MODULE 51: Utility Maximization

Multiple-Choice Questions

Question

When the price of a normal good falls, consumers will ______ the quantity they want, in part because they now have more money to spend on these units, which economists call ______ .
A.
increasethe substitution effect
B.
decreasethe unit effect
C.
increasethe price effect
D.
decreasethe quantity effect
E.
increasethe income effect

When the price of a normal good falls, consumers will ______ the quantity they want, in part because they now have more money to spend on these units, which economists call ______ .
Question

Suppose market prices for potatoes were to increase by 10%, and potato farmers wanted to know whether or not their overall total revenues would rise or fall as a consequence. The farmers could figure this out by calculating which of the following economic concepts?
A.
deadweight loss
B.
producer surplus
C.
diminishing marginal utility
D.
price elasticity of demand
E.
administrative costs

Suppose market prices for potatoes were to increase by 10%, and potato farmers wanted to know whether or not their overall total revenues would rise or fall as a consequence. The farmers could figure this out by calculating which of the following economic concepts?
Question

Suppose Jolene buys apples weekly. If the price of apples were to drop, Jolene would experience ______ in _____ .
A.
a decreasetotal revenue
B.
an increaseconsumer surplus
C.
a decreaseher budget constraint
D.
an increasemarginal utility
E.
a decreasewillingness to pay

Suppose Jolene buys apples weekly. If the price of apples were to drop, Jolene would experience ______ in _____ .
Question

Pizza and soda are often consumed together at Joe’s Diner. Suppose that the price of pizza rises from $0.75 a slice to $1.25 a slice, and consequently April sales of pizza drop from 1,050 to 950 slices. Using the midpoint method and this information, an economist could conclude the following:
A.
The cross price elasticity of demand is 0.2.
B.
The price elasticity of supply is 0.1.
C.
The price elasticity of demand is 0.2.
D.
The income elasticity of demand is 0.5.
E.
The unit elasticity of demand is 0.1.

Pizza and soda are often consumed together at Joe’s Diner. Suppose that the price of pizza rises from $0.75 a slice to $1.25 a slice, and consequently April sales of pizza drop from 1,050 to 950 slices. Using the midpoint method and this information, an economist could conclude the following:
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Question

Use the following information to answer Questions 5–8.

Suppose the government levies a tax of $0.50 per pack on the buyers of cigarettes. Suppose also that the price elasticity of demand for cigarettes is 1.2 and the price elasticity of supply is 0.7.

Because this tax is levied on the sale of a specific good, it is
A.
an excise tax.
B.
a progressive tax.
C.
a regressive tax.
D.
a proportional tax.
E.
a lump-sum tax.

Use the following information to answer Questions
Question

After this tax is levied, total surplus will _______ , and the price received by producers (not including the tax) will ________ .
A.
increaseincrease by exactly $0.50
B.
decreasefall by exactly $0.50
C.
increasefall by less than $0.50
D.
decreasefall by less than $0.50
E.
increaseincrease by more than $0.50

After this tax is levied, total surplus will _______ , and the price received by producers (not including the tax) will ________ .
Question

If economists were to study the tax incidence in this cigarette market, they would conclude which of the following?
A.
The burden of this tax falls entirely on consumers.
B.
The burden of this tax falls entirely on producers.
C.
The burden of this tax falls equally on consumers and producers.
D.
The burden of this tax falls more on consumers than on producers.
E.
The burden of this tax falls more on producers than on consumers.

If economists were to study the tax incidence in this cigarette market, they would conclude which of the following?
Question

In this example, cigarettes have
A.
perfectly inelastic demand.
B.
perfectly elastic demand.
C.
unit-inelastic demand.
D.
inelastic demand.
E.
elastic demand.

In this example, cigarettes have
Question

Jill is willing to sell her used calculator for $20. Her friend Jack is willing to pay $90 for a used calculator. They agree and trade at a price of $50. Which of the following is correct?
A.
Jill’s cost is $50.
B.
Jack’s individual consumer surplus is $30.
C.
Jill’s individual producer surplus is $30.
D.
Jack’s budget line is $90.
E.
Jill’s deadweight loss is $70.

Jill is willing to sell her used calculator for $20. Her friend Jack is willing to pay $90 for a used calculator. They agree and trade at a price of $50. Which of the following is correct?
Question

Refer to the figure for Questions 10–17.

Using the midpoint method, the price elasticity of demand between points C and E is _______ and economists would classify it as ______.
A.
0.67inelastic
B.
1.5elastic
C.
1unit-elastic
D.
0.67elastic
E.
1.5inelastic

Refer to the figure for Questions 1
Question

Using the midpoint method, the price elasticity of supply between points J and E is _______ and economists would classify it as ______ .
A.
2.67inelastic
B.
0.375elastic
C.
0perfectly inelastic
D.
2.67elastic
E.
0.33inelastic

Using the midpoint method, the price elasticity of supply between points
Question

Suppose the government levies a tax on the buyers of jeans that shifts the demand curve from D₁ to D_T. Using the diagram, determine the amount of the tax per pair of jeans sold.
A.
50
B.
40
C.
30
D.
20
E.
The exact amount of the tax cannot be determined.

Suppose the government levies a tax on the buyers of jeans that shifts the demand curve from
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Question

Which of the following statements about the tax on jeans is true?
A.
Buyers bear the entire burden of the tax, since the tax was levied on them.
B.
Buyers bear most of the burden of the tax, since the tax was levied on them.
C.
Buyers bear most of the burden of the tax, since demand is more inelastic than supply.
D.
Buyers bear a smaller tax burden than sellers, since demand is more elastic than supply.
E.
Buyers and sellers share the tax burden equally.

Which of the following statements about the tax on jeans is true?
Question

How much revenue would the government collect from the tax on jeans?
A.
$1,250
B.
$1,200
C.
$750
D.
$600
E.
$300

How much revenue would the government collect from the tax on jeans?
Question

Buyers in the jeans market gain ______ in consumer surplus before the imposition of the tax, and they gain ______ in consumer surplus after the imposition of the tax.
A.
$625$400
B.
$400$225
C.
$400$625
D.
$625$225
E.
$225$400

Buyers in the jeans market gain ______ in consumer surplus before the imposition of the tax, and they gain ______ in consumer surplus after the imposition of the tax.
Question

Jeans and product X (not shown) have a cross price elasticity of 3.7. After the imposition of the tax on jeans, buyers’ consumption of product X would ______ because jeans and product X are ______ .
A.
decreasenormal goods
B.
increasesubstitutes
C.
decreasecomplements
D.
increasecomplements
E.
decreasesubstitutes

Jeans and product X (not shown) have a cross price elasticity of 3.7. After the imposition of the tax on jeans, buyers’ consumption of product X would ______ because jeans and product X are ______ .
Question

The deadweight loss caused by the tax on jeans is
A.
$5.
B.
$30.
C.
$50.
D.
$60.
E.
$75.

The deadweight loss caused by the tax on jeans is
Question

Quantity of ball toss games Total utility (utils)
0 0
1 70
2 130
3 180
4 220
5 250
6 270
7 280

Quantity of video games Total utility (utils)
0 0
1 30
2 55
3 75
4 90
5 100
6 105
7 109
8 112
9 114

Use the information from the tables above to complete Questions 18–20.

If Jill purchased 5 video games and 1 ball toss game, she would receive _______ and _______ .
A.
a marginal utility of 10 from her last video gamea marginal utility of 70 from her last ball toss game
B.
a marginal utility of 105 from her last video gamea marginal utility of 130 from her last ball toss game
C.
her highest possible marginal utility from video games170 total utils from both products
D.
less than her highest possible marginal utility from ball toss games90 utils of marginal utility from both products
E.
100 utils in total utility from video gamesa marginal utility of zero from ball toss games
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Question

At the arcade, Jill likes the video games, which cost $0.50 to play, and the ball toss, which costs $2 to play. She has $6 to spend at the arcade. If Jill maximizes her utility, she will
A.
spend all of her $6 on the ball toss because she likes it the best.
B.
achieve a total utility of 220.
C.
spend all of her $6 on video games because they are the cheapest.
D.
play 9 video games and 7 games of ball toss.
E.
find where the marginal utility of playing video games equals the marginal utility of playing ball toss.

At the arcade, Jill likes the video games, which cost $0.50 to play, and the ball toss, which costs $2 to play. She has $6 to spend at the arcade. If Jill maximizes her utility, she will
Question

Suppose that video games still cost $0.50 and the ball toss still costs $2, but Jill now has $10.50 to spend at the arcade. If Jill chooses her optimal consumption bundle, she will purchase 9 video games and 3 games of ball toss.
A.
her marginal utility per dollar spent on video games will be 10.
B.
her marginal utility from her last game of ball toss will be 40.
C.
her total utility will be 280.
D.
she will spend less than $10.50.

Suppose that video games still cost $0.50 and the ball toss still costs $2, but Jill now has $10.50 to spend at the arcade. If Jill chooses her optimal consumption bundle, she will purchase 9 video games and 3 games of ball toss.

Quantity of ball toss games	Total utility (utils)
0	0
1	70
2	130
3	180
4	220
5	250
6	270
7	280

Quantity of video games	Total utility (utils)
0	0
1	30
2	55
3	75
4	90
5	100
6	105
7	109
8	112
9	114