Question 1

Suppose a consumer has an income of $$I = 120$$, the price of good 1 is $$p_1 = 10$, and the price of good 2 is p_2$ = 20. $$What is the equation for the consumer's budget constraint in terms of $$x_2 as a $$function of $$x_1$$?

Accepted Answer

$$x_2$$ = \frac{120}{20} - \frac{10}{20}$$x_1$$

Question 2

If a consumer's marginal benefit per dollar spent on good 1 is greater than that for good 2, i.e., $$\frac{MB_1$}{p_1$} \u003e \frac{MB_2$}{p_2$}$$, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good 1 and less of good 2

Question 3

A consumer is choosing between pizza and sandwiches. If the price of sandwiches increases, which of the following best describes the substitution effect?

Accepted Answer

The consumer buys more pizza and fewer sandwiches, holding utility constant

Question 4

Given the budget constraint $$I = p_1x_1 + p_2x_2$$, what is the opportunity cost of purchasing one more unit of good 1?

Accepted Answer

$$\frac{p_1$}{p_2$}$$ units of good 2

Question 5

If a consumer's willingness to pay for a pair of shoes is $$\120$ and the market price is $$\$$80$$, what is the consumer surplus for this purchase?

Accepted Answer

$$\40$

Question 6

Suppose the demand for a product decreases from 100 units to 80 units when the price increases from $$\10$ to $$\$$12. $$What is the arc price elasticity of demand?

Accepted Answer

$$\epsilon = \frac{80-100}{(80+100)/2} \div \frac{12-10}{(12+10)/2} = \frac{-20}{90} \div \frac{2}{11} \approx -1.22$$

Question 7

Which of the following statements about indifference curves is TRUE?

Accepted Answer

Indifference curves never cross each other

Question 8

A consumer spends all their income on two goods, A and B. If the price of A decreases, what happens to the budget constraint?

Accepted Answer

It pivots outward along the A-axis, increasing the maximum amount of A that can be purchased

Question 9

If the price elasticity of demand for a good is $$|\epsilon| \u003e 1$$, which of the following is true?

Accepted Answer

Demand is elastic and buyers are highly responsive to price changes

Question 10

Suppose a consumer's income increases from $$\1$$,000$$ to $$\$$1,200$$, and their quantity demanded of a good rises from 10 to 15 units. What is the arc income elasticity of demand?

Accepted Answer

$$\epsilon_I = \frac{15-10}{(15+10)/2} \div \frac{1200-1000}{(1200+1000)/2} = \frac{5}{12.5} \div \frac{200}{1100} \approx 2.2$$

Question 11

If the cross-price elasticity of demand between goods X and Y is positive, what does this imply?

Accepted Answer

Goods X and Y are substitutes

Question 12

A consumer faces the following marginal benefits and prices: $$MB_1 = 8$, p_1$ = 2$$, $$MB_2 = 10$, p_2$ = 5. Is $$the consumer maximizing utility, and if not, what should they do?

Accepted Answer

No; the consumer should buy more of good 1 and less of good 2

Question 13

Which of the following best describes a perfectly inelastic demand curve?

Accepted Answer

A vertical line, indicating quantity demanded does not change with price

Question 14

If a 10% increase in the price of a good leads to a 5% decrease in quantity demanded, what is the price elasticity of demand and how is demand classified?

Accepted Answer

$$\epsilon = \frac{-5\%}{10\%} = -0.5$$, so demand is inelastic

Question 15

Which of the following factors would make the demand for a good more elastic?

Accepted Answer

The good has many close substitutes

Question 16

A consumer's demand for a good is unit elastic. If the price increases by 20%, what happens to total revenue?

Accepted Answer

Total revenue remains unchanged

Question 17

Suppose the market price of bananas falls from $$\80$ to $$\$$50$$, and the quantity demanded increases from 40 to 80 units. What is the change in consumer surplus?

Accepted Answer

$$\Delta CS = \frac{1}{2} 	imes (80) 	imes (60) = 2,400$$

Question 18

If a good has an income elasticity of demand $$\epsilon_I \u003c 0$$, what type of good is it?

Accepted Answer

An inferior good

Question 19

Which of the following is NOT a determinant of the price elasticity of demand?

Accepted Answer

The cost of production for the good

Consumers and Incentives: The Buyer’s Problem, Consumer Surplus, and Elasticity

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