MicroEconomics Exam II

1. When consumers' incomes increased 10%, the quantity of milk bought increased 5%. This result means

Milk is an inferior good.

The demand for milk is income elastic.

Milk is a luxury.

Milk is a necessity.

2. If the price of a burger decreases by 5% and as a result the quantity of burgers demanded increases by 8%, the price elasticity of demand equals

0.60

1.60

0.40

0.625

3. A price ceiling is a price

Above which a seller cannot legally sell.

Below which a seller cannot legally sell.

That creates a surplus of the good.

Above which a seller cannot legally sell and one that creates a surplus of the good.

4. A price floor

Always results in a shortage.

Results in a surplus if the floor price is greater than the equilibrium price.

Always results in a surplus.

Results in a shortage if the floor price is greater than the equilibrium price.

5. Sally and Eric are the only people in an economy. Sally buys 3 bottles of water when the price is $2/bottle and 4 bottles of water when the price is $1/bottle. Eric buys 10 bottles of water when the price is $0.50/bottle and 5 bottles of water when the price is $1/bottle. In the market for water, the quantity demanded __________.

Increases as the price rises

Is 4 bottles at a price of $1/bottle

Increases as the price falls

Is 8 bottles at a price of $2/bottle

6. Choose the statement about monopoly that is incorrect.

Local water supply is a monopoly.

A monopoly sets its price to achieve its self-interest.

A monopoly produces more than the efficient quantity and charges too high a price.

A monopoly is a firm that is the sole provider of a good or service.

7. Consumer surplus __________.

Increases when the market price rises

Equals the amount that we spend on a good

Is the value of a good

Is the value of a good minus the price paid for it, summed over the quantity bought

8. If Sam wants to increase her total revenue from her sales of flowers and she knows that the demand for flowers is price elastic, she should

Raise her price because she knows that the quantity demanded will also increase.

Lower her price to increase the demand and shift the demand curve rightward.

9. You are the new vice president in charge of advertising at Taco Bell. In your upcoming advertising campaign, you plan to degrade the fast food competitor whose product is the closest substitute for Taco Bell's tacos. That would be the fast food chain whose cross elasticity of demand with your tacos is equal to

+1.55

-2.11

-1.75

+1.00

10. If University of Nebraska increased its season football ticket sales from 43,000 to 47,000 when it lowered price from $350.00 to $300.00, then its demand for season tickets must be __________ because total revenue __________ when the price was lowered.

Elastic; increased

Elastic; decreased

Inelastic; increased

Inelastic; decreased

11. As time passes after a change in the price, the supply of a good or servie

Becomes more elastic.

Initially becomes more elastic and then becomes less elastic.

Initially becomes less elastic and then becomes more elastic.

Becomes less elastic.

12. "Last October, due to an early frost, the price of a pumpkin increased by 10% compared to the price in the previous Halloween season. As a result, the quantity demanded county-wide decreased from 2M to 1.5M." Based on this statement, it is certain that the

Total revenue from the sale of pumpkins decreased.

Demand curve for pumpkins shifted leftward.

Price elasticity of demand for pumpkins decreased from its value in previous years.

Demand curve for Halloween costums shifted leftward.

13. The cross-elasticity of demand between Homer's Holesome Doughnuts and Krusty's Krispy Crullers is 5.0, which indicates that Homer's doughnuts and Krusty's crullers are

14. Taco Bell's economists determine that the price elasticity of demand for their tacos is 2.0. So, if Taco Bell raises the price of its tacos by 6.0%, the quantity demanded will decrease by __________ %.

3.0

12.0

2.0

6.0

15. To maximize its revenue,

A firm should always charge the highest price possible regardless of the elasticity of demand.

A firm facing classic demand should always raise its price.

A firm facing inelastic demand should always raise its price.

None of the above answers is correct.

16. Sherry wants to rent an apartment. Although rents are below what she is willing to pay, she cannot find an apartment. Then after a month of searching, she finds an apartment but she has to pay an additional $1000 to have the locks changed. Sherry has just experienced the effects of ___________.

A market working efficiently

Inelastic demand

A rent ceiling

A rent floor with a black market

17. The government sets a price floor for corn which is above the equilibrium price of corn. As a result, __________.

A deadweight loss will be created.

A shortage of corn will be created.

The corn market will be efficient.

None of the answers is correct.

18. A minimum wage __________.

Is an effective way of increasing employment

Is a price ceiling in the labor market

Is a price floor in the labor market

Changes the demand for labor

19. Which method is used to allocate best-selling books such as the latest Harry Potter?

Command

Contest

Market price

Majority rule

20. Producer surplus is __________.

Equal to the amount paid for a good or service

The value that we receive by purchasing a good or service

The price received for a good minus its minimum supply-price, summed over the quantity sold

21. The market supply curve is the __________ sum of the individual supply curves. It is formed by adding the __________.

Horizontal; marginal cost of all producers at each quantity

Horizontal; quantities supplied by all the producers at each price

Vertical; marginal cost of all producers at each quantity

Vertical; quantities supplied by all the producers at each price

22. Which method is used to allocate strategic resources in the military?

Market price

Majority rule

Contest

Command

23. Deadweight loss is __________.

Is the decrease in producer surplus that results from a decrease in price when demand decreases

Occurs only when production is greater than the efficient quantity

Is the decrease in total surplus that results from an inefficient level of production

24. Choose the correct statement.

The price of one more unit of a good or service is its marginal benefit.

25. Choose the correct statement.

Competitive equilibrium occurs when demand equals supply.

The competitive market pushes the quantity produced to its efficient level.

When the efficient quantity is produced in a competitive market, producer surplus is maximized.

When the efficient quantity is produced in a competitive market, consumer surplus is maximized.

26. At the competitive equilibrium, __________.

Marginal social cost equals marginal social benefit

Marginal social benefit is either equal to or greater than marginal social cost

Marginal social cost exceeds marginal social benefit

Marginal social benefit exceeds marginal social cost

27. Consumer surplus is __________.

Equal to the amount that we pay for a good or service

The value of a good minus the price paid for it, summed over the quantity bought

The value that we receive by purchasing a good or service

28. A __________ is owned by no one but used by everyone. The __________ leads to overproduction.

Common resource; tragedy of the commons

Monopoly; lack of competitors

Public good; free-rider problem

Market; high transactions costs in a market

29. Which method is used to allocate tickets to a Carrie Underwood concert?

Market price

Command

Contest

Majority rule

30. A __________ system allocate resources by the order of someone in authority.

Command

Paternalistic

Military

Hierarchical

31. Which method is used to allocate rides on the roller coaster among people with tickets?

Personal characteristics

First-come, first-served

Command

Contest

32. The price elasticity of demand for furniture is estimated at 1.3. This value means a 1% increase in the

Quantity of furniture demanded will increase the price of furniture by 1.3%.

Price of furniture will increase the quantity of furniture demanded by 1.3%.

Quantity of furniture demanded will decrease the price of furniture by 1.3%.

Price of furniture will decrease the quantity of furniture demanded by 1.3%.

33. Donuts and coffee are complements. When the price of a donut increases, the demand for coffee ________ and the cross elasticity of demand for coffee with respect to the price of a donut is _________.

Decreases; positive

Decreases; negative

Increases; negative

Increases; positive

34. A decrease in the price of eggs from $1.50 to $1.30 per dozen resulted in an increase in egg purchases in two ities. In Philadelphia, daily egg purchases increased from 6000 to 8000 dozens; in nearby Dover, Deleware, daily egg purchases increased from 300 to 400 dozens. The price elasticity of demand is therefore

The same in Philadelphia as in Dover.

Greater in the smaller city as would be expected.

Certainly affected by population differences in different markets.

Lower in the smaller city as would be expected.

35. When Sam's annual income was only $15,000, he purchased 50 pounds of bananas a year. When his income rose to $18,000, he purchased 55 pounds a year. Therefore,

For Sam, bananas are a normal good.

His income elasticity of demand for bananas is negative.

His income elasticity and price elasticity of demand for bananas are both greater than 1.

For Sam, bananas are an inferior good.

36. If the elasticity of demand for peaches is 1.76 and the elasticity of demand for apples is 1.59, then consumers are

37. If the demand curve for oranges is a downward sloping straight line, the price elasticity of demand will increase the

Lower the price of oranges.

Higher the income level of consumers.

Higher the price of other fruits.

Higher the price of oranges.

38. Demand is price inelastic if a relatively __________ price increase leads to a relatively __________ in the quantity demanded.

Large; small increase

Small; large increase

Small; large decrease

Large; small decrease

39. Price ceilings, such as rent ceilings, set below the equilibrium price

Might increase or decrease producer surplus.

Do not affect producer surplus.

Decrease producer surplus.

Increase producer surplus.

40. In general, how a sales tax is divided between buyers and sellers is determined by

Who the law says must pay the tax.

The government's choice of whom to tax.

The revenue needs of government.

The elasticities of supply and demand.

41. The supply of oil is more elastic than the demand for oil. If oil is $10/barrel, how will the tax be divided between the buyers and sellers?

The sellers and buyers will split the tax evenly.

The sellers will pay more of the tax than the buyers.

The buyers will pay more of the tax than the sellers.

The sellers will pay the entire tax.

42. The amount of a tax paid by the sellers will be larger the more __________ the demand and the more _________ the supply.

Elastic; elastic

Inelastic; inelastic

Inelastic; elastic

Elastic; inelastic

43. Assume that your state government has placed a price ceiling of $0.20/KW hour of electricity. The equilibrium price per KW hour for electricity is $0.25. The government's action will result in

A deadweight loss occurring.

An increase in the price of electricity to $0.25/KW hour.

An increase in producer surplus.

A surplus of electricity in the electricity market.

44. __________ is an illegal activity between buyers and sellers sometimes used to evade a price ceiling.

A price floor

Creating a shortage

Increased search activity

A black market

45. When a sales tax is imposed on sellers, the supply curve shifts so that the vertical distance between the old and the new supply curve equals the

Sales tax multiplied by the price elasticity of demand.

Amount of the sales tax.

Sales tax divided by the price elasticity of demand.

Sales tax multiplied by the price elasticity of supply.

46. Production quotas __________.

Raise the price of a good.

Lower the price of a good.

Do not change the price of a good.

None of the above.

47. In order to have an effect, a price ceiling must be set __________.

By suppliers

Above the equilibrium price

Equal to the equilibrium price

Below the equilibrium price

48. Which of the following is a typical effect of a price ceiling set below the equilibrium price?

The price ceiling has no effect on the market equilibrium.

Less of the good is produced with the ceiling than would be produced without the ceiling.

Consumers can buy more than they can at the equilibrium price because the ceiling price is lower.

None of the answers is correct.

49. An external benefit is a benefit that __________.

Affects someone other than the buyer of a good

Is greatest at the equilibrium point

Always equals external cost

Experiences increasing marginal returns

50. All of the following are sources of inefficiency except __________.

Price and quantity regulations

Taxes and subsidies

A decrease in supply

Monopoly

51. Choose the statement that is incorrect.

Value is what we get, and the price is what we pay.

The value of one more unit of a good or service is its marginal benefit.

52. Choose the correct statement.

The price of one more unit of a good or service is its marginal cost.

The cost of producing one more unit of a good or service is equal to the price.

53. When the efficient quantity is produced, __________.

Total surplus is maximized

Consumer surplus is maximized

Buyers and sellers acting in their self-interest do not promote the social interest

Producer surplus is maximized

54. Which method is used to allocate places in the freshman class at your college?

Lottery

Contest

Personal characteristics

Command

55. Taxes lead to __________ and subsidies lead to __________. Price regulations that put a cap on the rent a landlord is permitted to charge lead to __________. A monopoly leads to __________.

Overproduction; overproduction; overproduction; overproduction

Overproduction; underproduction; underproduction; overproduction

Underproduction; overproduction; underproduction; underproduction

Underproduction; underproduction; underproduction; underproduction