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Assignment $2$

Part I$$Multiple$-$choice questions

$1.$ The equilibrium condition for a consumer who is spending all of his or her budget on two

commodities, A and B$,$ is given by:

a$.$ MUA $=$ MUB

b$.$ MUA $/$ PB $=$ MUB $/$ PA

c$.$ MUA $/$ PA $=$ MUB $/$PB

d$.$ PA $=$ PB

$2.$ The marginal utility of a commodity is:

a$.$ an indication of the last use to which the commodity has been put or the use to which it

would next be put if more were available.

b$.$ equal to the price of that commodity.

c$.$ the ratio of the total utility generated by consuming that commodity to the total utility of all

other commodities that are consumed.

d$.$ the extra utility yielded by consuming each successive unit of that commodity.

e$.$ the same thing as the total utility derived from consuming that commodity.

$3.$ The price elasticity of demand equals the:

a$.$ absolute price change divided by the absolute quantity change between two points on a

demand curve.

b$.$ percentage change in revenue divided by the percentage decrease in price.

c$.$ percentage change in revenue divided by the percentage increase in quantity demanded.

d$.$ percentage change in quantity demanded divided by percentage change in price.

e$.$ slope of the demand curve.

Use the following information to answer questions $4$ and $5$: The Dark Night Movie Theater raised

the price of popcorn from $$2\mathrm{.}00$ per barrel to $$2\mathrm{.}30$ per barrel. This caused the quantity of barrels

sold to fall from $100$ per day to $80$ per day.

$4.$ At this time, the $($arc$)$ price elasticity of demand for popcorn could be estimated to be:

a$.-\mathrm{.}52.$

b$.-1.$

c$.-1\mathrm{.}59.$

d$.-1\mathrm{.}9.$

e$.-66\mathrm{.}67.$

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$5.$ The Dark Night Movie Theater will see its total revenues from popcorn sales:

a$.$ rise.

b$.$ fall.

c$.$ double.

d$.$ remain the same.

e$.$ fall to zero.

The figure below indicates the demand for air travel between New York City and Chicago. Use it to

answer question $6.$

$6.$ At point B$,$ total revenue is represented by area:

a$.$ EBGO.

b$.$ AOD.

c$.$ FCHO.

d$.$ AEB.

e$.$ EBIF.

$7.$ If a $10$ percent reduction in price causes a $5$ percent increase in the quantity of a commodity that

people buy, then in this region of the demand curve, price elasticity of demand is:

a$.$ elastic.

b$.$ unit$-$elastic.

c$.$ inelastic, although not perfectly so$.$

d$.$ perfectly inelastic.

$8.$ Which of the following observations would indicate that demand for a good is price$-$inelastic?

a$.$ The good in question is more of a necessity than a luxury for most people.

b$.$ There do not exist good substitutes for this good.

c$.$ The time period allowed for responding to a change in price is very small.

d$.$ All or any of the above.

$9.$ The law of diminishing marginal utility states that:

a$.$ as the amount of a good consumed increases, the total utility of that good tends to diminish.

b$.$ as the amount of a good consumed decreases, the total utility of that good tends to diminish.

c$.$ as income increases, marginal utility tends to diminish.

d$.$ as the amount of a good consumed increases, the marginal utility of that good tends to

diminish.

e$.$ when the price of a good increases, marginal utility tends to diminish.

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$10.$ If total utility reaches its maximum, then:

a$.$ marginal utility is at its maximum.

b$.$ marginal utility is zero.

c$.$ marginal utility is negative.

d$.$ this is always the amount the consumer should buy.

$11.$ A demand function for a good is given by Q $=100-10$P$,$ where Q $=$ quantity demanded per

unit of time and P $=$ the price per unit. At a price of $$4,$ the absolute value of the price

elasticity of demand is approximately equal to which of the following?

a$.\backslash$infty

b$.2/5$

c$.2/3$

d$.1/15$

e$.3/2$

$12.$ Refer to the information in Question $11.$ When P increases from $$4$ to $$5,$ what happens to total

revenue?

a$.$ Increase

b$.$ Decrease

c$.$ Unchanged

$13.$ The price of good X is $$1\mathrm{.}50$ and that of good Y is $$1\mathrm{.}00.$ If a consumer considers the marginal

utility of Y to be $30$ utils, and is maximizing utility with respect to purchases of X and Y$,$ then he

or she must consider the marginal utility of X to be:

a$.15$ utils

b$.20$ utils

c$.30$ utils.

d$.45$ utils.

$14.$ The income effect captures which of the following economic phenomena?

a$.$ If money incomes fall, people will purchase less of any given commodity.

b$.$ A decrease in the price of a major purchase has an effect similar to an increase in income,

and this may prompt people to buy more of that good.

c$.$ The quantity of a good purchased may actually decrease as people$$s incomes rise.

d$.$ As people$$s incomes rise, they save proportionately more out of income, so they actually

spend a smaller fraction of their incomes.

e$.$ If the price of a good drops, it is as though the prices of all other goods have risen, in

relative terms, so smaller quantities of those other goods will tend to be bought.

$15.$ As the $($relative$)$ price of beef rises, I eat more chicken instead. How do you describe this

consumer behavior?

a$.$ Production effect.

b$.$ Substitution effect.

c$.$ A change of taste.

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$16.$ Consumer surplus is defined as the:

a$.$ difference between the total utility of a good and the maximum amount that consumers are

willing to pay for it$.$