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CHAPTER 15 _ Market Demand

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					CHAPTER 15 | Market Demand

TRUE-FALSE

Difficulty: 3
Correct Answer: True
      12.   If a rational consumer must consume either zero or one unit
of a good, then an increase in the price of that good with no change in
income or in other prices can never lead to an increase in the
consumer’s demand for it.
Difficulty: 1
Correct Answer: False
      13.   In the reservation price model, either aggregate demand is
zero or everyone demands one unit of the good.
Difficulty: 1
Correct Answer: False
      14.   The Laffer effect occurs only if there is a backward-
bending labor supply curve.
Difficulty: 2
Correct Answer: True
      15.   If the demand curve were plotted on graph paper with
logarithmic scales on both axes, then its slope would be the elasticity
of demand.
Difficulty: 1
Correct Answer: True
      16.   The market demand curve is simply the horizontal sum of the
individual demand curves.
Difficulty: 1
Correct Answer: False
      17.   The demand curve is inelastic for inferior goods and
elastic for normal goods.
Difficulty: 1
Correct Answer: True
      18.   Marginal revenue is equal to price if the demand curve is
horizontal.
Difficulty: 2
Correct Answer: False
      19.   If the amount of money that people are willing to spend on
a good stays the same when its price doubles, then demand for that good
must have a price elasticity of demand smaller in absolute value than
1.
Difficulty: 1
Correct Answer: True
      20.   If the price elasticity of demand for a normal good is
constant, then a price increase of .10¢ will reduce demand by more if
the original price is $1 than if the original price is $2.
Difficulty: 1
Correct Answer: True
      21.   The demand function for potatoes has the quantity q = 1,000
- 10p. As the price of potatoes changes from .10¢ to .20¢, the absolute
value of the price elasticity of demand for potatoes increases.
Difficulty: 1
Correct Answer: True
      22.   If the demand curve for a good is given by the equation q =
2/p, where q is quantity and p is price, then at any positive price,
the elasticity of demand will be -1.
MULTIPLE CHOICE

       26.  Given his current income, Rico’s demand for bagels is
related to the price of bagels by the equation Q = 540 - 16P. Rico’s
income elasticity of demand for bagels is known to be equal to 0.5 at
all prices and incomes. If Rico’s income quadruples, his demand for
bagels will be related to the price of bagels by the equation
       a.   Q = 540 - 16P.
       b.   Q = 2,160 - 64P.
       c.   Q = 540 - 32P.
       d.   Q = 1,080 - 32P
       e.   Q = 1,080 - 16P.
Difficulty: 2
Correct Answer: b
       27.  Given his current income, Rico’s demand for bagels is
related to the price of bagels by the equation Q = 520 - 12P. Rico’s
income elasticity of demand for bagels is known to be equal to 0.5 at
all prices and incomes. If Rico’s income quadruples, his demand for
bagels will be related to the price of bagels by the equation
       a.   Q = 520 - 24P.
       b.   Q = 1,040 - 24P.
       c.   Q = 2,080 - 48P.
       d.   Q = 520 - 12P.
       e.   Q = 1,040 - 12P.
Difficulty: 3
Correct Answer: e
       28.  A person with a quasilinear utility function will
       a.   have a price elasticity of demand equal to zero for some
goods.
       b.   have an income elasticity of demand equal to one for some
goods.
       c.   necessarily consume zero quantity of some good.
       d.   necessarily consume positive amounts of every good.
       e.   None of the above.
Difficulty: 2
Correct Answer: c
       29.  In the village of Frankfurter, the demand function for
sausages per person is D(p) = 20 - 1.5p, where p is the price of a
single sausage. The present population of Frankfurter is 100 persons.
Suppose that 10 more people move into town, each of whom has the same
demand function as the old residents. At a price of $2, the price
elasticity of demand for sausages in Frankfurter is
       a.   increased by 10%.
       b.   decreased by 10%.
       c.   unchanged.
       d.   increased by 15%.
       e.   None of the above.
Difficulty: 1
Correct Answer: b
       30.  A firm faces a demand function D(p), for which the revenue-
maximizing price is $16. The demand function is altered to 2D(p). What
is the new revenue-maximizing price?
       a.   $8
       b.   $16
       c.   $32
       d.   There is insufficient information to determine this.
       e.   None of the above.
Difficulty: 1
Correct Answer: c
       31.  A firm faces a demand function D(p), for which the revenue-
maximizing price is $10. The demand function is altered to 2D(p). What
is the new revenue-maximizing price?
       a.   $5
       b.   $20
       c.   $10
       d.   There is insufficient information to determine this.
       e.   None of the above.
Difficulty: 1
Correct Answer: c
       32.  If the supply curve for x is given by x = 100p2, then the
inverse supply curve is given by
       a.   100/p2.
       b.   x2/100.
       c.   x1/2/10.
       d.   p-2/100.
       e.   None of the above.
Difficulty: 1
Correct Answer: c
       33.  Ed has 100 tons of manure. The lowest price at which he is
willing to sell it is $10 per ton. Fred wants to buy 100 tons of
manure. The most he is willing to pay is $8 per ton. The federal
government offers to subsidize manure sales at a rate of $1 per ton. If
Ed and Fred are the only people who deal in manure, then the deadweight
loss caused by the subsidy is
       a.   $100.
       b.   $50.
       c.   $0.
       d.   $200.
       e.   None of the above.
Difficulty: 2
Correct Answer: e
       34.  Fred’s price elasticity of demand for milk is -2 at today’s
prices when we measure price in dollars and quantity of milk in quarts.
If the price per quart of milk stays the same but we measure quantity
of milk in gallons and price in dollars, then what will be the
elasticity of demand for gallons of milk? (A gallon is four quarts.)
       a.   -1
       b.   -1/2
       c.   -8
       d.   -4
       e.   -2
Difficulty: 2
Correct Answer: d
       35.  In a small Kansas town, there are two kinds of gasoline
consumers: 100 Buick owners and 50 Dodge owners. Each Buick owner has
the demand function Db(p) = max{0, 20 - 5p} and each Dodge owner has the
demand function Dd = max{0, 15 - 3p}. In this town, the market demand
curve has
       a.   no kinks but gets steeper as price rises.
       b.   no kinks but gets flatter as price rises.
       c.   constant slope since individual demand curves have constant
slope.
       d.   a kink at p = 4 and another at p = 5.
       e.   a kink at p = 35/8.
PROBLEMS

Difficulty: 2
      1.    Suppose that the inverse demand function for wool is p =
A/q for some constant A. Suppose that 1/4 of the world’s wool is
produced in Australia.
      a.    If Australian wool production increases by 1% and the rest
of the world holds its output constant, what will be the effect on the
world price of wool?
      b.    How does the marginal revenue to Australia from an extra
unit of wool relate to the price of wool?
Answer:
      a.    Price will fall by about 0.25%.
      b.    Marginal revenue is 75% of price.
Difficulty: 2
      2.    Bart Wurst runs the only hot-dog stand in a large park in a
large boring town. On Sundays people in this town all sit in the park
and sunbathe. For any t between 0 and 30, the number of people who are
sitting within t minutes of Bart’s stand is 10t2. People in Bart’s town
are lazy and hate to walk. They think that every minute of walking they
do is as bad as spending $.10. Everybody in the park has a reservation
price of $1 for a hot dog, where the cost of a hot dog includes the
subjective cost of walking as well as the money price they have to pay
when they get there. (Nobody has ever thought of fetching a hot dog for
someone else.) Find a formula for the demand curve for Bart’s hot dogs.
Explain how you got it.
Answer: If Bart charges p, where 0 < p < 1, his extensive margin is the
customers who are at distance t* from Bart where p + .10t* = 1. Then t*
= 10 - p and the demand for hot dogs at prices p is the number (10 - p)2
of people within t* of Bart.
Difficulty: 3
      3.    In Tassel, Illinois (pop. 20,000), there are two kinds of
families, those who like swimming pools and those who don’t. Half of
the population is of each type. Families who like swimming pools are
willing to spend up to 5% of their income each year on a swimming pool.
Families who don’t like them would pay nothing for a swimming pool.
Nobody wants more than one swimming pool and nobody has thought of
sharing a swimming pool. Incomes in Tassel range between $10,000 and
$110,000. For incomes M in this range, the number of families in Tassel
with income greater than M is about 22,000 - .2M. (The two types of
families have the same income distribution.) Find the aggregate demand
function for swimming pools in Tassel (demand for swimming pools as a
function of the annual cost of having one).
Answer: The number of people willing to pay at least p is half of the
number who have income at least $20p. Therefore the aggregate demand
function is 11,000 - 2p.

				
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