Purdue University North Central

Economics 251

Review Questions - Chapter 5 - The Demand for Goods

(1) The law of diminishing marginal utility suggests that:

(a) people are willing to buy additional quantities of a good only if its price falls.

(b) people will substitute lower-priced goods for more expensive goods, ceteris paribus.

(c) price and quantity demanded are directly related.

(d) as marginal utility decreases, the willingness-to-pay increases.

(2) Which of the following is not held constant when considering the demand curve for pizza?

(a) Consumer incomes.

(b) The price of pizza.

(c) The price of spaghetti (a substitute).

(d) Expectations of higher prices for pizzas in the near future.

(3) Assume the price elasticity of demand for U.S. Frisbee Co. frisbees is -0.6. If the company increases the price of each frisbee from $6 to $8, the number of frisbees sold will:

(a) decrease by 17.1 percent.

(b) decrease by 33.1 percent.

(c) increase by 28.6 percent.

(d) increase by 17.1 percent.

(4) When the percentage change in quantity demanded is less than the percentage change in price, ceteris paribus:

(a) demand is elastic.

(b) demand is inelastic.

(c) demand is unitary elastic.

(d) elasticity is impossible to calculate.

(5) Suppose the quantity of U.S. automobiles demanded falls from 2.0 million to 1.5 million as a result of an average price increase from $10,000 to $15,000 per vehicle. The value of the price elasticity of demand is closest to:

(a) -0.14

(b) -0.71

(c) -1.00

(d) -1.40

(6) A demand curve is described as perfectly inelastic if:

(a) the same quantity is purchased regardless of price.

(b) the demand curve is horizontal.

(c) the demand curve has positive slope.

(d) None of the above are true.

(7) Which of the following wold be most likely to have a price-elasticity of demand between 0 and -1?

(a) An addictive drug.

(b) Vacation airline travel.

(c) Restaurant meals.

(d) New cars.

(8) Assume the price elasticity of demand for MC Pretzel Co. pretzels is -0.8. If the company increases the price of each bag of pretzels, total revenue will:

(a) decrease because fewer bags will be sold.

(b) increase because the company will be receiving more revenue per bag.

(c) increase because the percentage increase in the price is greater than the percentage decrease in the number of bags sold.

(d) be impossible to predict because we do not know the percentage change in price.

Complete the following table and use the information to answer Question (9) below.

Total Marginal

Quantity Consumed Utility Utility

1 25 25

2 --- 20

3 57 ---

$ 65 ---

(9) In the table, the marginal utility of the third unit is:

(a) 12

(b) 20

(c) 8

(d) 57

Complete the following table and use the information to answer Question (10) below. Assume that the price of cola is $2 per unit and the price of pretzels is $1 per unit.

Units of TU of MU of

Units of cola TU of cola MU of cola pretzels pretzels pretzels

1 40 40 1 30 30

2 --- 32 2 -- 20

3 96 24 3 66 16

4 112 --- 4 78 ---

5 124 --- 5 84 ---

(10) Referring to the table, suppose John has $4 to spend on cola and pretzels. What combination should he purchase in order to maximize his utility?

(a) 2 colas and 2 pretzels.

(b) no colas and 4 pretzels.

(c) 1 cola and 2 pretzels.

(d) 2 colas and no pretzels.