Question 1

Figure 10-1  
-Refer to Figure 10-1.Which of the following statements is true?

Accepted Answer

A)  Quantities Q0 and Q1 are the utility-maximizing quantities of hoagies at two different prices of hoagies. 
B)  Quantities Q0 and Q1 may not necessarily be the utility-maximizing quantities of hoagies at two different prices because we have no information on the consumer's budget or the price of other goods. 
C)  Quantity Q0 could be a utility-maximizing choice if the price is $5.75, but quantity Q1 may not be because we have no information on the marginal utility per dollar when price changes. 
D)  Quantities Q0 and Q1 are derived independently of the utility-maximizing model. 
A)  Quantities Q0 and Q1 are the utility-maximizing quantities of hoagies at two different prices of hoagies. 
B)  Quantities Q0 and Q1 may not necessarily be the utility-maximizing quantities of hoagies at two different prices because we have no information on the consumer's budget or the price of other goods. 
C)  Quantity Q0 could be a utility-maximizing choice if the price is $5.75, but quantity Q1 may not be because we have no information on the marginal utility per dollar when price changes. 
D)  Quantities Q0 and Q1 are derived independently of the utility-maximizing model. A

Question 2

Aisha and Debbie both purchase milk and bread at the same Quik Mart.They have different tastes for milk and bread and different incomes.They both buy some milk and some bread,but they buy considerably different quantities of the two goods.Which of the following statements is true,given that Aisha and Debbie are utility-maximizers?

Accepted Answer

A)  In equilibrium, their marginal rate of substitution between milk and bread is the same. 
B)  In equilibrium, their marginal rate of substitution between milk and bread is higher for the person with the higher income. 
C)  In equilibrium, the marginal rate of substitution between milk and bread is greater for the person who prefers milk more than bread. 
D)  No statement can be made about their respective marginal rates of substitution without their budget constraint/indifference curve diagrams. 
A)  In equilibrium, their marginal rate of substitution between milk and bread is the same. 
B)  In equilibrium, their marginal rate of substitution between milk and bread is higher for the person with the higher income. 
C)  In equilibrium, the marginal rate of substitution between milk and bread is greater for the person who prefers milk more than bread. 
D)  No statement can be made about their respective marginal rates of substitution without their budget constraint/indifference curve diagrams. A

Question 3

Utility is

Accepted Answer

A)  easily measured in units called utils. 
B)  subjective and difficult to measure. 
C)  the consumption of a quasi-public good like electricity or natural gas. 
D)  the production of a quasi-public good like electricity or natural gas. 
A)  easily measured in units called utils. 
B)  subjective and difficult to measure. 
C)  the consumption of a quasi-public good like electricity or natural gas. 
D)  the production of a quasi-public good like electricity or natural gas. B

Question 4

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions,yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions.Which of the following could explain this observation?

Accepted Answer

A)  People measure the value of a good in terms of its purchase price. 
B)  Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. 
C)  If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. 
D)  Sunk costs have a higher opportunity cost than costs that can be recovered. 
A)  People measure the value of a good in terms of its purchase price. 
B)  Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. 
C)  If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. 
D)  Sunk costs have a higher opportunity cost than costs that can be recovered.

Question 5

Many airlines have not reduced or eliminated fuel surcharges despite the price of oil dropping.A logical reason for this is that the decline in fuel prices

Accepted Answer

A)  shifted the supply curve for airline tickets to the left, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices did not decline. 
B)  shifted the supply curve for airline tickets to the right, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices still increased. 
C)  shifted the supply curve for airline tickets to the right, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices still increased. 
D)  shifted the supply curve for airline tickets to the left, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices did not decline. 
A)  shifted the supply curve for airline tickets to the left, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices did not decline. 
B)  shifted the supply curve for airline tickets to the right, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices still increased. 
C)  shifted the supply curve for airline tickets to the right, and at the same time an increase in demand for airline tickets shifted the demand curve to the right, so prices still increased. 
D)  shifted the supply curve for airline tickets to the left, and at the same time a decrease in demand for airline tickets shifted the demand curve to the left, so prices did not decline.

Question 6

A network externality refers to a situation in which the usefulness of a product decreases with the number of consumers who use it.

Accepted Answer

A) True 
 B)False

Question 7

Figure 10-1  
-Refer to Figure 10-1.When the price of hoagies increases from $5.00 to $5.75,quantity demanded decreases from Q1 to Q0.This change in quantity demanded is due to

Accepted Answer

A)  the price and output effects. 
B)  the income and substitution effects. 
C)  the fact that marginal willingness to pay falls. 
D)  the law of diminishing marginal utility. 
A)  the price and output effects. 
B)  the income and substitution effects. 
C)  the fact that marginal willingness to pay falls. 
D)  the law of diminishing marginal utility.

Question 8

Grace Makutsi finally bought a pair of blue shoes that she had been coveting for a long time.In less than a week she discovered that the shoes were uncomfortable.Grace went back to wearing her old pair and stashed away the new pair.When asked by her boss,Mme.Ramotswe why does she not simply give away the new pair,she said: "But I paid so much for them." Grace's behavior

Accepted Answer

A)  is rational: she should not discard a valuable item. 
B)  ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should give them away or not. 
C)  supports the endowment effect which states that ownership of an item makes it more valuable. 
D)  is rational because the more you pay for an item the more valuable it is. 
A)  is rational: she should not discard a valuable item. 
B)  ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should give them away or not. 
C)  supports the endowment effect which states that ownership of an item makes it more valuable. 
D)  is rational because the more you pay for an item the more valuable it is.

Question 9

If the price of lattes,a normal good you enjoy,falls,

Accepted Answer

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

Question 10

Economists have shown that when the ultimatum game experiment is carried out,both allocators and recipients act as if fairness is important.

Accepted Answer

A) True 
 B)False

Question 11

Identify the one statement that does not demonstrate how social effects influence consumer choice.

Accepted Answer

A)  Students in an Economics class are required to purchase a textbook assigned by the professor. 
B)  There is utility gained from consuming goods or services that others are consuming. 
C)  Some products that people consume are determined by the social popularity of the products. 
D)  Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience with their products which are then posted on the internet for others to see. 
A)  Students in an Economics class are required to purchase a textbook assigned by the professor. 
B)  There is utility gained from consuming goods or services that others are consuming. 
C)  Some products that people consume are determined by the social popularity of the products. 
D)  Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience with their products which are then posted on the internet for others to see.

Question 12

Why might network externalities result in products that contain inferior technologies?

Accepted Answer

Network externalities can create signifi

Question 13

Suppose the consumer's income increases while the prices of the goods remain constant.Then the

Accepted Answer

A)  budget constraint shifts inward parallel to the original budget constraint. 
B)  budget constraint shifts outward parallel to the original budget constraint. 
C)  indifference curves shift outward away from the origin. 
D)  indifference curves become flatter. 
A)  budget constraint shifts inward parallel to the original budget constraint. 
B)  budget constraint shifts outward parallel to the original budget constraint. 
C)  indifference curves shift outward away from the origin. 
D)  indifference curves become flatter.

Question 14

Each price-quantity combination on a consumer's demand curve shows the utility-maximizing quantity at the given price.

Accepted Answer

A) True 
 B)False

Question 15

Suppose Joe is maximizing total utility within his budget constraint.If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20,then,using the rule of equal marginal utility per dollar spent,the extra satisfaction received from the last shirt must be

Accepted Answer

A)  2,000 units of utility. 
B)  500 units of utility. 
C)  100 units of utility. 
D)  80 units of utility. 
A)  2,000 units of utility. 
B)  500 units of utility. 
C)  100 units of utility. 
D)  80 units of utility.

Question 16

Firms pay famous individuals to endorse their products because

Accepted Answer

A)  apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. 
B)  the firms are irrational and are wasting advertising expenditures. 
C)  famous people obviously know what are the best goods and services. 
D)  famous people only consume high quality products. 
A)  apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. 
B)  the firms are irrational and are wasting advertising expenditures. 
C)  famous people obviously know what are the best goods and services. 
D)  famous people only consume high quality products.

Question 17

The endowment effect suggests that that people

Accepted Answer

A)  have a strong attachment to their entitlement, regardless of whether they paid to acquire them. 
B)  have a strong sense of fairness. 
C)  are concerned about the welfare of others. 
D)  act in ways to distort market prices. 
A)  have a strong attachment to their entitlement, regardless of whether they paid to acquire them. 
B)  have a strong sense of fairness. 
C)  are concerned about the welfare of others. 
D)  act in ways to distort market prices.

Question 18

Consumers maximize total utility within their budget constraint by

Accepted Answer

A)  buying the cheapest goods they can find. 
B)  buying whatever they like the best. 
C)  buying the goods with the largest marginal utility per dollar spent. 
D)  spending the same dollar amount for each good. 
A)  buying the cheapest goods they can find. 
B)  buying whatever they like the best. 
C)  buying the goods with the largest marginal utility per dollar spent. 
D)  spending the same dollar amount for each good.

Question 19

The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior good.

Accepted Answer

A) True 
 B)False

Question 20

Consider the following hypothetical scenarios: Scenario A: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45.The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for $160 at another store,located about a 20-minute drive away.
Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45.The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store,located about a 20-minute drive away.
Based on standard economic theory,under which scenario would you make the 20-minute trip to the other store?

Accepted Answer

A)  Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial 
B)  Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) 
C)  in either scenario if I think a $15 savings is worth the 20-minute trip 
D)  in none of these scenarios if I think the $15 saving is not worth the 20-minute trip 
E)  C and D are correct answers. 
A)  Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial 
B)  Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) 
C)  in either scenario if I think a $15 savings is worth the 20-minute trip 
D)  in none of these scenarios if I think the $15 saving is not worth the 20-minute trip 
E)  C and D are correct answers.

Exam 10: Consumer Choice and Behavioral Economics

Figure 10-1 -Refer to Figure 10-1.Which of the following statements is true?

Utility is

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions,yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions.Which of the following could explain this observation?

Many airlines have not reduced or eliminated fuel surcharges despite the price of oil dropping.A logical reason for this is that the decline in fuel prices

A network externality refers to a situation in which the usefulness of a product decreases with the number of consumers who use it.

Figure 10-1 -Refer to Figure 10-1.When the price of hoagies increases from $5.00 to $5.75,quantity demanded decreases from Q1 to Q0.This change in quantity demanded is due to

If the price of lattes,a normal good you enjoy,falls,

Economists have shown that when the ultimatum game experiment is carried out,both allocators and recipients act as if fairness is important.

Identify the one statement that does not demonstrate how social effects influence consumer choice.

Why might network externalities result in products that contain inferior technologies?

Suppose the consumer's income increases while the prices of the goods remain constant.Then the

Each price-quantity combination on a consumer's demand curve shows the utility-maximizing quantity at the given price.

Firms pay famous individuals to endorse their products because

The endowment effect suggests that that people

Consumers maximize total utility within their budget constraint by

The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior good.

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

Filters

Figure 10-1 -Refer to Figure 10-1.When the price of hoagies increases from $5.00 to $5.75,quantity demanded decreases from Q₁ to Q₀.This change in quantity demanded is due to