7.2 microeconomics
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7.2 microeconomics

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Questions and Answers

What happens to Mary's marginal utility for apples when their price decreases?

  • It decreases.
  • It becomes zero.
  • It increases. (correct)
  • It remains constant.

    • At what price does Mary Andrews buy 5 pounds of apples?

  • $2 per pound (correct)
  • $1 per pound
  • $2.50 per pound
  • $1.50 per pound

    • If Mary buys fewer oranges as she increases her purchase of apples, what can be inferred about the relationship between these two fruits?

  • They are substitutes. (correct)
  • They are complements.
  • They have no relationship.
  • They are inferior goods.

    • What is the total budget Mary spends on apples and oranges after adjusting her consumption to maximize utility?

    <p>$20</p> Signup and view all the answers

    According to the marginal decision rule, what must be true for Mary to maximize her utility between apples and oranges?

    <p>The ratio of marginal utility to price must be the same for both goods.</p> Signup and view all the answers

    How much will Mary spend on apples and oranges after their prices change if she buys 12 pounds of apples and 8 pounds of oranges?

    <p>$20</p> Signup and view all the answers

    What was Mary's initial consumption of apples and oranges at the beginning of the situation described?

    <p>5 pounds of apples and 10 pounds of oranges</p> Signup and view all the answers

    What is the key function of the marginal decision rule in the context of consumer choice?

    <p>To maximize a consumer's utility given their budget.</p> Signup and view all the answers

    What happens to the consumption of apples when there is a price reduction?

    <p>Consumption of apples increases while consumption of oranges decreases.</p> Signup and view all the answers

    What is the substitution effect of a price change?

    <p>The increase in quantity demanded of a good as its price falls.</p> Signup and view all the answers

    What is the impact of an income-compensated price increase on consumer behavior?

    <p>Consumers buy less of the good that increased in price.</p> Signup and view all the answers

    How much did Ms. Andrews increase her apple consumption due to the substitution effect?

    <p>4 pounds</p> Signup and view all the answers

    What defines the income effect of a price change?

    <p>The implicit change in income due to the price change.</p> Signup and view all the answers

    If a good constitutes a small fraction of a consumer's budget, how does a price change affect purchasing power?

    <p>It has a negligible effect on purchasing power.</p> Signup and view all the answers

    What happens to the marginal utility of goods as Ms. Andrews increases her consumption of apples?

    <p>The marginal utility of apples falls and oranges rises.</p> Signup and view all the answers

    What is the combined effect of a price reduction on quantity demanded?

    <p>It is the sum of the substitution and income effects.</p> Signup and view all the answers

    What does a normal good imply regarding changes in income?

    <p>Consumption increases with an increase in income.</p> Signup and view all the answers

    How does the substitution effect influence price elasticity of demand?

    <p>A larger substitution effect leads to greater elasticity.</p> Signup and view all the answers

    If Ms. Andrews receives an implicit increase in income of $5, how does she utilize this increase?

    <p>She buys 3 more pounds of apples and 2 more pounds of oranges.</p> Signup and view all the answers

    What is the result of the substitution effect when the price of apples decreases?

    <p>Increased consumption of apples and decreased consumption of oranges.</p> Signup and view all the answers

    When the price of a good falls, what immediate consumer reaction occurs?

    <p>Increased consumption of that good.</p> Signup and view all the answers

    What effect does a price reduction have on the demand for a normal good?

    <p>It increases the quantity demanded due to the income effect.</p> Signup and view all the answers

    How do the substitution and income effects interact for a normal good when its price increases?

    <p>They both reinforce each other.</p> Signup and view all the answers

    In the case of an inferior good, what happens when consumer incomes increase?

    <p>Consumers substitute better goods for the inferior good.</p> Signup and view all the answers

    What is a characteristic of the demand for inferior goods when their prices fall?

    <p>The substitution effect increases quantity demanded while the income effect decreases it.</p> Signup and view all the answers

    Why do inferior goods tend to have less elastic demand than normal goods?

    <p>Because of weaker substitution effects compared to normal goods.</p> Signup and view all the answers

    What happens to the quantity demanded of an inferior good when its price increases?

    <p>It decreases due to the substitution effect.</p> Signup and view all the answers

    What defines the elasticity of demand for a good?

    <p>All of the above.</p> Signup and view all the answers

    Which statement about the substitution effect is true?

    <p>It changes consumption in the opposite direction to the price change.</p> Signup and view all the answers

    How does a consumer's purchasing power change when the price of a normal good decreases?

    <p>It increases, leading to higher demand.</p> Signup and view all the answers

    What describes the effect on consumer behavior when the price of an inferior good decreases?

    <p>Consumers may still prefer better alternatives despite a price decrease.</p> Signup and view all the answers

    What happens to a consumer's demand for a good when its price decreases?

    <p>The consumer's demand for the good typically increases.</p> Signup and view all the answers

    How is the market demand curve derived from individual demand curves?

    <p>By summing the quantities demanded at each price horizontally.</p> Signup and view all the answers

    What is the substitution effect when the price of apples falls?

    <p>Consumers buy more apples as they become relatively cheaper than oranges.</p> Signup and view all the answers

    What is the expected outcome when marginal utilities of two goods are equal?

    <p>Utility might not be maximized if the prices differ.</p> Signup and view all the answers

    What does an income-compensated price change assume?

    <p>Consumers have no change in purchasing power.</p> Signup and view all the answers

    Which of the following factors contributes to a consumer maximizing utility?

    <p>Equating the ratios of marginal utility to price.</p> Signup and view all the answers

    What is indicated by a downwards-sloping demand curve?

    <p>Demand decreases as price increases.</p> Signup and view all the answers

    What does the total quantity demanded at a specific price reflect?

    <p>The combined consumption of all consumers in the market.</p> Signup and view all the answers

    At $2 per pound, how many total pounds were demanded by all consumers in the example?

    <p>16 pounds.</p> Signup and view all the answers

    How does the income effect alter a consumer's behavior when a price decreases?

    <p>Consumers may feel richer and thus can buy more goods overall.</p> Signup and view all the answers

    What characterizes the demand curves for apples and oranges when the prices of these fruits are the same?

    <p>Marginal utilities of both goods tend to be equal at utility maximization.</p> Signup and view all the answers

    What effect does the price reduction of a good have on consumer purchasing power?

    <p>It increases the purchasing power.</p> Signup and view all the answers

    What is the consequence of the price of apples being different from the price of oranges?

    <p>Marginal utilities will generally be unequal for both goods.</p> Signup and view all the answers

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