Question 1

Suppose the price of food decreases while the price of clothing and income remain constant. According to microeconomic theory, what is the effect on the consumer’s optimal choice of food and clothing?

Accepted Answer

The consumer will buy more food and less clothing due to the substitution effect.

Question 2

Which of the following best describes the substitution effect when the price of a good falls?

Accepted Answer

Consumers buy more of the good because it is now relatively cheaper compared to other goods.

Question 3

If a good is inferior, what happens to its consumption as income increases, holding prices constant?

Accepted Answer

Consumption of the good decreases.

Question 4

Consider the demand function $Q = 1430 - 55P$ for domestic wheat and $Q = 1470 - 70P$ for foreign wheat. What is the aggregate world demand function for wheat?

Accepted Answer

$Q = 2900 - 125P$

Question 5

Which of the following statements about Giffen goods is correct?

Accepted Answer

A Giffen good is an inferior good where the income effect outweighs the substitution effect, resulting in an upward-sloping demand curve.

Question 6

Suppose a consumer’s utility function is $U(X,Y) = \log X + \log Y$, and prices are $P_X = 2$, $P_Y = 4$, with income $I = 60$. What is the optimal quantity of $X$ the consumer will purchase?

Accepted Answer

$X = 15$

Question 7

Which of the following best describes the equal marginal principle in consumer theory?

Accepted Answer

The consumer should allocate income so that the marginal utility per dollar spent is equal across all goods.

Question 8

If the cross-price elasticity between two goods is positive, what does this imply about their relationship?

Accepted Answer

The goods are substitutes.

Question 9

A market demand curve is derived by:

Accepted Answer

Horizontally summing individual demand curves.

Question 10

Suppose the price elasticity of demand for a product is $-2$. If the price increases by 10%, what is the expected percentage change in quantity demanded?

Accepted Answer

Quantity demanded decreases by 20%.

Question 11

Which of the following is an example of a positive network externality?

Accepted Answer

The bandwagon effect, where demand increases as more people buy the good.

Question 12

Consumer surplus is best described as:

Accepted Answer

The area under the demand curve and above the price paid.

Question 13

If a consumer’s Engel curve for rental housing bends backward at high income levels, what does this indicate?

Accepted Answer

Rental housing becomes an inferior good at high incomes.

Question 14

Suppose a government imposes a tax on gasoline and then rebates the tax revenue to consumers. What is the likely effect on gasoline consumption?

Accepted Answer

Consumption will decrease, but less than if there were no rebate.

Question 15

Given the Cobb-Douglas utility function $U(X,Y) = X^{0.5}Y^{0.5}$, prices $P_X = 2$, $P_Y = 4$, and income $I = 60$, what is the optimal quantity of $Y$?

Accepted Answer

$Y = 7.5$

Question 16

Which of the following best describes the Slutsky equation?

Accepted Answer

It decomposes the effect of a price change into substitution and income effects.

Question 17

If the demand for a good is perfectly inelastic, what happens to total expenditure when the price increases?

Accepted Answer

Total expenditure increases.

Question 18

Suppose the demand for Grape Nuts cereal is given by $\log(Q_G) = 1.998 - 2.085\log(P_G) + 0.62\log(I) + 0.14\log(P_S)$, where $P_G$ is the price of Grape Nuts and $P_S$ is the price of Shredded Wheat. What does the coefficient of $\log(P_S)$ indicate?

Accepted Answer

Grape Nuts and Shredded Wheat are weak substitutes.

Question 19

Which of the following is a limitation of using marketing experiments to estimate demand?

Accepted Answer

Experiments can be costly and may not reflect long-term consumer behavior.

Individual and Market Demand: Microeconomics Study Notes

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