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Chapter 9. Demand Theory II. Elasticity. Indifference Analysis
Chapter 9– Question 1
If an increase in the price of good X leads to a decline in demand for good Y
- X and Y are substitutes
- X and Y are complements
- X and Y are inferior goods
- X and Y are luxuries
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Chapter 9– Question 2
Price elasticity of demand stands for the percentage change in the price of a product in response to a percentage change in demand for the product. True or false?
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Chapter 9–Question 3
On a linear demand curve, elasticity of demand is unit elastic
- where the demand curve intersects the supply curve
- at its midpoint
- where the demand curve intersects the x-axis
- where the demand curve intersect the y-axis
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Chapter 9 –Question 4
The quantity demanded of laptops has increased by 30 per cent. If the price elasticity for laptops is 3.0, the price for laptops must have fallen by
- 6 percent
- 3 percent
- 30 percent
- 10 percent
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Chapter 9 –Question 5
If a normal good has many close substitutes, demand for it is price elastic. True or false?
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Chapter 9– Question 6
The price of a commodity falls from $10 to $8. Quantity demanded rises from 100 to 200 units.
What is the price elasticity of demand between the two prices? Use the midpoint formula.
- 5.0
- 3.05
- 2
- 2.5
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Chapter 9– Question 7
If the cross elasticity for two goods is + 1,5 they are complements. True or false?
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Chapter 9– Question 8
If marginal utility falls slowly, the demand curve is price inelastic. True or false?
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Chapter 9 – Question 9
In order to increase its revenues, a firm decides to raise the price of its product. The firm obviously assumes that the price elasticity of demand for its product is
- above one
- one
- below one
- none of the above
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Chapter 9 –Question 10
Using our wine-water example, write down the equations which a consumer uses to make an optimal choice between water and wine
1) when he applies the equimarginal principle for bundles
2) when he applies indifference analysis
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Chapter 9– Question 11
A consumer's budget for commodity X and commodity Y is $100. X costs $10 per unit, Y $5 per unit.
1) Draw the budget line on a diagram.
2) The consumer wants to spend half of his budget on each commodity. Label this point on the budget line.
3) What is the marginal rate of substitution between X and Y at this point?
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Chapter 9 – Question 12
Explain how a demand curve can be derived from indifference analysis.
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Chapter 9– Question 13
Income elasticity for luxuries is
- above zero but below 1
- below zero
- equal to 1
- above 1
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Chapter 9– Question 14
Look at the table below.
| Price | Quantity | |
| $40 | 2 | |
| $30 | 4 | |
| $20 | 6 | |
| $10 | 8 |
Demand is most price elastic between
- $30 and $40
- $20 and $30
- $10 and $20
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Chapter 9 –Question 15
Your utility function for commodities x and y is u(x,y) = 8x + 4y. You buy 10 units of x and 4 units of y. You now lower your purchases of x to 8. How many units of y must you buy to get the same utility?
- 8 units of y
- 4 units of y
- 12 units of y
- none of the above.
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Chapter 9– Question 16
If a firm plans to raise its product's price, the firm believes that
- the price of complements will also increase
- the prices of substitutes will fall
- demand for the product is price inelastic
- its product is an inferior good
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Chapter 9 – Question 17
You are offered a job. The pay is $10 per hour. You can choose the number of hours. The maximum you are able to work is 50 hours. Your utility function for leisure and money to spend on consumption is U(C,L) = CL.
1) Write down your budget constraint for leisure and consumption. This gives you your options in terms of the allocation of time. (Consider only options with a difference of 5 hours, otherwise the list becomes too long.)
2) Calculate the utility each bundle yields. This gives you your options in terms of utility.
3) Find the optimal bundle of leisure and consumption.
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Chapter 9– Question 18
Explain why two indifference curves cannot intersect.
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