ECON 201 Practice Test 2 (Chapter 5, 6 and 21)

____ 1. If the value of the price elasticity of demand is -0.2, this means that a a. 20 percent decrease in price causes a 1 percent increase in quantity demanded b. 0.2 percent decrease in price causes a 1 percent increase in quantity demanded c. 1 percent decrease in price causes a 0.2 percent increase in quantity demanded d. 0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded e. 100 percent decrease in price causes a 200 percent increase in quantity demanded 2. Price elasticity of demand is typically negative because a. as price decreases, quantity demanded decreases b. as price decreases, quantity demanded increases c. as price decreases, demand decreases d. as price decreases, demand increases e. consumers rarely respond to a change in price 3. Suppose that you allow yourself $50 per month to spend on compact disks. You spend exactly this much every month regardless of the price of compact disks. Therefore, your demand for CDs a. is elastic b. is inelastic c. is unit elastic d. cannot be characterized unless we know the price of a disk e. cannot be characterized unless we know the price and quantity of compact disks purchased 4. If the demand for swordfish is price elastic and the price of swordfish increases, then a. the quantity of swordfish demanded will increase b. the total revenue from swordfish sales will decrease c. the total revenue from swordfish sales will increase d. the total revenue from swordfish sales will not change e. whether total revenue rises or falls depends on how much the price of swordfish increases 5. Which of the following describes a situation in which demand must be elastic? a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50. b. The price of pens rises by 10 cents, and total revenue rises. c. A 20 percent increase in the price of pens leads to a 20 percent decrease in the quantity of pens demanded. d. Total revenue does not change when the price of pens rises. e. Total revenue decreases when the price of pencils rises. 6. For which of the following products is the consumer's demand curve most likely to be vertical? a. lobster, for a seafood lover b. cars, for high school students c. insulin, for a diabetic d. compact disks, for a music lover e. beef, for a food lover

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7. Today's supply curve of dorm rooms on campus is likely to be a. downward sloping b. relatively flat c. vertical d. horizontal e. price elastic 8. If the cross-price elasticity of demand is -3, then the goods are __________ and the consumers' responsiveness would be characterized as __________. a. substitutes; inelastic b. substitutes; elastic c. substitutes; unit elastic d. complements; inelastic e. complements; elastic 9. Assume that the income elasticity of demand for rice is 2. This means that rice is a (an)_____ good. a. inferior b. necessary c. luxury 10. In order to derive a demand curve for cheese, we would change a. the price of cheese and hold other things constant b. income and hold other things constant c. the price of other goods and hold everything else constant d. the price of all goods, including cheese and hold other things constant e. tastes and hold other things constant Exhibit 1 Total Utility Games of Games of billards bowling 0 0 100 70 180 130 240 180 272 210 288 218 292 222

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Quantity 0 1 2 3 4 5 6

____ 11. Suppose you have $30 to spend on either bowling or billiards. A game of billiards costs you $4, and bowling costs $2 per game. Using the information in Exhibit 1, determine the utility-maximizing combination of bowling and billiards. a. twelve games of bowling b. five billiards games, two games of bowling c. five billiards games, five games of bowling d. three billiards games, eight games of bowling e. four billiards games, four games of bowling

____ 12. All combinations of Pepsi and coffee that yield Ahmad the same satisfaction lie along a particular: a. marginal utility curve d. indifference curve b. demand curve e. expansion path c. budget line ____ 13. The marginal utility of a second copy of today's Gulf News is a. infinite b. positive and greater than the marginal utility of the first copy c. 1 AED d. equal to the marginal utility of the first copy e. practically zero ____ 14. At consumer equilibrium between goods F and C, all of the following statements is true except one. Which is the exception? a. MUF/MUC = PF/PC b. MRS = the absolute value of the slope of the budget line c. MRS = -PF/PC d. utility is maximized subject to the budget constraint e. PF/PC = TUF/TUC ____ 15. Elvis values the first gravy sandwich at $5, the second at $4.50, the third at $4. If he buys three for $4 each, his consumer surplus is a. $12 b. $9.50 c. $4 d. $5 e. $1.50 ____ 16. The slope of an indifference curve is equal to the a. marginal utility of the good measured on the vertical axis b. marginal utility of the good measured on the horizontal axis c. price elasticity of demand d. marginal rate of substitution e. relative price of the good measured on the horizontal axis ____ 17. Assume that you allocate your income to calzones and juice and that you have not yet spent your entire budget. If the marginal utility of a fourth calzone is 100 and the marginal utility of a third glass of juice is 50, you would a. eat a fourth calzone because it has a higher marginal utility b. consider the relative prices of calzones and juice before deciding what to consume next c. drink a third glass of juice because you've had less juice d. consider whether or not marginal utility is diminishing before deciding what to consume next e. consider the total utility received so far from calzones and juice before deciding what to consume next

Exhibit 2

____ 18. In Exhibit 2, the marginal rate of substitution between points a and b equals a. 1/3 b. 100 c. 5/6 d. 2 e. 1 ____ 19. Which of the following statements about indifference curves is not true? a. Indifference curves do not intersect. b. Indifference curves slope downward. c. Indifference curves are convex (bowed in toward the origin). d. Every indifference curve intersects the consumer's budget line at least once. e. The consumer is indifferent among the combinations illustrated along a given curve. ____ 20. Ahmad has AED 50 per week to spend on good A, which has a price of AED 5, and good B, which has a price of AED 4. He buyes six units of A and five of B. The marginal utility of the sixth unit of A is 20, and the marginal utility of the fifth unit of B is 25, which of the following is true? a. He is not maximizing his utility and should buy more of A b. He is not maximizing his utility and should buy more of B c. He is maximizing his utility d. We cannot tell if he is maximizing his utility unless we know his total utility e. He is not maximizing his utility because he is not spending all of his income ____ 21. A candy bar sells for 50 cents, video games are 25 cents each, the horizontal (candy) intercept of Ann's budget line is 12, and the vertical (video game) intercept of Ann's budget line is 24. Which of the following best describes what would happen to the budget line if Ann's income decreased? a. It would shift leftward to a parallel position. b. It would shift rightward to a nonparallel position. c. It would shift leftward to a nonparallel position. d. Nothing. e. It would shift rightward to a parallel position.

22. Which of the following is the most likely explanation for the imposition of a price floor in the market for corn? a. Policymakers have studied the effects of the price floor carefully and they recognize that the price floor is advantageous for society as a whole. b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into enacting the price floor. c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor. d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor. 23. A price ceiling will be binding only if it is set a. equal to equilibrium price. b. above equilibrium price. c. below equilibrium price. d. none of the above; a price ceiling is never binding.

24. Based on the figure above, in which of the following cases would sellers have to develop a rationing mechanism? a. A price ceiling is set at $8. b. A price ceiling is set at $12. c. A price floor is set at $8. d. A price floor is set at $10. 25. Economists generally believe that rent control is a. an efficient and equitable way to help the poor. b. not efficient, but the best available means of solving a serious social problem. c. a highly inefficient way to help the poor raise their standard of living. d. an efficient way to allocate housing, but not a good way to help the poor.

26. A minimum wage that is set above a market's equilibrium wage will result in a. an excess demand for labor, that is, unemployment. b. an excess demand for labor, that is, a shortage of workers. c. an excess supply of labor, that is, unemployment. d. an excess supply of labor, that is, a shortage of workers. 27. A tax on the buyers of coffee will a. increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and increase the equilibrium quantity of coffee. b. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. d. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and increase the equilibrium quantity of coffee. 28. Which is the most correct statement about the burden of a tax imposed on buyers of sugar? a. Buyers bear the entire burden of the tax. b. Sellers bear the entire burden of the tax. c. Buyers and sellers share the burden of the tax. d. The government bears the entire burden of the tax. 29. If a tax is imposed on a market with inelastic demand and elastic supply, a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared.

Short Answers and Problem Solving 1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a. Levi-brand blue jeans or clothing b. Cigarettes over the next week or cigarettes over the next five years c. Insulin or Aspirin d. Business travel or vacation travel. 2. Use the graph shown to answer the following questions. Put the correct letter in the blank.

a. b. c. d. e. f. g. h. i. j.

The elastic section of the graph is represented by section _______. The inelastic section of the graph is represented by section _______. The unit elastic section of the graph is represented by section _______. The portion of the graph in which a decrease in price would cause total revenue to fall would be _________. The portion of the graph in which a decrease in price would cause total revenue to rise would be _________. The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________. The section of the graph in which total revenue would be at a maximum would be _______. The section of the graph in which elasticity is greater than 1 is _______. The section of the graph in which elasticity is equal to 1 is ______. The section of the graph in which elasticity is less than 1 is _______.

3. The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply and demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there excess demand or excess supply of cheese? b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. c. In response to farmers complaints, the government agrees to purchase all the excess supply of cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses? Why. 4. The government decided to reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold. a. Should they impose this tax on producers or consumers? Explain carefully using supply a supply-and-demand diagram. b. If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram. c. Are consumers of gasoline helped or hurt by this tax? Why? d. Are workers in the oil industry helped or hurt by this tax? Why? 5. Consider two goods X and Y. Derive the demand curve for good X from an indifference-curvebudget-line model. Assume good X is on the horizontal axis and good Y on the vertical axis. 6. a. Draw a consumers indifference curves for Pepsi and Sandwich. Describe the property of diminishing marginal rate of substitution. (Have Pepsi on the horizontal axis and Sandwich on the vertical axis) b. A consumer has income of $3,000. Price of Pepsi is $3 per glass, and price of Sandwich $6 per sandwich. Draw the consumers budget constraint. (Have Pepsi on the horizontal axis and Sandwich on the vertical axis). What is the slope of this budget constraint? c. Show a consumers budget constraint and indifference curves for Pepsi and Sandwich. Show the optimal consumption choice. If the price of Pepsi is $3 per glass and the price of Sandwich is $6 per sandwich, what is the marginal rate of substitution at this optimal point? d. If the price of Pepsi falls to $2 per glass while the price of Sandwich remains the same, for a consumer with an income of $3,000, show what happens to consumption of Pepsi and Sandwich.

MULTIPLE CHOICE

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

C B C B E C C E C A C D E E E D B A D B A D C A

25. ANS: C 26. ANS: C

27. ANS: C

28. ANS: C 29. ANS: A