conditions are:
LM = 50 – V2 = 0
LV = 200 – 2MV = 0
L = 166.75 – V2M = 0
Solve for the optimal bundle:
M = 8.74, V = 4.37.
The expenditure is:
50(8.74) + 200(4.37) = 1311.
Ed would pay up to 1500 - 1311 = $189 to avoid the price change. This is the EV.
Topic: Expenditure Function and Consumer Welfare
Status: Old
9) Jeremy derives all of his utility from consuming milk shakes; he devotes his entire $20 allowance to
milk shakes each week. Suppose the price of milk shakes rise from $2 to $4. Compute Jeremy's
Compensating Variation and Equivalent Variation.
Answer: The CV is the amount of money needed to return Jeremy to his original level of utility. He
initially consumes 20/2 = 10 shakes per week. The only way to make Jeremy as happy as before after the
price rises is to give him enough income so that he can still consume 10 shakes. Thus we would need to
increase his income from $20 to $40. CV = -$20.
The EV is the amount Jeremy would pay to prevent the price increase. To compute this, notice that
Jeremy consumes just 20/4 = 5 shakes after the price increase. He would be willing to pay $10 of his
income to prevent the price change leaving him to consume 10 shakes. Thus the EV=-$10
Topic: Expenditure Function and Consumer Welfare
Status: Old
10
Copyright © 2014 Pearson Education, Inc.
10) Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of
playing Wartcraft). Currently, sodas are $1 each and Wartcraft costs $1 per hour. Ian has $12 of income.
a. Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.
b. Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.
c. Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to $2.
Answer:
a. Ian initially will purchase six units of each. When the price of Wartcraft rises to $2, the only bundle
which will return Ian to the same indifference curve is (6,6). This bundle now costs $18. Thus the
CV = $12 - $18 = -$6. We need to pay Ian $6 to return him to the initial utility level following the price
change.
b. After the price change, with an income of $12, Ian will purchase 4 units of each good. If the prices
were still $1 each, then the income level that puts Ian at the bundle (4,4) is $8. So the EV = $8 - $12 = -$4.
c. Denote W and S as the quantities of each good. Perfect complements implies that W=S in the
optimum. The budget constraint implies that pW + S = 12, where p is the price of Wartcraft and the price
of soda is 1. Solve for W=12/(1 + p). The CS is the integral of 12/(1 + p) between p = 1 and p = 2. This solves
to be $4.87 (approx.).
Topic: Expenditure Function and Consumer Welfare
Status: Old
11) Suppose you work for a government agency that is considering removing certain agricultural
subsidies. The removal of these subsidies will increase the price, thus lowering consumers' welfare.
Because only aggregate market data is available, you are unable to measure the exact values for the
compensated and equivalent variation by consumer. However, you are able to estimate the change in
market consumer surplus. Assuming agricultural products are normal goods, how does your estimate of
consumer surplus compare to the unknown EV and CV? Explain. Under what conditions will the three
measures of welfare be close to one another?
Answer: For normal goods, the CS will be less than the CV and greater than the EV (in absolute value).
Typically, these measures will be close for (1) small price changes, (2) small income effects/elasticity, and
(3) small budget share.
Topic: Expenditure Function and Consumer Welfare
Status: Old
For the following, please answer "True" or "False" and explain why.
12) Kisa consumes the same amount of cigarettes each week regardless of her income (assume that her
income is sufficiently large such that the quantity is affordable). The Equivalent Variation equals the
Compensating Variation.
Answer: True. The difference between the measures lies with the income effect/elasticity. There is no
income effect for Kisa therefore the measures will be the same.
Topic: Expenditure Function and Consumer Welfare
Status: Old
11
Copyright © 2014 Pearson Education, Inc.
13) Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the
price of childcare by measuring the amount of income that can be taken away from the consumer (at the
new price) such that they can just afford their original bundle of goods. Is this correct? If not, is it more or
less than the true compensating variation? Explain with a graph.
Answer:
It is less than the true compensating variation. The drop in income from the BC after to BCB is the CV. The
drop from BCafter to BCA is the amount of income that can be taken away leaving the original bundle
just affordable.
Topic: Expenditure Function and Consumer Welfare
Status: Old
12
Copyright © 2014 Pearson Education, Inc.
14) A study of the benefits of television asked consumers two questions: (1) How much would you pay to
watch TV (versus no TV watching), and (2) How much would you have to be paid to voluntarily stop
watching TV. Show how these are found with two separate graphs of indifference curves and budget
constraints. Are these values likely to be equal? Discuss briefly.
Answer: The first question is the willingness to pay for TV (all or nothing).
Original bundle = a
Without TV = b
With TV but income reduced = d.
The CV is the amount of income we can take away that keeps the consumer on the same IC as when TV is
banned.
13
Copyright © 2014 Pearson Education, Inc.
The second question asks for the willingness to accept:
Original bundle = a
Without TV= b
Without TV but compensated = c
CV is the amount needed to compensate her for the loss is the amount of income needed to shift BC to
BC'.
These are different questions and represent different changes in income. A person typically will pay less
than they will accept due to the income effect from having the initial right (the right to watch TV, for
example).
Topic: Expenditure Function and Consumer Welfare
Status: Old
14
Copyright © 2014 Pearson Education, Inc.
15) A consumer has the quasi-linear utility function
U(q1,q2) = 64q11/2 + q2
Assume p2 = 1 and Y = 100. Find the consumer's compensating and equivalent variations for an increase
in p1 from 1 to 2.
Answer: First, find her demand for good 1:
q1 = 16/p12
It is helpful to write her utility in terms of q1 and her expenditures/income:
= 64q11/2 + E - p1q1
When p1=1, her demand is q1=16. Her utility is then:
= 64(16)1/2 + 100 - 16 = 596
When p1 = 2, then q1 = 4. The CV is the amount of additional income needed to achieve the same utility
level with that higher price:
596 = 64(4)1/2 + 100 + CV - 4
Thus, CV = 372.
The EV is found by the equation
64(16)1/2 + 100 - EV - 16 = 64(4)1/2 + 100 - 4
Notice this is the same as the equation above so EV = CV.
Topic: Expenditure Function and Consumer Welfare
Status: Old
2) Sarah's demand curve for whiskey has the same slope as Pete's; however, it lies to the right of Pete's.
An increase in the price of whiskey will cause
A) Sarah to incur a greater loss of consumer surplus than Pete will.
B) Pete to incur a greater loss of consumer surplus than Sarah will.
C) Sarah and Pete to incur the same loss of consumer surplus.
D) Sarah's demand curve to shift closer to Pete's.
Answer: A
Topic: Market Consumer Surplus
Status: Old
15
Copyright © 2014 Pearson Education, Inc.
Another random document with
no related content on Scribd:
GABRIELLE