Question

5A Venus owns a musical instruments store, and the price elasticity of demand for the pianos is -0.6. If Venus increases the price of the pianos,

A the number of pianos sold will increase.

B the demand for organs, which are substitutes for pianos, will decrease.

C total revenues from piano sales will increase.

D total revenues from piano sales will decrease.

E total revenues from piano sales will remain the same.

5B A is priced at $8 per unit, B is priced at $4 per unit, and Jill has $48 to spend on A and B. She purchases 3 units of A and 6 units of B. The marginal utility of the last unit of A purchased is 32, and the marginal utility of the last unit of B purchased is 24. Based on this information,

A Jill is maximizing her utility, given her budget constraint.

B In order to maximize utility, Jill should buy more of A and less of B.

C Jill is not spending all of her budget.

D Jill should buy less of both A and B.

E In order to maximize utility, Jill should buy more of B and less of A.

5C The demand for a product is given by P = 42 – 6Q, where P is price and Q is quantity sold. At a price of $12, consumer surplus equals

A $135

B $6

C $75

D $5

E $60

F $150

G $12

5D Assume that TV shows and movies are both “good”. Based on the table below, which of the statements is necessarily true?

    Market Basket        Units of TV Shows        Units of Movies

1 8 4

2 4 8

3 7 4

A A rational consumer must prefer basket 1 to basket 3.

B A rational consumer must be indifferent between basket 1 and basket 2.

C A rational consumer must prefer basket 3 to basket 2.

D A rational consumer must be indifferent between basket 2 and basket 3.

E A rational consumer must prefer basket 2 to basket 1.

Answer 1

Answer 5A. C. total revenues from piano sales will increase.

reason- Price elasticity of demand is inelastic. It implies that a rise in price will lead to rise in total revenue from piano sales.

Answer 5B. E. In order to maximize utility, Jill should buy more of B and less of A.

Reason- Utility maximizing level is where MUa/Pa is equal to MUb/PUb.

MUa/Pa= 32/8= 4

MUb/Pb= 24/4=6

Since MUb/Pb> MUa/Pa, consumer should buy more of good B and less of good A.

Answer 5C. Consumer surplus= $75

reason- Consumer surplus= 0.5*(42-12)*5= 0.5*30*5= $75

Answer 5D. A A rational consumer must prefer basket 1 to basket 3.

Reason- Basket 1 contains 8 shows and 4 movies. Basket 3 contains 7 shows and 4 movies.

So consumer will prefer basket 1 to basket 3.

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