Question 1

Suppose you have a $$1 million advertising budget to maximize beer sales. Based on the marginal increase in sales per 100K $$spent, how should you allocate your budget among TV, Radio, and Internet advertising?

Accepted Answer

$$700K on TV, 200K on $$Internet, $100K on Radio

Question 2

Which type(s) of advertising in the beer sales scenario exhibit diminishing returns as spending increases?

Accepted Answer

Internet, TV, and Radio

Question 3

Given the following gasoline market data: Before tax, $$P^* =  1.50$ per gallon, Q^* = 40$ gallons. After tax, P$$^* =  $$1.80$$ per gallon, $$Q^* = 35$$ gallons. What is the point elasticity of demand for gasoline?

Accepted Answer

$$-0.43$$

Question 4

Using the elasticity value from the gasoline market, fit the data into a constant elasticity demand function. Which of the following is correct?

Accepted Answer

$$Q^d = 72.27P$$^{-0.43}$$

Question 5

Suppose a per-gallon tax on gasoline raises $105 in tax revenue for the government. What does this imply about the price elasticity of gasoline supply?

Accepted Answer

Inelastic; producer bears the relatively larger burden of the tax

Question 6

The demand and supply for automobiles are given by: $$Q^d = 0.1P$$^{-2.1}$$ and Q^s$$ = $$6400P^{0.9}. $$What is the own-price elasticity of demand for automobiles?

Accepted Answer

$$-2.1$$

Question 7

Given the same demand and supply functions for automobiles, what is the wage elasticity of supply for automobiles if wage is an input in production?

Accepted Answer

$$0.5$$

Question 8

If initially $$I = 20$$,000$$ and w$$ = $$25/hour$$, calculate the equilibrium price and quantity in the automobile market. What is the equilibrium price?

Accepted Answer

$$10,000$$

Question 9

Suppose income increases by 10%. Calculate the new equilibrium in the automobile market. What happens to $$P^*$$ and $$Q^*$$?

Accepted Answer

$$P^*$$ increased by a greater percentage than $$Q^*$$, thus the own-price elasticity of demand is greater than the income elasticity.

Question 10

Billy Joe’s utility function for X and Y is $$U(X, Y) = X$$^{1/8}$$Y^{7/8}$. Are his preferences strictly monotonic and strictly convex?

Accepted Answer

Strictly monotonic and strictly convex

Question 11

Does the utility function $$U(X, Y) = X$$^{1/8}$$Y^{7/8}$ exhibit diminishing marginal utility for both X and Y?

Accepted Answer

Yes, both X and Y exhibit diminishing marginal utility

Question 12

Given the utility function $$U(X, Y) = X$$^{1/8}$$Y^{7/8}$, what happens to the marginal rate of substitution (MRS) as you move along an indifference curve increasing X and decreasing Y?

Accepted Answer

MRS decreases

Question 13

Suppose Mary Joe’s preferences for food (X) and clothing (Y) are governed by $$U(X, Y) = X + Y. $$Are her preferences quasi-linear?

Accepted Answer

Yes, they are quasi-linear

Question 14

Given Mary Joe’s utility function $$U(X, Y) = X + Y$$, what is her optimal demand for X if $$P_X \u003c P_Y$$ and income is $$I$$?

Accepted Answer

$$X^* = I/P_X$$, $$Y^* = 0$$

Question 15

Suppose clothing prices jump to $$24/bundle$$ and Mary Joe’s income is $$22. At $$this new optimum, how many bundles of food and clothing does she consume?

Accepted Answer

10 bundles of food, 0 bundles of clothing

Question 16

Based on the BLS table, U.S. consumer preferences for food are Cobb-Douglas if the income elasticity of demand for food is:

Accepted Answer

Equal to one

Microeconomics Study Guidance: Elasticity, Demand, Utility, and Consumer Choice

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