CHAPTER 4CONSUMER DEMAND

MULTIPLE CHOICE 1. If two services provide the same amount of satisfaction or utility, the consumer is said to display: a. constant marginal utility. b. indifference. c. cardinal utility. d. ordinal utility.

2. When preferences are transitive, consumers are able to: a. understand how much more one product is preferred over another product. b. rank order the desirability of various goods and services. c. need not know that one product is preferred to another product. d. understand how much less preferred one product is versus another product.

3. A utility function is: a. additive, by definition. b. a descriptive statement that relates satisfaction or well-being to the consumption of goods and services. c. multiplicative, by definition. d. can be neither additive nor multiplicative.

4. The utility derived from consumption is: a. tangible. b. revealed through purchase decisions for goods and services. c. measured directly. d. inversely related to the number of market baskets considered.

5. All combinations of goods and services that provide the same utility are identified by the: a. law of diminishing marginal utility. b. law of constant marginal utility. c. law of increasing marginal utility. d. indifference curve.

6. The increase in overall consumption made possible by a price cut is the: a. income effect. b. substitution effect. c. income and substitution effect. d. consumption effect.

7. A utility function is a descriptive statement that relates total utility to:

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a. b. c. d.

income. the production of goods and services. the consumption of goods and services. prices.

8. Holding consumption of other goods and services constant: a. average utility tends to rise as consumption increases within a given time interval. b. marginal utility tends to diminish as consumption increases within a given time interval. c. marginal utility tends to rise as consumption increases within a given time interval. d. marginal utility tends to hold constant as consumption increases within a given time interval.

9. If the marginal utility derived from consuming cheeseburgers tends to fall, the cost of each marginal unit of satisfaction will: a. fall when prices are held constant. b. rise when prices are held constant. c. stay the same if prices are held constant. d. fall if prices are allowed to rise.

10. According to the law of diminishing marginal utility: a. as the consumption of a given product rises, the added benefit eventually diminishes. b. as the production cost for a given product rises, the added benefit eventually diminishes. c. the demand curve for some products is upward-sloping. d. as the price of a given product rises, the added benefit eventually diminishes.

11. Given limited budgets, consumers obtain the most satisfaction if they purchase goods and services that: a. provide the highest level of marginal utility. b. provide the highest level of total utility. c. provide the highest level of marginal utility per dollar spent. d. cost the least.

12. An indifference curve is a set of market baskets that: a. provide the same utility. b. contain the same goods. c. have identical marginal rates of substitution. d. can be obtained for the same cost.

13. An increase in the quantity purchased following a price cut is: a. unrelated to the law of diminishing marginal utility. b. inconsistent with the law of diminishing marginal utility. c. inconsistent with utility-maximizing behavior. d. consistent with the law of diminishing marginal utility.
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14. The marginal rate of substitution is always equal to: a. minus one times the ratio of marginal utilities for each product. b. the marginal utility of either product. c. the total utility of either product. d. the slope of the budget constraint.

15. If the quantity of X is measured on the horizontal axis and the quantity of Y is measured on the vertical axis, the slope of the budget constraint will decrease if the: a. price of X decreases. b. price of Y decreases. c. marginal utility of X decreases. d. budget decreases.

16. Income and substitution effects explain change in the quantity of a good consumed that result from a change in: a. consumer preferences. b. price of other goods. c. income. d. price.

17. The change to a new indifference curve following a rise in aggregate consumption caused by a price cut is: a. a price effect. b. a substitution effect. c. a consumption effect. d. an income effect.

18. The movement along an indifference curve reflecting the substitution of cheaper products for more expensive ones is : a. utility effect. b. an income effect. c. a substitution effect. d. supply effect.

19. A consumer will obtain the maximum level of utility if: a. PX = MUX and PY = MUY b. B = PXX + PYY c. MUX/MUY = PX/PY d. MRS = -MUX/MUY

20. The demand for a product tends to be inelastic if: a. it is expensive.

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b. consumers are quick to respond to price changes. c. it has many substitutes. d. a small proportion of consumer's income is spent on the good.

21. Perfect substitutes have: a. L-shaped indifference curves. b. straight-line indifference curves. c. indifference curves that are concave to the origin. d. indifference curves that are convex to the origin.

22. Because moviegoers like to consume buttered popcorn and soda at the theater, movies, buttered popcorn and soda are all: a. normal goods. b. substitutes. c. complements. d. independent goods.

23. Holding all else constant, a given percentage increase in the price of X and Y will cause the budget constraint to: a. shift outward in a parallel manner. b. move inward along the X-axis only while maintaining a fixed Y-intercept. c. shift inward in a parallel manner. d. move outward along the Y-axis only while maintaining a fixed X-intercept.

24. Holding all else equal, an increase in the relative price of X will cause the budget constraint to: a. move inward along the X-axis only while maintaining a fixed Y-intercept. b. become more steeply sloped. c. move outward along the X-axis only while maintaining a fixed Y-intercept. d. move outward along the Y-axis only while maintaining a fixed X-intercept.

25. The consumer surplus concept cannot be used to explain: a. two-part pricing. b. discounts for wholesale buyers. c. bundle pricing. d. how the price charged might exceed the marginal benefit from consumption.

PROBLEM 1. Consumer Preferences. Indicate whether each of the following statements is true or false. Explain why. A. According to the more is better principle, all goods and services are desirable in the sense of being able to satisfy consumer wants.
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B.

When preferences are complete, consumers know how much a given good or service is preferred compared to another good or service. The nonsatiation principle dictates that each incremental unit of consumption causes marginal utility to rise.

C.

D. If two services provide the same amount of satisfaction or utility, the consumer is said to display indifference between the two. E. The consumer's understanding of cardinal utility makes possible a rank ordering of preferred goods and services.

2. Utility Theory. Determine whether each of the following statements is true or false. Explain why. A. According to the theory of consumer behavior, more is not always better. B. Consumers must know how much one product is preferred over another in order to make informed consumption decisions. A utility function is a descriptive statement that relates satisfaction or well-being to the consumption of goods and services.

C.

D. The nonsatiation principle is specific to a given time and place. E. Total utility measures the consumer's overall level of satisfaction derived from consumption activities

3. Indifference Curves. Confirm that each of the following statements is true or false. Explain why. A. Intersecting indifference curves would reflect a violation of the "more is better" principle. B. C. Indifference curves must have positive slope. Higher indifference curves are better.

D. The law of diminishing marginal utility gives indifference curves a bowed outward, or convex to the origin, appearance E. Indifference curves represents all market baskets that provide a given consumer the same amount of utility or satisfaction.

4. Substitutes and Complements. Determine whether each of the following statements is true or false. Indicate why. A. Substitutes are goods and services that become more desirable when consumed together.
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B. C.

Complements are goods and services that can be used to fulfill a similar need or desire. When goods and service can be freely but imperfectly substituted, indifference curves have a U-shape.

D. Perfect substitutes are goods and services that satisfy the same need or desire and have a L-shaped appearance.. E. Perfect complements are goods and services consumed together in the same combination and have a straight-line appearance.

5. Consumer Surplus. Explain why each of the following statements is true or false. A. Consumer surplus exists if an individual consumer is able to buy something for less than the maximum amount they are willing to pay. B. Consumer surplus is the value of purchased goods and services and equals the amount paid to sellers. A firm can enhance profits by charging each customer a per-unit fee equal to marginal cost, plus a fixed fee equal to the amount of consumer surplus generated at that per-unit fee.

C.

D. The optimal bundle price is a single lump sum amount equal to the total area under the demand curve at that point. E. If exact information about the value of each individual product for each individual consumer was available, the firm could earn maximum profits by precisely tying the price charged to the marginal value derived by each customer.

6. Consumer Choice. Indicate whether each of the following statements is true or false, and defend your answer. A. The best feasible market basket combination always lies below the budget line. B. If consumers derive twice as much satisfaction from the consumption of goods as from the consumption of services, then consumers would be willing to pay twice the price for goods as opposed to services. If a given consumer consistently chooses a specific market basket over another market basket, and if the chosen market basket is cheaper that the alternative, then the consumer has a revealed preference for the chosen market basket.

C.

D. The marginal rate of substitution, is simply the change in consumption of Y necessary to offset a given change in the consumption of X if the consumer's overall level of utility is to remain constant. E. By connecting all points of tangency between budget constraints and indifference curves, a consumption path is identified.

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7. Optimal Consumption. A. Complete the following table that describes the demand for goods: Total Utility 50 90 120 140 150 Marginal Utility Price/Marginal Utility

Price $100 90 80 70 60 B. C.

Units 1 2 3 4 5

Explain your answer to part A. What is the optimal level of goods consumption if the marginal utility derived from the consumption of services costs $3 per util?

8. Optimal Consumption. A. Complete the following table that describes the demand for services: Total Utility 125 225 300 350 375 Marginal Utility Price/Marginal Utility

Price $125 115 105 95 85 B. C.

Units 1 2 3 4 5

Explain your answer to part A. What is the optimal level of services consumption if the marginal utility derived from the consumption of goods costs $2 per util?

9. Optimal Consumption. The following table describes the demand for tickets to the opera, during the two-week season. Total Utility 100 180 240 280 300 Marginal Utility Price/Marginal Utility

Price Tickets $50 1 40 2 30 3 20 4 10 5

A. Complete the table.

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B. C.

Explain your answer to part A. What is the optimal level of opera consumption if the marginal utility derived from the consumption of movie tickets during the same two-week period costs $0.25 per util?

10. Demand Curves. Seth MacFarlane is an ardent movie fan. The following table shows the relation between the number of movies MacFarlane attends per month and the total utility derived from movie consumption: Number of Movies per Month 1 2 3 4 5

Total Utility 100 175 225 250 250

A. Construct a table showing MacFarlane's marginal utility derived from movie consumption. B. At an average movie ticket price of $10, MacFarlane is only able to justify three movies per month. Calculate the cost per unit of marginal utility derived from movie consumption at this activity level. If the cost-marginal utility tradeoff found in part B represents the most MacFarlane is willing to pay for movie consumption, calculate the prices at which MacFarlane would attend two, three, four, and five movies per month.

C.

D. Plot MacFarlane's movie demand curve.

11. Demand Curves. Meg Griffin enjoys chocolate candy. The following table shows the relation between the pounds of chocolates consumed per month and the total utility derived from consumption: Pounds of Chocolate per Month 1 2 3 4 5

Total Utility 200 350 450 500 500

A. Construct a table showing Griffin's marginal utility derived from chocolates consumption. B. At an average chocolates price of $10 per pound, Griffin is able to justify consumption of four pounds of chocolates per month. Calculate the cost per unit of marginal utility derived from chocolates consumption at this activity level. If the cost-marginal utility tradeoff found in part B represents the most Griffin is willing to
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C.

pay for chocolates consumption, calculate the prices of which Griffin would eat one, two, three, four, and five pounds per month. D. Plot Griffin's chocolates demand curve.

12. Optimal Expenditure. Consider the following data: Goods (G) Total Units Utility 1 150 2 285 3 405 4 480 5 525 Services (S) Total Units Utility 1 95 2 185 3 270 4 345 5 400

A. Construct a table showing the marginal utility derived from the consumption of goods and services. Also show the trend in marginal utility per dollar spent (the MU/P ratio) if PG = $30 and PS = $20. B. If two units of goods are consumed, what level of services consumption could also be justified? If four units of services are consumed, what level of goods consumption could also be justified?

C.

D. What is the optimal allocation of a $150 budget? Explain.

13. Optimal Expenditure. Consider the following data: Cola (C) Orange Juice (O) 12 oz Total 12 oz Total Cans Utility Cans Utility 1 200 1 500 2 350 2 700 3 450 3 800 4 525 4 850 5 550 5 875 A. Construct a table showing the marginal utility derived from the consumption of cola and orange juice. Also show the trend in marginal utility per dollar spent (the MU/P ratio) if PC = $0.50 and PO = $1. B. If two cans of orange juice are consumed, what level of cola consumption could also be justified? If five cans of cola are consumed, what level of juice consumption could also be justified?

C.

D. What is the optimal allocation of a $3.50 budget? Explain.

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14. Revealed Preference. Chris Griffin is a big fan of Hard Rock (Heavy Metal). With a $400 budget to spend on live music during the summer, it is easy to calculate the number of shows that Griffin can afford to attend at various ticket prices. Ticket Price $50 40 25 20 10 Number of Shows 8 10 16 20 40

A. Is this sufficient information to derive Griffin's demand schedule? Why or why not? B. After attending three shows for $25 each, Griffin decides to spend $125 on a new pair of Birkenstock sandals rather than go to a fourth Heavy Metal show. How much more marginal utility is derived from buying the Birkenstocks rather than attending a fourth show at the same $25 price?

15. Revealed Preference. Lois Griffin is a big fan of country music. With a $600 budget to spend on live music during the summer, it is easy to calculate the number of shows that Griffin can afford to attend at various ticket prices. Ticket Price $100 75 50 25 Number of Shows 6 8 12 24

A. Is this sufficient information to derive Griffin's demand schedule? Why or why not? B. After attending three shows for $50 each, Griffin decides to spend $250 on a Martha Stewart Everyday Victoria Seating Set rather than go to a fourth country music concert. How much more marginal utility is derived from buying the Victoria Seating Set rather than attending a fourth show at the same $50 price?

16. Revealed Preference. Meg Griffin just spent $200 on a clingy new dress, and $1,100 on a new Prada bag. A. Use the revealed preference concept to explain the relative value of the Prada bag. B. Is this marginal value a relative maximum or a relative minimum?

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17. Revealed Preference. Stewie Griffin just spent $1,000 on a climate-control device, and $5 on a box of chocolates. A. Use the revealed preference concept to explain the relative value of the climate-control device. B. Is this marginal value a relative maximum or a relative minimum?

18. Consumer Surplus: Tables. Kenny McCormick likes to view movies on demand from the local cable TV company. The following table shows the prices at which McCormick would pay to view one, two, three, four, and five movies per month: Movies on Demand per Month 0 1 2 3 4 5

Price $25 20 15 10 5 0

A. Plot McCormick's movies on demand curve. B. Use the demand curve to help you calculate the number of movies viewed and the amount of consumer surplus derived at a viewing price of $5.

19. Consumer Surplus: Tables. Stan Marsh likes to buy used computer games on DVDs from a local Blockbuster outlet in South Park. The following table shows the prices at which Marsh would buy one, two, three, four, and five DVDs per month: Number of DVDs Purchased per Month 0 1 2 3 4 5

Price $25 20 15 10 5 0

A. Plot Marsh's DVD demand curve. B. Use the demand curve to help you calculate the number of DVDs bought per month and the amount of consumer surplus derived at a price of $10.

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20. Consumer Surplus: Equations. Eric Cartman likes to rent computer games on DVDs from a local Blockbuster outlet in South Park. Cartman's DVD rental demand curve can be written: QD = 5 - 0.2P where QD is the number of DVD rentals and P is the rental price per month. A. Plot Cartman's DVD rental demand curve, using price as a function of the quantity demanded. B. Use the demand curve to help you calculate the number of DVDs rented per month and the amount of consumer surplus derived at a rental price of $5.

21. Consumer Surplus: Equations. Clyde Butters likes to rent jetskis on the beach in Kingston, Rhode Island. Butters rental demand curve can be written: QD = 10 - 0.2P where QD is the number of jetskis rented per week, and P is the rental price per 2-hour rental period. A. Plot Butters' jetski rental demand curve, using price as a function of the quantity demanded. B. Use the demand curve to help you calculate the number of jetskis rented per week and the amount of consumer surplus derived at a rental price of $20 per 2-hour rental period.

22. Consumer Surplus: Equations. Craig Damien takes dress shirts to be laundered on a regular basis. Damien's demand curve for shirt laundry services can be written: P = $6 - $0.3QD where QD is the number of shirts laundered per month, and P is laundry price per shirt. A. Plot Damien's demand curve for shirt laundry services , using price as a function of the quantity demanded. B. Use the demand curve to help you calculate the number of shirts laundered per month and the amount of consumer surplus derived at a price of $1.50.

23. Consumer Surplus: Equations. Estella Filmore takes business suits dress shirts to be dry cleaned on a regular basis. Filmore's demand curve for business suit dry cleaning services can be written: P = $15 - $2QD where QD is the number of shirts laundered per month, and P is laundry price per shirt. A. Plot Filmore's demand curve for dry cleaning services , using price as a function of the quantity demanded.
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B.

Use the demand curve to help you calculate the number of business suits dry cleaned per month and the amount of consumer surplus derived at a price of $5.

24. Two-Part Pricing. Breezy Point Lodge sits alongside Big Pelican Lake in northern Minnesota. It's surrounded by breathtaking acres of woods and water, and features lots of family activities to enjoy all year long, like golf, tennis, water sports, fishing, snowmobiling and cross-country skiing. Like many vacation resorts, Breezy Point has discovered the advantages of offering its services on an annual membership or "time-sharing" basis. To illustrate, assume that an individual vacationer's weekly demand and marginal revenue curves can be written: P = $5,000 - $2,000Q, MR = TR/Q = $5,000 - $4,000Q, where P is the price of a single week of vacation time, and Q is the number of weeks of vacation time purchased during a given year. For simplicity, assume that the resort's marginal cost for a week of vacation time is $1,000, and that fixed costs are nil. This gives the following total and marginal cost relations: TC = $1,000Q, MC = TC/Q = $1,000. A. Calculate the profit-maximizing price, output, profit level, and consumer surplus assuming a per unit price is charged each customer. B. Calculate the profit-maximizing price, output and profit level assuming a two-part pricing strategy is adopted for each customer. Now assume that fixed costs of $750,000 per year are incurred, and that 250 time-share customers ("owners") are attracted when an optimal two-part pricing strategy is adopted. Calculate total annual profits.

C.

25. Revealed Preference. Peter Griffin rents small outboard motors to the summer months from the Griffin Family Resort in Michigan's Upper Peninsula. Last week, Griffin rented motors for 20 rental days at a rate of $30 per day. This week, rentals days fell to 15 when Griffin raised the price to $35 per day. Using these two price-output combinations, the relevant linear demand and marginal revenue curves can be estimated as: P = $50 - $1Q and MR = $50 - $2Q A. Set MR = 0 and solve for Q to calculate the revenue-maximizing price-output combination and profit level. How much are these maximum revenues? B. If marginal cost is $20 per rental day, calculate the profit-maximizing price-output combination. Also calculate revenues and profits at this profit-maximizing activity level. (Remember MR = MC at the profit-maximizing activity level.)
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