Test 2 (Chapters 3 & 4)

Question 1

Elasticity

Answer 1

measure of the responsiveness of one variable to changes in another variable

Question 2

Own Price Elasticity

Answer 2

Measure of responsiveness of the quantity demanded of a good to a change in the price of that good

Question 3

Factors that affect own-price elasticity

Answer 3

substitutes, time, percentage of one’s budget, how broadly the good is defined

Question 4

Substitutes

Answer 4

an increase (or decrease) in the price of one good leads to an increase (decrease) in the demand for the other good

Question 5

Cross-Price Elasticity

Answer 5

responsiveness of the demand for good to changes in the price of a related good

Question 6

Consumer Preferences

Answer 6

determine which good will be consumed

Question 7

Completeness

Answer 7

consumer is capable of expressing a preference for or indifference among all bundles

Question 8

Monotonicity

Answer 8

more is better

Question 9

Strict Convexity

Answer 9

curved line (C-shaped); demonstrates interior solutions

Question 10

Transitivity

Answer 10

indifference curves never cross each other; consumer never makes a choice

Question 11

Indifference Curves

Answer 11

defines the combinations of two goods that give a consumer the same level of satisfaction

Question 12

Marginal Rate of Substitution

Answer 12

rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction (slope of the budget line)

Question 13

Diminishing Rate of Substitution

Answer 13

Marginal Rate of Substitution decreases as one moves down the indifference curve

Question 14

Budget Line

Answer 14

bundles of goods that exhaust a consumer’s income

Question 15

Consumer Equilibrium

Answer 15

affordable bundle that yields the greatest satisfaction to the customer

Question 16

Normal Good

Answer 16

as income increases demand for the good will increase

Question 17

Inferior Good

Answer 17

as income increases demand for the good will decrease

Question 18

Substitution Effect

Answer 18

movement along a given indifference curve that results from a change in the relative price of goods

Question 19

Income Effect

Answer 19

movement from one indifference curve to another that results from the change in real income caused by a price change

Question 20

own-price elasticity formula

Answer 20

percentage change in quantity demanded divided by the percentage change in the price of the good

Question 21

elastic demand

Answer 21

if the absolute value of the own price elasticity is greater than 1

Question 22

inelastic demand

Answer 22

if the absolute value of the own price elasticity is less than 1

Question 23

perfectly elastic demand

Answer 23

if own price elasticity is infinite in absolute value (demand curve is horizontal)

Question 24

perfectly inelastic demand

Answer 24

if the own price elasticity is zero (demand curve is vertical)

Question 25

cross-price elasticity formula

Answer 25

percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good