Question 1

We can derive the market demand curve for gold earrings

Accepted Answer

A)  only if the tastes of all gold earring consumers are similar. 
B)  by adding horizontally the individual demand curves of each gold earring consumer. 
C)  by adding vertically the quantity demanded of each gold earring consumed at each price. 
D)  by adding the prices each gold earring consumer is willing to pay for each quantity. 
A)  only if the tastes of all gold earring consumers are similar. 
B)  by adding horizontally the individual demand curves of each gold earring consumer. 
C)  by adding vertically the quantity demanded of each gold earring consumed at each price. 
D)  by adding the prices each gold earring consumer is willing to pay for each quantity.

Question 2

Economists have noted that businesses of a certain type tend to congregate geographically, attracting workers with skills in those fields. This, in turn, lures more firms seeking employees with those skills. Some examples include commercial banking, software development, and the automobile industry. What mechanism is at work here? Briefly explain how the mechanism works to the advantage of employers and employees.

Accepted Answer

The mechanism at work is a network exter

Question 3

There are two conditions necessary for a consumer to maximize her utility. One is that the marginal utilities per dollar spent on each good and service consumed are equal. What is the other condition?

Accepted Answer

A)  Total spending on all goods and services must equal the amount available to be spent. 
B)  The consumer must be satisfied with the choices she makes. 
C)  The total spent on each good and service is the same. 
D)  The prices of each good and service consumed must not be too high. 
A)  Total spending on all goods and services must equal the amount available to be spent. 
B)  The consumer must be satisfied with the choices she makes. 
C)  The total spent on each good and service is the same. 
D)  The prices of each good and service consumed must not be too high.

Question 4

Many people leave their servers tips in restaurants, even when they are not likely to visit the restaurant again. This is evidence that

Accepted Answer

A)  people would rather pay for good service at an inexpensive restaurant than pay higher prices and receive poor service at an expensive restaurant. 
B)  people enjoy eating at restaurants more than eating at home. 
C)  people treat others fairly even if doing so makes them worse off financially. 
D)  there has been an improvement in the service people receive in restaurants over time, partly because the restaurant industry has become more competitive. 
A)  people would rather pay for good service at an inexpensive restaurant than pay higher prices and receive poor service at an expensive restaurant. 
B)  people enjoy eating at restaurants more than eating at home. 
C)  people treat others fairly even if doing so makes them worse off financially. 
D)  there has been an improvement in the service people receive in restaurants over time, partly because the restaurant industry has become more competitive.

Question 5

Marginal utility is

Accepted Answer

A)  the change in total utility divided by the price of the last unit of a good or service consumed. 
B)  the change in total utility a person receives from consuming an additional unit of a good or service. 
C)  the utility from consuming a given quantity of a good or service. 
D)  the decrease in total utility from consuming more and more units of a good or service. 
A)  the change in total utility divided by the price of the last unit of a good or service consumed. 
B)  the change in total utility a person receives from consuming an additional unit of a good or service. 
C)  the utility from consuming a given quantity of a good or service. 
D)  the decrease in total utility from consuming more and more units of a good or service.

Question 6

The average price of gasoline in your neighborhood is $3.53 per gallon. Your neighbor Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $3.46 per gallon However, she cautions you that there usually long lines at that station. Is her suggestion beneficial to you?

Accepted Answer

A)  Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial. 
B)  No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station. 
C)  Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to consume more of other goods. 
D)  No, my friend is misled; clearly, the lower priced gasoline must be of inferior quality and could damage vehicles. 
A)  Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial. 
B)  No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station. 
C)  Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to consume more of other goods. 
D)  No, my friend is misled; clearly, the lower priced gasoline must be of inferior quality and could damage vehicles.

Question 7

One reason that consumers and businesses might not act rationally is

Accepted Answer

A)  it is difficult to obtain enough information about the elasticities of demand and supply. 
B)  they may not realize their actions are inconsistent with their goals. 
C)  consumer tastes change constantly. 
D)  they do not always value fairness when they make choices. 
A)  it is difficult to obtain enough information about the elasticities of demand and supply. 
B)  they may not realize their actions are inconsistent with their goals. 
C)  consumer tastes change constantly. 
D)  they do not always value fairness when they make choices.

Question 8

Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions: Scenario A: "Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?"
Scenario B: "Imagine that you have decided to see a play where admission is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?"
As long as additional tickets are available, there's no meaningful difference between losing $10 in cash before buying a ticket, and losing the $10 ticket after buying it. In both cases, you are out $10. Yet, far more subjects (88 percent) in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend another $10 to see the play.
Which of the following is the best explanation for the results of the experiment?

Accepted Answer

A)  The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable, but this is not so in Scenario B. 
B)  In Scenario B, people had not anticipated spending an additional $10, so in effect the price of the ticket is $20 and not $10, whereas in Scenario A, the price of the ticket is still $10. 
C)  In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket, whereas in Scenario B, they do not make the connection between the lost $10 bill and the play. 
D)  The net benefit derived from watching the play is lower in Scenario A, where the effective cost is $20 compared to the net benefit in Scenario B. 
A)  The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable, but this is not so in Scenario B. 
B)  In Scenario B, people had not anticipated spending an additional $10, so in effect the price of the ticket is $20 and not $10, whereas in Scenario A, the price of the ticket is still $10. 
C)  In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket, whereas in Scenario B, they do not make the connection between the lost $10 bill and the play. 
D)  The net benefit derived from watching the play is lower in Scenario A, where the effective cost is $20 compared to the net benefit in Scenario B.

Question 9

What is the common feature displayed by the following items? a. eating in a newly opened "fusion" cuisine restaurant
B. attending a Red Sox game in Fenway Park
C. wearing Lucky Brand designer jeans

Accepted Answer

A)  They are all highly inelastic goods. 
B)  The consumption of these goods takes place privately. 
C)  The consumption of these goods takes place publicly. 
D)  They tend to be consumed by better educated people. 
A)  They are all highly inelastic goods. 
B)  The consumption of these goods takes place privately. 
C)  The consumption of these goods takes place publicly. 
D)  They tend to be consumed by better educated people.

Question 10

The satisfaction a person receives from consuming goods and services is called

Accepted Answer

A)  contentment. 
B)  psychic income. 
C)  wealth. 
D)  utility. 
A)  contentment. 
B)  psychic income. 
C)  wealth. 
D)  utility.

Question 11

Article Summary
The article describes three key ways startup companies can get the most benefit from celebrity endorsements. One way is choosing a celebrity that can bring credibility to the company and then incorporating the celebrity into the company's marketing strategy. Second, get public relations value from the celebrity by offering exclusive interviews, contests, and photos and videos of the celebrity with the product. Finally, make sure to choose a celebrity who will represent the product at all times, giving the product maximum exposure.
Source: Kevin Tighe II, "3 Ways Startups Can Turn Celebrity Endorsements Into Big Gains," Forbes, March 8, 2013.
-Refer to the Article Summary. One explanation for the increase in product sales because of celebrity endorsements is that people seem to receive ________ from goods they believe are popular.

Accepted Answer

A)  more utility 
B)  diminishing utility 
C)  greater network externalities 
D)  increased path dependency 
A)  more utility 
B)  diminishing utility 
C)  greater network externalities 
D)  increased path dependency

Question 12

All but one of the following have been suggested by some economists as possible consequences of path dependency and switching costs. Which of the following is not a possible consequence of path dependency and switching costs?

Accepted Answer

A)  Consumers may get locked into using products with inferior technology. 
B)  market failure 
C)  diseconomies of scale 
D)  Government intervention may be necessary in affected markets in order to improve economic efficiency. 
A)  Consumers may get locked into using products with inferior technology. 
B)  market failure 
C)  diseconomies of scale 
D)  Government intervention may be necessary in affected markets in order to improve economic efficiency.

Question 13

Farah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a loaf and the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC0. Put bread on the horizontal axis and chicken on the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of chicken. On the same graph you drew in part (a), draw an indifference curve to identify her optimal bundle. Label this bundle "E."
c. Is her budget exhausted? Verify your answer.
d. Now suppose Farah's income falls to so that she can now devote $80 to the two goods. Prices however remain unchanged. In the same diagram, graph her new budget constraint and label it BC1. Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your answer.
f. What must happen to her total utility following the decrease in her income?

Accepted Answer

a. See the figure below
b. See the figur

Question 14

Under J.C. Penney's everyday low pricing policy, the everyday low prices

Accepted Answer

A)  ended up being the highest prices ever charged by the company. 
B)  were always lower than the sale prices under the previous policy. 
C)  were not actually charged every day, but only once a month during half-off sales. 
D)  ended up being higher than the sale prices under the previous pricing policy. 
A)  ended up being the highest prices ever charged by the company. 
B)  were always lower than the sale prices under the previous policy. 
C)  were not actually charged every day, but only once a month during half-off sales. 
D)  ended up being higher than the sale prices under the previous pricing policy.

Question 15

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the highest point on his indifference curve.

Accepted Answer

A) True 
 B)False

Question 16

Table 10-6
   Table 10-6 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1.
-Refer to Table 10-6. If Jay can eat all the burgers he wants for free, how many burgers will he consume?

Accepted Answer

A)  7 burgers 
B)  6 burgers 
C)  5 burgers 
D)  3 burgers 
A)  7 burgers 
B)  6 burgers 
C)  5 burgers 
D)  3 burgers

Question 17

The amount of income a consumer has to spend on goods and services is known as

Accepted Answer

A)  purchasing power. 
B)  effective demand. 
C)  a budget constraint. 
D)  wealth. 
A)  purchasing power. 
B)  effective demand. 
C)  a budget constraint. 
D)  wealth.

Question 18

If the price of muffins, a normal good you enjoy, rises,

Accepted Answer

A)  the income and substitution effects offset each other, but the price effect leads you to buy fewer muffins. 
B)  both the income and substitution effects lead you to buy fewer muffins. 
C)  the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
D)  the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
A)  the income and substitution effects offset each other, but the price effect leads you to buy fewer muffins. 
B)  both the income and substitution effects lead you to buy fewer muffins. 
C)  the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
D)  the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased.

Question 19

A curve that shows combinations of consumption bundles that give a consumer the same utility is called

Accepted Answer

A)  a utility curve. 
B)  an indifference curve. 
C)  a preference curve. 
D)  a demand curve. 
A)  a utility curve. 
B)  an indifference curve. 
C)  a preference curve. 
D)  a demand curve.

Question 20

Table 10-3
  
-Refer to Table 10-3. The table above shows Lee's marginal utility from consuming ice cream cones and cans of Lime Fizz Soda. Select the phrase that completes the following statement. "We can determine the number of ice cream cones and cans of Lime Fizz Soda Lee should consume to maximize his utility

Accepted Answer

A)  if we know what Lee's income is." 
B)  if we know what Lee's income is and the price of an ice cream cone and the price of a can Lime Fizz Soda." 
C)  by adding up the marginal utilities for ice cream cones and Lime Fizz Soda." 
D)  if we know the values of the marginal utility per dollar for ice cream cones and Lime Fizz Soda." 
A)  if we know what Lee's income is." 
B)  if we know what Lee's income is and the price of an ice cream cone and the price of a can Lime Fizz Soda." 
C)  by adding up the marginal utilities for ice cream cones and Lime Fizz Soda." 
D)  if we know the values of the marginal utility per dollar for ice cream cones and Lime Fizz Soda."

Exam 10: Consumer Choice and Behavioral Economics

We can derive the market demand curve for gold earrings

There are two conditions necessary for a consumer to maximize her utility. One is that the marginal utilities per dollar spent on each good and service consumed are equal. What is the other condition?

Many people leave their servers tips in restaurants, even when they are not likely to visit the restaurant again. This is evidence that

Marginal utility is

One reason that consumers and businesses might not act rationally is

What is the common feature displayed by the following items? a. eating in a newly opened "fusion" cuisine restaurant B. attending a Red Sox game in Fenway Park C. wearing Lucky Brand designer jeans

The satisfaction a person receives from consuming goods and services is called

All but one of the following have been suggested by some economists as possible consequences of path dependency and switching costs. Which of the following is not a possible consequence of path dependency and switching costs?

Under J.C. Penney's everyday low pricing policy, the everyday low prices

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the highest point on his indifference curve.

Table 10-6 Table 10-6 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1. -Refer to Table 10-6. If Jay can eat all the burgers he wants for free, how many burgers will he consume?

The amount of income a consumer has to spend on goods and services is known as

If the price of muffins, a normal good you enjoy, rises,

A curve that shows combinations of consumption bundles that give a consumer the same utility is called

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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