Problem Set 1: Short Answer.
Exercise \(\PageIndex{1}\)
Given the following:
Q1 = 125 + 3 P2 .1 M - 6 P1
P2 = 25; M = 500; P1 = 20
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
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Good 2 is a substitute.
Good 1 is inferior.
Direct: Q1 = 150 -6 P1
Inverse: P1 = 25 -0.17 Q1
Consumer Surplus = $ 75
Exercise \(\PageIndex{2}\)
Given the following:
Q1 = 230 + 5 P2 -0.2 M -5 P1
P2 = 10; M = 400; P1 = 30
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a substitute.
Good 1 is inferior.
Direct: Q1 = 200 -5 P1
Inverse: P1 = 40 -0.2 Q1
Consumer Surplus = $ 250
Exercise \(\PageIndex{3}\)
Given the following:
Q1 = 104 + 2 P2 + 0.1 M -6 P1
P2 = 30; M = 1000; P1 = 20
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a substitute.
Good 1 is normal.
Direct: Q1 = 264 -6 P1
Inverse: P1 = 44 -0.17 Q1
Consumer Surplus = $ 1728
Exercise \(\PageIndex{4}\)
Given the following:
Q1 = 382 -2 P2 -0.3 M -4 P1
P2 = 30; M = 300; P1 = 40
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
-
Answer
-
Good 2 is a complement.
Good 1 is inferior.
Direct: Q1 = 232 -4 P1
Inverse: P1 = 58 -0.25 Q1
Consumer Surplus = $ 648
Exercise \(\PageIndex{5}\)
Given the following:
Q1 = 137 -3 P2 + 0.4 M -3 P1
P2 = 25; M = 400; P1 = 50
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a complement.
Good 1 is normal.
Direct: Q1 = 222 -3 P1
Inverse: P1 = 74 -0.33 Q1
Consumer Surplus = $ 864
Exercise \(\PageIndex{6}\)
Given the following:
Q1 = 102 + 6 P2 + 0.3 M -4 P1
P2 = 5; M = 600; P1 = 40
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a substitute.
Good 1 is normal.
Direct: Q1 = 312 -4 P1
Inverse: P1 = 78 -0.25 Q1
Consumer Surplus = $ 2888
Exercise \(\PageIndex{7}\)
Given the following:
Q1 = 400 -4 P2 -0.4 M -3 P1
P2 = 20; M = 200; P1 = 50
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a complement.
Good 1 is inferior.
Direct: Q1 = 240 -3 P1
Inverse: P1 = 80 -0.33 Q1
Consumer Surplus = $ 1350
Exercise \(\PageIndex{8}\)
Given the following:
Q1 = 200 + 4 P2 + 0.2 M -5 P1
P2 = 20; M = 800; P1 = 30
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a substitute.
Good 1 is normal.
Direct: Q1 = 440 -5 P1
Inverse: P1 = 88 -0.2 Q1
Consumer Surplus = $ 8410
Exercise \(\PageIndex{9}\)
Given the following:
Q1 = 260 -6 P2 -0.5 M -2 P1
P2 = 5; M = 100; P1 = 60
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
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Answer
-
Good 2 is a complement.
Good 1 is inferior.
Direct: Q1 = 180 -2 P1
Inverse: P1 = 90 -0.5 Q1
Consumer Surplus = $ 900
Exercise \(\PageIndex{10}\)
Given the following:
Q1 = 132 -5 P2 + 0.5 M -2 P1
P2 = 10; M = 300; P1 = 60
--------
Is good 2 a substitute or complement to good 1?
Is good 1 a normal or inferior good?
Write equations for the direct and inverse demand schedules.
Plot the inverse demand schedule. Label the vertical and horizontal intercepts along with the own-price and quantity.
Calculate consumer surplus at this data point. Shade the area that represents consumer surplus.
-
Answer
-
Good 2 is a complement.
Good 1 is normal.
Direct: Q1 = 232 -2 P1
Inverse: P1 = 116 -0.5 Q1
Consumer Surplus = $ 3136
Problem Set 2: Multiple Choice.
Exercise \(\PageIndex{1}\)
-
Which best describes consumer surplus?
a) Large surplus that result when consumers perceive the product in question to be undesirable (e.g., negative demand).
b) Value that the consumer receives from a transaction above the price he or she is required to pay.
c) Situations where the consumer only wants one unit of the product. Additional units are considered to be surplus.
d) Goods that consumers store for use at a later date.
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Answer
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b
Exercise \(\PageIndex{2}\)
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Which of the following is most likely to shift the demand schedule out (to the right or northeast)?
a) An increase in population.
b) An increase the own-price.
c) A decrease in the price of a substitute product.
d) All of the above.
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Answer
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a
Exercise \(\PageIndex{3}\)
-
Suppose that a prestigious journal reports that the regular consumption of walnuts reduces risk of heart disease. As a consequence, the demand for walnuts increases (walnut demand shifts to the right).
a) Walnuts would switch from becoming inferior goods to normal goods.
b) This would be described as a change in the price of a substitute product because heart disease is something no one wants.
c) This change in demand would best be characterized as a change in preferences.
d) All of the above
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Answer
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c
Exercise \(\PageIndex{4}\)
-
Which best describes a direct demand schedule?
a) Price is a function of quantity.
b) Quantity is a function of price.
c) Price is a function of income.
d) Both a and c.
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Answer
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b
Exercise \(\PageIndex{5}\)
-
Which condition is the best example of a product in a state of latent demand?
a) High-protein muffins filled with roasted caterpillars.
b) Fresh salads in cold Midwestern and Northeastern cities during the winter months of the mid to late 1800s.
c) Demand for products that are outdated (e.g., unused tickets to last week’s ball game).
d) Demand for apples.
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Answer
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b
Exercise \(\PageIndex{6}\)
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Suppose the economy goes into recession, many people lose their jobs, and nearly everyone has a lower income. Which products will likely experience an increase in market demand?
a) Products classified as normal goods.
b) Products that are classified as inferior goods.
c) Products classified as necessities.
d) Products classified as complements.
e) Products classified as substitutes.
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Answer
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b
Exercise \(\PageIndex{7}\)
-
Which best describes complements as described in class?
a) Goods that are consumed together, for example, gasoline and automobiles.
b) Luxury items purchased in the hope of eliciting complements from friends or acquaintances.
c) Goods that can be used in lieu of one another, for example, beef and poultry.
d) Goods for which demand increases given an increase in income.
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Answer
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a
Exercise \(\PageIndex{8}\)
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In demand, if the price of good A decreases and the demand for good B also decreases then which must be true?
a) Good A is a substitute for good B.
b) Good A is a complement for good B.
c) Good A is a normal good.
d) Good B is an inferior good.
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Answer
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a
Exercise \(\PageIndex{9}\)
-
When you write an equation for the inverse demand curve,
a) Price will be a function of quantity (price is on the left-hand side of the equation).
b) Quantity will be a function of price (quantity is on the left-hand side of the equation).
c) The demand schedule will slope upwards.
d) Both b and c.
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Answer
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a
Exercise \(\PageIndex{10}\)
-
The law of demand
a) States that as price increases, quantity decreases and
vice versa
.
b) Reflects the fact that marginal utility usually declines as the number of units consumed increases.
c) Reflects the fact that different consumers will generally place different valuations on the product. In other words, as price declines more consumers will find it attractive to participate in the market.
d) All of the above.
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Answer
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d
Exercise \(\PageIndex{11}\)
-
If consumer incomes increase,
a) demand will shift out (to the right).
b) demand will shift in (to the left).
c) demand will not shift but there will be a new quantity demanded from the same demand schedule.
d) the shift in demand cannot be determined without additional information.
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Answer
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d
Exercise \(\PageIndex{12}\)
-
Consumer surplus refers to
a) The triangular area below the linear inverse demand curve and above the horizontal axis.
b) The sum of the value that consumers receive above the price they are required to pay.
c) Situations where consumers do not like a product and so the result is an excess or surplus.
d) A case where producers put too much on the market.
e) Both a and b.
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Answer
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b
Exercise \(\PageIndex{13}\)
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Prepared breakfast cereal is best described as being in a state of:
a) Latent demand.
b) Negative demand.
c) Effective demand.
d) Latent supply.
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Answer
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c
Exercise \(\PageIndex{14}\)
-
By definition, an inferior good is:
a) A good that is in a state of negative demand.
b) A good for which demand increases (shifts out) when consumer incomes decline.
c) A good for which demand decreases (shifts in) when consumer incomes decline.
d) A good that would be unappetizing to most consumers.
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Answer
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b
Exercise \(\PageIndex{15}\)
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The law of demand indicates:
a) Cross-price elasticities will be negative for substitute products.
b) The demand schedule will be downward sloping.
c) Income elasticities will be positive.
d) Demand shifts when tastes and preferences change.
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Answer
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b
Exercise \(\PageIndex{16}\)
-
Vacations to Mars are best described as being in a state of:
a) Latent demand.
b) Negative demand.
c) Effective demand.
d) No demand state since consumers cannot buy these products.
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Answer
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a
Exercise \(\PageIndex{17}\)
-
By definition a normal good is:
a) A good that is in a state of negative demand.
b) A good for which demand increases (shifts out) when consumer incomes decline.
c) A good for which demand decreases (shifts in) when consumer incomes decline.
d) A good that consumers consider to be “normal” in the sense that there is nothing extraordinary about it. Food insects, for example, would be abnormal goods for many US consumers.
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Answer
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c
Exercise \(\PageIndex{18}\)
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All else equal, if income increases and the demand schedule shifts out (to the right) then you can conclude that:
a) The demand schedule is for a normal good.
b) The demand schedule is for an inferior good.
c) The demand schedule is for a substitute product.
d) The demand schedule is for a complementary product.
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Answer
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a