Question 1

We determine the market demand curve by adding individual demand curves

Accepted Answer

Market demand curves are determined by adding individual demand curves horizontally, which means summing up the quantities demanded by all consumers at each price level.

Question 2

The Slutsky equation portrays

Accepted Answer

The Slutsky equation takes into account both the income and substitution effects. It decomposes the total effect of a price change into the substitution effect (as seen in the Hicksian demand curve) and the income effect (as seen in the change in purchasing power due to the change in price). Therefore, it is not just limited to one effect.

Question 3

Caroline Sierra loves to eat raspberry-apple cobblers, but will only do so if the raspberries and apples are used in the ratio of 3 ounces of raspberries to 2 ounces of apples. Assume that each cobbler uses exactly 3 ounces of raspberries and 2 ounces of apples. Each cobbler eaten yields 1 unit of utility, and the utility of cobblers is linear in the number eaten. Say the price of raspberries is $5 per ounce and the price of apples is $2 per ounce. It costs $190 to achieve a utility level of 10. Then a tax is placed on raspberries so that their price increases from $5 to $10 per ounce. What is the price-compensating variation?

Accepted Answer

The original cost of ingredients for one cobbler is $(3 	imes 5) + (2 	imes 2) = $15 + $4 = $19. To achieve a utility level of 10, the cost is 10 cobblers 	imes $19/cobbler = $190. After the tax, the cost of raspberries per ounce increases to $10, making the new cost of ingredients for one cobbler $(3 	imes 10) + (2 	imes 2) = $30 + $4 = $34. To maintain the same utility level of 10 with the new prices, the cost is 10 cobblers 	imes $34/cobbler = $340. The price-compensating variation is the difference between the new cost and the original cost, which is $340 - $190 = $150.

Question 4

Just as a demand function can be derived from the process of utility _______________, given the consumer's income and the prices, an expenditure function can be derived by a process of income _______________, given the predetermined level of utility for the consumer and the prices.

Accepted Answer

A demand function is derived by minimizing the consumer's expenditure for a given level of utility, while an expenditure function is derived by maximizing the consumer's utility for a given level of expenditure or income. Therefore, the correct answer is maximization, minimization.

Question 5

A measure of consumer surplus determined by the area under the compensated demand curve is known as the

Accepted Answer

The area under the compensated demand curve represents the maximum amount that consumers would be willing to pay for a good or service, which is equivalent to their total consumer surplus. This measure is considered exact because it takes into account changes in income and the substitution effect, providing a more accurate representation of the value consumers place on a product.

Question 6

A measure of how much income must be given to a consumer after a price change to leave the consumer at the same level of utility the consumer had attained before the price change occurred is called

Accepted Answer

Price-compensating variation in income measures the change in income necessary to offset the effects of a price change and keep the consumer at the same level of utility. The Slutsky equation is a tool used to decompose the effects of a price change on the quantity demanded of a good into an income effect and a substitution effect. Opportunity cost is the cost of forgoing the next best alternative when making a choice.

Question 7

Describe how society can lower the dishonest wage.

Accepted Answer

The answer of Describe how society can lower the dishonest...

Question 8

An explanation for why people view a loss more importantly than a gain is

Accepted Answer

Prospect Theory explains that people give more weight to losses than gains, sometimes leading to risk aversion.

Question 9

Describe the difference between a perfectly inelastic demand curve and a perfectly elastic demand curve.

Accepted Answer

The answer of Describe the difference between a perfectly inelastic...

Question 10

Because they are the only ones we can observe by looking at data on prices and quantities, we are forced to work with

Accepted Answer

Uncompensated demand functions are directly observable from market data because they reflect the quantities of goods that consumers purchase at different prices, without adjusting for changes in utility levels or purchasing power.

Question 11

The process of deriving the market demand curve is purely hypothetical because

Accepted Answer

The market demand curve is derived by adding up the individual demand curves of all consumers in the market. However, since we cannot know the utility functions of all people in a society, the process of deriving the market demand curve is purely hypothetical. Despite this, it still provides a useful tool for analyzing the behavior of markets and consumers. Choices B and C are incorrect because economic curves are not purely theoretical and many of them can be observed in the real world. Additionally, while psychological assumptions may be subjective, they are still widely used in economic analysis.

Question 12

According to the price and income multiplication property of demand, if we multiply all the prices in an economy and the income of its agents by the same factor, then the demand for any given good will

Accepted Answer

According to the price and income multiplication property of demand, if we multiply all the prices in an economy and the income of its agents by the same factor, then the relative prices of goods and the purchasing power of consumers remains the same. Therefore, the demand for any given good will not change.

Question 13

The budget of a consumer will be exhausted because any consumer is ________ satiated and, therefore, will always be able to increase utility by consuming _______.

Accepted Answer

A consumer can never be completely satisfied (or "never" satiated), and therefore will always be able to increase their utility by consuming more. This means that their budget will eventually be exhausted if they continue to consume more, as they will reach their maximum budget limit. Therefore, choice C - never, more - is the best answer.

Question 14

List the three properties of demand functions.

Accepted Answer

The answer of List the three properties of demand functions....

Question 15

What is the difference between the exact measure and the approximate measure of consumer surplus?

Accepted Answer

The answer of What is the difference between the exact...

Question 16

Jeffrey Bafilo's demand function for economics textbooks is Q = 1,001 - 10p. At a market price of $100 per book, what is Jeffrey's consumer surplus?

Accepted Answer

Jeffrey's consumer surplus is calculated as the area of the triangle formed by the demand curve above the price he pays. The demand curve intersects the price axis at Q = 0 when p = 100.1 (from Q = 1,001 - 10p, setting Q to 0 gives p = 100.1). The height of the triangle is thus 0.1 (100.1 - 100), and the base is the quantity demanded at $100, which is Q = 1,001 - 10(100) = 1. The area of the triangle (consumer surplus) is 0.5 * base * height = 0.5 * 1 * 0.1 = $0.05.

Question 17

The following is Dave's demand schedule for music downloads:
 $\begin{array} { | l | l | } 
\hline \text { Quantity } & \text { Price } \
\hline 1 & 2.50 \
\hline 2 & 2.00 \
\hline 3 & 1.50 \
\hline 4 & 1.00 \
\hline 5 & 0.50 \
\hline
\end{array}$ 
If a firm is selling downloads at $1.00 and then Dave obtains a promotional code that allows him to download for $0.50 each, what is the gain in consumer surplus to Dave?

Accepted Answer

The answer of The following is Dave's demand schedule for...

Question 18

If we represent an agent's preferences by a(n) __________ utility function, then the way we number the agent's indifference curves does not affect the demands made by the agent.

Accepted Answer

When we represent an agent's preferences by an ordinal utility function, we are only concerned with the ranking of bundles of goods in terms of the agent's preferences. The specific numerical values assigned to each bundle do not matter; all that matters is the ordering. Therefore, the way we number the agent's indifference curves, which represent bundles that provide equal levels of utility to the agent, does not affect the demands made by the agent.

Question 19

Caroline Sierra loves to eat raspberry-apple cobblers, but will only do so if the raspberries and apples are used in the ratio of 3 ounces of raspberries to 2 ounces of apples. Assume that each cobbler uses exactly 3 ounces of raspberries and 2 ounces of apples. Each cobbler eaten yields 1 unit of utility, and the utility of cobblers is linear in the number eaten. Say the price of raspberries is $5 per ounce and the price of apples is $2 per ounce. What is the cost of achieving 20 units of utility?

Accepted Answer

To make one cobbler, Caroline needs 3 ounces of raspberries and 2 ounces of apples in a ratio of 3:2.
Therefore, for every 3 ounces of raspberries, she needs 2 ounces of apples.
Thus, the total cost of ingredients for one cobbler is:
3 ounces of raspberries × $5 per ounce + 2 ounces of apples × $2 per ounce = $15 + $4 = $19

Each cobbler yields 1 unit of utility, so to achieve 20 units of utility, Caroline needs to eat 20 cobblers.

Therefore, the cost of achieving 20 units of utility is:
20 cobblers × $19 per cobbler = $380

So, the best choice is A.

Question 20

Income elasticity of demand is the percentage change in the

Accepted Answer

Income elasticity of demand measures the responsiveness of demand for a good to a change in the income of the consumers who buy the good. It is calculated as the percentage change in the quantity demanded of a good divided by the percentage change in the income of the consumer.

Quiz 5: Some Applications of Consumer Demand, and Welfare Analysis