exam 2

Question 1

Economists have shown that the burden of a tax is the same whether the tax is collected from the buyer or the seller. Why, then, are gasoline and cigarette taxes imposed on sellers?

Sellers are more honest than buyers.

It is more difficult for buyers to keep track of their purchases, and for the government to verify that the right of amount of tax revenue is collected.

The demand for both gasoline and cigarettes is very elastic.

The Equal Protection Clause of the U.S. Constitution prohibits the government from imposing taxes like these on buyers.

Answer 1

It is more difficult for buyers to keep track of their purchases, and for the government to verify that the right of amount of tax revenue is collected.

Question 2

The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the

supply curve for imported champagne is vertical.

demand curve is downward sloping and the supply curve is upward sloping.

demand curve for imported champagne is vertical.

demand curve for imported champagne is horizontal.

Answer 2

demand curve for imported champagne is vertical.

Question 3

Suppose that in Canada the government places a $1,500 tax on the buyers of new snowmobiles. After the purchase of a new snowmobile, a buyer must pay the government $1,500. How would the imposition of the tax on buyers be illustrated in a graph?

The tax will shift the demand curve down by $1,500.

The tax will shift the supply curve up by $1,500.

The tax will shift both the demand and supply curves down by $1,500.

The tax will shift the demand curve up by $1,500.

Answer 3

The tax will shift the demand curve down by $1,500.

Question 4

When Congress passed a law that imposed a tax designed to fund its Social Security and Medicare programs it wanted employers and workers to share the burden of the tax equally. Most economists who have studied the incidence of the tax have concluded

the tax on employers is too high because it reduces the employment of low-skilled workers.

the tax is not high enough to cover the future costs of Social Security and Medicare.

the tax rate should be greater for high-income workers than for low-income workers.

the burden of the tax falls almost entirely on workers.

Answer 4

the burden of the tax falls almost entirely on workers.

Question 5

In general, a “big ticket item” such as a house or new car will

tend to have a more inelastic demand the more time that passes.

tend to have an inelastic demand because it has many substitutes.

tend to have an inelastic demand because spending on the item takes up a large share of the average consumer’s budget.

tend to have a more elastic demand than a lower-priced good.

Answer 5

tend to have a more elastic demand than a lower-priced good.

Question 5

Suppose a decrease in the supply of bottled water results in a decrease in revenue. This indicates that

the supply of bottled water is inelastic in the price range considered.

the demand for bottled water is elastic in the price range considered.

the supply of bottled water is elastic in the price range considered.

the demand for bottled water is inelastic in the price range considered.

Answer 5

the demand for bottled water is elastic in the price range considered.

Question 6

If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is

relatively elastic.

relatively inelastic.

unit elastic.

perfectly elastic.

Answer 6

relatively elastic.

Question 6

Which of the following statements about the price elasticity of demand is correct?

The absolute value of the elasticity of demand ranges from zero to one.

Demand is more elastic the smaller the percentage of the consumer’s budget the item takes up.

The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good.

In general, demand is more elastic in the long run than it is in the short run.

Answer 6

In general, demand is more elastic in the long run than it is in the short run.

Question 7

When demand is elastic, a fall in price causes total revenue to rise because

the percentage increase in quantity demanded is less than the percentage fall in price.

when price falls, quantity sold increases so total revenue automatically rises.

the increase in quantity sold is large enough to offset the lower price.

the demand curve shifts.

Answer 7

the increase in quantity sold is large enough to offset the lower price.

Question 8

Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply of barley. The drought will cause farm revenue to

rise because the percentage decrease in quantity sold is less than the percentage increase in price.

rise because there will be a shortage of barley.

fall because of the decrease in the quantity of barley sold.

rise because the percentage increase in quantity sold is greater than the percentage increase in price.

Answer 8

rise because the percentage decrease in quantity sold is less than the percentage increase in price.

Question 9

If the market for a product is broadly defined, then

the expenditure on the good is likely to make up a large share of one’s budget.

the good has many complements.

there are many substitutes for the product and the demand for the product is relatively elastic.

there are few substitutes for the product and the demand for the product is relatively inelastic.

Answer 9

there are few substitutes for the product and the demand for the product is relatively inelastic.

Question 10

Which of the following correctly comments on the following statement? “The only way to increase the revenue from selling a product is to increase the product’s price.”

This statement is not true. Revenue will decrease as the price of the product increases because quantity demanded will fall.

The statement is true.

This statement is not true. Revenue will increase as the price of the product increases only if demand is inelastic.

It is not true. Revenue will increase as the price of the product increases only if demand is elastic.

Answer 10

This statement is not true. Revenue will increase as the price of the product increases only if demand is inelastic.

Question 11

In recent years, a number of cities have enacted taxes on soda and other sweetened beverages. If the policy goal of these city governments is to reduce health care costs and and insurance rates for taxpayers by reducing the total amount of soda and sweetened beverages consumed, this would be most successful if the price elasticity of demand for these sweetened beverages is

inelastic.

elastic.

unit elastic.

perfectly inelastic.

Answer 11

elastic.

Question 12

Suppose the value of the price elasticity of demand is -3. What does this mean?

A 3 percent increase in the price of the good causes quantity demanded to decrease by 1 percent.

A $1 increase in price causes quantity demanded to fall by 3 units.

A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent.

Answer 12

A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

Question 13

Aaron, the owner of Jack Browns, wants to know what will happen to the sales of beer if he decreases or increases the price of beer. Currently he sells 5,000 pints per week at a price of $8.00 per pint. The price elasticity of demand for beer is -.50. How many pints will he sell if he increases price to $10.00 (enter the number with no commas)?

Jot down you answer for the following question.

Answer 13

4,375

Question 14

Aaron, the owner of Jack Browns, wants to know what will happen to the sales of beer if he decreases or increases the price of beer. Currently he sells 5,000 pints per week at a price of $8.00 per pint. The price elasticity of demand for beer is -.50. How much revenue will he earn if he increases the price to $10.00 (enter the number with no commas)?

Answer 14

43,750

Question 15

Suppose you manage the social media accounts for local businesses. You charge $2,000 per business, and manage the accounts for 30 businesses. Your costs are rising so you are thinking about raising the price to $2,500. If the price elasticity of demand is -0.40, how by how much will your revenue change (enter the number with no commas, and no $ symbol, if the revenue falls make sure you include a negative sign)?

Answer 15

7,500

Question 16

Suppose Congress is considering increasing the minimum wage from $10 to $15 per hour. At the current wage 75 million hours are demanded. The price elasticity of demand for labour is -0.30. By how much will total income increase? (enter the number with no commas, no $ symbol, and round your answer to two decimal places, don’t include the 6 zeros for millions)?

Answer 16

206.25

Question 17

Over time, slavery redemption programs have become _____ effective since the supply curve of slaves becomes _______ elastic over time.

less; more

less; less

more; more

more; less

Answer 17

less; more

Question 18

Consider the following characteristics:
a. low transactions costs
b. small levels of pollution
c. high levels of pollution
d. clear assignment of property rights

Which of the above are assumptions behind the Coase Theorem?
a, b, and d

a, c, and d

a and d

a only

Answer 18

a and d

Question 19

The price elasticity of supply for umbrellas is 2. Suppose you’re told that following a price increase, quantity supplied increased by 30 percent. What was the percentage change in price that brought this about?

15 percent

60 percent

6.7 percent

impossible to determine without additional
information

Answer 19

15 percent

Question 20

While politicians and the general public often favor a “command-and-control” approach to the reduction of greenhouse gases, many economists favor market-based policies because they

rely on economic incentives rather than on administrative rules.

eliminate the need for government involvement in all pollution regulation.

completely eliminate negative externalities.

convert all negative externalities into positive externalities.

Answer 20

rely on economic incentives rather than on administrative rules.

Question 21

If there are no externalities, a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because

too little of the good will be produced.

economic surplus is maximized.

too much of the good will be produced.

a deadweight loss will occur that is equal to the area under the demand curve for the good.

Answer 21

too much of the good will be produced.

Question 22

The demand for most farm products is relatively inelastic. All else constant, what is the effect on farm revenues as a result of the introduction of new and better farm equipment which increases productivity?

Farm revenues could increase or decrease depending on the cost of this new equipment.

Farm revenues decrease.

Farm revenues increase.

Farm revenues remain constant because consumers will not increase their
consumption of farm products by much.

Answer 22

Farm revenues decrease.

Question 23

Which of the following is a source of market failure?

unforeseen circumstances which leads to the bankruptcy of many firms

incomplete property rights or inability to enforce property rights

a lack of government intervention in a market

an inequitable income distribution

Answer 23

incomplete property rights or inability to enforce property rights

Question 24

If a soda tax is implemented and demand for soda is price elastic, the effect on discouraging soda consumption would be ________ and ________ tax revenue would be collected than if demand were inelastic.

larger; less

smaller; less

smaller; more

larger; more

Answer 24

larger; less

Question 25

If the penalty on sellers of an illegal good is less than the penalty on buyers of an illegal good, then supply of the good will ________ by ________ demand and the price of the good will ________.

decrease; the same amount as; remain the same

increase; more than; increase

decrease; less than; decrease

decrease; more than; decrease

Answer 25

decrease; less than; decrease

Question 26

Suppose the California Nurses Union successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of physician’s assistants hired, what conclusion can you draw?

The cross-price elasticity of demand between registered nurses and physician’s assistants is positive.

The price elasticity of demand for registered nurses is negative while the price elasticity of demand for physician’s assistants is positive.

The cross-price elasticity of demand between registered nurses and physician’s assistants is negative.

Physician’s assistants are more valuable in terms of their productivity.

Answer 26

The cross-price elasticity of demand between registered nurses and physician’s assistants is positive.

Question 27

Getting an annual flu shot is a way to reduce the chances of not only contracting influenza, but also spreading it to other people. In this sense, getting an annual flu shot is reducing ________ of spreading a contagious disease.

the social benefit

positive externalities

the private benefit

negative externalities

Answer 27

negative externalities

Question 28

Demand for a luxury item, such as a yacht, is likely to be

income elastic and price inelastic.

both income inelastic and price inelastic.

income inelastic and price elastic.

both income elastic and price elastic.

Answer 28

both income elastic and price elastic.

Question 29

Suppose the value of the price elasticity of supply is 4. What does this mean?

A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.

A 4 percent increase in the price of the good causes quantity supplied to increase by 1 percent.

A 1 percent increase in the price of the good causes the supply curve to shift upward by 4 percent.

For every $1 increase in price, quantity supplied increases by 4 units.

Answer 29

A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.

Question 30

Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price?

The decrease in price will always be proportional to the magnitude of the demand shift.

The more elastic the supply curve, the greater the price increase.

The increase in price is not affected by the elasticity of the supply curve.

The more elastic the supply curve, the smaller the price decrease.

Answer 30

The more elastic the supply curve, the smaller the price decrease.

Question 31

If the quantity of walkie-talkies supplied increases by 5 percent when price increases by 12 percent, then

the walkie-talkie supply curve will shift to the right.

the walkie-talkie supply curve will shift to the left.

the supply of walkie-talkies is inelastic.

the supply of walkie-talkies is elastic.

Answer 31

the supply of walkie-talkies is inelastic.

Question 32

Suppose the cross-price elasticity of demand between orange juice and grapefruit juice is approximately 6. What does this mean?

If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased.

The demand for orange juice is 6 times greater than the demand for grapefruit juice.

A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption.

A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.

Answer 32

A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.

Question 33

Anyone can purchase sulfur dioxide emission allowances on the Chicago Mercantile Exchange. Several environmental groups have raised money to buy allowances (which they subsequently destroy). As part of their fund-raising, these groups have urged contributors to buy the allowances as gifts. As one newspaper story put it, “For the environmentalist in your life, here’s a gift that is sold by the ton, fits in an envelope and will last forever.”

What is impact on the price of the emission allowances in the market if more people buy sulfur emission allowances and destroy them?

The price falls but not to zero.

The price falls to zero.

The price remains unchanged.

The price rises.

Answer 33

The price rises.

Question 34

Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes. According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution.

not necessary; equitable

necessary; equitable

not necessary; efficient

necessary; efficient

Answer 34

not necessary; efficient

Question 35

How does the construction of a market demand curve for a private good differ from that for a public good?

There is no difference; in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price.

The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.

There is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good.

The market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price.

Answer 35

The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.

Question 36

Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption. All else equal, if the government decided to impose a tax on soda, the equilibrium quantity of soda would ________ and the equilibrium price of soda would ________.

increase; decrease

decrease; decrease

increase; increase

decrease; increase

Answer 36

decrease; decrease

Question 37

Because producers do not bear the external cost of pollution

private production exceeds the economically efficient level.

the economically efficient level of production is achieved.

the market price is too high.

private production is below the economically efficient level.

Answer 37

private production exceeds the economically efficient level.

Question 38

Economic incentives are designed to make individual self-interest coincide with social interest. According to economists, which of the following methods of pollution control best uses economic incentives to reduce pollution?

rewarding environmental groups for monitoring the activities of private firms that produce products which generate pollution

requiring the installation of specific pollution control devices

instituting a system of tradable emission allowances

imposing quantitative limits on the amount of pollution and imposing a penalty for non-compliance with these limits

Answer 38

instituting a system of tradable emission allowances

Question 39

Sarah and Bella share an apartment and they are deciding whether or not to purchase a weekly housecleaning service. The value of the service to each of them is $50 and it costs $80 to hire a housecleaner. Suppose Bella is lazy and a spendthrift and Sarah suspects that Bella will be willing to pay $80. What is Sarah likely to do, given that she is as rational as any other person?

She might offer to do Bella’s housecleaning chores if Bella would pay her $50.

She will come clean and tell Bella that since Bella is lazy and a spendthrift she should pay a bigger share of the $80.

She might claim that she is not willing to pay for a housecleaner, hoping that Bella would pay the entire $80.

She will correctly rationalize that Bella’s laziness and spendthrift ways are irrelevant to the decision at hand.

Answer 39

She might claim that she is not willing to pay for a housecleaner, hoping that Bella would pay the entire $80.

Question 40

Private producers have no incentive to provide public goods because

production of huge quantities of public goods entails huge fixed costs.

the government subsidy granted is usually insufficient to enable private producers to make a profit.

once produced, it will not be possible to exclude those who do not pay for the good.

they cannot avoid the tragedy of the commons.

Answer 40

once produced, it will not be possible to exclude those who do not pay for the good.

Question 41

It is difficult for a private market to provide the economically efficient quantity of a public good because

public goods produce positive and negative externalities.

individual preferences are not revealed in the market for the good.

it is too expensive to produce the necessary amount of the good.

by law governments cannot use cost-benefit analysis to determine this quantity.

Answer 41

individual preferences are not revealed in the market for the good.

Question 42

Which of the following is an example of a club good?

cable television

crime prevention

organic apples

stock of knowledge in the public domain

Answer 42

cable television

Question 43

If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

equal to the marginal private cost of production at the economically efficient level of pollution.

at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

equal to the amount of the deadweight loss created in the absence of a pollution tax.

equal to the marginal external cost at the economically efficient level of pollution.

Answer 43

equal to the marginal external cost at the economically efficient level of pollution.

Question 44

Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If the Coase theorem holds and the victims of the pollution could not legally enforce the right of their property not to be damaged, the amount of pollution reduction

would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost.

would be the same as if it would be if the owners of the smelter were legally liable.

would be too small; the government would have to intervene to bring about an efficient outcome.

would be significantly less than if the owners of the smelter were legally liable for damages.

Answer 44

would be the same as if it would be if the owners of the smelter were legally liable.

Question 45

A negative externality exists if

there are quantity controls in a market.

the marginal social cost of producing a good or service exceeds the private cost.

there are price controls in a market.

the marginal private cost of producing a good or service exceeds the social cost.

Answer 45

the marginal social cost of producing a good or service exceeds the private cost.

Question 46

When a positive externality exists, the private market produces

products at a low opportunity cost.

products at a high opportunity cost.

more than the economically efficient output level.

less than the economically efficient output level.

Answer 46

less than the economically efficient output level.

Question 47

Economists Kenneth Chay and Michael Greenstone found that in the two years following the passage of the Clean Air Act of 1970, the sharp reduction in air pollution also led to a decline in infant deaths. Although this and other studies provide compelling evidence of the link between pollution and infant health, it is not clear that reductions from the much lower levels of ambient pollution today would have the same effect. Which of the following reasons could explain this?

The cost of pollution abatement today is much higher than it was in the 1970s. Thus, it would be far more costly to achieve the same level of benefit today as the benefit achieved in 1970.

Today, the level of pollution is much higher. Therefore, it will take a much larger reduction in air pollution to reap benefits similar to those in 1970.

When levels of pollution are high, the marginal benefit of reducing pollution also is high. It follows therefore that the benefit of reducing air pollution in 1970 would be much higher than the benefit from a proportional reduction in air pollution today when the level of pollution is much lower.

When levels of pollution are high, the marginal benefit of reducing pollution is low. Therefore, it was necessary to significantly reduce air pollution in 1970 before benefits could be realized. Today, when the level of pollution is much lower, such drastic measures are unnecessary.

Answer 47

When levels of pollution are high, the marginal benefit of reducing pollution also is high. It follows therefore that the benefit of reducing air pollution in 1970 would be much higher than the benefit from a proportional reduction in air pollution today when the level of pollution is much lower.

Question 48

Which of the following is a source of market failure?

incomplete property rights or inability to enforce property rights

a lack of government intervention in a market

unforeseen circumstances which leads to the bankruptcy of many firms

an inequitable income distribution

Answer 48

incomplete property rights or inability to enforce property rights

Question 49

Private solutions to the problem of externalities are most likely when

transactions costs are low and the monetary damages to third parties are high.

transactions costs are low and the number of bargaining parties is large.

transactions costs are low and the number of bargaining parties is small.

government actively encourages these solutions.

Answer 49

transactions costs are low and the number of bargaining parties is small.

Question 50

A product is considered to be nonexcludable if

it is jointly owned by all members of a community.

you can keep those who did not pay for the item from enjoying its benefits.

your consumption of the product reduces the quantity available for others to consume.

you cannot keep those who did not pay for the item from enjoying its benefits.

Answer 50

you cannot keep those who did not pay for the item from enjoying its benefits.

Question 51

While politicians and the general public often favor a “command-and-control” approach to the reduction of greenhouse gases, many economists favor market-based policies because they

rely on economic incentives rather than on administrative rules.

convert all negative externalities into positive externalities.

completely eliminate negative externalities.

eliminate the need for government involvement in all pollution regulation.

Answer 51

rely on economic incentives rather than on administrative rules.

Question 52

Which of the following must be present to reach a private solution to an externality problem?

The transactions costs to negotiate a solution must be relatively low.

A majority of the parties affected by the externality must agree to a solution.

The total number of people, creators of the problem and those affected, must be relatively large to justify negotiating a solution.

The government must approve the solution for it to be a legal solution.

Answer 52

The transactions costs to negotiate a solution must be relatively low.

Question 53

Behavioral economics refers to the study of situations

where consumers and firms appear to make choices that are appropriate to reach their goals.

where consumers and firms do not appear to be making choices that are economically rational.

where consumers and firms disobey the laws of demand and supply.

where consumers and firms appear to value fairness when they make choices.

Answer 53

where consumers and firms do not appear to be making choices that are economically rational.

Question 54

The income effect of an increase in the price of salmon

refers to the effect on a consumer’s purchasing power which causes the consumer to buy less salmon, holding all other factors constant.

is the change in the demand for other types of fish, say trout, that results from a decrease in purchasing power.

is the change in the demand for salmon when income increases.

refers to the relative price effect—salmon is more expensive compared to other types of fish—which causes the consumer to buy less salmon.

Answer 54

refers to the relative price effect—salmon is more expensive compared to other types of fish—which causes the consumer to buy less salmon.

Question 55

Many economists do not believe that network externalities lock consumers into the use of products that have technology inferior to other, similar products. These economists believe that

there is no good evidence that switching costs exist.

the government will prevent products with inferior technology from being sold to consumers.

in practice, the gains from using a superior technology exceed the losses consumers incur from switching costs.

consumers are always rational.

Answer 55

in practice, the gains from using a superior technology exceed the losses consumers incur from switching costs.

Question 56

The endowment effect suggests that that people

have a strong sense of fairness.

act in ways to distort market prices.

are concerned about the welfare of others.

have a strong attachment to their property, regardless of whether they paid to acquire it.

Answer 56

have a strong attachment to their property, regardless of whether they paid to acquire it.

Question 57

If Marlowe obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on oranges, then Marlowe

is maximizing total utility.

should buy fewer oranges and fewer apples.

should buy more apples and fewer oranges.

should buy more oranges and fewer apples.

Answer 57

should buy more apples and fewer oranges.

Question 58

The choice of a good is path dependent when

people who move location follow the path of people who moved before them.

it can only be used in one way.

the first technology that was adopted has an advantage over a better technology that came later.

consumers get utility from consuming goods that others are consuming, such as restaurants.

Answer 58

the first technology that was adopted has an advantage over a better technology that came later.

Question 59

If, when you consume another piece of candy, your marginal utility is zero, then

you should consume less candy.

you have maximized your total utility from consuming candy.

you want more candy.

you have not yet reached the point of diminishing marginal utility.

Answer 59

you have maximized your total utility from consuming candy.

Question 60

Health clubs typically experience an increase in one-year memberships in January, but many new customers cancel their memberships before the end of the year. Which of the following is the best explanation for this behavior?

Some people are overly optimistic about their future behavior.

Some people fail to treat their membership fees as sunk costs.

Some health club members suffer minor injuries that prevent them from working out.

Some members receive utility from activities they believe are popular.

Answer 60

Some people are overly optimistic about their future behavior.

Question 61

Which of the following does not explain why consumers buy products that many other consumers are already buying?

cost-effective way to gather information about a product

network externalities

the satisfaction people derive by being viewed as “fashionable”

differences in tastes and preferences

Answer 61

differences in tastes and preferences

Question 62

The substitution effect of an increase in the price of Raisin Bran refers to

the fact that the higher price of Raisin Bran lowers consumer’s purchasing power, holding money income constant.

the decrease in the demand for Raisin Bran when its price rises.

the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, causes consumers to buy less Raisin Bran.

the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left.

Answer 62

the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, causes consumers to buy less Raisin Bran.

Question 63

One reason that consumers and businesses might not act rationally is

consumer tastes change constantly.

it is difficult to obtain enough information about the elasticities of demand and supply.

they do not always value fairness when they make choices.

they may not realize their actions are inconsistent with their goals.

Answer 63

they may not realize their actions are inconsistent with their goals.

Question 64

Along a downward-sloping linear demand curve

the marginal utility from the consumption of each unit of the good rises and the total utility from consuming larger quantities remain constant.

the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases.

the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities remain constant.

the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities increase.

Answer 64

the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases.

Question 65

Terence has $50 per week to spend on Subway sandwiches and milkshakes. The price of a Subway sandwich is $5 and the price of a milkshake is $4. He buys 6 sandwiches and 5 milkshakes. The marginal utility of the 6th sandwich = 25 and the marginal utility of the 5th milkshake = 24. Which of the following is true?

He is maximizing his utility.

He is not maximizing his utility and should buy more milkshakes.

He is not maximizing his utility because he is not spending all of his income.

He is not maximizing his utility and should buy more Subway sandwiches.

Answer 65

He is not maximizing his utility and should buy more milkshakes.

Question 66

If a consumer receives 22 units of marginal utility for consuming the first can of soda, 20 units from consuming the second, and 15 from the third, the total utility of consuming the three units is

15 utils.

unknown as more information is needed to determine the answer.

35 utils.

57 utils

Answer 66

57 utils

Question 67

Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal marginal utility per dollar spent, the extra satisfaction received from the last shirt must be

500 units of utility.

100 units of utility.

2,000 units of utility.

80 units of utility.

Answer 67

80 units of utility.

Question 68

Adhira buys chocolates and almonds. She has 3 bars of chocolates and 4 bags of almonds. The marginal utility of the third chocolate bar is 18 units of utility and the marginal utility from the fourth bag of almonds is also 18. Is Adhira maximizing her utility?

No, she must buy 1 more chocolate bar to equate her quantities of the two goods.

No, she must cut back to 3 bags of almonds to equate her quantities of the two goods.

No, without information on her income and the prices of the two goods, we cannot answer the question.

Yes, the marginal utility from the last unit of each good is equal.

Answer 68

No, without information on her income and the prices of the two goods, we cannot answer the question.

Question 69

Consider a good whose consumption takes place publicly. Your decision to buy that good depends

only on the price of the good.

only on the characteristics of the good.

both on the characteristics of the product and on how many other people are buying the good.

only on how many other people buy the good.

Answer 69

both on the characteristics of the product and on how many other people are buying the good.

Question 70

For a demand curve to be upward sloping, the good would have to be an inferior good, and

the income effect and the substitution effect would have to be nonexistent.

the income effect would have to be larger than the substitution effect.

the income effect would have to be smaller than the substitution effect.

the income effect would have to be equal to the substitution effect.

Answer 70

the income effect would have to be larger than the substitution effect.

Question 71

A significant downside to network externalities is that

there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies.

there may be large switching costs to firms changing technologies.

firms may network with unethical suppliers or distributors.

the costs of using celebrity endorsements may be very high.

Answer 71

there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies.

Question 72

Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices this means that economists believe

consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them.

consumers spend their incomes to order to accumulate the most goods and services.

consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others.

consumers will always buy goods and services at the lowest possible prices.

Answer 72

consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them.

Question 73

Which of the following is likely to occur as the result of the law of diminishing marginal utility?

Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant.

Sabine’s utility from her first granola bar is greater than Rachel’s utility from her second granola bar.

Petra’s utility from her second apple was less than her satisfaction from her first orange.

Hudson enjoyed his second slice of pizza more than his first.

Answer 73

Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant.