- A buyer has purchased three units of good X. The marginal benefit of the fourth unit of X exceeds the marginal cost of the fourth unit of good X. Which of the following reasons explains why the buyer should purchase the fourth unit?
I. The marginal net benefit of the fourth unit is positive.
II. Buying the fourth unit will increase total benefits by more than total costs.
III. Buying the fourth unit will increase total benefits and decrease total costs.
a) I only
b) I and II only
c) II only
d) I, II, III
- According to marginal analysis, optimal decision-making involves:
a) Taking actions whenever the marginal benefit is positive.
b) Taking actions only if the marginal cost is zero.
c) Taking actions whenever the marginal benefit exceeds the marginal cost.
d) All of the above.
The following TWO questions refer to an individual’s demand curve diagram, illustrated below.
- If the price of this good is $1 per unit, what will be the quantity demanded?
a) 5.
b) 10.
c) 15.
d) 20.
- What are the TOTAL benefits to this individual if she consumes 10 units of the good? a) $5.
b) $10.
c) $20.
d) $30. - The demand curve for a good is derived from the:
a) Marginal cost of the good.
b) Marginal benefit of the good.
c) Marginal benefits of the good minus marginal costs of the good.
d) Production Possibilities Frontier
- Which of the following statements about demand curves is TRUE?
I. The “Law of Demand” holds if a consumer’s marginal benefit is lower at higher quantities consumed than it is at lower quantities consumed.
II. If the consumer’s marginal benefit is the same no matter what quantity is consumed, then her demand curve will be vertical.
III. All else equal, the marginal benefit of consuming a normal good will be higher for richer consumers than for poorer consumers.
a) III only.
b) I and II only.
c) I and III only.
d) I only.
The following FOUR questions refer to the diagram below, which illustrates a consumer’s demand curve for a good.
- If the price of this good is $30, what quantity will be demanded?
a) 5 units.
b) 10 units.
c) 15 units.
d) 20 units.
- If the price of this good is $20, what quantity will be demanded?
a) 5 units.
b) 10 units.
c) 15 units.
d) 20 units.
- If the price of this good is $20, what will consumer surplus equal? a) $100.
b) $200.
c) $300
d) $400. - If the price of this good falls from $30 to $20, but the consumer is prohibited from buying more than 5 units of the good, by how much will consumer surplus increase?
a) $100.
b) $75.
c) $50
d) $25.
Exercises 3.3
- Which of the following statements about demand curves is TRUE?
a) If price falls and quantity demanded increases, this is represented by a movement along a given demand curve.
b) If price falls and quantity demanded increases, this is represented by a shift of the demand curve.
c) If price falls and quantity demanded increases, this can be represented by either a movement along a given demand curve, or a shift of the demand curve.
d) None of the above are true.
- Which of the following is NOT a determinant of the demand for good X?
a) The income of consumers who buy good X.
b) The cost of labor used to produce good X.
c) The price of good Y, a complement to X.
d) The number of buyers of good X.
- Which of the following will result in a DECREASE in demand (i.e., a leftward shift of the demand curve)?
a) An increase in income, if the good is normal.
b) A decrease in the price of a complement to the good.
c) An increase in the price of a substitute for the good.
d) None of the above.
- Suppose that my daily marginal benefit from drinking coffee increases by $2 per cup. Which of the following represents the effect of this on my coffee demand curve?
- Which of the following is NOT a determinant of the demand for good X?
a) The cost of labor used to produce good X.
b) The price of good X.
c) The income of consumers who buy good X.
d) The price of good Y, which is a substitute for good X.
- Which of the following IS a determinant of the demand for good X?
a) The income of consumers who buy good X.
b) The cost of labor used to produce good X.
c) The supply of good X.
d) The number of sellers of good X.
- A decrease in quantity demanded is, graphically, represented by:
a) A leftward shift in the demand curve.
b) A rightward shift in the demand curve.
c) A movement up and to the left along a demand curve.
d) A movement down and to the right along a demand curve.
- Suppose goods X and Y are substitutes. Which of the following is TRUE?
a) An increase in the price of X will result in a decrease in the equilibrium price of Y.
b) An decrease in the price of X will result in an increase in the equilibrium quantity of Y.
c) An increase in the price of X will result in an increase in the equilibrium quantity of Y.
d) More than one of the above is true.
- If cookies are a normal good and incomes increase, we would expect:
a) An increase in equilibrium price and a decrease in equilibrium quantity.
b) A decrease in equilibrium price and an increase in equilibrium quantity.
c) A decrease in equilibrium price and equilibrium quantity.
d) An increase in equilibrium price and equilibrium quantity.
- A decrease in demand is, graphically, represented by:
a) A leftward shift in the demand curve.
b) A rightward shift in the demand curve.
c) A movement up and to the left along a demand curve.
d) A movement down and to the right along a demand curve.
- The diagram below illustrates 3 possible demand curves for coconuts.
Suppose that coconuts and pineapples are substitutes. If the price of pineapples increases, which of the following movements will represent the effect of this in the market for coconuts?
a) A to C.
b) A to B.
c) B to A.
d) B to E.
The following TWO questions refer to the diagram below.
- If the price of this good is $20, what will be the quantity demanded? a) 10.
b) 20.
c) 30.
d) 40. - If the price of this good is $60, what will consumer surplus equal? a) $50.
b) $100.
c) $150.
d) $200. - The following question refers to the diagram below, which illustrates an individual’s demand curve for a good.
If the price of this good falls from P1 to P2, then consumer surplus will by areas .
a) increase; B+D.
b) decrease; B+D.
c) increase; A+B+D.
d) decrease; A.
- Consider the diagram below.
At the equilibrium in this market, which area represents CONSUMER surplus?
a) There is no consumer surplus.
b) Area w.
c) Area x + y.
d) Area w + y.
- Which of the following CANNOT result in a shift of the demand curve for a good?
a) A change in consumers’ incomes.
b) A change in the price of the good.
c) A change in the price of a complement to the good.
d) All of the above will shift the demand curve.
- Suppose the price of good X increases. If X and Y are substitutes, then, in the market for good Y, we would expect:
a) An increase in both the equilibrium price and quantity.
b) A decrease in the equilibrium price and an increase in the equilibrium quantity.
c) An increase in the equilibrium price and a decrease in the equilibrium quantity.
d) A decrease in both the equilibrium price and quantity.
- If coffee and milk are complements, then which of the following will occur if the price of coffee increases?
a) The quantity of coffee demanded will increase.
b) The quantity of coffee supplied will decrease.
c) The demand for milk will increase.
d) The demand for milk will decrease.
- Consumer surplus is equal to:
a) Revenue received for a good minus that good’s cost of production.
b) The amount of money a consumer is willing to pay for a good.
c) The opportunity cost of a good.
d) None of the above.
Summary Revision
demand
a schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period.
demand schedule
(see demand)
law of demand
the principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.
diminishing marginal utility
the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.
income effect
a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
substitution effect
(1)a change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product’s price.(2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its outputs
demand curve
a curve illustrating demand.
determinants of demand
factors other than price that determine the quantities demanded of a good or service
normal good
a good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
inferior good
a good or service whose consumption declines as income rises (and conversely), price remaining constant
substitute goods
products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
complementary goods
products and services that are used together. When the price of one falls, the demand for the other increases (and conversely)
change in demand
a change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right.
change in quantity demanded
a change in the amount of a product that consumers are willing and able to purchase because of a change in the product’s price.
supply
a schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.
supply schedule
(see supply)
law of supply
the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
supply curve
a curve illustrating supply
determinants of supply
factors other than price that determine the quantities supplied of a good or service.
change in supply
a change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right.
change in quantity supplied
a change in the amount of a product that producers offer for sale because of a change in the product’s price
equilibrium price
the price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for the price to rise or fall.
equilibrium quantity
(1)the quantity demanded and supplied at the equilibrium price in a competitive market.(2) the profit-maximizing output of a firm.
surplus
the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.
shortage
the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
productive efficiency
the production of a good in the least costly way; occurs when a production takes place at the output at which average total cost is a minimum and marginal product per dollar’s worth of input is the same for all inputs.
allocative efficiency
the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized
price ceiling
a legally established maximum price for a good or service.
price floor
a legally determined minimum price above the equilibrium price.
market
a group of buyers and sellers of a particular good or service
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
perfectly competitive market
a market in which the goods being offered for sale are all the same and the buyers and sellers are so numerous that no single buyer or seller can influence the market price
monopoly
a market in which there is only one seller and that seller sets the price
oligopoly
a market in which there are a few sellers who don’t always compete aggressively
monopolistacally competitive
a market that contains many sellers who have the ability to set the price for their own product because each offers a slightly different product
quantity demanded
the amount of the good that buyers are willing and able to purchase
law of demand
the claim that the quantity demanded of a good falls when the price of the good rises
demand schedule
a table that shows the relationship between price of a good and quantity demanded
demand curve
a graph of the relationship between the price of a good and the quantity demanded
market demand
the sum of all the individual demands for a particular good or service that is found by adding the individual demands horizontally
income, prices of related goods, taste, expectations, number of buyers
variables that shift the demand curve
normal good
a good for which an increase in income leads to an increase in demand
inferior good
a good for which a decrease in income leads to an increase in demand for this type of good (ex: bus tickets)
substitutes
two goods for which an increase in the price of one leads to a decrease in demand for the other (ex: hot dogs and hamburgers)
compliments
two goods for which a decrease in the price of one leads to an increase in demand for the other (ex: peanut butter and jelly)
