Consumer choice and elasticity

Consumer choice and elasticity are important concepts in economics that help to explain how consumers make decisions about purchasing goods and services, and how those decisions are affected by changes in price and other factors.

Elasticity is a measure of how responsive the quantity demanded of a good or service is to changes in its price. A good or service that is considered to be elastic will see a large change in the quantity demanded when its price changes, while a good or service that is considered to be inelastic will see a smaller change in the quantity demanded when its price changes.

Consumer choice is the process by which consumers decide what to buy, based on factors such as price, quality, and availability. Factors such as income, preferences, and consumer tastes also play a role in consumer choice.

In general, consumer choice is influenced by the relative prices of different goods and services, as well as by the consumer’s own income and tastes. When the price of a good or service increases, consumers are likely to reduce their consumption of that good or service and shift their spending to other goods or services that are considered to be better value for money.

Elasticity is an important concept for businesses and policymakers to understand, as it can help them to predict how changes in price and other factors will affect consumer behavior. For example, if a business raises the price of a good or service that is considered to be elastic, it may see a significant decline in the quantity demanded, which could result in a decrease in revenue. On the other hand, if a business raises the price of a good or service that is considered to be inelastic, it may see a smaller change in the quantity demanded, which could result in an increase in revenue.

In conclusion, consumer choice and elasticity are closely related concepts in economics that help to explain how consumers make decisions about purchasing goods and services, and how those decisions are affected by changes in price and other factors. Understanding these concepts can be important for businesses and policymakers looking to make decisions about pricing, marketing, and other aspects of their operations.

1.Goods that have a negative income elasticity are known as:

inferior goods

public goods

merit goods

luxury goods

2.Which of the following fundamental principles does not underlie the choices of consumers?

One good can be substituted for another

Limited income necessitates choice

Consumers make decisions with perfect information

Consumers make decisions purposefully

3.If the absolute value of the price elasticity of eggs is 1.5, a 10 percent reduction in the price of eggs would lead to a:

10 percent increase in quantity demanded

15 percent increase in the quantity demanded

15 percent decrease in quantity demanded

1.5 percent increase in quantity demanded

4.Anne usually eats out at restaurants 20 times a month. Due to higher food prices, the cost of restaurant meals rises substantially. If, as a result, Anne not only eats out less but also purchase less of other goods, such as clothing, due to the decreased real purchasing power of her monthly budget this illustrates:

that the opportunity cost of consuming restaurant food has decreased

the income effect of a price change

that the supply of food is highly price elastic

that food is a luxury good for Anne

5.Suppose a 20 percent increase in Henry’s income results in a 10 percent increase in the quantity of cigars he consumes. Henry’s income elasticity of demand for cigars is:

1.0

1.5

2.0

0.5

6.When the demand for a good is price elastic, a decrease in the price of the good will result in:

no change in total expenditures (or total revenue)

a decrease in the quantity demanded

an increase in total expenditures (or total revenue)

a decrease in total expenditures (or total revenue)

7.Suppose at his current rates of consumption, Max has a marginal utility of 5 for the last apple consumed and 12 for the last hamburger consumed. If the price of apples is $1 and the price of hamburgers is $3, to maximize his utility Max should:

consume fewer apples and more hamburgers

keep his consumption of hamburgers and apples unchanged

there is not enough information to know how Max should alter his consumption to maximize his utility

consume fewer hamburgers and more apples

8.A bakery sells 50 slices of cakes per week when the price of each slice is $2. The shop owner lowers the price to $1, and as a result sales increase to 60 slices per week. The price elasticity of demand for cake slices is:

−0.35

−0.45

−0.18

−0.27

9.A local clothing store is having a sale in which if you purchase one men’s suit at full price, you can then purchase a second suit at half price. Russell purchases only one suit at the sale. The best explanation for why he would not purchase a second suit, even though the price is lower, is:

the law of supply

the increasing opportunity cost of producing suits for the manufacturer

the increasing marginal cost of purchasing the second suit

the law of diminishing marginal utility

10.Suppose Jacob’s income elasticity of demand for gasoline is 0.75. If Jacob’s income rises by 20 percent, then the percentage change in his quantity demanded of gasoline will be:

15 percent

30 percent

25 percent

20 percent

11.A luxury good is one that has:

a price elasticity that is negative

an income elasticity that is negative

an income elasticity greater than one

an income elasticity between zero and one

12.The price elasticity of demand for a product is:

the percentage change in price divided by the percentage change in quantity demanded

the change in the number of units consumed divided by the dollar amount of the change in price

the average of the percent change in price and percent change in quantity demanded divided by the new price

the percentage change in quantity demanded divided by the percentage change in price

13.Which of the following is true of the substitution effect of a price change?

It is the tendency to buy less of everything when real income falls due to a higher price

It only applies to inferior goods, and not normal goods, when the prices change

It affects the supply curve for a good, but not the demand curve

It is the tendency to replace a good that has become relatively more expensive with one that is now relatively less expensive

14.Suppose an apple and an orange yield the same amount of benefit for Erin, and she is getting ready to purchase one of them for a snack. Which of the following is true according to the principles of consumer choice?

If the price of oranges is higher the price of apples, Erin will purchase an apple

Erin will purchase the higher-priced item because it yields a higher marginal utility

Erin’s choice will be unaffected by the price of apples and oranges

If the price of oranges is lower the price of apples, Erin will purchase an apple

15.The price elasticity of supply of a product is:

the percentage change in price divided by the percentage change in quantity supplied

equal to one divided by the price elasticity of demand

the difference between the income elasticity of demand and the price elasticity of demand

the percentage change in quantity supplied divided by the percentage change in price

16.The relationship between elasticity and the length of the adjustment period is sometimes referred to as the second law of demand, in the case of price increase it states that:

buyers will respond by a cutting back a greater amount in the long run than in the short run

buyers generally do not need time to fully adjust to a price change, they do so immediately

there are no substitutes for a product in the long run

buyers will respond by a cutting back a greater amount in the short run than in the long run

17.When the absolute value of the price elasticity of demand for a good is equal to one, an increase in the price of the good will:

an increase in the quantity demanded

no change in total expenditures (or total revenue)

an increase in total expenditures (or total revenue)

a decrease in total expenditures (or total revenue)

18.Identify the correct statement about the income effect of a price change.

It is the tendency of consumers to consume more of a good when the opportunity cost of producing the good is high

It is the tendency to replace a good that has become relatively more expensive with one that is now relatively less expensive

It refers to the increase in the amount of a good consumed resulting from an increase in consumer’s real income when there is a reduction in the price of the good

It is the tendency of marginal utility to rise for goods that are now relatively inexpensive

19.Suppose a good has many substitutes available in the market. Which of the following is likely to be true?

If the price of the good increases, the proportionate decrease in the quantity of the good demanded will be less than the proportionate increase in the price of the good

If the income of a consumer increases, the proportionate decrease in the quantity of the good demanded will exceed the proportionate increase in the income of the consumer

If the income of a consumer increases, the proportionate decrease in the quantity of the good demanded will be less than the proportionate increase in the income of the consumer

If the price of the good increases, the proportionate decrease in the quantity of the good demanded will exceed the proportionate increase in the price of the good

20.The law of diminishing marginal utility implies that the height of the demand curve for a good:

falls as the quantity consumed of the good increases

falls as the price of the good increases

rises as the price of the good increases

rises as the quantity consumed of the good increases

21.If the absolute value of the price elasticity of demand for a good is 1.5, the demand for the good is considered:

inelastic

inferior

unitary elastic

elastic

22.The income elasticity of demand for a good is the:

percentage change in the quantity demanded of a good divided by the percentage change in its price

percentage change in the price of the good divided by the percentage change in the quantity demanded of the good

percentage change in consumer income divided by the percentage change in the quantity demanded of the good

percentage change in the quantity demanded of the good divided by the percentage change in consumer income

23.If Kelly purchases fewer hot dogs as her income rises, then:

Hot dogs are a normal good for Kelly

Hot dogs are a luxury good for Kelly

Hot dogs are an inferior good for Kelly

Hot dogs are a necessity good for Kelly

24.If the demand for a good is “perfectly elastic”, then the demand curve for the good will be:

downward sloping

a horizontal line

a vertical line

upward sloping

25.Suppose the price of a pack of cigarettes increases from $5 per pack to $8 per pack and causes the quantity demanded to reduce from 200 packs to 190 packs per month. The absolute price elasticity of demand for cigarettes is approximately:

0.38 and the demand for cigarettes is inelastic

0.11 and the demand for cigarettes is inelastic

0.11 and the demand for cigarettes is elastic

1.26 and the demand for cigarettes is elastic

26.If even a large percentage change in the price of heart surgeries to only a small percentage change in quantity demanded, we can conclude that:

the demand for heart surgeries is inelastic

the income elasticity of heart surgeries is negative

the supply elasticity of heart surgeries is negative

the demand for heart surgeries is elastic

27.A necessity good is one that has:

an income elasticity between zero and one

a price elasticity that is negative

an income elasticity that is negative

an income elasticity greater than one

28.The law of demand states that:

the quantity demanded of a product is directly proportional to its price, all other things remaining constant

the quantity demanded of a product is inversely proportional to its price, all other things remaining constant

the marginal utility derived from a product is directly proportional to its price

the marginal utility derived from a product is inversely proportional to its price

29.Suppose the price of smartphones increases by 5 percent and the quantity demanded of smartphones falls by 10 percent. The coefficient of price elasticity of demand for smartphones is:

−1

−2.5

−0.5

−2

30.For any two goods, utility is maximized when:

the total utility from the first good equals the total utility from the second good

the marginal utility of the first good equals the marginal utility of the second good

the marginal utility per dollar spent is equal for both goods consumed

the total quantity of both goods consumed is equal

31.Suppose at a price of $500 per laptop, the quantity demanded of laptops is 180 units. When the price of laptops increases to $600, the quantity demanded by consumers falls to 120 units. The absolute value of the price elasticity of demand for laptops is:

2.2

4.2

4.3

3.4

32.In the (arc) price elasticity formula, the percentage change in the price of a good (or quantity) is calculated differently than a normal percentage change. For the purposes of elasticity the percent change in price is computed by:

dividing the dollar change in the price of the good by the average of the two (old and new) prices of the good and then multiplying it by 100

multiplying the dollar change in the price of the good and the unit change in the quantity of the good demanded

dividing the average dollar change in the price of the good by the dollar change in the price of the good and then multiplying it by 100

multiplying the dollar change in the price of the good and the average quantity of the good demanded

33.Suppose Chloe consumes 2 burgers per week at a price of $5 per burger and James consumes 5 burgers per week at the same price. The total quantity of burgers demanded in this two-person market at the price of $5 is:

34.Just like the price elasticity of demand, the price elasticity of supply:

is smaller with the passage of time as most decision makers respond quickly to price changes and then tend to revert back to their old purchase level over time

is greater than one, in absolute value, for luxury goods

is generally negative

is greater with the passage of time because there is more time for decision makers to adjust

35.A normal good is a good that has a:

negative income elasticity of demand

positive income elasticity of demand

positive price elasticity of demand

negative cross-price elasticity of demand

36.When the demand for a good is inelastic, an increase in the price of the good will result in:

an increase in the quantity demanded

a decrease in total expenditures (or total revenue)

an increase in total expenditures (or total revenue)

no change in total expenditures (or total revenue)

37.Keesha buys a pound of beef every week at the store. However, an increase in the price of beef causes Keesha to purchase a pound of chicken instead. Which of the following statement is true?

This is an example of the law of supply

This illustrates the law of elasticity

This violates the law of demand

This is an example of the substitution effect

38.Suppose Brady is grocery shopping and the store is out of beef, so Brady buys chicken instead. Brady’s choice reflects the fact that:

total utility diminishes as more of a good is consumed

consumers cannot make decisions without perfect information

one good can be substituted for another

consumers do not take into account the opportunity costs of goods

39.Which of the following is true of marginal utility?

It increases as you consume more of a good in a given period of time

It is an objective concept

It measures the total satisfaction derived from the consumption of all units of a good

It is the additional satisfaction derived from consuming an additional unit of a good

40.Suppose the price elasticity of demand for eggs is 3 and the price elasticity of demand for toilet paper is 0.35. This implies that:

the demand for eggs is elastic, while the demand for toilet paper is inelastic

the demand for both eggs and toilet paper are inelastic

the demand for both eggs and toilet paper are elastic

the demand for eggs is inelastic, while the demand for toilet paper is elastic

41.Suppose there is an increase in the price of automobiles, but total consumer expenditures (and total sales revenue) remain the same. The price elasticity of demand, in absolute value, must be equal to:

exactly 1

less than zero

less than 1, but greater than zero

greater than 1

42.Suppose Nancy is currently maximizing her utility by purchasing 2 hats and 5 t-shirts. The prices of hats and t-shirts are $15 and $12, respectively. If Nancy derives a marginal utility of 30 from the last hat purchased, the marginal utility derived from the last t-shirt purchased is:

43.The maximum price a consumer is willing to pay for an additional unit of a good shows the:

average cost of the good

opportunity cost of the good

marginal cost of the good

marginal benefit from the good

44.Reagan spends more time doing research regarding which car she is going to purchase than she does regarding which coffee maker to purchase. This illustrates the consumer choice principle that:

the marginal utility derived from coffee is higher than a car

the time and effort consumers spend in acquiring information is directly related to the potential value derived from the information

consumers make decisions as if they have unlimited resources and income

consumers ignore opportunity cost when doing research

Consumer choice and elasticity

Consumer choice and elasticity

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