Question 1

Suppose the market demand for a good is given by $P = 60 - Q$. If the market price is $P = 30$, what is the consumer surplus?

Accepted Answer

$450$

Question 2

Which of the following best describes consumer surplus?

Accepted Answer

The area under the demand curve and above the market price, up to the quantity purchased.

Question 3

If the price of a good increases from $0.50$ to $1.00$, what happens to consumer surplus?

Accepted Answer

Consumer surplus decreases by the area $A + B$ under the demand curve between the two prices.

Question 4

Which of the following is a limitation of using utility as a measure of consumer welfare?

Accepted Answer

Utility functions are rarely known and do not allow for easy comparisons across consumers.

Question 5

The expenditure function $E(p_x, p_y, U)$ is used to:

Accepted Answer

Determine the minimum expenditure needed to achieve a given utility level at given prices.

Question 6

Compensating variation (CV) is best described as:

Accepted Answer

The amount of money needed to keep a consumer on their original indifference curve after a price increase.

Question 7

A government imposes a quota limiting the purchase of a good to 12 units. What is the effect on the consumer's budget constraint?

Accepted Answer

The budget constraint develops a kink at 12 units, removing part of the consumer's choice set.

Question 8

If a government provides $100 in food stamps (in-kind transfer) instead of $100 in cash, what is a likely effect on consumer welfare?

Accepted Answer

Consumers may be worse off if they would have preferred to spend less on food and more on other goods.

Question 9

Suppose a consumer's utility function is $U = Y + N$, where $Y$ is income and $N$ is leisure. The time constraint is $H = 24 - N$ and total income is $Y = wH + Y^*$. What is the first-order condition for maximizing utility?

Accepted Answer

$\frac{\partial U}{\partial Y} \cdot w = \frac{\partial U}{\partial N}$

Question 10

If the wage rate increases, what are the two effects on labor supply?

Accepted Answer

The substitution effect (work more) and the income effect (work less).

Question 11

A backward-bending labor supply curve at higher wages implies that:

Accepted Answer

The income effect dominates the substitution effect, so people work fewer hours as wages rise.

Question 12

If a government increases the marginal income tax rate, what is the effect on the after-tax wage?

Accepted Answer

The after-tax wage decreases to $w = (1 - 	au)w$

Question 13

Which of the following is true regarding the effect of a lump-sum subsidy versus a price subsidy for child-care on consumer welfare?

Accepted Answer

A lump-sum subsidy provides greater benefit to recipients for the same government expenditure.

Question 14

Given the demand curve $P = 60 - 0.5Q$, what is the consumer surplus when the price is $P = 20$?

Accepted Answer

$1600$

Question 15

Which of the following best describes equivalent variation (EV)?

Accepted Answer

The amount of money that would have to be taken away from a consumer to harm them as much as a price increase.

Question 16

If a government wants to maximize the increase in demand for child-care services, which policy should it choose?

Accepted Answer

A price subsidy for child-care services.

Question 17

Suppose the government imposes a marginal tax rate $	au$ on labor income. The government's tax revenue from an individual is:

Accepted Answer

$T = 	au w H(w)$,\ where\ H(w)\ is\ hours\ worked\ at\ after	ext{-}tax\ wage$

Question 18

Which of the following is NOT a reason why food stamps are used instead of cash transfers?

Accepted Answer

To maximize consumer utility regardless of spending choices.

Question 19

For a normal good, how do the three welfare measures (CV, CS, EV) typically compare for small price changes?

Accepted Answer

$|CV| > |CS| > |EV|$, but all are very similar for small changes.

Consumer Welfare, Policy Analysis, and Labor Supply in Microeconomics

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