Name_________________

Unless a question explicitly says otherwise, assume that all supply

curves slope upward and all demand curves slope downward.

True/False.

Mark box A for True and box B for False. Each correct answer adds
2 points to your score. Each blank answer gives you 1 point.

1. __ If demand for a good is price elastic, a binding price floor

leads to an increase in consumer expenditure on the good.

2. If a PPF is outward bowed, there will be increasing opportunity

costs for one good, but not the other.

3. __ If potato chips and Doritos are substitutes, then an increase

in the price of potato chips will cause the demand for
Doritos to increase.

4. An increase in supply corresponds to an upward shift of a

supply curve.

5. __ If, for Sally, the marginal benefit of a chocolate bar is equal

to its price, then she will purchase the chocolate bar.

6. __ A subsidy that increases consumption of a good creates a

deadweight loss.

7. __ A binding price ceiling always results in a surplus.

8. A consumer always buys more of a good when its marginal utility

is positive.
 Page # 2

9. The demand curve for an inferior good slopes upward.

10. An increase in demand causes consumer expenditure to increase.

Multiple Choice.

Mark the box corresponding to the best answer. Each correct answer
adds 5 points to your score. Each blank answer gives you 1 point.

11. A straight-line and an outward-bowed PPF differ in which of the

following ways?

(a) an outward-bowed PPF represents constant opportunity

costs, while a straight-line PPF represents opportunity
costs of zero.
(b) an outward-bowed PPF represents increasing opportunity
costs, while a straight-line PPF represents opportunity
costs of zero.
(c) an outward-bowed PPF represents constant opportunity
costs, while a straight-line PPF represents increasing
opportunity costs.
(d) an outward-bowed PPF represents increasing opportunity
costs, while a straight-line PPF represents constant
opportunity costs.
(e) an outward-bowed PPF represents decreasing opportunity
costs, while a straight-line PPF represents constant
opportunity costs.

12. Which of the following correctly describes changes resulting

from a shift in the supply curve of new automobiles?

(a) The quantity of automobiles sold decreases during a

recession when people have lower incomes.
(b) The quantity of automobiles sold decreases when a
higher tax is imposed on gasoline.
(c) The quantity of automobiles sold decreases due to a
wage increase for automobile workers.
(d) The quantity of automobiles sold decreases when
scientists prove that driving is harmful to the health.
(e) The quantity of automobiles sold decreases due to a new
law that raises the minimum driving age.
 Page # 3

13. Which of the following could lead to a decrease in the demand

for apples?

(a) An increase in the price of bananas, a substitute good.

(b) Consumers develop new preferences for bananas over
apples.
(c) An increase in the cost of producing apples.
(d) Scientists prove that apples prevent Alzheimer's
disease.
(e) New apple trees are planted, doubling apple production.

14. Suppose the demand for food products is price inelastic. One
implication of this is that:

(a) unexpectedly large food harvests could increase the

farmers' revenue
(b) even small percentage changes in prices will lead to
large percentage changes in the quantity demanded
(c) the absolute value of the price elasticity of demand
for these goods will be greater than one
(d) droughts that reduce food harvests will have little
impact on food prices
(e) large percentage changes in prices will lead to only
small percentage changes in the quantity demanded.

15. If the quantity demanded of a good falls at every price as a

result of an increase in consumers' incomes, then the good
is:

(a) an inferior good

(b) a normal good
(c) an ordinary good
(d) a Giffen good
(e) a complementary good
 Page # 4

16. Cod over-fishing in the Baltic Sea is a concern within the

European Union. The diagram below shows the market for
Baltic Sea cod. Suppose the European Union issues fewer
fishing permits causing supply to decrease and the price of
cod to increase to $7/pound. By how much did supply
decrease?
I

P ($) ,
I

_____ _
1
L
:
J. I
J_________ _ S _
7 I
,
I

I
I
, ,
I
J I I
6 ------~--------- ---------i--------­ L _
, ,
I ,

, I

5 ------~---------~---------I--_------~----------~------
"
" ,
I

" I
I I I
4 ------:----------, ---------~---------
I
---------i-----­
I 1 I I
I j I I
I t i t ,
3 ----- ---------:---------1---------:--------­ ---i)-~

I • I I
I I I I I
2 ------~---------~---------~---------~----------~------
I t I J I
I 1 I I I
I I I I I

10 25 40 55 70
Pounds of Cod

(a) 70 pounds of cod

(b) 30 pounds of cod
(c) 15 pounds of cod
(d) 60 pounds of cod
(e) 55 pounds of cod
 Page # 5

17. The diagram below shows the market for miniature candy bars.
Fearing that the general public is becoming increasingly
unhealthy, the government decides to impose a production
quota of 80 miniature candy bars. A result of this policy
is to

supply
• • • , • • I
_ _ _ _ _ __ L. 1 1____ __ _ _ ...

~
~
I I I t I I
I , I I I I
I I I I I I I
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: : : : : : demand
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I t I I , I ,
I I I I I I I
1 -------~-------~-------~-------~------~-------~-------~
I I I I I I I

40 80 120 160 200 240 280

Quantity

(a) increase consumer surplus by $80.

(b) increase producer surplus by $40.
(c) decrease consumer surplus by $120.
(d) decrease producer surplus by $200.
(e) decrease producer surplus by $160.
 Page # 6

18. Suppose the government imposes a $1 tax on each gallon of milk

to raise money for childrens' health programs. The market
for milk is illustrated in the diagram below. How much
milk is sold after the tax is imposed?
,I
P ($)
3.50
_____ _ ,
L
,
,,
I

J
,
..
~_________ _ s _

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I , I

______ I~ _ _ _ _ _ _ _ _
1 _ J_________
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.
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,
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I I
,
,

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, .
--------------------r-----­
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,.
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I .. I
,
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------r--------- ---------,--------- ---------r-----­
2.00 I
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~
I
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t
,
---------r---------,---------~---------
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-----.
,
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,

D
I I I 1 I

------~---------~---------~---------~----------~-----.
1.00 I
I
J I
J
j
I
I
I I
I , J J I
I t i l I

.50

40 60 80 100 120
Q (millions of gallons)

(a) 120 million gallons

(b) 100 million gallons
(c) 80 million gallons
(d) 60 million gallons
(e) 40 million gallons

19. The market for wine is currently in equilibrium. Suppose the

price of beer (a substitute for wine) increases, and at the
same time a wildfire sweeps through Napa Valley, destroying
a portion of this season's grape crop (used in the
production of wine). What does this imply about the new
equilibrium price and quantity of wine?

(a) The equilibrium quantity increases while the

equilibrium price cannot be determined.
(b) The equilibrium quantity decreases while the
equilibrium price cannot be determined.
(c) The equilibrium price increases while the equilibrium
quantity cannot be determined.
(d) The equilibrium price decreases while the equilibrium
quantity cannot be determined.
(e) Both the equilibrium price and quantity cannot be
determined.
 Page # 7

20. Suppose the government grants a $2000 subsidy for a Chrysler

New Yorker, a stylish, large-bodied vehicle first produced
decades ago. If demand is more elastic than supply, then
what can you say about the resulting change in the consumer
price and the producer price?

(a) The consumer price decreases by more than the producer

price increases.
(b) The consumer price falls by the same amount as the
producer price rises.
(c) The consumer price increases by more than the producer
price falls.
(d) The consumer price increases by less than the producer
price falls.
(e) The consumer price decreases by less than the producer
price increases.
 Page # 8

21. The market for fresh shrimp in Florida is shown below. In

August, the equilibrium is represented by point A. In
October, the equilibrium is represented by point B. Which
of the following can account for the new equilibrium at
point B?

I. Some shrimp consumers left Florida permanently in

September.
II. The price of crab, a substitute for shrimp, increased
during September.
III. A tornado destroyed one third of the shrimp-fishing
boats in September.
IV. In September, the AMA announced shrimp may cause
potential heart problems.

P($)
I
I
I
I
.'" ., ., B
--".
-............
:
I
.~ I /
" I ,/'
'., 1./
P* - - - - - - - - - - - - - ///
- .1"··--'.....
A
/~" : ~"", ....

/ : "'~~
/ I '''-.
/ :"0
Q* Q (Lbs of Shrimp)

(a) I and II together

(b) II and III together
(c) III and IV together
(d) III and I together
(e) IV and II together
 Page # 9

22. ___ Consider the market for cigarettes illustrated below. Suppose
that the demand for cigarettes increases by 100 packs. What
is the price elasticity of supply between the original and
new equilibrium? (Note: use the midpoint formula from
class. )

P ($) Supply
7

4 I

, ,,
I

3 -----r---------~---------
I
I ,
,

I I
, I I ,

2 ------~---------~---------~---------~---------
I I I ,
I I , I
I I I I
I I I I ,
1 ------~---------~---------~---------~----------~-----.
I I I I I
, I I I I
I , I , I
I I I I I

100 150 200 250 300 Q

(a) -2
(b) 0.73
(c) 0.5
(d) 1
(e) -1
 Page # 10

23. The graph below shows the supply and demand curves in the soft
drink market. If the government decides to impose a $4 per
unit tax, then how much of the resulting tax revenue is a
transfer from consumer surplus?
P ($)

12 - -- - - - - - - -r - - - - - ­
I
- - -..,- - - - - - - - - -.., - - - - - - - - - -­
I I
I I I
I I I
I I I
10 I ~----------~-----------
I I I

I I I

I I I

I I I

8 ----------~----
I
----~----------~-----------
I I
I I I
I I I
I I I

61----~,~--.JIk-----+,-----;-. Supply
I I
I I
I I
I 1 I •
4 ----------~---------~----- ~-----------i
I I I

I I I

: : : i
2 ----------,----------T---------- ----------;
I I I '
I I I
I I I
I I I
I I I
I I I

40 60 80 100 Q

(a) $0
(b) $80
(c) $120
(d) $160
(e) $200
 Page # 11

24. The graph below shows the PPF of an economy that produces
tables and chairs. Which of the following values CANNOT be
the opportunity cost at point B?
tables
45 r - - -__ A
40 ,
,
,,
,
,

2 0 ------­ -------­ --­ -"--­ -----­ -­ ----­ -----------­

,
,
,
,,

20 70 80 chairs

(a) 1 table/chair
(b) 3.5 chairs/table
(c) 1.5 tables/chair
(d) 2 chairs/table
(e) 3 tables/chair
 Page # 12

25. The graph below shows the market for moon rocks. Suppose the
government imposes a price ceiling of $2. The resulting
deadweight loss in the market will be

P ($ )
7 -.---,-----,----- -----.,------,...---,.---­
: ~ s: : I

6
I I t I

. .
_ ........,...... __ .. "'II .... - ...... - _ . . . _~

··,
,
. .
~ ....... - - .~

5 _ ...... -r .......' ... t''''

·,
""tor •• ~ .....

4 --.... -~-, -......... ;............. ··

... ...... . . ""'.:. . - - - - -1 ~ - ~ .. :.. ~ .......... - ~

··
,
I
. I
.
•

2
··· ..
,
, I
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1 ...... "'~"" ~ ~

··,
~.- __ ~_~ __ ~ ~~ ~~ .... R
po .... ..... ... - - .......

I ,

· .
I I
I ,

o 2 4 6 8 10 12 14

MOon Rocks

(a) $12
(b) $16
(c) $0
(d) $24
(e) $4

26. Suppose the supply for toothpicks is perfectly elastic. After

imposing a tax, producer surplus __ ~ __ and supplier revenue

(a) stays constant; stays constant

(b) decreases; stays constant
(c) increases; decreases
(d) decreases; decreases
(e) stays constant; decreases
 Page # 13

27. Kate is maximizing her utility. Her marginal utilities are

given in the table below. She has an income of $26 and the
only goods available are grapes and cherries. If you know
that she optimally buys 4 pounds of grapes and 3 pounds of
cherries when the price of a pound of grapes is $2 and the
price of a pound of cherries is $6, then the marginal
utility of the third pound of cherries could be:

Quantity
Marginal 1 2 3 4 5 6 7
Utility
Pounds of 80 50 30 20 15 10 5
Grape
Pounds of 90 75 X 20 10 5 2
Cherries

(a) 36
(b) 28
(c) 2a
(d) 12
(e) None of the above

28. Consider the market for collectible World War I pacifist

pamphlets. A fire destroys most of the pamphlets at the
auction house where they are to be sold. What would you
predict would happen in the market for pacifist pamphlets
as a result of this fire?

(a) The equilibrium price increases and the equilibrium

quantity falls.
(b) The equilibrium price increases and the equilibrium
quantity increases.
(c) The equilibrium price falls and the equilibrium
quantity falls.
(d) The equilibrium price falls and the equilibrium
quantity increases.
(e) The equilibrium price falls and the equilibrium
quantity does not change.
 Page # 14

29. The market for heart surgery in Canada is illustrated by the

diagram below with a supply curve given by 81. With the
implementation of the Canadian Health Act, heart surgery is
subsidized by the government, resulting in the supply curve
82. Which of the following correctly describes what is
happening in the market?

P($)
I ! I J ~
,SI
3000 --+--~--~---~--~--~--~---~--
I D' I I I I I I I
I I 1 I I I I I

I I I I , I I I I I

2500 --p- ,--~---~--r--.-- --~--~--~_.

I I I I I I 1 I I

I I I I I I I

I I I I I I I I I I

2000 --T--' -,---r-­ --7--'--~---r--T-'

I I I I I I I I 1 I
I I I I ' I I I I
I I I I I I I I I
1500 --r--,-- --r--r--,--,---r--r--T-' S2
I I I I I I I I

I I I I I I I

I I I I I I I I I I

1000 --T--'--~-- r--r--'--'---~-- --T-'

I I I I I I t

I I I I I I I 1 I

__ L __ J __ J L _L __ l L __ L __ !_
500 I I 1 I I I Itt I
I I I I I I I I I

I I 1 I I I I I t

o 100 200 ~o
Q

(a) The per unit subsidy is $1500.

(b) Consumer surplus after the subsidy is $0.
(c) There is excess demand for heart surgery in the new
equilibrium.
(d) The total subsidy payment by the government is
$500,000.
(e) Producers' revenue after the subsidy is $0.
 Page # 15

30. Torrey spends all of her money on shoes and candy. Her
marginal benefit schedule for pairs of shoes is given
below. Which of the following tells the meaning of this
marginal benefit schedule?

Pairs of Shoes Marginal Benefit ($)

1 35
2 35
3 35
4 20
5 20
6 0

(a) If a pair of shoes is cheaper than $20, Torrey will

spend all of her money on shoes.
(b) Torrey will only buy 5 pairs of shoes, no matter what
her income is.
(c) Torrey is willing to pay at most $35 for a pair of
shoes.
(d) The market price of shoes is between $20 and $35.
(e) The price of shoes is $35 for the first 3 pairs, and
$20 for the next 2 pairs.

31. A small town in the Farm Belt can use its water to irrigate
cornfields, produce ethanol, or for residents to drink and
take showers. The PPF illustrating the tradeoff in the
town between the bushels of corn grown and the gallons of
ethanol produced is outward bowed. Suppose more water is
used to produce ethanol, moving the town from point A to
point B on its PPF. The opportunity cost of an additional
gallon of ethanol, moving from point A to point B is:
(Note: Graph not included)

(a) The loss of bushels of corn divided by the gain in

gallons of ethanol between point A and point B.
(b) The gain in gallons of ethanol divided by the loss of
bushels of corn between point A and point B.
(c) The loss of bushels of corn between point A and point B.
(d) The loss of bushels of corn between point A and point B
times the price of corn.
(e) The price of a bushel of corn divided by the price of a
gallon of ethanol, multiplied by the loss of bushels of
corn between point A and point B.
 Page # 16

32. When the price of sunburst squash is 39 cents per pound, people
buy 200 pounds. When the price instead is 59 cents per
pound, people spend $88.50 on sunburst squash. This
implies that between the prices of 39 and 59 cents per
pound:

(a) demand for sunburst squash is price inelastic

(b) demand for sunburst squash is price elastic
(c) demand for sunburst squash is perfectly inelastic
(d) demand for sunburst squash is perfectly elastic
(e) demand for sunburst squash is unit elastic

33. In lecture, when we discussed shifting the demand and supply

curve at the same time, the example we used was:

(a) the market for bananas in China

(b) the market for landscaping in Los Angeles
(c) the market for unskilled labor on the Arizona border
(d) the market for children in Sweden
(e) the market for baskets in Africa
 Answer Key

Number Answer

1 False
2 False
3 True
4 Fal$e
5 True

6 True
7 False
8 False
9 False
10 True
11 D
12 C
13 B
14 E
15 A

16 D
17 B
18 D
19 C
20 E
21 B
22 D
23 D
24 E
25 C

26 E
27 A
28 A
29 D
30 C
31 A
32 A
33 A