# Consumer Econ – Flashcards

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question
You can drive to campus or take a bus. Driving costs you \$1/mile in gas and maintenance. If you live 2 miles from campus, and are a rational decision maker, what is your reservation price for a bus ticket?
\$2
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Most economists are against rent control because it
discourages the building of new apartments
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A hailstorm kills all of the wheat in Minnesota. What will happen to the price and quantity of wheat sold in the U.S.?
equilibrium price rises, equilibrium quantity falls
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Pizza and beer are complements. The price of beer increases. What happens to the market for pizza?
equilibrium price falls; equilibrium quantity falls
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You decide to go skiing this weekend. It costs \$50 for transportation, \$50 for lodging, \$30 for ski lift tickets. You are unemployed. What is the total cost of the ski weekend?
\$130
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Let demand be given by P=10. Let supply be given by P=Q. What is the equilibrium quantity?
5
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You decide to go skiing this weekend. It costs \$50 for transportation, \$50 for lodging \$30 for lift tickets and you could have earned \$100 as a waiter. What is the total cost of the ski weekend?
\$230
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A long hot summer has increased the demand for beer. At the same time a tax is placed on alcohol. What can we say about the equilibrium price and quantity of alcohol?
equilibrium prices rises; equilibrium quantity is unknown
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If the number of suppliers in the microcomputer industry increases, what would we expect to happen?
movement along the demand curve will occur
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The equilibrium price is the price
at which quantity supplied equals quantity demanded
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If the good is inferior, then an increase in income will cause the demand curve to
shift left
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If price and quantity are not at their equilibrium positions, then
it is possible to reallocate so that some people are better off without harming others
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If the State of MS decides to raise the drinking age to 25, what would happen to the demand for beer
the demand for beer will shift left
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The price in the market has fallen and so has the quantity. This could be happening because
income has fallen and this is a normal good
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Let demand be given by P=10-Q. Let supply be given by P=Q. What is the equilibrium price?
5
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If the price of PC's go down dramatically, what will happen in the market for Windows softwares?
The equilibrium price of softwares will go up because PCs and softwares are complements
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In town of Blackville, demand for typical one-bedroom apartment monthly rental is given by P=1225-1.5Q, and supply is P=125+0.5Q . If the city imposes a rent control of \$325/month, what will happen?
600 units of apartments will be demanded, but only 400 units will be supplied, causing a shortage of 200 units.
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Let demand be given by P=20-3Q and supply by P=5+2Q. Equilibrium quantity will be:
3
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A new discovery makes ink jet computer printers less expensive to produce. At the same time another type of computer printer, the laser printer, also becomes less expensive. What would you expect to happen to the equilibrium price and quantity of ink jet printers?
Equilibrium price will fall, but the effect on quantity is uncertain
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The price of peanut butter rises due to a blight on the peanut crop. Peanut butter and jelly are complements. What happens to the equilibrium quantity and price of jelly?
Equilibrium price falls, equilibrium quantity falls
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If you go to college, you need to spend: tuition \$5,000; books \$200; housing \$1,000; food \$1,000. Alternatively you could live on your own (at the same food and housing costs) and work to earn \$10,000. What is the total opportunity cost of going to school?
\$15,200
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If the Surgeon General announces that colas cause cancer then we would expect
the demand for cola will shift left
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You have rented a car for \$200. You are considering whether you should take this car for a 300-mile journey, which will cost you \$0.20 per mile (including gas). What is the cost of the journey?
\$60
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If you go to college, you will need to spend: tuition \$5,000; books \$200; housing \$1,000; food \$1,000. Suppose that you could live at home only at the cost of food \$1,000 and work to earn \$10,000. Studying and work are equally desirable in your mind. What is the total opportunity cost to you of going to school rather than working?
\$16,200
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If the benefits of X=\$50 and the price of X=\$50, then
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Let supply be given by Q=-7.5+0.5P and demand by Q=10-2P. What will be the equilibrium price in this market?
25
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My income rose and the price of good Y rose also. This means that my demand curve for good X shifted right
This statement will always be true if good Y is a substitute for X and X is a normal good
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Adam Smith in The Wealth of Nations argued
society works best when people act in their own interest
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If an airline overbooks it pays people who volunteer to leave the overbooked flight. This system may be better than drawing randomly from a hat the people who should miss the flight because:
those with the least to lose are the ones who miss the flight.
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We say economists are doing positive economics when they
look for regularities and principles in economic life that can help show how the economy works
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An example of a normative statement
Food stamps are a good way to help low-income people to afford food.
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A consumer is choosing between red wine and white wine. The price of red wine is 20 and the price of white wine is 10. If the marginal rate of substitution is 1, and if red wine is on the horizontal axis, then the consumer is buying:
too much red wine
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An increase in income with no changes in the price of either good will cause:
an outward shift of the budget line
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An increase in the price of one good will cause
an inward rotation of the budget line
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If food is on the vertical axis and shelter on the horizontal axis, then the equation for the budget line can be expressed as:
PSS + PFF = M.
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If the consumer's budget constraint is given by 10F+5S=100 where F is food and S is shelter, how much food can he buy if he purchases 2 units of shelter?
9
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If the consumer's budget constraint is given by 10F+5S=100 where F is food and S is shelter, what is the opportunity cost of food in terms of shelter?
5
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If the consumer's budget constraint is given by 4P+2B=50 where P is pizza and B is burgers, the following bundles of pizza and burger would be on the budget constraint:
P=2; B= 21
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Jane has 30 dollars to spend. She must spend it on some combination of frozen dinners and ice cream. Suppose the price of frozen dinners is \$2 and one serving of ice cream costs \$3. Which of the following represents her budget constraint correctly?
(2 * FROZEN_DINNER) + (3 * ICE_CREAM) ≤ 30
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Say a consumer is choosing between wine and cheese. The price of wine is 10 and the price of cheese is 5. If the marginal rate of substitution is 4, and if wine is on the horizontal axis and cheese is on the vertical axis then the consumer is purchasing
too much cheese
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Suppose price of food is \$5/lbs, and price of shelter is \$10/sqyd. If you have a weekly income of \$120, what is the opportunity cost of buying an additional square yard of shelter?
2 lbs of food
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Suppose price of food is 2, price of shelter is 4, and your income is 100. If food is on the vertical axis and shelter on the horizontal axis, then the equation for the budget line can be expressed as:
F= 50-25F
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Suppose the budget constraint is given by 20P + 5S =200, where P is pizza and S is sandwich. If the price of S and P increase by 10% each, then the budget line will shift:
down with the same slope.
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The graph of the budget line below has dollars on the vertical axis and food on the horizontal axis. Which statement is false?
The distance OA shows the amount of money spent on OD amount of food.
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The law of diminishing marginal utility
as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
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According to the rational choice model, cash grants are preferred to food stamps because:
they enhance consumer choice
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Given the budget of \$80, what quantities of books and movies will maximize Joe's level of satisfaction?
5 movies and 4 books
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If the consumer is willing to give up 3 units of food (vertical axis) in exchange for one unit of shelter (horizontal axis) and food is priced at 10 and shelter at 20, then the consumer is buying:
too much food for utility maximization
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The marginal benefit of a typical activity
decreases as you do more of the activity
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T/F When the price of good X (on the horizontal axis) falls and the price of good Y rises, the budget line gets steeper.
False
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What are the common mistakes in Cost-Benefit calculations?
-ignoring opportunity costs -failing to ignore sunk cost -average vs. marginal cost distinction
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Give an example of how consumers use the concept of reservation price in making consumption decisions.
the price at which a person would be indifferent between doing x and not doing x
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How is the circular flow of the economy related to the dual role of consumers?
-chart means for consumers is that consumers have dual roles in market economy -in the final goods market--provide expenditures, receive goods and services -in the factors market--provide inputs or factors of production (labor, capital), receive incomes
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What is the "law of demand" and what causes it? (2 reasons)
-inverse relationship between price and the quantity demanded -downward sloping demand curve Price increases-->Qd dec. Price decreases-->Qd inc. -other things being equal, consumer will buy less of a good at a high price than at a low price
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How does an increase (and decrease) in demand affect the equilibrium price and quantity sold in the market?
Price increases-->Qd dec. Price decreases-->Qd inc.
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How does an increase (and decrease) in supply affect the equilibrium price and quantity sold in the market?
Price inc-->Qs inc Price dec.-->Qs dec
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Give an example of price ceiling and discuss its goal and effect.
-hold inflation in check -keep purchase of certain item within reach of low income customers -a legal maximum on the price at which a good can be sold -rent control
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Give an example of price floor and discuss its goal and effect
-increase the incomes of those who sell the item -a legal minimum on the price at which a good can be sold -agricultural price support -minimum cage
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What was Adam Smith's position regarding consumer sovereignty?
-interests of free & self-seeking consumers can lead allocation of economic resources most efficiently -a strong opposition to "mercantilism" which is a strong central gov. exists that tends to favor the interests of merchants & manufacturers over the interests of consumers
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What are the positive and normative economic considerations?
Positive- about 'what is-concern with factual issues positive questions economics have better chances to provide clear answers Normative- about 'what should be-deals with ethical or moral issues economic cannot provide clear answers involves values-shows th
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Discuss how a consumer's budget constraint illustrates opportunity cost
-shows that consumers can only buy "affordable" bundles of goods that do not cost more than their income -slope= opp. cost
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How does a consumer's budget constraint reflect changes in income?
-income and prices define a consumer's budget constraint -when income is limited, the real cost of any single good or service is the value of the next preferred other goods and services that could have been purchased with the same amount of money -a change in the price of one good may change the entire allocation -some goods may be demanded more, while others may be demanded less
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Discuss two general assumptions about the properties of consumer utility.
-diminishing marginal utility -positive marginal utility
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Diminishing Marginal Utility
as you increase consumption of a product, you get less and less marginal utility from consuming each additional unit of that product ex//: all you can eat buffet
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What are the properties of indifference curves?
-have a negative slope (willing to give up some to get more of other goods) -further from the origin (0,0), preferred (the more, the better) -convex toward 0 (decreasing marginal utility -Indifference curves cannot cross
question
What is MRS?