Download Econ2: Practice Test 2 Multiple Choice Identify the choice that best

Econ2: Practice Test 2
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. The price elasticity of demand measures how much
a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply.
____
2. Demand is said to be price elastic if
a. the price of the good responds substantially to changes in demand.
b. demand shifts substantially when income or the expected future price of the good changes.
c. buyers do not respond much to changes in the price of the good.
d. buyers respond substantially to changes in the price of the good.
____
3. An increase in price causes an increase in total revenue when
a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
d. All of the above are possible.
____
4. The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a
change in the price. If the owner is only interested in increasing revenue, he should
a. lower the price of the bread sticks.
b. leave the price of the bread sticks alone.
c. raise the price of the bread sticks.
d. reduce costs.
____
5. Necessities such as food and clothing tend to have
a. high price elasticities of demand and high income elasticities of demand.
b. high price elasticities of demand and low income elasticities of demand.
c. low price elasticities of demand and high income elasticities of demand.
d. low price elasticities of demand and low income elasticities of demand.
____
6. A decrease in supply will cause the smallest increase in price when
a. both supply and demand are inelastic.
b. demand is elastic and supply is inelastic.
c. both supply and demand are elastic.
d. demand is inelastic and supply is elastic.
____
7. Which of the following would most likely increase the demand for peanut butter?
a. a decrease in the price of jelly, a good that is often used with peanut butter
b. the discovery that excessive consumption of peanut butter is harmful to one's health
c. crop failures that raise the price of peanuts
d. the invention of a new product that consumers think is a good substitute for peanut butter
____
8. If consumer purchases of a good are not very sensitive to the price of the good, this is illustrated by a
a. demand curve that is relatively flat (more horizontal).
b. demand curve that is relatively steep (more vertical).
c. supply curve that is relatively flat (more horizontal).
d. supply curve that is relatively steep (more vertical).
____
9. Which of the following would lead to an increase in the demand for gasoline in Universityville, a typical
college town?
a. the local bus service beginning to offer free bus transportation to students
b. homecoming weekend when many former alumni visit the local college
c. a large protest by a campus environmental group urging people to walk or ride their bikes
rather than drive
d. an increase in the tuition charged by the local college, which reduces student enrollment
____ 10. If the United Auto Workers union can obtain a substantial wage increase for auto workers, there will be
a. a decrease in the supply of automobiles, which is a shift to the right of the supply curve.
b. a decrease in the supply of automobiles, which is a shift to the left of the supply curve.
c. an increase in the supply of automobiles, which is a shift to the right of the supply curve.
d. an increase in the supply of automobiles, which is a shift to the left of the supply curve.
Figure 3-10
____ 11. Figure 3-10 illustrates the conditions of demand and supply in the market for compact discs. Indicate the
equilibrium price and quantity.
a. price, $20; quantity, 2,000
b. price, $15; quantity, 3,000
c. price, $10; quantity, 2,000
d. price, $10; quantity, 4,000
____ 12. The Invisible Hand Principle suggests that
a. market prices direct individuals to produce more goods.
b. individuals pursuing their own interests detract from the economic well-being of society.
c. there should be stronger governmental initiatives to ensure cooperation for the betterment
of society.
d. market forces tend to channel the actions of self-interested individuals into activities that
promote the general betterment of society.
____ 13. According to the law of supply, as the price of a good falls,
a. buyers will buy more of the good.
b. buyers will buy less of the good.
c. sellers will produce more of the good.
d. sellers will produce less of the good.
Figure 4-17
____ 14. Refer to Figure 4-17. If the government imposes a price ceiling in this market at a price of $5.00, the result
would be a
a. shortage of 20 units.
b. shortage of 10 units.
c. surplus of 20 units.
d. surplus of 10 units.
Essay
15. Suppose a person defects from Cuba (a country that generally disregards the use of markets) to the United
States and asks to see a market in action. Where would you take her? Did you give her a complete showing of
this market?
16. A terrible storm wipes out 70 percent of the peanut crop. Explain and show graphically how this will affect
the market for peanut butter and the market for jelly, a complementary good.
17. Suppose the United Auto Workers union obtains a substantial wage increase for auto workers. How will this
affect the market for automobiles?
18. Joanne states, "If raising the minimum wage to $10 an hour is good, like Senator Largess suggests, then
raising it to $20 an hour would be twice as good." Is Joanne correct? Why or why not?
19. Government programs such as Medicare substantially subsidize health care purchases by some consumers in
the U.S. economy. Who benefits from these subsidies? How do they affect the price of health care? If you are
not a recipient of this program, are you made better or worse off by the subsidy? Explain.
20. Suppose the U.S. Government banned the sale and production of cigarettes. What are likely effects of this
action on the market for cigarettes?
Econ2: Practice Test 2
Answer Section
MULTIPLE CHOICE
1. ANS:
NAT:
MSC:
2. ANS:
NAT:
MSC:
3. ANS:
NAT:
MSC:
4. ANS:
NAT:
MSC:
5. ANS:
NAT:
MSC:
6. ANS:
NAT:
MSC:
7. ANS:
8. ANS:
9. ANS:
TOP:
10. ANS:
11. ANS:
12. ANS:
13. ANS:
14. ANS:
A
PTS: 1
DIF: 1
REF: 5-1
Analytic
LOC: Elasticity
TOP: Price elasticity of demand
Definitional
D
PTS: 1
DIF: 2
REF: 5-1
Analytic
LOC: Elasticity
TOP: Elastic demand
Definitional
B
PTS: 1
DIF: 2
REF: 5-1
Analytic
LOC: Elasticity
TOP: Total revenue
Applicative
C
PTS: 1
DIF: 2
REF: 5-1
Analytic
LOC: Elasticity
TOP: Total revenue
Interpretive
D
PTS: 1
DIF: 2
REF: 5-1
Analytic
LOC: Elasticity
TOP: Income elasticity of demand
Interpretive
C
PTS: 1
DIF: 3
REF: 5-3
Analytic
LOC: Elasticity
TOP: Price elasticity of demand | Price elasticity of supply
Analytical
A
PTS: 1
OBJ: Suggested Quiz
B
PTS: 1
TOP: Consumer Choice and the Law of Demand
B
PTS: 1
Changes in Demand versus Changes in Quantity Demanded
B
PTS: 1
TOP: Changes in Supply versus Changes in Quantity Supplied
B
PTS: 1
OBJ: Graphics Questions
D
PTS: 1
OBJ: On-line Practice
D
PTS: 1
OBJ: On-line Practice
A
PTS: 1
OBJ: Graphics Questions
ESSAY
15. ANS:
Most students will provide answers such as the grocery store, a mall, or an automobile dealership, which are
all good examples of the physical acts of trade and commerce. A physical "marketplace," however, is just the
beginning of what economists mean when they talk about a "market." This question is useful in helping
students understand that a market is not necessarily a place but a term used to describe a process. You may
want to contrast the different types of markets mentioned such as supermarkets (posted prices), car
dealerships (some price negotiation), and flea markets (relatively high levels of dickering).
PTS: 1
OBJ: Critical Thinking
16. ANS:
Higher peanut prices will shift the supply curve for peanut butter to the left (a decrease in supply). A higher
price and a lower quantity demanded will result. The demand for jelly will decrease in response to higher
peanut butter prices. This leftward shift in the demand curve will reduce the price of jelly and the quantity
supplied.
PTS: 1
OBJ: Critical Thinking
17. ANS:
The higher wages will shift the supply of automobiles to the left. As a result, the price of automobiles will
rise, and the quantity of automobiles sold will decline.
PTS: 1
OBJ: Critical Thinking
18. ANS:
The minimum wage is a price floor that causes unemployment when it is established above the marketclearing wage for unskilled workers. If the equilibrium wage in this market is $4 an hour and the minimum is
$10, workers who aren't worth at least this much to the firm will not be hired. If it is raised to $20, even fewer
workers will find jobs. We could suggest that raising the minimum wage is bad, but it would be hard to say
that raising it to $20 would be twice as bad. Bads are hard to quantify, and all of this is beyond the value-free
world of positive economics. Raises of this nature in the minimum wage will increase unemployment. It is up
to the individual to decide if this is good or bad.
PTS: 1
OBJ: Critical Thinking
19. ANS:
The subsidy will increase the price of health care. The benefit will be split between consumers and producers
depending on the elasticities of supply and demand. If you do not receive the subsidy, you are worse off
because of the higher prices for health care.
PTS: 1
OBJ: Critical Thinking
20. ANS:
Several changes are likely to happen in the cigarette market. First, the quality of cigarettes sold will decline.
Second, the price of cigarettes will rise. Third, the profits of persons selling cigarettes (assuming they are not
caught) will rise. Fourth, the rate of violence will increase.
PTS: 1
OBJ: Critical Thinking