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Utility and Supply and Demand Elasticity

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The exercises are about UTILITY and SUPPLY & DEMAND ELASTICITY.

1.What does a demand for enrollment in a specific college look like? What is on the axes? Is the demand price-elastic? Income-elastic? How could you find out?
3. How does total and marginal utility change as you spend more time surfing the Net?
4. If the price of gasoline doubled, how would consumption of (a) gasoline, (b) cars and (c) public transportation be affected?
7. Why are per capita advertising expenditures so high in the United States and so low in Brazil? (see world view, page 108).
8. According to news stories on pages 95 and 96, how does the price the price elasticity of demand differ for teenagers and adults? Why?
10. How has the Internet affected the price elasticity of demand for air travel? Use MS Excel software to complete a graph for question 10.

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1. The demand curve for a specific college would be downward sloping, reflecting the decreasing number of students as the cost of tuition increases. The axes would be cost on the y axis and number of students on the x axis. The slope of the demand curve would reflect the price elasticity of demand. We can calculate the price elasticity of demand simply by calculating the slope (percent change price/percent change in number of students).

Income elasticity of demand is the percentage change in quantity demanded divided by percentage change in income. Thus if income increases 10% and the number of people attending college increases by 10%, the income elasticity of demand is 20%/10% =2. This would be reflected as an outward shift in the demand curve for those with the higher incomes - more education would be purchased at all price levels. This is likely the case with college education, which is a luxury.

3. When you spend a short amount of time on the Internet, you derive a lot from it. You do the searches that are most interesting to you. After some time, though, your searches are less beneficial. There ...

Solution Summary

Demonstration of the effects of utility and elasticity on the consumption of various goods.

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Supply Curve Elasticity

1. A supply curve revels-
a) the highest price producers are willing to accept for each level of output b) the difference between quantity demanded and quantity supplied at each price c) the maximum level of output an industry can produce, regardless of price. d) the quantity of output that producers are willing to produce and sell at each possible market price
2. When the current price is above the market clearing level we would expect-
a) quantity demanded to exceed quantity supplied b) quantity supplied to exceed quantity demanded c) price to rise in future d) grater production to occur during the next period.
3. if the actual price were below the equilibrium price in the market for bread, a
a) a surplus would develop that cannot be eliminated over time b) shortage will develop, which market forces eliminate over time c) a surplus would develop that which market forces eliminate over time d) shortage will develop, which market forces would tend to exacerbate.
4. When the current price is above the equilibrium price, we would expect-
a) quantity demanded to exceed quantity supplied b) quantity supplied to exceed quantity demanded c) price to rise in future d) grater production to occur in the next period
5. From 1970 to 1993 the real price of college education increased and total enrollment increased. Which of the following would cause and unambiguous increase in the real price of college education?
a) A shift to the right to supply curve for college education and a shift to the right in the demand curve for college education b) A shift to the right to supply curve for college education and a shift to the left in the demand curve for college education c) A shift to the left to supply curve for college education and a shift to the right in the demand curve for college education d) A shift to the left to supply curve for college education and a shift to the left in the demand curve for college education
6. From 1970 to 1993 the real price eggs decreased and total annual consumption of eggs decreased. Which of the following would cause and unambiguous decrease in the real price of eggs?
a) A shift to the right to supply curve for eggs and a shift to the right in the demand curve for college education b) A shift to the right to supply curve for eggs and a shift to the left in the demand curve for eggs c) A shift to the left to supply curve for eggs and a shift to the right in the demand curve for eggs d) A shift to the left to supply curve for eggs and a shift to the left in the demand curve for eggs.
7. Gasoline and Automobiles are a.) are complements b) are both inferior goods c) are both more inelastic in demand in the long run that in the short run. d) have a positive cross price elasticity of demand

8. Which of the following would shift the demand curves for the new text books to the right?
a) a fall in the price of paper used in publishing text b) a fall in the price of equivalent used textbooks c) an increase in the number of student attending college. d) a fall in the price of new textbooks.
9. Which of the following will cause the demand curve for betakes CD shift to the right?
a). A increase in the price of disc b) A decrease in the income of people who like to buy the disc c) A increase price of a substitute CD. d) all of the above e) none of the above
10. Which of the following will not cause a shift to the right in the demand curve for beer? A) A change in price B) A change in income C) A change in price of a substitute D) A change in price of a complements E) None of the above
11. Which of the following will cause a shift to the right in the demand curve for Gasoline? I) A large increase of price in public transportation II) A large decrease in the price of Automobile III) A large reduction in the costs of producing gasoline
a) 1 only b) 2 only c) 1 and 2 only d) 2 and 3 only e) 1, 2 and 3
12. The income elasticity of demand is the
a) absolute change in the quantity demanded resulting from a one unit change in income b) Percent change quantity demanded resulting from the absolute change in income. c) Percent change quantity demanded resulting from the one percent change in income. d) Percent change in income resulting from a one percent change in quantity demanded. e) Percent change in income resulting from a one percent change in price.
13. Elasticity measures-
a) The slope of demand curve b) The inverse of the slope of demand curve c) the percentage change in one variable in response to a 1% change in quantity d) sensitivity of price to a change in quantity
14. A vertical demand curve is
a) Completely inelastic b) income elasticity c) cross-price elasticity d) cross-substitution elasticity
15. If two goods are substitutes, the cross price elasticity of demand
a) Negative b) Positive c) Zero d) Infinite

16. A freeze in brazils coffee growing regions will-
a) result in sharp increase in the price of coffee in the short run because demand and supply are highly inelastic b) result in sharp increase in the price of coffee in the short run because demand and supply are highly elastic c) result in sharp decrease in the price of coffee in the short run because demand is highly inelastic and supply are highly elastic d) result in little change in the price of coffee in the short run because supply in infinitely elastic.
17. The theory of consumer behavior is based on certain assumptions. It includes at least the assumptions that preferences are-
a) complete b) transitive c) intransitive d) a&b e) a&c
18. Which of the following is true about indifference curve where one commodity is bad?
a) It has a negative slop b) It has a positive slop c) It is horizontal d) It is vertical
Considering following three market basket-
Food Clothing
A 8 5
B 5 8
C 6 3
19. If preferences satisfy all four of the usual assumptions
a) A is on the same indifference curve as B b) B is on the same indifference curve as C c) A is preferred to B d) A is preferred to C e) Both A & B is correct
20. Which of the following cannot be true?
a) The consumer could be indifferent between A & B b) The consumer could be indifferent between B & C c) A & C could be the same indifference curve d) A & C must be on the same indifference curve
21. Assuming that food is measured in horizontal axis and clothing on vertical. If the price of food rises relative to that of clothing, the budget line will-
a) Become flatter b) Become steeper c) Shift outward d) Become steeper or flatter depending on the relationship between price and Income.
22. Which of the following will result in decrease in consumers purchasing power?
a) Decrease in consumer's income. b) an increase in the price of the good on the vertical axis c) an increase in the price of the good on the horizontal axis d) all of the above.
23. if Jill's MRS of popcorn for candy is 2 (Popcorn is in the horizontal axis), jill would willing to give up-
a) 2 but no more than 2, units of popcorn for an additional unit of candy. b) 2 but no more than 2, units of popcorn for an additional unit of popcorn c) 1 but no more than 1, units of popcorn for an additional 2 unit of candy d) 2 but no more than 2, units of popcorn for an additional 2 unit of candy
24. Pencils cell for 10 cents, Pens cell for 50 cents. Suppose jack whose preferences satisfy all of the usual assumptions, buys 5 pen and 1 pencil each semester, with this consumption bundle, his MRS of pencils for pens is 3, which of the following is true?
a. Jack could increase his utility by buying more pens and fewer pencils. b. Jack could increase his utility by buying more pencils and fewer pens. c. Jack could increase his utility by buying more pens and more pencils. d. Jack could increase his utility by buying fewer pens and fewer pencils. e. Jack is at the corner solution and is maximizing his utility.
25. An individual consumes only two goods. X & Y. Which of the following expressions represents the utility maximizing market basket?
a) MRSxy is at a maximum b) Px/Py= money income c) MRSxy= money income d) MRSxy= Px/Py e) all of the above
26. If prices and Income in a two-good society double, what will happen to budget line?
a) The intercepts of budget line will increase b) The intercepts of budget line will decrease c) The slope of budget line may increase or decrease c) insufficient information is given to determine what effect the change will have on the budget lien. e) there will be no effect in budget line.
27. The price of lemonade is $.50 and price of popcorn is $1.00. If fred has maximized his utility, by purchasing lemonade and popcorn, his marginal rate of substitution will be-
a) 2 lemonade for each person b) 1 lemonade for each person c) ½ lemonade for each person d) intermediate unless more information on Fred's marginal utilities is provided.
28. Which of the following is not necessarily true of a consumer who has maximized utility for two good X and Y
a) MRSxy= Px/Py b)MUx/MUy = Px/Py c) Px/Py= money income d) Px/Py= slope of indifference curve at the optimal choice e)MUx/Px=MUy/Py
29. When a person consumes two goods (A & B), the persons utility is maximized the budge is allocated such that-
a) The marginal Utility of A= The marginal Utility of B b) The marginal Utility of A* price of A= The marginal Utility of B* price of B c) The ratio of total utility of A to the price of A= The ratio of marginal utility of B to the price of A d) The ratio of marginal utility of A to the price of A= The ratio of marginal utility of B to the price of B
30. The Change in the Quantity demanded of resulting from a change in relative price with the level of satisfaction held constant is called the ____________ effect.
I. All Giffen goods are inferior goods. Ii. All inferior goods are Giffen goods
a) I and II are true b) I is true, II is false c) I is false, II is true d) I and II are false
31. For an Inferior good, the Income and substitution effects are-
a) Work Together b) Work against c) always cancel each other d) can work together or in position to each other upon their relative magnitudes.
32. The substitution effect of a price change for product X can be thought as the change in consumption of X associated with a change in-
a) the price of X with the level of real income held constant b) the price of X with the level of real income not considered c) the price of X with the prices of other good changing, by the same percentage as that for product X d) income, with prices of other good held constant.
33. Which of the following describes the Giffen good case? When the price of the good-
a) rise, the income effect is opposite the greater than the substitution effect , and consumption falls. b) falls, the income effect is in the same direction as the substitution effect, and consumption rises c) falls, the income effect is in the opposite direction as the substitution effect, and consumption falls d) falls, the income effect is in the opposite direction as the substitution effect, and consumption rises.
34. Use the following two statements in answering the question- I. For all Giffen goods the substitution effect is larger than the income effect II. For all inferior goods the substitution effect is larger than the income effect.
a. I & II are true b. I true, II false c. I false, II true d. I & II are false.
35. Assume Beer is a normal good and the price of beer rises, then the substitution effect results in the person buying ______ of the good and the good and the income effect results in the person buying ______ of the good.
a) more, more b)more, less c)less, more d)less, less
35. Assume Beer is a normal good and the price of beer falls, then the substitution effect results in the person buying ______ of the good and the good and the income effect results in the person buying ______ of the good.
a) more, more b)more, less c)less, more d)less, less

36. Good A is a Giffen good. If the price of good A were suddenly doubles, the income effect would cause the purchase of good A to increase by
a) more than double b)exactly double c) less than double d) any of the above e) none of the above.
37. For each situation illustrated which one fits with which?
a) Completeness b) Transitivity c) More is better d) Diminishing Marginal Rate of Substitution.
1. 2.

3. Middle one is 80 4.
100
60 80
100
5. 6.

38. For each of the following income elasticities of good X, indicate the classification of good (normal, superior), the sign of the income effect and whether IE is >, <, =.
Income Elasticity Classification Sign
a. = to 1.2 __________ +, -, 0, < ,>, =
b. = .8 __________ +, -, 0, < ,>, =
c. =0 __________ +, -, 0, < ,>, =
d. = -.2 __________ +, -, 0, < ,>, =
What is true of the following if good X has a demand curve with a positive slope?
Classification Sign
__________ +, -, 0, < ,>, =

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