Q: The price elasticity of demand is calculated as:

$$\frac{\text{percentage change in quantity demanded}}{\text{percentage change in price}}$$

Question 1

Which of the following best describes the concept of a budget constraint in consumer theory?

Accepted Answer

It shows the combinations of goods a consumer can afford given their income and the prices of goods.

Question 2

Suppose Camilla has a budget of $$3000, jeans cost 500 $$each, and sweaters cost $250 each. What is the equation for her budget constraint?

Accepted Answer

$$500J + 250S = 3000$$

Question 3

If the price of jeans increases, what happens to the budget line in a graph with jeans on the x-axis and sweaters on the y-axis?

Accepted Answer

The budget line rotates inward, reducing the maximum number of jeans that can be purchased.

Question 4

Which property is NOT true of indifference curves?

Accepted Answer

Indifference curves can be upward sloping.

Question 5

At the utility-maximizing bundle, what is true about the slopes of the indifference curve and the budget line?

Accepted Answer

The slope of the indifference curve equals the slope of the budget line.

Question 6

The 'equal bang for the buck' rule states that at the optimal consumption bundle:

Accepted Answer

The marginal utility per dollar spent is equal for all goods.

Question 7

If Camilla’s income increases, what happens to her budget line?

Accepted Answer

It shifts outward, parallel to the original line.

Question 8

Which of the following best describes consumer surplus?

Accepted Answer

The area below the demand curve and above the price line.

Question 9

If the market price of jeans rises from $$50 to 75$$, what happens to consumer surplus?

Accepted Answer

Consumer surplus decreases.

Question 10

The price elasticity of demand is calculated as:

Accepted Answer

$$\frac{	ext{percentage change in quantity demanded}}{	ext{percentage change in price}}$$

Question 11

If the price elasticity of demand for a good is greater than 1 in absolute value, demand is:

Accepted Answer

Elastic.

Question 12

Suppose the price of jeans drops from $$75 to 50 $$and quantity demanded increases from 1 to 5. What is the arc elasticity of demand?

Accepted Answer

$$\frac{(5-1)}{(5+1)/2} \div \frac{(50-75)}{(50+75)/2}$$

Question 13

If a firm faces inelastic demand for its product, what will happen to its total revenue if it increases the price?

Accepted Answer

Total revenue will increase.

Question 14

Which of the following goods is most likely to have a perfectly inelastic demand curve?

Accepted Answer

Insulin

Question 15

Cross-price elasticity of demand measures:

Accepted Answer

The responsiveness of demand for a good to changes in the price of another good.

Question 16

If the cross-price elasticity between two goods is positive, the goods are:

Accepted Answer

Substitutes.

Question 17

A normal good is defined as a good for which:

Accepted Answer

Demand increases as income increases.

Question 18

Which formula correctly expresses income elasticity of demand?

Accepted Answer

$$\frac{	ext{percentage change in quantity demanded}}{	ext{percentage change in income}}$$

Question 19

Which of the following would likely increase the price elasticity of demand for a product?

Accepted Answer

A large share of the consumer's budget spent on the product.

Question 20

Suppose the price of jeans increases, and Camilla’s demand for sweaters also increases. What does this indicate about the relationship between jeans and sweaters?

Accepted Answer

Jeans and sweaters are substitutes.

Consumer Choice, Budget Constraints, and Demand in Microeconomics

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