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Chapter 8. Demand Theory I.
The Demand Curve. Consumer Behaviour
Chapter 8 – Question 1
Below you find a demand schedule for ice cream cones for June, July and August. A, B and C are three different consumers.
Below you find a demand schedule for ice cream cones for June, July and August. A, B and C are three different consumers.
| Price | A |
B |
C |
| $2 | 40 |
30 |
10 |
| $3 | 30 |
22 |
8 |
| $4 | 20 |
18 |
2 |
1) Draw a market demand curve for ice cream cones.
2) The current market price is $3. What is market demand at this price?
3) Show on your diagram what happens to the market demand curve when market demand declines by 20 percent owing to cold, rainy weather.
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Chapter 8– Question 2
A household earns $5,000 a month and saves $1,000 a month. What is its propensity to consume?
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Chapter 8– Question 3
What the propensity to consume of a household that
1) spends its entire income
2) saves its entire income
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Chapter 8– Question 4
Below you find the utility a consumer derives from buying three commodities A, B and C.
| Product | A | B | C |
| Quantity | 2 | 3 | 4 |
| Price per unit | $5 | $7 | $9 |
| Utility derived from the last unit | 10 utils | 10 utils | 10 utils |
The consumer
- has made a rational decision because all three products yield the same marginal utility
- should decrease purchases of C
- should decrease purchases of A and B and increase purchases of C
- should increase purchases of A
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Chapter 8– Question 5
The slope of the demand curve for butter shows that an increase in the price of butter leads to
- a decline in the amount of butter available
- an increase in demand for margarine
- an expected decline in the price of butter
- a decline in the price of margarine
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Chapter 8– Question 6
Refer to the table below. What is the utility derived from increasing consumption from 3 ice cream cones to 4 ice cream cones?
| Number of Ice Cream Cones | Total Utility | Marginal Utility | ||
| 1 | 15 | |||
| 2 | 5 | |||
| 3 | 0 | |||
| 4 | 18 |
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Chapter 8– Question 7
A consumer buys a bundle of two goods, A and B. MU/P for A is 40/1. The marginal utility of B is 20. The price of B must therefore be
- 5
- 0.5
- 2
- none of the above
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Chapter 8– Question 8
A consumer buys a bundle with two goods, X and Y. MU/P for X is 4, MU/P for Y is 3. What should the consumer do to optimise his decision with the same amount of money?
- increase X
- increase Y
- increase Y and lower X
- increase X and lower Y
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Chapter 8 –Question 9
Explain the relationship between the income and substitution effects.
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Chapter 8– Question 10
Explain why the law of diminishing marginal utility is the best explanation of the law of demand.
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Chapter 8– Question 11
An increase in the propensity to consume will
- cause a movement downward the demand curve for red roses
- cause a movement upward the demand curve for red roses
- shift the demand curve for red roses to the right
- shift the demand curve for red roses to the left
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Chapter 8– Question 12
A decline in incomes will
- shift the demand curve for hamburgers to the left
- shift the demand curve for hamburgers to the right
- cause an upward movement along the demand curve for hamburgers
- cause a downward movement along the demand curve for hamburgers
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Chapter 8– Question 13
If the price of one product is lowered, the substitution effect suggests that consumers will buy more of the product whose price has not changed. True or false? Explain your answer.
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Chapter 8– Question 14
Many people think that junk food is an inferior good. If consumer incomes increase, what happens to
1) the demand curve for junk food
2) the quantity demanded
3) the equilibrium price
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Chapter 8 –Question 15
| Commodity A | Commodity B | |
| MU | 40 | 20 |
| Price | 8 | 5 |
A consumer's expenditure is given. He could improve his choice by
- consuming A only.
- consuming B only
- increasing consumption of A and reducing consumption of B
- increasing consumption of B and reducing consumption of A
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Chapter 8 –Question 16
Your optimal buying decision is to buy 20 units of A at $1 and 5 units of B. The last A gave you 10 units of utility. The last unit of B gave you 20 units of utility. The price of B is
- $0.50
- $0.25
- $4.00
- $1.50
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