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# Macroeconomics: Chapters 4 and 6

The price elasticity of demand coefficient measures:

The basic formula for the price elasticity of demand coefficient is:
percentage change in quantity demanded/percentage change in price.

The demand for a product is inelastic with repsect to price if:
consumers are largely unresponsive to a per unit price change.

Which of the following is not characteristic of the demand for a commodity that is elastic?
The elasticity coefficient is less than one.

If a firm can sell 3,000 units of product A at \$10 per unit and 5,000 at \$8, then:
the price elasticity of demand is 2.25.

Suppose that as the price of Y falls from \$2.00 to \$1.90 the quantity of Y demanded increses from 110 to 118. Then the price elasticity of demand is:
\$1.37.

Which type of goods is most adversely affected by recessions?
Goods for which the income elasticity coefficient is relatively high and positive.

Which of the following goods (with their respective income elasticity coefficients in parentheses) willl most likely suffer a decline in demand during a recession?
Plasma screen and LCD TVs

Which of the following goods will least likely suffer a decline in demand during a recession?
Toothpaste

If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:
increase the amount demanded by more than 10 percent.

If the demand fo a product is elastic, then total revenue will:
rise as price falls.

If the University Chamber music Society decides to raise ticket prices to provide more funds to finance concerts, the Society is assuming that the demand for tickets is:
inelastic.

The state legislature has cut Gigantic State University’s appropriations. GSU’s Board of Regents decides to increase tuition and fees to compensate for the loss of revenue. The board is assuming that the:
demand for education at GSU is inelastic.

The elasticity of demand for a product is likely to be greater:
the greater the amount of time over which buyers adjust to a price change.

Refer to the above diagram. Total revenue at price P1 is indicated area(s):
A + B

Refer the to above diagram. If price falls from P1 to P2 total revenue will become area(s):
B + D

The demand schedules for such products as eggs, bread, and electricity tend to be:
relatively price inelastic

The elasticity of demand for a product is likely to be greater:
The greater the amount of time over which buyers adjust to a price change.

We would expect:
the demand for Coca-Cola to be more elastic than the demand for soft drinks in general.

Which of hte following statements is correct?
Demand is more elastic when a large number of substitute goods are available.

The more time consumers have to adjust to a change in price:
The greater will be the price elasticity of demand.

Microsoft charges a substantially lower price for a software upgrade than for the initial purchase of the software. This implies that Microsfot views the demand curve for the software upgrade to be:
more elastic than the demand for the original software.

The supply of known Monet paintings is:
perfectly inelastic.

Refer to the above information and assume the stadium capacity is 5,000. If the Mudhens’ management charges \$7per ticket:
there will be 1,000 empty seats.

Refer to the above information and assume the stadium capacity is 5,000. If the Mudhens’ management wanted a full house for hte game, it would:
set ticket prices at \$5.

A product has utility if it:
satisfies consumer wants.

Marginal utility can be:
positive, negative, or zero.

Mary says, “You would have to pay me \$50 to attend that pro wrestling event.” For Mary, the marginal utility of the event is:
negative.

Refer to the above data. The value for Y is:
45

Refer to the above data. The value for X is:
15

Refer to the above data. The value for W is:
20

Refer to the above data. The value for Z is:
-5

Refer to above data. Marginal utility becomes negative beginning with the:
fourth unit.

Where total utility is at a maximum, marginal utility is:
zero.

The law of diminishing marginal utility states that:
beyond some point additional units of a product will yield less and less extra satisifaction to a consumer.

The first Pepsi yields Craig 18 units of utlity and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utlity. The marginal utility of the third Pepsi is:
8 units of utility.

Marginal utility is the:
change in total utility obtained by consuming one more unit of a good.

To maximize utility a consumer should allocate money income so that the:
marginal utility obtained from the last dollar spent on each product is the same.

Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy:
more of X and less of Y.

In introducing the opportunity cost of time into the theory of consumer behavior we find that, all else equal:
one should consume less of time-intensive goods.

The fact that most medical care purchases are finance through insurance:
increasess the amount of health care consumed.

reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences.

Suppose that Dairy Barn Foods produces a regular sour cream with only 5 grams of fat per serving (assume that this is still considered a lot of fat to consume per serving).
It should advertise that the “low fat” sour cream has only “half the fat” of their regular sour cream.

Josh will receive a salary of \$300,000 next year. According to prospect theory:
Josh’s satisfaction with that salary depends on how much he made in the past.

Why do credit card companies typically require small minimum payment amounts on their customers’ monthly credit card statements?
Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements.

The process by which people isolate purchases and fail to consider all consumption options simultaneously is known as:
mental accounting.

Kara was earning \$40,000 per year. When her income rose to \$60,000 per year, she enjoyed the higher level of consumption for a while, but eventually she was no more happy than when she earned \$40,000 (assume prices didn’t change over this time period). Economist Richard Easterlin described this as:

According to prospect theory, firms are more likely to shrink packages than raise prices because:
consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money.

Alex was willing to pay \$50 for the new World Cup soccer ball. When he recieved it as a gift, he was willing to sell it, but for no less than \$80. According to behavioral economists:
Alex’s behavior is consistent with the endowment effect.

Which of the following questionsw best illustrates the “framing effects” studied by behavioral economists?
How much would you rather receive: \$100 while everone else gets \$110, or \$80 like everyone else?

Determinants of Demand. When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).

2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.

4. Price of related goods:

a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.

Example: If the price of coffee rises, the demand for tea should increase.

b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.

Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.

5. Expectation of future:

a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.

b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

Elasticity:
Greater than one.

Inelasticity:
Less than one.

Unit Elasticity:
One.

Framing Effect:
Change in people’s preferences.

Marginal Benefits:
Extra Benefits.

Law of Diminishing Marginal Utility:
Added satisfaction declines as a consumer acquires additional units of a given product.

Utility:
The satisfaction or pleasure one gets from consuming a good or product.

Total Utility:
The total amount of satisfaction or pleasure a person deries from consuming some specific quantity–for example, 10 units–of a good or service.

Marginal Utility:
The extra satisfaction a consumer realizes from an additional unit of that product–for example, from the eleventh unit.

Rational Behavior:
When consumers want to get “the most for their money” or, technically, to maximize their total utility.

Budget Constraint:
Each consumer’s fixed, limited amount of money income.

Utility-Maximizing Rule:
Last dollar spent on each product yields the same amount of extra (marginal) utility.

Consumer Equilibrium:
When the consumer has “balanced his margins.”

Income Effect:
A change in the demand of a good or service, induced by a change in the consumers’ discretionary income.

Substitution Effect:
An effect caused by a rise in price that induces a consumer (whose income has remained the same) to buy more of a relatively lower-priced good and less of a higher-priced one.

Behavioral Economics:
A theory stating that there are important psychological and behavioral variables involved in the economic decisions of consumers or countries.

Status Quo:
the existing state or condition.

Loss Averse:
people’s tendency to strongly prefer avoiding losses to acquiring gains.

Prospect Theory:
The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics.

Framing Effects:
a set of concepts and theoretical perspectives on how individuals, groups, and societies organize, perceive, and communicate about reality. Framing is commonly used in media studies, sociology, psychology, and political science.

Anchoring:
a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.

Mental Accounting:
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.”If Richard Thaler’s concept of mental accounting is one of two pillars upon which the whole of behavioral economics rests, then prospect theory is the other.”
Belsky and Gilovich (1999)

Endowment Effect:
People often demand much more to sell an object than they would be willing to pay to buy it.

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