Q: If the price of butter rises from $$1.81 to 2.82 $$per pound between 1980 and 2010, and the Consumer Price Index (CPI) rises from 100 to 218.06 over the same period, what is the real price of butter in 2010 dollars?

$$ \text{Real Price}_{2010} = \frac{2.82}{100} \times 218.06 = 6.15$$ $

Q: If the price of corn flakes increases by 6% and the quantity demanded decreases by 6%, what is the price elasticity of demand?

$$ \text{Elasticity} = \frac{-6\%}{6\%} = -1 $$

Q: Suppose the government sets a price ceiling of $$80 in a competitive market where the equilibrium price is 100. If $$the quantity demanded at $80 is 22 million and the quantity supplied is 14 million, what is the size of the shortage?

$$ 22 - 14 = 8 \text{ million units} $$

Q: Suppose the demand curve for a product is given by $$ Q = 300 - 20P + 4I $$, where $$I is $$average income in thousands of dollars. If $$I = 5$$, what is the market-clearing price when $$Q = 0$$?

$$ 0 = 300 - 20P + 4 \times 5 \Rightarrow 0 = 300 - 20P + 20 \Rightarrow 20P = 320 \Rightarrow P = 16 $$

Q: If the marginal rate of substitution (MRS) between food and clothing for Julie is $$2$$, and the price of food is $$2$$ per unit while the price of clothing is $$10$$ per unit, is Julie maximizing her utility?

No, because $$ \text{MRS} = 2 $$ and $$ \frac{P_F}{P_C} = \frac{2}{10} = 0.2 $$, so she should consume more food and less clothing.

Q: Suppose the CPI in 1980 is 100 and in 2010 is 218.06. If the nominal price of butter in 1980 is $1.81, what is the real price of butter in 2010 dollars?

$$ \text{Real Price}_{2010} = 1.81 \times \frac{218.06}{100} = 3.94$$ $

Question 1

Suppose the price of regular-octane gasoline were $0.20 per gallon higher in New Jersey than in Oklahoma. If the average driver in New Jersey buys 500 gallons per year, what is the annual extra cost paid by New Jersey drivers compared to Oklahoma drivers?

Accepted Answer

$$ 500 	imes 0.20 = 100$

Question 2

If the price of butter rises from $$1.81 to 2.82 $$per pound between 1980 and 2010, and the Consumer Price Index (CPI) rises from 100 to 218.06 over the same period, what is the real price of butter in 2010 dollars?

Accepted Answer

$$ 	ext{Real Price}_{2010} = \frac{2.82}{100} 	imes 218.06 = 6.15$$ $

Question 3

If the price of corn flakes increases by 6% and the quantity demanded decreases by 6%, what is the price elasticity of demand?

Accepted Answer

$$ 	ext{Elasticity} = \frac{-6\%}{6\%} = -1 $$

Question 4

Suppose the government sets a price ceiling of $$80 in a competitive market where the equilibrium price is 100. If $$the quantity demanded at $80 is 22 million and the quantity supplied is 14 million, what is the size of the shortage?

Accepted Answer

$$ 22 - 14 = 8 	ext{ million units} $$

Question 5

If the cross-price elasticity of demand between butter and margarine is positive, what does this imply about the relationship between the two goods?

Accepted Answer

They are substitutes.

Question 6

Suppose the demand curve for a product is given by $$ Q = 300 - 20P + 4I $$, where $$I is $$average income in thousands of dollars. If $$I = 5$$, what is the market-clearing price when $$Q = 0$$?

Accepted Answer

$$ 0 = 300 - 20P + 4 	imes 5 \Rightarrow 0 = 300 - 20P + 20 \Rightarrow 20P = 320 \Rightarrow P = 16 $$

Question 7

If the price elasticity of demand for gasoline is $$-0.2$$, and the government imposes a tax that increases the price by 10%, what is the expected percentage change in quantity demanded?

Accepted Answer

$$ -0.2 	imes 10\% = -2\% $$

Question 8

Jane receives utility from consuming food ($$F) $$and clothing ($$C) as $$given by the utility function $$ U(F, C) = FC . If $$the price of food is $$2$$ per unit, the price of clothing is $$10$$ per unit, and Jane's income is $$50$$, what is her utility-maximizing bundle?

Accepted Answer

$$ F = 5, C = 4 $$

Question 9

Suppose Brenda wants to buy a new car and has a budget of $25,000. She reads that as the price of gasoline rises, the demand for fuel-efficient cars increases. What economic concept does this scenario illustrate?

Accepted Answer

Substitute goods

Question 10

If the marginal rate of substitution (MRS) between food and clothing for Julie is $$2$$, and the price of food is $$2$$ per unit while the price of clothing is $$10$$ per unit, is Julie maximizing her utility?

Accepted Answer

No, because $$ 	ext{MRS} = 2 $$ and $$ \frac{P_F}{P_C} = \frac{2}{10} = 0.2 $$, so she should consume more food and less clothing.

Question 11

Suppose the price of margarine increases. What is the likely effect on the demand for butter?

Accepted Answer

The demand for butter will increase.

Question 12

If the government imposes a binding price floor above the equilibrium price, what is the likely market outcome?

Accepted Answer

A surplus will result.

Question 13

If the income elasticity of demand for a good is negative, what type of good is it?

Accepted Answer

Inferior good

Question 14

Suppose the CPI in 1980 is 100 and in 2010 is 218.06. If the nominal price of butter in 1980 is $1.81, what is the real price of butter in 2010 dollars?

Accepted Answer

$$ 	ext{Real Price}_{2010} = 1.81 	imes \frac{218.06}{100} = 3.94$$ $

Question 15

If the price of a substitute good increases, what happens to the demand curve for the original good?

Accepted Answer

It shifts to the right.

Question 16

Suppose the demand for a product is perfectly inelastic. What would be the effect of a price increase?

Accepted Answer

Quantity demanded remains unchanged.

Question 17

If the government subsidizes the consumption of a normal good, what is the likely effect on equilibrium price and quantity?

Accepted Answer

Equilibrium price increases and equilibrium quantity increases.

Question 18

If the marginal utility per dollar spent on food is greater than that on clothing, what should a consumer do to maximize utility?

Accepted Answer

Buy more food and less clothing.

Question 19

Suppose the price elasticity of demand for a product is $$-1.5. If $$the price increases by 10%, what is the expected percentage change in quantity demanded?

Accepted Answer

$$ -1.5 	imes 10\% = -15\% $$

Microeconomics Study Guide: Demand, Supply, Elasticity, and Consumer Choice

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