Microeconomics Exam II

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  • 1/61 Questions

    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.
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MicroEconomics Exam II

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  • 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

    Correct Answer
    A. 1.60
  • 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.

    Correct Answer
    A. Above which a seller cannot legally sell.
  • 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.

    Correct Answer
    A. Results in a surplus 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

    Correct Answer
    A. Increases as the price falls
  • 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.

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

    Correct Answer
    A. 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 percentage decrease in the quantity demanded will be smaller than the percentage increase in price.

    • Raise her price because she knows that the percentage increase in the quantity demanded will be greater than the percentage decrease in price.

    • 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.

    Correct Answer
    A. Raise her price because she knows that the percentage increase in the quantity demanded will be greater than the percentage decrease in price.
  • 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

    Correct Answer
    A. +1.55
  • 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

    Correct Answer
    A. 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.

    Correct Answer
    A. Becomes more 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.

    Correct Answer
    A. Total revenue from the sale of pumpkins decreased.
  • 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

    • Substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers).

    • Complements and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers).

    • Complements and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers).

    • Substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers).

    Correct Answer
    A. Substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers).
  • 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

    Correct Answer
    A. 12.0
  • 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.

    Correct Answer
    A. A firm facing inelastic demand should always raise its price.
  • 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

    Correct Answer
    A. A rent ceiling
  • 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.

    Correct Answer
    A. A deadweight loss will be created.
  • 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

    Correct Answer
    A. Is a price floor in the labor market
  • 19. 

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

    • Command

    • Contest

    • Market price

    • Majority rule

    Correct Answer
    A. Market price
  • 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

    • More on the 100th unit of a good that is produced than on the 1st unit of a good that is produced

    Correct Answer
    A. 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

    Correct Answer
    A. Horizontal; 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

    Correct Answer
    A. 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

    • Occurs in markets that produce at the competitive equilibrium and in markets that produce more than the quantity at the competitive equilibrium

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

    Correct Answer
    A. Is the decrease in total surplus that results from an inefficient level of production
  • 24. 

    Choose the correct statement.

    • The value of one more unit of a good or service is its marginal benefit, and we measure marginal benefit by the area under the demand curve.

    • The value of one more unit of a good or service is its marginal benefit, and we measure marginal benefit by the maximum price that is willingly paid for another unit of the good or service.

    • The value of one more unit of a good or service is equal to the price of one more unit of a good or service.

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

    Correct Answer
    A. The value of one more unit of a good or service is its marginal benefit, and we measure marginal benefit by the maximum price that is willingly paid for another unit of the good or service.
  • 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.

    Correct Answer
    A. The competitive market pushes the quantity produced to its efficient level.
  • 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

    Correct Answer
    A. Marginal social cost equals marginal social benefit
  • 27. 

    Consumer surplus is __________.

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

    • Greater on the 100th unit of a good that we buy than on the 1st unit of a good that we buy

    • 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

    Correct Answer
    A. The value of a good minus the price paid for it, summed over the quantity bought
  • 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

    Correct Answer
    A. Common resource; tragedy of the commons
  • 29. 

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

    • Market price

    • Command

    • Contest

    • Majority rule

    Correct Answer
    A. Market price
  • 30. 

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

    • Command

    • Paternalistic

    • Military

    • Hierarchical

    Correct Answer
    A. Command
  • 31. 

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

    • Personal characteristics

    • First-come, first-served

    • Command

    • Contest

    Correct Answer
    A. First-come, first-served
  • 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%.

    Correct Answer
    A. 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

    Correct Answer
    A. Decreases; negative
  • 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.

    Correct Answer
    A. The same in Philadelphia as in Dover.
  • 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.

    Correct Answer
    A. For Sam, bananas are a normal 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

    • More sensitive to a change in the price of peaches than they are to a change in the price of apples.

    • Less sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples.

    • Less sensitive to a change in the price of peaches than they are to a change in the price of apples.

    • More sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples.

    Correct Answer
    A. More sensitive to a change in the price of peaches than they are to a change in the price of apples.
  • 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.

    Correct Answer
    A. 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

    Correct Answer
    A. 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.

    Correct Answer
    A. Decrease 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.

    Correct Answer
    A. 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.

    Correct Answer
    A. The buyers will pay more of the tax than the sellers.
  • 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

    Correct Answer
    A. 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.

    Correct Answer
    A. A deadweight loss occurring.
  • 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

    Correct Answer
    A. 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.

    Correct Answer
    A. Amount of the sales tax.
  • 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.

    Correct Answer
    A. Raise the price of a good.
  • 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

    Correct Answer
    A. 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.

    Correct Answer
    A. Less of the good is produced with the ceiling than would be produced without the ceiling.
  • 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

    Correct Answer
    A. Affects someone other than the buyer of a good

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