Principles of Microeconomics - Practice Exam

1. Microeconomics deals with: A) the working of the entire economy or large sectors of it. B) C) D) economic growth. individual units in the economy. gross domestic product.

2. If resources are scarce it means that they: A) cannot provide enough goods or services to satisfy all human material wants and needs. B) C) D) have no opportunity cost. are probably not valued by consumers. have an unlimited supply.

3. The problem of scarcity is confronted by: A) industrialized societies. B) C) D) pre-industrialized societies. societies governed by communist philosophies. all societies.

4. The opportunity cost of something is: A) greater during periods of rising prices. B) C) D) equal to the money cost. less during periods of falling prices. what is given up to acquire it.

5. A choice made ________ is a choice whether to do a little more or a little less of something. A) at the front end B) C) in the beginning at the margin

Page 1

D)

ceteris paribus

6. We are forced to make choices because of: A) exploitation. B) C) D) efficiency. scarcity. the margin.

7. A resource is anything that: A) can be used in production. B) C) D) you pay for. is in scarce supply. can be consumed.

8. You can either spend $100 on a new economics textbook or a new CD player. If you choose to buy the new economics textbook, the opportunity cost is: A) $100. B) C) D) the new CD player. both the $100 and the new CD player. impossible to determine.

9. A new fast-food restaurant offered a free meal (valued at $5) a week for a year to its first 100 customers. Ramona camped out for 48 hours before the opening to be one of the first 100 customers. The cost of the free meal a week for a year for Ramona was: A) zero. B) C) D) $260. whatever she would have done with those 48 hours. The cost is impossible to determine.

10. For which of the following decisions would marginal analysis be most relevant? A) Should I go to college or work after graduating from high school?

Page 2

B) C) D)

Should I eat another donut? Should I use $20,000 as a down payment on a house or buy a car? Should I get married?

11. Which of the following demonstrates how people respond to incentives to make themselves better off? A) More students major in economics when they hear that salaries for economists are rising. B) C) D) Students are assigned dorm rooms through a lottery system. Students are encouraged to donate blood because it is the right thing to do. Students and faculty are encouraged to wear college apparel to support the college athletic teams.

12. Lena and Jess are roommates. Lena hates to clean the bathroom. Jess will only agree to clean the bathroom if Lena vacuums the living room. This statement best represents the economic concept of: A) the real cost of something is what you must give up to get it. B) C) D) how much? is a decision at the margin. people usually exploit opportunities to make themselves better off. there are gains from trade.

13. Gains from trade arise because of: A) specialization in production. B) C) D) specialization in consumption. marginal analysis. individual choice.

14. The phrase gains from trade refers to the: A) profits obtained from sales of a good or service. B) C) D) increase in total output that is realized when individuals specialize in particular tasks and trade with each other. gains that one obtains by taking advantage of an uninformed buyer and selling at a higher than average price. gains that one obtains by taking advantage of a temporary discount or sale price.

Page 3

15. Market failure occurs when: A) prices of essential goods such as gas become very high. B) C) D) individual actions have side effects that are not properly taken into account. mutually beneficial trades take place. a business declares bankruptcy.

16. The government of a small town has decided to ban smoking in all restaurants, stores, and government offices. This is an example of which principle? A) One person's spending is another person's income. B) C) D) When markets fail to achieve efficiency, government intervention can improve society's welfare. There are gains from trade. Resources should be used as efficiently as possible to achieve society's goals.

17. When people want more goods and services than are available, the economy experiences inflation. This statement best represents the economic concept of: A) resources are scarce. B) C) D) when markets don't achieve efficiency, government intervention can improve society's welfare. overall spending sometimes gets out of line with the economy's productive capacity. government policies can change spending.

18. A simplified representation that is used to study a real situation is called: A) a model. B) C) D) a production possibility frontier. an assumption. a trade-off.

19. The production possibility frontier illustrates that: A) the economy will automatically end up at full employment. B) C) an economy's productive capacity increases proportionally with its population. if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced.

Page 4

D)

economic production possibilities have no limit.

Use the following to answer questions 20-21: Figure: Guns and Butter

20. (Figure: Guns and Butter) On this figure, points A, B, E, and F: A) indicate combinations of guns and butter that society can produce using all of its factors efficiently. B) show that the opportunity cost of more guns increases, but that of more butter decreases. C) D) indicate that society wants butter more than it wants guns. indicate constant costs for guns and increasing costs for butter.

21. (Figure: Guns and Butter) This production possibility frontier is: A) bowed out from the origin because of increasing opportunity costs. B) C) D) bowed in toward the origin because of increasing opportunity costs. bowed in toward the origin because of constant costs of guns and butter. linear because of constant costs.

23. When moving along a production possibility frontier, the opportunity cost to society of getting more of one good: A) is constant. B) C) is measured in dollar terms. is measured by the amount of the other good that must be given up.

Page 5

D)

usually decreases.

24. A production possibility frontier illustrates the ________ facing an economy that ________ only two goods. A) prices; sells B) C) D) trade-offs; produces trade-offs; consumes shortages; produces

25. All points inside the production possibility frontier represent: A) efficient production points. B) C) D) inefficient production points. nonfeasible production points. economic growth.

26. All points on the production possibility frontier represent: A) efficient production points. B) C) D) inefficient production points. nonfeasible production points. economic growth.

27. All points outside the production possibility frontier represent: A) efficient production points. B) C) D) inefficient production points. nonfeasible production points. economic growth.

28. The opportunity cost of production: A) is the price of a good. B) is what you give up to produce the good.

Page 6

C) D)

decreases as production increases. is what you gain by producing the good.

Use the following to answer questions 29-30:

29. (Table: Trade-off of Study Time and Leisure Time) A student sleeps 8 hours per day and divides the remaining time between study time and leisure time. The table shows the combinations of study and leisure time that can be produced in the 16 waking hours of each day. If a student decides to consume one additional hour of leisure time, how many hours of study time must be given up? A) 4 B) C) D) .25 1 16

30. (Table: Trade-off of Study Time and Leisure Time) A student sleeps 8 hours per day and divides the remaining time between study and leisure time. Suppose this student is studying 4 hours and spending 10 hours doing leisure activities. What is true about this allocation of his scarce resources? A) This point is outside the production possibility frontier. B) C) D) This point is inside the production possibility frontier. This point is on the production possibility frontier. This point is both efficient and feasible.

31. If a production possibility frontier is a straight line, it tells us that the opportunity cost of producing one more unit of good X: A) is an increasing amount of good Y.

Page 7

B) C) D)

is a decreasing amount of good Y. is equal to the inverse of the amount of good Y. is a constant amount of good Y.

32. An economy is said to have a comparative advantage if it: A) can produce more of all goods than another economy. B) C) D) can produce less of all goods than another economy. has the highest cost for producing a particular good. has the lowest cost for producing a particular good.

33. Efficient production exists when the economy is: A) operating underneath its production possibility frontier. B) C) D) operating on its production possibility frontier. operating outside its production possibility frontier. moving beyond its production possibility frontier.

34. As long as people have different ________, everyone has a comparative advantage in something. A) direct costs B) C) D) benefits utility opportunity costs

35. If they spend all night writing computer programs, Laurence can write 10 programs while Carrie Anne can write 5. If they spend all night making sunglasses, Laurence can make 6 while Carrie Anne can make 4. Given this information and supposing Laurence and Carrie Anne have constant opportunity costs, we know that: A) Laurence has an absolute advantage in programs but not in sunglasses. B) C) D) Laurence has an absolute advantage in both programs and sunglasses. Carrie Anne has an absolute advantage in programs but not in sunglasses. Carrie Anne has an absolute advantage in both programs and sunglasses.

Page 8

36. If they spend all night writing computer programs, Laurence can write 10 programs while Carrie Anne can write 5. If they spend all night making sunglasses, Laurence can make 6 while Carrie Anne can make 4. We know that: A) Laurence's opportunity cost of writing programs is less than that of Carrie Anne. B) C) D) Laurence's opportunity cost of writing programs and of making sunglasses is less than that of Carrie Anne. Carrie Anne's opportunity cost of writing programs and of making sunglasses is less than that of Laurence. Carrie Anne's opportunity cost of writing programs is less than that of Laurence.

38. The circular-flow diagram illustrates how households ________ goods and services and ________ factors of production. A) buy; sell B) C) D) buy; buy own; buy own; sell

39. The circular-flow diagram illustrates how firms ________ goods and services and ________ factors of production. A) buy; sell B) C) D) buy; buy sell; buy sell; sell

40. In the simplest circular-flow model, households supply ________ and demand ________. A) capital; barter B) C) D) wages and income; capital markets factors of production; goods and services firms; markets

41. Which of the following statements is a normative statement? A) Women's labor force participation rate has increased during the past 100 years. B) The federal minimum wage is higher today than it was in 1990.

Page 9

C) D)

Children in the United States are required to go to school until they reach a certain age. The best way to encourage growth in the economy is through government spending.

42. Which of the following would be a positive economic statement? A) Government has grown too large and should be reduced. B) C) D) There has been an increase in the rate of inflation. Government should be subject to the same rules as all other institutions. Women should be paid as much as men for the same work.

43. Economists may disagree about policies because: A) they may approach the issue using different sets of values. B) C) D) they may be using different economic models. they enjoy disagreeing with each other. they may approach the issue using different sets of values and because they may be using different economic models.

Use the following to answer question 44: Scenario: Linear PPF Largetown has a linear production possibility frontier and produces socks and shirts. The table below shows the number of units of labor necessary to produce one sock or one shirt.

44. (Scenario: Linear PPF) If Largetown has 80 hours of labor, what is the maximum number of socks it can produce? A) 40 socks B) C) D) 20 socks 2 socks 4 socks

Page 10

46. The Kansas market for corn is considered a competitive market. This means there are ________ buyers and ________ sellers of corn in Kansas. A) many; few B) C) D) few; many many; many few; few

47. A shift of the demand curve for Luis's Pizza would not be caused by a change in the: A) buyers' incomes. B) C) D) price of Luis's Pizza. price of Humberto's Pizza. popularity of Luis's Pizza.

48. If goods A and B are substitutes, a decrease in the price of good B will: A) increase the demand for good A. B) C) D) increase the demand for good B. decrease the demand for good A. increase the demand for good B and decrease the demand for good A.

49. If goods A and Z are complements, an increase in the price of good Z will: A) increase the demand for good A. B) C) D) decrease the demand for good A. decrease the demand for good Z. decrease the demand for good A and decrease the demand for good Z.

Page 11

Use the following to answer question 50: Figure: Demand for Coconuts

50. (Figure: Demand for Coconuts) If there is an overall increase in taste and preference for coconuts, then the movement that would take place in the model could be: A) A to C. B) C) D) B to A. C to A. B to E.

51. A decrease in the price of eggs will result in a(n): A) increase in the demand for eggs. B) C) D) increase in the supply of eggs. greater amount of eggs supplied. greater amount of eggs demanded.

52. The law of demand is illustrated when: A) an increase in tuition encourages more students to enroll in college because the quality of education has risen. B) an increase in the purchases of personal computers results from lower prices. C) D) higher oil prices causes oil companies to drill for new sources of oil. higher incomes cause more people to adopt golf as a sport.

Page 12

53. The primary difference between a change in demand and a change in the quantity demanded is: A) a change in demand is a movement along the demand curve and a change in quantity demanded is a shift in the demand curve. B) a change in quantity demanded is a movement along the demand curve and a change in demand is a shift in the demand curve. C) both a change in quantity demanded and a change in demand are shifts in the demand curve, only in different directions. D) both a change in quantity demanded and a change in demand are movements along the demand curve, only in different directions. 54. Which of the following would shift the demand curve for new textbooks to the right? A) a decrease in the price of paper B) C) D) a fall in the price of used textbooks an increase in college enrollments a fall in the price of new textbooks

55. The law of demand is illustrated by a demand curve that is: A) horizontal. B) C) D) downward-sloping. vertical. upward-sloping.

56. Which of the following is not a determinant of supply? A) expectations regarding future prices B) C) D) the technology of production the cost of production consumer tastes

57. A technological advance in the production of automobiles will: A) increase the demand for automobiles. B) C) D) increase the supply of automobiles. decrease the demand for automobiles. decrease the supply of automobiles.

Page 13

Use the following to answer questions 58-59: Figure: Supply of Coconuts

58. (Figure: Supply of Coconuts) If the price of coconuts decreases, then the movement that would take place in the model could be: A) A to B. B) C) D) B to A. C to A. E to B.

59. (Figure: Supply of Coconuts) If there is an improvement in the technology used to harvest coconuts (e.g., a faster, less expensive coconut picker), then the movement in the model could be: A) A to C. B) C) D) B to A. C to A. B to E.

60. The primary difference between a change in supply and a change in the quantity supplied is that: A) a change in quantity supplied is a movement along the supply curve, while a change in supply is a shift in the supply curve. B) both a change in quantity supplied and a change in supply are movements along the supply curve, only in different directions.

Page 14

C) D)

a change in supply is related to the supply curve, while a change in quantity supplied is related to shifts in the demand curve that elicit a change in supply. a change in supply is a movement along the supply curve, while a change in quantity supplied is a shift in the supply curve.

61. An increase in supply is caused by: A) an increase in input prices. B) C) D) suppliers' expectations of higher prices in the future. an increase in the price of the good. a decrease in prices of goods that are substitutes in production.

62. Which would not cause the supply curve to shift? A) a change in technology B) C) D) a change in factor costs a change in the price of the good a change in suppliers' expectations of prices

63. Market equilibrium occurs when: A) there is no incentive for prices to change in the market. B) C) D) quantity demanded equals quantity supplied. the market clears. there is no incentive for prices to change in the market, quantity demanded equals quantity supplied, and the market clears.

Page 15

Use the following to answer questions 64-66: Figure: DVD Market

64. (Figure: DVD Market) The figure shows the weekend rental market for DVDs in Collegetown. The equilibrium price for DVD rentals is ________ and the equilibrium quantity is ________. A) $5; 50 B) C) D) $3; 30 $9; 90 $6; 40

65. (Figure: DVD Market) At a rental price of $3, there will be A) equilibrium in the rental market for DVDs. B) C) D) an increase in demand. an excess supply of 40 DVD rentals. an excess demand of 40 DVD rentals.

66. (Figure: DVD Market) At a rental price of $6, there will be: A) equilibrium in the rental market for DVDs. B) C) D) a decrease in demand. an excess supply of 20 DVD rentals. an excess demand of 20 DVD rentals.

Page 16

67. A competitive market with flexible prices and many buyers and sellers will: A) eliminate surpluses. B) C) D) eliminate shortages. reach an equilibrium. eliminate surpluses and shortages and reach an equilibrium.

68. What is the difference between a shortage and scarcity? A) Scarcity will always exist because choices must be made, but a shortage will only exist if the price is kept below the equilibrium level. B) Scarcity is a result of two or more alternative uses and will always exist, and quantities of supply and demand adjusting to flexible prices will create shortages. C) A shortage will exist when a good is scarce. D) There is no distinction between the two. They are the same thing.

69. Which of the following always results in an increase in price and quantity? A) an increase in supply and a decrease in demand B) C) D) an increase in demand with no change in supply an increase in supply with no change in demand a decrease in demand and supply

Use the following to answer questions 70-71:

70. (Table: The Lemonade Market) If the price of a cup of lemonade is $1.00, what will exist in the market? A) equilibrium

Page 17

B) C) D)

a shortage of 150 cups a shortage of 75 cups a surplus of 75 cups

71. (Table: The Lemonade Market) If the price of lemonade were $1.25 per cup, we would expect to see: A) a rising price to eliminate the shortage. B) C) D) a rising price to eliminate the surplus. a falling price to eliminate the shortage. a market in equilibrium.

72. If the supply and demand curves intersect at a price of $47, then any price above that would result in a(n): A) shortage. B) C) D) surplus. equilibrium. increase in demand.

73. An increase in demand, with no change in supply, will lead to ________ in equilibrium quantity and ________ in equilibrium price. A) an increase; an increase B) C) D) an increase; a decrease a decrease; an increase a decrease; a decrease

74. An increase in supply, with no change in demand, will lead to ________ in equilibrium quantity and ________ in equilibrium price. A) an increase; an increase B) C) D) an increase; a decrease a decrease; an increase a decrease; a decrease

Page 18

Use the following to answer questions 75-76: Figure: Shifts in Demand and Supply II

75. (Figure: Shifts in Demand and Supply II) The graph shows how supply and demand might shift in response to specific events. Suppose consumer incomes decrease. Which panel best describes how this will affect the market for used clothing, an inferior good? A) Panel A B) C) D) Panel B Panel C Panel D

76. (Figure: Shifts in Demand and Supply II) The graph shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating pomegranates causes aging. Which panel best describes how this will affect the market for pomegranates? A) Panel A B) Panel B

Page 19

C) D)

Panel C Panel D

77. Along a given demand curve, an increase in the price of a good will: A) increase consumer surplus. B) C) D) decrease consumer surplus. have no effect on consumer surplus. decrease producer surplus.

Use the following to answer questions 78-79:

78. (Table: Consumer Surplus and Phantom Tickets) Using the information in the table, if the price of a ticket to see Phantom of the Opera is $50, then Robert's consumer surplus is: A) $60. B) C) D) $50. $10. $240.

79. (Table: Consumer Surplus and Phantom Tickets) If the box-office price of a ticket to see Phantom of the Opera is $50, and there is no other market for tickets, then total consumer surplus for the five students is: A) $100. B) C) D) $175. $230. $240.

Page 20

Use the following to answer question 80: Figure: Market for Hamburgers

80. (Figure: Market for Hamburgers) The figure shows the weekly market for hamburgers at the Tasty Burger Palace. If the Palace sells 400 burgers, consumer surplus will equal: A) $650. B) C) D) $400. $225. $450.

82. We can measure total consumer surplus for Good X as: A) the sum of the individual consumer surpluses for all buyers of X. B) C) D) the area above the demand curve for X and below the price of X. the area bounded by the demand curve for X and the two axes. the area above the supply curve for X.

83. Consumer surplus can be found by computing the area: A) above the supply curve and below the price. B) C) under the supply curve and above the price. under the demand curve and above the price.

Page 21

D)

under the demand curve and below the price.

84. We can measure total producer surplus for Good X as: A) the sum of the individual producer surpluses for all buyers of X. B) C) D) the area below the supply curve for X and above the price of X. the area bounded by the supply curve for X and the two axes. the area between the demand curve for X and the supply curve for X.

85. Producer surplus is represented by the area ________ the supply curve and ________ the price. A) above; above B) C) D) above; below below; above below; below

86. The total surplus generated in a market is: A) the excess supply due to the imposition of a price floor. B) C) D) the surplus that exists when a good is not scarce, defined as the total amount (if any) by which quantity supplied exceeds quantity demanded at a zero price. the net benefit to consumers, defined as the excess of consumer surplus over producer surplus. the sum of consumer surplus and producer surplus.

Page 22

Use the following to answer question 87: Figure: Market for Hamburgers

87. (Figure: Market for Hamburgers) The figure shows the weekly market for hamburgers at the Tasty Burger Palace. The maximum total surplus for the market for the Palace burgers is ________ and it occurs at a price equal to ________. A) $550; $1.50 B) C) D) $640; $1.60 $1,050; $2 Not enough information is provided to answer this question, since the maximum total surplus could occur at a price that is not marked in the figure.

Page 23

Use the following to answer questions 88-89: Figure: Consumer and Producer Surplus

88. (Figure: Consumer and Producer Surplus) In the figure, if an effective price floor exists in this market, then consumer surplus ________ and total surplus ________. A) increases; decreases B) C) D) decreases; stays the same increases; stays the same decreases; decreases

89. (Figure: Consumer and Producer Surplus) In the figure, if an effective price ceiling exists in this market, then producer surplus ________ and total surplus ________. A) decreases; decreases B) C) D) increases; stays the same decreases; stays the same increases; decreases

91. A price control is: A) when a firm controls the price of the good it produces. B) C) D) a legal restriction on how high or low a price in a market may go. an upper limit on the quantity of some good that can be bought or sold. a tax placed on the sale of a good which controls the market price.

Page 24

92. A(n) ________ market is a market in which goods or services are bought and sold illegally. A) black B) C) D) uncontrolled unregulated unproductive

93. Price controls encourage black markets because: A) they eliminate opportunity costs. B) C) D) individuals can profit by illegal exchanges. they create too much efficiency. they create too much equity.

Page 25

Use the following to answer questions 94-95: Figure and Table: Market for Apartments

94. (Figure and Table: Market for Apartments) This figure represents a competitive market for apartments. If a government price ceiling at $700 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A) surplus of 0.6 million apartments. B) C) D) shortage of 0.6 million apartments. surplus of 0.2 million apartments. shortage of 0.2 million apartments.

Page 26

95. (Figure and Table: Market for Apartments) This figure represents a competitive market for apartments. If a government price ceiling at $900 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A) surplus of 0.6 million apartments. B) C) D) shortage of 0.6 million apartments. surplus of 0.2 million apartments. shortage of 0.2 million apartments.

96. The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price ceiling in the market at a price of $0.40 per pound, then: A) quantity demanded will decrease. B) C) D) quantity supplied will increase. there will be a shortage of the good. the price ceiling will not affect the market price or output.

97. Price ceilings that lead to shortages will impose costs on society because they: A) will eliminate long waiting lines. B) C) D) may result in black market prices, which are lower than the market-determined price would be. lead to a smaller quantity offered on the market. help businesses instead of consumers.

Page 27

Use the following to answer question 98: Figure: Market for Blue Jeans

98. (Figure: Market for Blue Jeans) Suppose the government believes blue jeans are too expensive and it wants to make sure blue jeans are affordable to more citizens. This type of price control is called a ________ and the price would be set equal to ________. A) price floor; $100 B) C) D) price floor; $55 price ceiling; $55 price ceiling; $100

Use the following to answer question 100:

100. (Table: Market for Butter) If the government imposes a price floor of $0.90 per pound of butter, the quantity of butter actually purchased will be: A) 10.5 million pounds.

Page 28

B) C) D)

9.0 million pounds. 1.5 million pounds. 10.0 million pounds.

101. Suppose the government sets a price floor of $2.85 per bushel on corn when the current price is $2.55. This price floor will: A) cause a surplus of corn. B) C) D) cause a shortage of corn. have no effect on the price of corn. increase the supply of corn.

104. A minimum price set above the equilibrium price is a: A) demand price. B) C) D) supply price. price floor. price ceiling.

105. A price floor is likely to cause deadweight loss because: A) buyers incur additional search costs looking for the scarce good. B) C) D) the quantity of the good being bought and sold is less than the equilibrium quantity. a black market emerges where sellers sell the good at prices above the price floor. some buyers who want to buy at the controlled price are unable to find a seller willing to sell at that price.

106. A price ceiling will create a persistent ________ and a price floor will create a persistent ________. A) surplus; surplus B) C) D) shortage; surplus shortage; shortage surplus; shortage

107. When the government imposes a limit on sales of a good or service by a quota, it usually issues a license that gives the owner the right to sell a given quantity of the good. The market price of the license is equal to: A) the demand price of the good.

Page 29

B) C) D)

the wedge that represents the difference between the demand price and the supply price. the quota rent. the quota rent and the wedge that represents the difference between the demand price and the supply price.

108. Quantity controls set below the equilibrium quantity cause all of the following except: A) incentives for illegal activities. B) C) D) missed opportunities in the form of mutually beneficial transactions that don't occur. the supply price of the quantity transacted to exceed the demand price of the quantity transacted. quota rents.

109. The market for salmon is in equilibrium. A price ceiling, a price floor, and a quota limit in this market would all have what outcome in common? A) deadweight loss created by a quantity exchanged that is less than the equilibrium quantity B) C) D) a supply price that exceeds a demand price revenue collected by the government on each unit of salmon harvested deadweight loss created by a transfer of surplus from consumers to producers

110. Suppose the United States removes the current sugar quotas and the market price of sugar drops. In the candy bar market, we would expect consumer surplus to: A) increase. B) C) D) decrease. not change. Consumer surplus cannot be determined without information about the supply curve.

Page 30

Use the following to answer questions 111-113: Figure: Market I

111. (Figure: Market I) A surplus of the good would result if the price was equal to: A) $15. B) C) D) $9. $6. $0.

112. (Figure: Market I) If a price floor of $15 was imposed on this market, government would need to buy ________ units of the good, and spend a total amount of ________ on its purchase. A) 5; $75 B) C) D) 10; $150 9; $135 9; $81

113. (Figure: Market I) If a price floor of $6 was imposed on this market, this would: A) result in a surplus of the good. B) C) D) have no effect on this market. increase production of this good. increase consumer spending on this good.

Page 31

Use the following to answer question 114: Figure: Market for Lattes

114. (Figure: Market for Lattes) In the market for lattes shown in the figure, what is the price elasticity of demand between prices of $2 and $2.50 per cup, using the midpoint formula? A) 1 B) C) D) 1.29 2.51 3

115. The price elasticity of demand measures the responsiveness of the change in: A) quantity demanded to a change in price. B) C) D) price to a change in quantity demanded. the slope of the demand curve to a change in price. the slope of the demand curve to a change in quantity demanded.

116. When price goes down, the quantity demanded goes up. Price elasticity measures how: A) much the price goes down. B) C) D) much the quantity goes up. responsive the price change is in relation to the quantity change. responsive the quantity change is in relation to the price change.

Page 32

117. Suppose at a price of $10 the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand between the prices of $10 and $8, using the midpoint method, is approximately: A) 1.17. B) C) D) 1.50. 0.85. 1.00.

Use the following to answer questions 118-119: Scenario: Price Elasticity When calculating price elasticity with the following data, please use the midpoint method and take the absolute value.

118. (Scenario: Price Elasticity) What is the price elasticity of demand between $2.50 and $2.25? A) 9 B) C) D) 19 119 0.5

119. (Scenario: Price Elasticity) What is the price elasticity of demand between $2.00 and $1.75? A) 2.33 B) 3.00

Page 33

C) D)

4.00 0.125

120. The price elasticity of demand for skiing lessons in New Hampshire is over 1.00. This means that the demand is ________ in New Hampshire. A) price elastic B) C) D) price inelastic price unit-elastic. perfectly price elastic

121. The demand for textbooks is price inelastic. Which of the following would explain this? A) Many alternative textbooks can be used as substitutes. B) C) D) Students have a lot of time to adjust to price changes. Textbook purchases consume a large portion of most students' income. The good is a necessity.

122. A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, Due to the increase in tuition, how many of you will transfer to another university? One student out of about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is: A) 1. B) C) D) highly elastic. highly inelastic. 0.

123. If a university decreases the price of tickets to football games to collect more revenue, it is assuming that the demand for tickets is: A) unstable. B) C) D) price-inelastic. price-elastic. price unit-elastic.

Page 34

124. The demand for strawberry ice cream tends to be relatively price-elastic because: A) for most people, there are many close substitutes for strawberry ice cream. B) C) D) it costs so little. it has to be consumed very quickly. for most people, there are many close substitutes for strawberry ice cream and because it costs so little.

125. If a good is a necessity with few substitutes, then the price elasticity of demand will tend to be: A) more price-elastic. B) C) D) less price-elastic. equal to 1. the same as that of a luxury good.

Use the following to answer questions 126-127: Figure: Demand Curves

126. (Figure: Demand Curves) Which graph shows a perfectly elastic demand curve? A) A B) C) D) B C D

127. (Figure: Demand Curves) Which graph shows a perfectly inelastic demand curve? A) A B) B

Page 35

C) D)

C D

128. An important determinant of the price elasticity of demand is the: A) price of related goods. B) C) D) level of technology. availability of substitutes. quantity of the good supplied.

129. The income elasticity of demand of a normal good is: A) between 1 and 0. B) C) D) less than 0. equal to 0. greater than 0.

130. If your income increases and your consumption of bagels increases, other things equal, bagels are considered a(n): A) negative good. B) C) D) positive good. inferior good. normal good.

131. If an increase in income leads to a decrease in the demand for a good, then the good is said to be: A) normal. B) C) D) a luxury. inferior. a staple or necessity.

Page 36

132. If an increase in income leads to an increase in the demand for a good, then the good is said to be: A) normal. B) C) D) a luxury. inferior. a staple or necessity.

134. A perfectly elastic supply curve is: A) horizontal. B) C) D) downward-sloping. upward-sloping. vertical.

135. The supply curve for a good will be more elastic if: A) spending on the good accounts for a large share of a consumer's income. B) C) D) the good is a luxury item. production inputs are readily available at a relatively low cost. there is very little time for producers to respond to a price change.

Page 37