ECON 3300 Lecture Notes - Lecture 4: Marginal Utility, Marginal Cost, Demand Curve
There are two types of consumers or vacationers of a monopoly hotel in a resort town: type 1, of which there are 300 consumers willing to pay V1 = $600 per day; and type 2, of which there are 500 consumers, willing to pay V2 = $200 per day. The daily unit cost of serving a consumer is $50 per day, plus there is a fixed cost of $5,000 per day.
a. What price will the hotel set and how many consumers will be served? What is the hotel's daily profit and what is consumer surplus?
b. Suppose a marketing campaign targeted to type 2 consumers can raise their willingness to pay to $350 per night. What is the maximum amount that the hotel would pay per day to run the campaign? If the campaign costs less than this amount and the firm engages in it what is the effect on consumer surplus?
c. Now suppose that there are 850 consumers willing to pay V2 = $200 per day. Everything else is the same. How do your answers to a) and b) change in this case?
Michael spends all of his income on coffee and donuts. A coffee costs $2.50 and a donut costs $2.00. At his current consumption level, the marginal utility for coffee is 30 utils, and the marginal utility for a donut is 60 utils. Which statement best describes what Michael needs to do to maximize his utility?
Question 1 options:
What is it called when the marginal utility derived from the last dollar spent on each good is the same across all goods and the last dollar spent uses all of the available budget for the purchase of those goods?
Question 2 options:
Question 3 (1 point)
What does the economic theory of marginal utility infer?
Question 3 options:
Kate is addicted to chocolate and does not care how much it costs. In fact, she spends more than $20 a week on chocolate. What can be concluded about elasticity in her buying decisions?
Question 4 options:
Question 5 (1 point)
Why does the demand for a good become relatively more elastic?
Question 5 options:
Question 6 (1 point)
Assume the price of chicken per pound is $3.49 and that Americans purchase 10 million pounds per chicken every month. If the price of chicken increases to $5.49 per pound, identify what will occur to consumer surplus?
Question 6 options:
Question 7 (1 point)
What is another name for the difference between the price that consumers are willing to pay for a good and a lower price that they may actually have to pay?
Question 7 options:
Adam, Brian, Robert, and Sam all want to attend a football game. The admission price is $48. Adam is willing to pay $59 for the ticket. Brian is willing to pay $39. Robert is willing to pay $45, and Sam is willing to pay $55. Based on this information, who will go to the game?
Question 8 options:
Question 9 (1 point)
Lily is willing to pay $10 for one bracelet and $5 for a second. Patty is willing to pay $12 for one bracelet and $2 for a second. If the price is currently $8 per bracelet, identify what is the total consumer surplus after Lily and Patty make their purchases?
Question 9 options:
Question 10 (1 point)
Manfred is willing to shovel one driveway for $25, a second for $30, and a third for $35. Assume that the market rate for shoveling driveways is $32. How many driveways will Manfred shovel, what will be his total revenue, and what will be his producer surplus?
Question 10 options:
Question 11 (1 point)
What would the difference between the price that producers receive and the lower price at which they are willing to sell the good be called?
Question 11 options:
Question 12 (1 point)
What will happen when there is an increase in the price of eBook downloads?
Question 12 options:
Question 13 (1 point)
When is price elasticity of demand utilized to measure how an individual changes the quantity they demand?
Question 13 options:
Question 14 (1 point)
Assume Mary consumes only tea and pastries. A cup of tea costs 5 euros and a pastry costs 8 euros. Her weekly income is 450 euros. Mary always drinks 2 cups of tea for every pastry she consumes. What is Maryâs optimal weekly consumption bundle?
Question 14 options:
Question 15 (1 point)
When is producer surplus a positive value?
Question 15 options:
_____ 1. Suppose you make silver jewelry. If the price of silver falls, we would expect you to:
a. be willing and able to produce less jewelry than before at each possible price.
b. be willing and able to produce more jewelry than before at each possible price.
c. face greater demand for your jewelry.
d. face a weaker demand for your jewelry.
_____ 2. If suppliers expect the price of their product to fall in the future, then they will:
a. increase supply (supply curve shifts out) now.
b. decrease supply (supply curve shifts in) now.
c. increase supply in the future, but not now.
d. decrease supply in the future, but not now.
_____ 3. Consider the market for portable air conditioners, initially in equilibrium. When a heatwave strikes, the equilibrium price:
a. increases and equilibrium quantity decreases.
b. decreases, and the equilibrium quantity increases.
c. and quantity both increase.
d. and quantity both decrease.
_____ 4. Buyers can buy all they want to buy and sellers can sell all they want to sell at:
a. prices at and above the equilibrium price.
b. prices at and below the equilibrium price.
c. prices above and below the equilibrium price, but not at the equilibrium price.
d. the equilibrium price, but not at prices above or below the equilibrium price.
_____ 5. The law of supply and demand states that:
a. demand and supply curves shift out as time goes by.
b. the price of a goodwill rise in response to excess demand for that good.
c. when the supply curve for good shifts, the demand curve for that good shifts in response.
d. the equilibrium price of goodwill be rising more often than it will be falling.
_____ 6. If Doritos and Cheetos are substitutes, a rise in the price of Cheetos will cause:
a. the equilibrium quantity of Doritos to fall and the price of Doritos to rise.
b. the equilibrium quantity and price of Doritos to rise.
c. the equilibrium quantity and price of Doritos to fall.
d. the equilibrium quantity of Doritos to rise and the price of Doritos to fall.
_____ 7. New production technology is perfected that allows auto manufacturers to build an automobile using half the labor hours formerly needed. As a result:
a. the equilibrium quantity of automobiles increases and the price decreases.
b. the equilibrium quantity and price of automobiles increase.
c. the equilibrium quantity and price of automobiles decreases.
d. there is likely no change in the number of automobiles produced.
_____ 8. The U.S. government announces that it will raise the interest rate on college student loans beginning in January of next year. The immediate market impact is:
a. the demand curve for student loans shifts out.
b. the supply curve for student loans shifts out.
c. we anticipate that more student loans will be completed next year than this year.
d. all of the above are correct.
_____ 9. What curve shift produces a fall in price and increase in quantity exchanged?
a. An inward shift in the demand curve.
b. An inward shift in the supply curve.
c. An outward shift in the supply curve.
d. An outward shift in the demand curve.
_____ 10. We note that fewer motorcycles were sold this year than last and that the price is also lower. What event could have caused this outcome?
a. A technological change that improved the fuel efficiency of motorcycles.
b. A rise in the wages paid to motorcycle manufacturing workers.
c. A motorcycle craze due to the popularity of Sons of Anarchy.
d. Increasing concerns about health impacts from breathing motorcycle exhaust.
_____ 11. The price that results in quantity supplied equaling quantity demanded is the optimal (best) price because it:
a. maximizes the combined welfare of buyers and sellers.
b. maximizes the cost of the seller.
c. minimizes the expenditure of buyers.
d. all of the above are correct.
_____ 12. Consumer surplus is the:
a. quantity of good consumers get without paying anything.
b. amount a consumer pays minus the amount the consumer is willing to pay.
c. amount a consumer is willing to pay minus the amount the consumer pays.
d. value of a good to a consumer.
_____ 13. In a market, the marginal buyer is the one:
a. whose willingness to pay is higher than all other buyers and potential buyers.
b. whose willingness to pay is lower than all other buyers and potential buyers.
c. who is willing to buy exactly one unit of the good.
d. who would be the first to leave the market if the price were any higher.
_____ 14. If a consumer is willing and able to pay $20 for a particular good and if she actually pays $16 for the good, then her consumer surplus is:
_____ 15. Suppose there is an early freeze in California that reduces the size of the orange crop. What happens to consumer surplus in the market for oranges?
a. Consumer surplus increases.
b. Consumer surplus decreases.
c. Consumer surplus is not affected by this change.
d. We would have to know whether the demand for oranges is elastic or inelastic.
_____ 16. Producer surplus is the area on a supply/demand graph:
a. under the supply curve.
b. between the supply and demand curves.
c. below the price line and above the supply curve.
d. under the demand curve and above the price line.
_____ 17. Economists typically measure economic efficiency using:
a. total producer and consumer surplus.
b. profits to firms.
c. the quantity supplied by sellers.
d. the price paid by buyers.
_____ 18. Which of the following statements is correct?
a. Efficiency and equality are both maximized when total surplus is maximized.
b. Efficiency deals with the size of the economic pie; equality with how fairly the pie is sliced.
c. Efficiency is more difficult to evaluate than equality.
d. Equality is judged on positive grounds; efficiency requires normative judgments.
_____ 19. The price elasticity of demand measures how much:
a. quantity demanded a response to changes in price.
b. quantity demanded a response to changes in income.
c. price responds to a change in demand.
d. Both a and c are correct
_____ 20. Goods with many close substitutes tend to have:
a. less elastic demands.
b. more elastic demands.
c. price elasticities of demand that are unit elastic.
d. income elasticities that are negative.
Short Answer Questions:
All of the following questions are based on the data shown here for coffee demand and supply at a fictional Columbus coffee shop called Go-bucks.
Price Quantity Quantity
per Cup Demanded Supplied
$1.60 1,700 1,220
$1.80 1,555 1,300
$2.00 1,400 1,400
$2.20 1,235 1,520
$2.40 1,060 1,660
$2.60 875 1,820
_____ 21. (6 points) Using the mid-point formula, calculate the price elasticity of demand as the price increases from $1.60 to $1.80.
_____ 22. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $1.80 to $2.00.
_____ 23. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $2.40 to $2.60.
24. (4 points) Over which price range is demand inelastic? Over which price range is demand elastic? Does this follow the trend noted in class?
_____ 25. (6 points) Turning to the supply side, calculate the price elasticity of supply as the price increases from $2.20 to $2.40.
26. (2 points) How would you describe the price elasticity of supply over this range?