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

A consumer is choosing between two goods, A and B. The marginal benefit per dollar spent on A is $$MB_A/p_A = 2$$, and on B is $$MB_B/p_B = 3. $$What should the consumer do to maximize utility?

Accepted Answer

Buy more of good B and less of good A

Question 3

If a consumer's budget increases from $$I to$$ $$I' \u003e I$$, with prices held constant, what happens to the budget constraint?

Accepted Answer

It shifts outward in a parallel fashion

Question 4

Given the utility function $$U = u(x_1$, x_2$)$$ and the budget constraint $$I = p_1x_1 + p_2x_2$$, what is the condition for the optimal bundle?

Accepted Answer

$$\frac{MB_1$}{p_1$} = \frac{MB_2$}{p_2$}$$ and the budget is exhausted

Question 5

If the price of good 2 decreases, holding all else constant, what happens to the consumer's budget constraint?

Accepted Answer

It rotates outward along the good 2 axis

Question 6

A consumer is willing to pay $$100 for a concert ticket, but the market price is 60. $$What is the consumer surplus for this purchase?

Accepted Answer

$40

Question 7

Suppose the demand for a product decreases from 100 units to 80 units when the price increases from $$10 to 15. $$What is the arc price elasticity of demand?

Accepted Answer

$$\frac{80-100}{(80+100)/2} \div \frac{15-10}{(15+10)/2} = \frac{-20}{90} \div \frac{5}{12.5} = -0.222 \div 0.4 = -0.555$$

Question 8

If the cross-price elasticity of demand between tea and coffee is positive, what does this imply?

Accepted Answer

Tea and coffee are substitutes

Question 9

Which of the following best describes the substitution effect when the price of sandwiches increases, holding utility constant?

Accepted Answer

The consumer buys fewer sandwiches and more of other goods

Question 10

A good has an income elasticity of demand $$\epsilon_I = -0.5. $$What type of good is this?

Accepted Answer

Inferior good

Question 11

If the price elasticity of demand for a product is $$|\epsilon| \u003e 1$$, what happens to total revenue if the firm increases the price?

Accepted Answer

Total revenue decreases

Question 12

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves never cross

Question 13

Suppose a consumer's demand for a good does not change at all when the price changes. What is the price elasticity of demand for this good?

Accepted Answer

$$\epsilon = 0$$

Question 14

A consumer faces the following marginal benefits per dollar: $$MB_1$$/$$p_1 = 0.5$ for good 1 and MB_2$/p_2$ = 0.8$$ for good 2. What should the consumer do to maximize utility?

Accepted Answer

Buy more of good 2 and less of good 1

Question 15

If a consumer's budget constraint is $$I = p_1x_1 + p_2x_2$$, 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 16

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

Accepted Answer

The good has many close substitutes

Question 17

If the arc income elasticity of demand for a good is $$\epsilon_I = 1.5$$, how is this good classified?

Accepted Answer

Luxury good

Question 18

A consumer's willingness to pay for the 5th unit of a good is $$20$$, but the market price is $$12. $$What is the consumer surplus for the 5th unit?

Accepted Answer

$8

Question 19

If the price of good A increases and the quantity demanded of good B increases, what is the relationship between goods A and B?

Accepted Answer

They are substitutes

Question 20

Suppose a consumer's demand for a good is perfectly elastic. What does the demand curve look like?

Accepted Answer

It is horizontal

Consumers and Incentives: Microeconomic Study Notes

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