Question 1

Suppose a consumer's utility function is $$U(X, Y) = X$$^{0.5}$$Y^{0.5}$$, where $$X is $$food and $$Y is $$clothing. If the price of food is $$P_X = 2$$, the price of clothing is $$P_Y = 4$$, and income is $$I = 80$$, what is the utility-maximizing quantity of food $$X^*$ the consumer will purchase?

Accepted Answer

$$X^* = 20$$

Question 2

Which of the following best describes the substitution effect when the price of a good falls, holding utility constant?

Accepted Answer

The consumer buys more of the good because it is now relatively cheaper compared to other goods.

Question 3

A decrease in the price of hamburger leads to an increase in its consumption for incomes below $$20 per month, but a decrease in its consumption for incomes above 20 $$per month. According to the Engel curve, hamburger is:

Accepted Answer

A normal good for incomes below $$20 and an inferior good for incomes above 20.$$

Question 4

If the marginal utility per dollar spent on food is less than the marginal utility per dollar spent on clothing, what should a utility-maximizing consumer do?

Accepted Answer

Buy more clothing and less food.

Question 5

Suppose the domestic demand for wheat is $$Q_D = 100 - 2P$$ and the export demand is $$Q_E = 80 - P. $$What is the total world demand for wheat when the price is $$P = 20$$?

Accepted Answer

$$Q_{world} = 100 - 2(20) + 80 - 20 = 120$$

Question 6

Which of the following statements about Giffen goods is correct?

Accepted Answer

The income effect is negative and larger than the substitution effect, so demand decreases as price falls.

Question 7

If a good is a complement to another good, what happens to the demand for the first good when the price of the second good increases?

Accepted Answer

The demand for the first good decreases.

Question 8

A market demand curve is derived by:

Accepted Answer

Horizontally summing individual demand curves at each price.

Question 9

Suppose the price elasticity of demand for a product is $$-0.5. If $$the price increases by 10%, what happens to the quantity demanded?

Accepted Answer

It decreases by 5%.

Question 10

Consumer surplus is best described as:

Accepted Answer

The area under the demand curve and above the price line.

Question 11

If a gasoline tax is imposed and the proceeds are rebated to consumers, what is the likely effect on gasoline consumption and consumer satisfaction?

Accepted Answer

Gasoline consumption decreases and consumer satisfaction decreases.

Question 12

Which of the following is true about the Lagrange multiplier ($$\lambda) in $$consumer optimization?

Accepted Answer

$$\lambda$$ represents the marginal utility of income.

Question 13

Suppose a consumer's utility function is $$U(X, Y) = X$$^{0.3}$$Y^{0.7}$$, prices are $$P_X = 1$$, $$P_Y = 2$$, and income is $$I = 60. $$What is the demand function for $$X$?

Accepted Answer

$$X^* = 0.3 	imes \frac{I}{P_X}$$

Question 14

If the price elasticity of demand for housing is $$-0.8$$ and the income elasticity is $$1.2$$, which of the following is true?

Accepted Answer

Housing demand is inelastic with respect to price and a normal good.

Question 15

Which of the following best describes speculative demand?

Accepted Answer

Demand based on the expectation that the price of the good will increase.

Question 16

If a consumer's marginal rate of substitution (MRS) of food for clothing equals the ratio of the prices of food and clothing, what does this imply?

Accepted Answer

The consumer is maximizing utility given their budget constraint.

Question 17

Which of the following is a correct statement about the duality in consumer theory?

Accepted Answer

Utility maximization and expenditure minimization yield the same demand functions.

Question 18

If the demand for rental housing is found to be an inferior good for incomes above $$40,000$$, what does this imply about the Engel curve for rental housing?

Accepted Answer

The Engel curve bends backward for incomes above $$40,000.$$

Question 19

Suppose a consumer faces the following budget constraint: $$2X + 4Y = 80. If $$the consumer chooses $$X = 20$$ and $$Y = 10$$, what is the total expenditure on each good?

Accepted Answer

Food: $$40$$, Clothing: $$40$$

Chapter 4: Individual and Market Demand – Microeconomics Study Notes

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