Exercises Chapter 4 Individual and Market Demand

Figure 4.1.2

1) Refer to Figure 4.1.2. The connection of points B and D forms:

A) a demand curve.
B) an income-consumption curve.
C) a price-consumption curve.
D) a shift from one demand curve.to another.

2) Refer to Figure 4.1.2. From the information on the figure, we can obtain:
A) an upward-sloping demand curve.
B) two points on a downward-sloping individual demand curve.
C) a downward-sloping market demand curve.
D) a demand curve for food and clothing.

3) An individual demand curve can be derived from the ________ curve.

A) price-consumption
B) price-income
C) income-substitution
D) income-consumption
E) Engel

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4) Refer to Figure 4.1.3 above. The connection of points A and B on the graph yields:
A) a price-consumption curve.
B) an income-consumption curve.
C) an individual demand curve.
D) an Engel curve.

5) Refer to Figure 4.1.3 above. From the information on the figure we can derive:
A) a price-consumption curve.
B) two points on an individual demand curve.
C) a shifting demand curve.
D) an upward-sloping demand curve.

6) An Engel curve:
A) slopes upward for normal goods and downward for inferior goods.
B) slopes upward for inferior goods and downward for normal goods.
C) slopes upward for both normal and inferior goods.
D) slopes downward for both normal and inferior goods.

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7) Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases, the quantity of
food purchased:
A) increases, due to the income effect but decreases due to the substitution effect.
B) increases, due to the substitution effect but decreases due to the income effect.
C) increases from A to B due to the income effect, and then to C due to the substitution effect.
D) decreases.

8) Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the figure, leads
us to believe that:
A) food in an inferior good and clothing a normal good.
B) food in a normal good and clothing an inferior good.
C) both food and clothing are normal goods.
D) both food and clothing are inferior goods.

9) Which of the following is true concerning the substitution effect of a decrease in price?
A) It will lead to an increase in consumption only for a normal good.
B) It always will lead to an increase in consumption.
C) It will lead to an increase in consumption only for an inferior good.
D) It will lead to an increase in consumption only for a Giffen good.

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel
receives from cake (MUc) and donuts (MUd) are given as follows:

MUc = Qd MUd = Qc

Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.

10) See Scenario 4.1. What is Daniel's budget constraint?

A) 240 = 3Pc + 3Pd
B) 240 = 3Qc + 3Qd
C) 240 = (Pc)(Qc)
D) 240 = (Qc)(Qd)
E) none of the above

11) See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above?
A) 0
B) 24
C) 40
D) 60
E) none of the above

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12) Donald derives utility from only two goods, carrots (Qc) and donuts (Qd). His utility function is as
follows:
U(Qc,Qd) = (Qc)(Qd)
The marginal utility that Donald receives from carrots (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Donald has an income (I) of $120 and the price of carrots (Pc) and donuts (Pd) are both $1.
a. What is Donald's budget line?
b. What is Donald's income-consumption curve?
c. What quantities of Qc and Qd will maximize Donald's utility?
d. Holding Donald's income and Pd constant at $120 and $1 respectively, what is Donald's demand
curve for carrots?
e. Suppose that a tax of $1 per unit is levied on donuts, which raises the after-tax price to $2. How will
this alter Donald's utility maximizing market basket of goods?
f. Suppose that, instead of the per unit tax in (e), a lump sum tax of the same dollar amount is levied on
Donald. What is Donald's utility maximizing market basket?
g. The taxes in (e) and (f) both collect exactly the same amount of revenue for the government, which of
the two taxes would Donald prefer? Show your answer numerically and explain why Donald prefers the
per unit tax over the lump sum tax, or vice versa, or why he is indifferent between the two taxes.

13) Harding Enterprises has developed a new product called the Gillooly shillelagh. The market demand
for this product is given as follows:
Q = 240 - 4P
a. If the shillelagh is priced at $40, what is the point price elasticity of demand? Is demand elastic or
inelastic?
b. If the shillelagh price is increased slightly from $40, what will happen to the total expenditure on the
Gillooly shillelagh?

14) Refer to Figure 4.4.3 above. When the price of pizza is $20, total expenditure and consumer surplus
are, respectively:
A) $2000; $2000.
B) $1000; $2000.
C) $2000; $1000.
D) $1000; $1000.

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15) The wheat market is perfectly competitive, and the market supply and demand curves are given by
the following equations:
QD = 20,000,000 - 4,000,000P
QS = 7,000,000 + 2,500,000P,
where QD and QS are quantity demanded and quantity supplied measured in bushels, and per
bushel.
a. Determine consumer surplus at the equilibrium price and quantity.
b. Assume that the government has imposed a price floor at $2.25 per bushel and agrees to buy any
resulting excess supply. How many bushels of wheat will the government be forced to buy? Determine
consumer surplus with the price floor.

16) Some luxury product manufacturers will purposefully raise prices on their goods in order to reduce
sales volume. This strategy may successfully increase sales revenue if the luxury goods are subject to the
________ effect and have relatively ________ demand.
A) bandwagon; elastic
B) bandwagon; inelastic
C) snob; elastic
D) snob; inelastic

17) When demand is written as log(Q) = -0.23 - 0.34 log(P) + 1.33 log(I), the price elasticity of demand
equals:
A) –0.23
B) –0.34
C) –0.72
D) 1.33

18) In the demand equation log(Q) = a - b log(P) + b2 log(P2) + c log(I), where P is the price of the good in
question, P2 is the price of a second good and I is income, the second good must be:
A) a normal good.
B) an inferior good.
C) a substitute for the good in question.
D) a complement for the good in question.

19) The marginal utility associated with the additional consumption of X is given by:
A) the second derivative of the utility function with respect to good X.
B) equal to total utility.
C) the partial derivative of the utility function with respect to good X.
D) the Lagrangian multiplier.

20) The Slutsky equation is a formula for:

A) maximizing total utility, subject to a budget constraint.
B) calculating the marginal utility of income.
C) calculating the marginal utility of the last dollar spent on one good or another.
D) decomposing the effects of a price change into substitution and income effects.