Economics: Price Elasticity & Consumer Theory

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Questions and Answers

What does price elasticity of supply measure?

The relationship between price and consumer income.

The change in quantity demanded due to price changes.

The responsiveness of quantity supplied to a change in price. (correct)

The rate of inflation in the market.

If the price elasticity of supply is less than 1, what is it classified as?

Perfectly elastic

Inelastic (correct)

Unitary

Elastic

How is price elasticity of supply calculated?

Using the formula: %∆Q / %∆P. (correct)

Through the formula: %∆P / %∆Q.

By comparing total revenue before and after price changes.

By assessing consumer demand changes only.

In the given illustration, how many bottles of organic juice were supplied in the second month?

2,500 bottles Signup and view all the answers

What supplies the formula for calculating the price elasticity of supply?

PES = (%∆Q)/(P2 - P1)/P1. Signup and view all the answers

If a producer changes the price from ₱120 to ₱180 and the quantity supplied increases from 1,500 to 2,500, what is the change in quantity supplied?

1,000 bottles Signup and view all the answers

What characterizes perfectly inelastic supply?

Quantity supplied remains constant regardless of price changes. Signup and view all the answers

What is the meaning of a price elasticity value of 1?

The supply is unitary elastic. Signup and view all the answers

What is the elasticity of supply calculated from the given values?

1.34 Signup and view all the answers

What does the assumption of 'Optimization' in consumer theory imply?

Consumers aim to maximize total satisfaction within their budget. Signup and view all the answers

What does the assumption of completeness imply about consumer preferences?

Consumers can rank all bundles according to their satisfaction. Signup and view all the answers

According to the assumptions of consumer theory, what must consumers be aware of?

The prices of goods and services and their income Signup and view all the answers

How does transitive preference affect consumer choices?

It ensures consistent ranking of preferences between bundles. Signup and view all the answers

If the price increases from $120 to $180 and the quantity supplied increases from 1,500 to 2,500, what does this indicate?

An elastic supply response to price changes Signup and view all the answers

Which of the following is NOT an assumption of consumer theory?

Consumers can borrow money to expand their purchasing capability. Signup and view all the answers

What does non-satiation indicate about consumer preferences?

Consumers always prefer to have more of a good than less. Signup and view all the answers

Which characteristic describes how indifference curves typically behave?

Indifference curves are downward sloping. Signup and view all the answers

What is the formula for calculating the percentage change in quantity supplied?

((Q2 - Q1) / Q1) * 100 Signup and view all the answers

If a consumer considers Bundle A to provide more utility than Bundle B, what can be inferred?

Bundle A is preferred over Bundle B. Signup and view all the answers

What does a supply elasticity of 1.34 suggest about the responsiveness of supply to price changes?

Supply is elastic. Signup and view all the answers

In consumer theory, what is implied by 'information' as an assumption?

Consumers must know all available goods and their utilities. Signup and view all the answers

What defines an indifference curve?

A set of points representing different bundles providing the same satisfaction. Signup and view all the answers

Why is the assumption of transitive preferences important in consumer theory?

It helps predict how consumers will choose between bundles. Signup and view all the answers

If a consumer is indifferent between two bundles, what does this imply?

Both bundles provide the same level of utility. Signup and view all the answers

What does the slope of the budget line represent?

The amount of good Y given up for one more unit of good X Signup and view all the answers

If a consumer spends all their income on good Y, which equation represents this scenario?

Y = M / Py Signup and view all the answers

Which two conditions must the maximizing bundle of goods satisfy?

It must be on the budget constraint and provide maximum utility Signup and view all the answers

How does an increase in the price of good X affect the budget line?

It makes the budget line steeper Signup and view all the answers

Which of the following is true about preferences for gift certificates versus gifts?

Most people prefer gift certificates as they allow for individual choice Signup and view all the answers

Which equation represents the budget constraint for the consumer?

M = Px * X + Py * Y Signup and view all the answers

What happens to the budget line if the consumer experiences an increase in income?

It shifts outward, allowing more of goods X and Y to be purchased Signup and view all the answers

Which statement is true regarding the budget line if good X is bought instead of good Y?

Less of good Y must be consumed due to the budget constraint Signup and view all the answers

What does the shape of an indifference curve indicate about consumer preferences?

Consumers prefer a balance of goods rather than excessive amounts of one. Signup and view all the answers

How is marginal utility defined in the context of consumer theory?

The additional utility gained from consuming one more unit of a good. Signup and view all the answers

What happens to the marginal utility of a good as its consumption increases?

It diminishes with increased consumption. Signup and view all the answers

What does a marginal rate of substitution of 2 signify?

The consumer is willing to give up two units of Y for each unit of X added. Signup and view all the answers

What does the budget constraint represent in consumer behavior?

The limitation on the consumption bundles a consumer can afford. Signup and view all the answers

Why can't total utility and marginal utility be plotted on the same graph?

They measure utility differently and have distinct scales. Signup and view all the answers

What effect does increasing the consumption of Good X have on the consumption of Good Y?

It decreases the consumption of Good Y to maintain the same utility level. Signup and view all the answers

Which statement correctly describes convex indifference curves?

They illustrate diminishing marginal rate of substitution as one good increases. Signup and view all the answers

Study Notes

Price Elasticity of Supply

Measures responsiveness of quantity supplied to change in price
Formula: % change in Quantity Supplied / % change in Price
Values of Elasticity:
- Less than 1: Inelastic
- 0: Perfectly inelastic
- 1: Unitary
- More than 1: Elastic
Example: A producer sells 1,500 bottles of juice at ₱120 and increases production to 2,500 bottles at ₱180.
- Price Elasticity calculated at 1.34, making the supply elastic.

Consumer Theory Assumptions

Consumers strive to maximize satisfaction from good and service consumption
Consumers are completely informed about all relevant products and services
Consumers can rank consumption bundles by satisfaction levels
- Complete: Consumers can rank all conceivable bundles of commodities.
- Transitive: If Bundle A is preferred to Bundle B, and Bundle B is preferable to Bundle C, then Bundle A is preferred over Bundle C.
Consumers prefer more of a good rather than less (non-satiation)

Indifference Curves

Represent combinations of goods and services that provide the same level of utility.
Characteristics:
- Downward Sloping: Because consumers obtain utility from both goods, when more of one good is added, to maintain the same utility level, the consumer needs less of the other good.
- Convex: As consumption of one good increases relative to another, the consumer is willing to trade a small reduction in the other good for an equal increase in the first good.
- Bowed towards the origin: Consumers prefer a bit of everything rather than a lot of just one thing.

Other Concepts in Consumer Theory

Marginal Utility: Additional utility gained from consuming one more unit of a good, holding all other goods constant.
Marginal Rate of Substitution: The number of units of good Y you are willing to give up for one more unit of good X while maintaining constant utility. This rate diminishes along an indifference curve.

Budget Constraints

Restricts consumer behavior by requiring a bundle of goods that is affordable.
Budget Line: Represents all bundles of goods purchasable with full income at given prices.
Slope of the Budget Line: Indicates the amount of good Y that must be given up to buy one more unit of good X.
Equation: 𝑀𝑀 = 𝑃𝑃𝑥𝑥 𝑋𝑋 + 𝑃𝑃𝑦𝑦 𝑌𝑌
- where: 𝑀𝑀 = Income, 𝑃𝑃𝑥𝑥 = Price of good X, 𝑋𝑋 = Quantity of good X, 𝑃𝑃𝑦𝑦 = Price of good Y, and 𝑌𝑌 = Quantity of good Y.

Utility Maximization

Consumers seek to maximize satisfaction while staying within budget constraints
Optimizing Bundle Conditions:
- The bundle must be on the budget constraint (affordable)
- The bundle must be the consumer's most preferred combination.
Applications of Indifference Curves:
- Gifts and Gift Certificates: People usually prefer gift certificates as presents rather than gifts of one specific good.
- Income and Leisure for Workers: Indifference curves can be used to analyze how workers allocate their time between work and leisure.
Corner Solutions: Situations where a consumer chooses to consume only one of the goods, as their indifference curves might touch the budget line only in a corner solution.

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Description

Explore the concepts of price elasticity of supply and the assumptions of consumer theory in this quiz. Understand how elasticity affects production decisions and the behavior of consumers in maximizing utility. Test your knowledge with practical examples and definitions.