Principles of Microeconomics (Econ 002) Signature:Drake University, Summer 2004William M. Boal Printed name:

QUIZ #6“Consumer Choices and Demand”

INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100.

I. Multiple choice: Circle the one best answer to each question. [3pts each: 42 pts total]

(1) Points on the budget linea. are not affordable.b. are exactly affordable.c. can be purchased with money left over.d. have a total cost of zero.

(2) Suppose the price of a bicycle is $200 and the price of a computer is $800. The consumer's opportunity cost of a bicycle isa. 1/4 of a computer.b. one computer.c. two computers.d. four computers.

(3) In the graph below, what could cause the rotation depicted in the budget line?a. An increase in income.b. A decrease in income.c. An increase in the price of energy.d. An increase in the price of other goods.

(4) In the graph below, what could cause the shift depicted in the budget line?a. An increase in income.b. A decrease in income.c. An increase in the price of food.d. An increase in the price of other goods.

(5) If the consumer’s income and all prices increase by 20%, thena. the slope of the budget line changes.b. the slope of the budget line does not change but

the intercepts do.c. neither the slope of the budget line nor its

intercepts change.d. cannot be determined from information given.

(6) The graph below shows Bob’s indifference curves and two possible combinations (or bundles) of goods. According to this graph, combination A isa. more valuable to Bob than combination B.b. less valuable to Bob than combination B.c. just as valuable to Bob as combination B.d. cannot be determined from the information

given.Other goods

En

erg

y

Other goodsF

ood

Principles of Microeconomics (Econ 002)Drake University, Summer 2004

Quiz 6Page 2 of 5

(7) What is wrong with the indifference-curve graph below?a. It violates the assumption that consumers do the

best they can with what they have.b. It violates the Law of One Price.c. It violates the assumption of diminishing

marginal rates of substitution.d. It violates the assumption that "more is better"

from the consumer's perspective.

(8) The indifference-curve graph below reveals that the consumer views cheddar cheese and munster cheese asa. perfect substitutes.b. perfect complements.c. perfect squares.d. none of the above

(9) The indifference-curve graph below reveals that the consumer views computers and printers asa. perfect substitutes.b. perfect complements.c. perfect squares.d. none of the above

A

B

Other goods

Clo

thin

g

Other goods

Hou

sin

g

Munster cheese

Che

ddar

che

ese

Principles of Microeconomics (Econ 002)Drake University, Summer 2004

Quiz 6Page 3 of 5

(10) Carmen’s indifference-curve diagram is shown below. The straight line represents Carmen’s budget line and the curved lines represent her indifference curves. If Carmen is currently at point A, she could be made better off without exceeding her budget bya. buying more entertainment and fewer other

goods.b. buying more other goods and less entertainment.c. either (a) or (b).d. Carmen cannot be made better off by changing

her purchases.

(11) At a consumer's best choice, the consumer's marginal rate of substitution equals a. its maximum value.b. total income.c. zero.d. the price ratio.

(12) The price of gasoline is approximately equal toa. the value to the consumer of the first gallon of

gasoline that a consumer buys.b. the value to the consumer of the last gallon of

gasoline that a consumer buys.

c. the average value to the consumer of all gallons of gasoline that a consumer buys.

d. zero.

(13) Suppose Derek has been buying five pounds of tomatoes every week, at a price of $2.00 per pound. Now suppose the price drops to $1.50 per pound. The benefit to Derek of this price change, measured as the increase in Derek's consumer surplus, isa. exactly $2.50.b. less than $2.50.c. greater than $2.50.d. zero.

Printers

Com

put

ers

En

tert

ain

men

t

Other goods

A

Principles of Microeconomics (Econ 002)Drake University, Summer 2004

Quiz 6Page 4 of 5

(14) Suppose Eva has been buying four pounds of bananas every week, at a price of $0.50 per pound. Now suppose the price rises to $1.00 per pound. The loss to Eva from this price change, measured as the decrease in Eva's consumer surplus, isa. exactly $2.00.b. less than $2.00.c. greater than $2.00.d. zero.

II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section.

(2) [Consumer choice and demand: 33 pts] The indifference curves in the graph below represent Meghan’s preferences for souvenirs and corn dogs at the State Fair.

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Corn dogs

So

uve

nir

s

a. Would Meghan rather have 1 corn dog and 9 souvenirs, or 3 corn dog and 5 souvenirs?

corn dogs souvenirs

b. Would Meghan rather have 4 corn dogs and 6 souvenirs, or 2 corn dogs and 8 souvenirs?

corn dogs souvenirs

Suppose Meghan has a budget of $30 to spend on souvenir corn dogs and souvenirs. The price of souvenirs is $3.c. Using a straightedge, carefully draw Meghan’s budget line on the graph

above when the price of corn dogs is $5. Label this budget line “A”.

d. How many corn dogs will Meghan buy if the price of corn dogs is $5? corn dogs

e. Using a straightedge, carefully draw Meghan’s budget line on the graph above when the price of corn dogs is $3. Label this budget line “B”.

f. How many corn dogs will Meghan buy if the price of corn dogs is $3? corn dogs

g. Using a straightedge, carefully draw Meghan’s budget line on the graph above when the price of corn dogs is $2. Label this budget line “C”.

h. How many corn dogs will Meghan buy if the price of corn dogs is $2? corn dogs

Principles of Microeconomics (Econ 002)Drake University, Summer 2004

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i. [9 pts] Plot three points on Meghan’s demand curve for corn dogs, and sketch her demand curve below.

$0

$1

$2

$3

$4

$5

$6

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Quantity demanded of corn dogs

Pri

ce o

f co

rn d

og

s

(3) [Consumer surplus: 21 pts] Consider the market demand curve for music CDs shown in the graph below.

$0$2$4$6$8

$10$12$14$16$18$20

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity demanded (millions)

Pri

ce

First, suppose the price of CDs is $14.a. How many CDs are purchased by consumers? millionb. How much money is spent by consumers on CDs? $ millionc. If the sale of CDs were banned altogether (for some reason), would

consumers be better off, worse off, or just as well off?d. ... by how much? [Hint: Compute total consumer surplus.] $ million

Now suppose the price of CDs falls from $14 to $10.e. How many CDs are now purchased by consumers? millionf. If the price of CDs fell from $14 to $10, would consumers be better off,

worse off, or just as well off?g. ... by how much? [Hint: Compute the change in consumer surplus.] $ million

Principles of Microeconomics (Econ 002)Drake University, Summer 2004

Quiz 6Page 6 of 5

III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [4 pts]

(1) Consider the following statement: "To be rational means to be objective. All rational consumers, faced with the same budget constraints, would make the same choices." Do you agree or disagree? Why?

(2) We have three souvenir tee-shirts to give out to five people. Obviously, only three people will get tee-shirts. We want to give the tee-shirts to the three people who value tee-shirts most. We know that one person values a tee-shirt at $10, one at $8, one at $6, one at $4, and one at $2. However, we don't know which person values the tee-shirt at which amount. (When we ask, they all claim to value the tee-shirt at $10!) Devise a mechanism for ensuring that the tee-shirts go to the three people who value them the most. (Your answer cannot involve mind-reading or truth serum.)

Which question are you answering? _________ . Please write your answer below.

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