Review 1: Progress Check Elasticities and beyond

If the price of an apple is $0.50, the marginal utility per dollar spent on the fifth apple is:

[Topic: Marginal utility]

• 20

• 40

• 100

• 60

Answer explanation

Correct. The marginal utility per dollar spent on the fifth apple is 250−220/0.50=60.

The marginal utility per dollar spent on the last orange consumed is 75. If the price of an apple is $0.50, how many apples would Johnny have to consume before he considers purchasing another orange?

[Topic: Marginal Utility]

• 2

• 3

• 4

• 6

Answer explanation

Correct. The marginal utility per dollar spent on the fourth apple is (220−180)/$0.50=80 . This is the last apple that has a marginal utility per dollar spent that is greater than 75.

Which of the following correctly describes the income effect associated with the law of demand?

[Topic: Income Effect]

• If consumer income increases, there will be an upward movement along the demand curve for a normal good.

• If the price of a good increases, the demand for the good decreases because the demand for its substitute in consumption increases.

• If the price of a good decreases, the demand for the good increases because the lower price increases the demand for its complement in consumption.

• If the price of a normal good decreases, the purchasing power of a consumer’s income increases and therefore consumers will be willing and able to purchase more of the good.

Answer explanation

Correct. The price decrease of a normal good increases the purchasing power of consumer income and allows the consumer to buy more of the good

Which of the following will occur as a result of a decrease in the prices of the inputs used to produce a good?[Topic: Supply Shift]

• The quantity supplied would increase at each possible price for the good.

• The price of the good would increase for any given quantity supplied.

• The quantity supplied would increase as the price of the good increased.

• The price of the good would increase as the quantity supplied decreased.

Answer explanation

Correct. A decrease in input prices lowers the cost of production and shifts the supply curve to the right. As a result, more of the good will be offered for sale at each possible price for the good.

Which of the following explains why the supply curve is upward sloping?

[Topic: Law of Supply]

• Producers receive subsidies as they increase production.

• At a higher quantity, producers are more able to control the market price.

• At a higher quantity, producers are more able to control the market price.

• At a higher price, producers are willing to sell more to increase their profits.

Answer explanation

Correct. All other things remaining constant (ceteris paribus), an increase in price of a good increases profitability, incentivizing sellers to increase the quantity supplied. Thus, as price increases the quantity supplied increases, implying that the supply curve is upward sloping.

The market supply curve for a product is derived from the individual firm supply curves by

[Topic: Market Supply Curve]

• multiplying the equilibrium quantity sold by the number of producers in the market

• multiplying the quantities each producer sells by the market price

• summing the quantities each producer sells and multiplying by the market price

• summing the quantities each producer sells at each possible price

Answer explanation

Correct. The supply curve describes the relationship between prices and quantities supplied for each producer in the market. The market supply curve is obtained by horizontally summing the individual supply curves (that is, by adding the quantities supplied at each possible price by each producer in the market).

A 10 percent increase in the price of a good results in a 4 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices

[Topic: Elasticity and Total Revenue]

• is upward sloping

• is inelastic

• has increased by 40%

• has a price elasticity of demand equal to 2.5

Answer explanation

Correct. The demand elasticity can be determined by applying the total revenue test because whether total revenue increases, decreases, or remains the same when price changes depends on the price elasticity of demand. Price and total revenue move in opposite directions if demand is elastic and move in the same direction if demand is inelastic. In this case, an increase in the price resulted in an increase in total revenue. Thus, demand must be inelastic. That is, the percentage increase in price outweighs the percentage decrease in quantity demanded, resulting in a net increase in total revenue

A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded?

[Topic PED]

• It will increase by 20 percent

• It will decrease by 5 percent

• It will decrease by 20 percent

• It will remain unchanged

Answer explanation

Correct. The absolute value of the price elasticity of demand is 2 and is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore, the percentage change in quantity demanded will be 20% (this is calculated by multiplying the 2 by 10%). The price elasticity of demand illustrates the negative relationship between price and quantity demanded. Therefore, an increase in price by 10% will result in a decrease in quantity demanded by 20% for an absolute value of a price elasticity of demand of 2.

Which of the following statements is true about the demand curve above?

[Topic: Elasticity on a Linear D-Curve]

• The elasticity of demand increases when moving from point X to point Y.

• The elasticity of demand decreases when moving from point X to point Y.

• Demand is elastic at each given price because the slope is constant and equal to −2.

• Demand is elastic between quantities 4 and 8.

Answer explanation

Correct. The price elasticity of demand decreases as price falls and quantity rises between point X and Y when moving down along the demand curve. That is, the demand becomes more inelastic along the linear demand curve as price decreases.

Which of the following would cause the supply of good X to become more elastic?

[Topic: Supply Elasticity]

• A short time frame for making production decisions

• Increased prices of inputs required to produce good X

• The ability to easily reallocate inputs to production of good X

• Greater availability of substitutes for good X

Answer explanation

Correct. Elasticity is a measure of responsiveness of quantity supplied to changes in price. The ability to reallocate resources easily allows producers to respond to changes in price quickly. One of the determinants of the elasticity of supply is the time period it takes to respond to changes in market conditions. The ability to easily reallocate inputs lessens the time period to adjust and respond. Thus, supply becomes more elastic.