Chapter 7/Consumer Choice and Elasticity 289
Chapter 7
Consumer Choice and Elasticity
Questions 1 Through 10 are a Suggested Chapter Quiz.
1. If Mr. Smith thinks the last dollar spent on shirts yields less satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should
a. decrease his spending on cola.
b. decrease his spending on cola and increase his spending on shirts.
c. increase his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
2. A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The increase causes households to
a. spend more on sugar.
b. spend less on sugar.
c. spend the same amount on sugar.
d. consume more goods like coffee and tea that are complements of sugar.
3. Which of the following would be the best example of consumer surplus?
a. Jane does not get cell-phone service because she feels that it is worth less than the $30 a month fee.
b. Sam pays $8 for a haircut that is worth $10 to him.
c. Ralph buys a house for $104,000, the maximum amount that he would be willing to pay for it.
d. Sue purchases a book for $20 and uses a credit card to pay for it.
4. “I like ice cream, but after eating homemade ice cream last night, I want to have something else for dessert today.” This statement most clearly reflects
a. the budget constraint.
b. consumer irrationality.
c. the second law of demand: Price elasticity increases with time.
d. the law of diminishing marginal utility.
5. If Sarah’s income rises by 20 percent, and, as a result, she purchases 40 percent more designer clothing, her income elasticity for designer clothing is
a. 0.5.
b. 1.0.
c. 2.0.
d. Not enough information is given to answer this question.
6. Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt. These findings reflect that
a. tomatoes are a necessity while salt is a luxury.
b. it takes longer for consumers to adjust to a change in the price of salt than to a change in the price of tomatoes.
c. salt will not spoil as easily as fresh tomatoes.
d. more good substitutes exist for fresh tomatoes than for salt.
7. Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price elasticity of demand for cigarettes is equal to
a. –0.20.
b. –0.67.
c. –1.50.
d. –3.00.
8. Suppose that the quantity of DVD players sold increased from 200 to 400 when the price fell from $225 to $175. Over this price range, the absolute value of the price elasticity of demand for DVD players is
a. 0.25.
b. 0.375.
c. 1.0.
d. 2.67.
e. 4.0.
9. If a Krispy Kreme doughnut shop near campus increases its prices by 5 percent, but revenues from its sales are unchanged, the price elasticity of demand for the services offered by the doughnut shop must be
a. elastic.
b. of unitary elasticity.
c. inelastic.
d. equal to 0.5.
10. If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more on gas, this would best be explained by
a. the substitution effect.
b. the income effect.
c. the highly elastic demand for gasoline.
d. all of the above.
Answer Key 1 through 10
*1. (d), 2. (a), 3. (b), 4. (d), 5. (c), 6. (d), 7. (b), 8. (d), 9. (b), 10. (b)
Fundamentals of Consumer Choice
11. Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If Elaine drinks three cups of coffee for breakfast, her marginal utility is equal to
* a. $.50, the value of her last cup of coffee.
b. $1.00, the value of her first cup of coffee.
c. $2.25.
d. $1.50.
12. Marginal utility is the change in
a. total utility when an extra unit of output is produced.
* b. total utility when an extra unit of output is consumed.
c. marginal utility when an extra unit of output is produced.
d. average utility when an extra unit of output is consumed.
13. The principle of diminishing marginal utility says that
a. as more of a good or service is consumed, demand will decrease.
b. as more of a good or service is consumed, the price will rise.
c. the marginal utility of additional units consumed will increase.
* d. the marginal utility of additional units consumed will decline.
14. Diminishing marginal utility means that
a. as you consume more of a good, other things constant, the total satisfaction you obtain from consuming this good tends to fall.
b. as you hire more labor, other things constant, the total amount produced begins to fall.
* c. as you consume more of a good, other things constant, the additional satisfaction you obtain from each additional unit of the good tends to fall.
d. as you consume more of a good, other things constant, the extra satisfaction you obtain from each additional unit becomes negative.
15. Which of the following most directly reflects the law of diminishing marginal utility?
a. After watching two football games, Terry decides to watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
* c. After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth disc.
d. A musician receives the biggest ovation of the evening after playing the final number of a recital.
16. Which of the following relates most directly to the law of diminishing marginal utility?
* a. After watching two football games, Terry decides to play golf rather than watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. Two carpenters build their own house rather than hiring a contractor.
d. A musician receives the biggest ovation of the evening after playing the final work of a recital.
17. After eating six chocolate candy bars in ten minutes, Jody says, “You would have to pay me to eat another chocolate candy bar!” This statement best illustrates
a. the law of demand.
b. the substitutability among goods.
* c. the law of diminishing marginal utility.
d. that chocolate candy bars are an inferior good.
18. A local restaurant offers an “all you can eat” ribs special. You pay $11.95, and then you can eat as many servings as you desire at no additional cost. It would follow that you will stop eating when
* a. your marginal utility (or value) derived from eating another serving is zero.
b. your total utility (or value) derived from all of the servings consumed just equals $11.95.
c. your marginal utility (or value) derived from another serving equals $11.95.
d. it is physically impossible for you to eat any more.
Marginal Utility, Consumer Choice, and the Demand Curve of an Individual
19. If the price of a good is $0, a consumer will
a. consume an infinite quantity.
* b. consume all units with positive marginal utility.
c. consume the entire amount supplied.
d. consume until total utility becomes 0.
20. The fact that a gallon of gasoline commands a higher market price than a gallon of water indicates that
a. gasoline is an economic good but water is not.
* b. the marginal utility of gasoline is greater than the marginal utility of a gallon of water.
c. the average utility of a gallon of gasoline is greater than the average utility of a gallon of water.
d. the total utility of gasoline exceeds the total utility of water.
21. The marginal value of a commodity to a consumer
a. increases as more of the good is consumed.
b. is exactly equal to price for all units purchased by the consumer.
* c. is measured by the height of the individual consumer’s demand curve.
d. is equal to the area above the price and below the individual consumer’s demand curve.
22. Ceteris paribus, an increase in the price of a good will cause the
a. quantity demanded of the good to increase.
b. quantity supplied of the good to decrease.
* c. consumer surplus derived from the good to decrease.
d. demand of the good to increase.
23. The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called
a. price elasticity of demand.
* b. consumer surplus.
c. the substitution effect.
d. income elasticity of demand.
24. John’s demand schedule for pizza is indicated below. If the current price of pizza is $1.10 per slice, what is John’s consumer surplus if he buys five slices of pizza?
Price Q
(dollars) (slices)
1.50 1
1.40 2
1.30 3
1.20 4
1.10 5
1.00 6
a. $0
* b. $1.00
c. $1.10
d. $6.50
25. If John’s marginal benefit derived from the consumption of another candy bar is greater than the price of the candy bar,
a. John will not purchase any more candy bars.
* b. John will increase his total satisfaction by purchasing the candy bar.
c. the opportunity cost of the candy bar is lower than the price.
d. John will decrease his total utility if he purchases the candy bar.
26. If Jane’s marginal benefit as a consumer in the jeans market is larger than the price of a pair of jeans,
a. Jane will not purchase any more jeans.
* b. Jane can benefit by purchasing more jeans.
c. the opportunity cost of a pair of jeans is lower than the price.
d. Jane will decrease her total utility by purchasing more jeans.
Table 7-1
Price of the Good Aaron Angela Austin Alyssa
$0.00 20 16 4 8
0.50 18 12 6 6
1.00 14 10 2 5
1.50 12 8 0 4
2.00 6 6 0 2
2.50 0 4 0 0
27. Refer to Table 7-1. When the price of the good is $1.00, the quantity demanded in this market would be
a. 42 units.
* b. 31 units.
c. 24 units.
d. 14 units.
28. Refer to Table 7-1. If the price increases from $1.00 to $1.50,
a. the market demand decreases by 20 units.
b. individual demand curves, when drawn, will shift to the left.
c. the quantity demanded in the market decreases by 2 units.
* d. the quantity demanded in the market decreases by 7 units.
29. Refer to Table 7-1. Whose demand does not conform to the law of demand?
a. Aaron’s
b. Angela’s
* c. Austin’s
d. Alyssa’s
30. If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should
a. bowl less, so the marginal satisfaction from expenditures in this area will increase.
b. spend more on hamburgers, so total satisfaction from that activity will increase.
c. eliminate spending on hamburgers.
* d. bowl more and spend less on hamburgers.
31. If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should
a. decrease his spending on cola.
* b. decrease his spending on cola and increase his spending on shirts.
c. increase his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
32. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will
* a. cause the consumer to buy more of good Y and less of good X.
b. cause the consumer to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that the consumer buys.
d. result in an upward-sloping demand for good Y because of the substitution effect.
33. Jeff likes Pepsi and pizza. When the price of pizza rises, the substitution effect causes Pepsi to be relatively
a. more expensive, so Jeff buys more Pepsi.
b. more expensive, so Jeff buys less Pepsi.
* c. less expensive, so Jeff buys more Pepsi.
d. less expensive, so Jeff buys less Pepsi.
34. Assume that a college student purchases only coffee and Snickers. The substitution effect associated with a decrease in the price of a Snickers will result in
a. an increase in the consumption of coffee only.
b. a decrease in the consumption of coffee only.
* c. an increase in the consumption of Snickers and a decrease in the consumption of coffee.
d. a decrease in the consumption of Snickers and an increase in the consumption of coffee.
35. If the price of hamburger increases, the substitution effect works to
a. decrease the quantity of hamburger supplied.
b. increase the number of hamburger buns demanded.
* c. decrease the quantity of hamburger demanded.
d. increase the number of hamburger buns supplied.
Use the following information to answer the next two questions.
JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls.
36. According to the substitution effect, which of the following is most likely to occur?
a. JoAnn will purchase less cola and more sparkling water.
* b. JoAnn will purchase more cola and less sparkling water.
c. JoAnn will purchase more of all goods due to her higher real income.
d. JoAnn’s demand curve will decrease (shift in), causing her to purchase less cola.