Download Econ 101, Section 5, S01

Econ 101, Section 5, S01
Schroeter
Exam #2, Red
Choose the single best answer for each question.
1. If demand is perfectly inelastic, the demand curve is
*. vertical.
b. horizontal.
c. a curved line along which the product of price and quantity is a constant.
d. a straight line that is neither vertical nor horizontal.
2. Suppose that the cross-price elasticity of demand is positive for goods A and B. In this case,
a. the demands for goods A and B are elastic.
b. the demands for goods A and B are inelastic.
c. goods A and B are complements.
*. goods A and B are substitutes.
3. For a particular good, the quantity demanded decreases from 1800 units/day to 1500 units/day
when the price increases from $2.50/unit to $2.80/unit. Over this range of prices, the own-price
elasticity of demand (calculated by the "midpoint method") is
*. -1.606.
b. -1.000.
c. -0.842.
d. -0.623.
4. The market for widgets is competitive. Someone discovers an easier and less expensive way
to manufacture widgets. (This, of course, will increase the supply of widgets.) Under what
circumstances will widget manufacturers realize an increase in revenue?
a. The supply of widgets is elastic.
b. The supply of widgets is inelastic.
*. The demand for widgets is elastic.
d. The demand for widgets is inelastic.
5. If the demand for a good is inelastic, a 10% increase in price will decrease
*. quantity demanded by less than 10%.
b. quantity demanded by more than 10%.
c. revenue by less than 10%.
d. revenue by more than 10%.
2
6. Government efforts to combat illegal, addictive drugs include drug interdiction programs and
drug education programs. Which of the following is true? In the market for illegal, addictive
drugs,
*. drug interdiction programs increase equilibrium price and total expenditure.
b. drug interdiction programs decrease equilibrium price and quantity.
c. drug education programs increase equilibrium price and quantity.
d. drug education programs increase equilibrium price and total expenditure.
7. In lecture's supply-and-demand analysis of rent control, we drew the short-run supply curve of
rental apartments as perfectly inelastic. This assumption reflects the fact that
a. no matter how low rents fall, no one can use more than one apartment.
b. there is currently a building boom in the rental housing market.
c. most cities have plenty of land that is suitable for residential development.
*. it takes time to build new apartment buildings.
8. Suppose that the Ames City Council were to pass a rent control ordinance that prohibits any
increase in rents above their current levels. Then the demand for rental housing in Ames
increases (perhaps because a company builds a new manufacturing plant in town making many
new employment opportunities available). Which of the following would we expect to see in the
local housing market?
a. Developers would rush to build new rental apartment buildings to accommodate the increased
demand.
*. There would be a persistent excess demand for rental apartments in Ames.
c. Landlords would have difficulty renting apartments when vacancies do occur.
d. All of the above.
9. Which of the following is true?
a. The demand for gasoline tends to be more elastic in the short-run than in the long-run.
b. A good with many close substitutes is likely to have very inelastic demand.
c. The demand for Budweiser beer is likely to be less elastic than the demand for beer in general.
*. None of the above are true.
10. An inferior good has
a. an own-price elasticity of demand in the elastic range.
b. a perfectly inelastic demand curve.
*. an income elasticity of demand that is negative.
d. none of the above.
3
11. Which of the following is an example of a price ceiling?
a. the minimum wage.
b. the price support policies that the federal government applied (in past years) to several
agricultural commodity markets.
*. rent control.
d. all of the above.
12. Which of the following would we expect to occur in a market with a binding price ceiling?
a. Sellers go out of their way to attract customers by offering non-price concessions (a better
warranty, for example).
b. The government steps forward as the "buyer of last resort."
*. Prospective buyers secretly offer illegally high prices.
d. Unsold inventory piles up in warehouses.
Questions 13 and 14 refer to the following graph of demand and supply curves in an unskilled
labor market. To begin, the government imposes no wage controls of any kind and the market is
in equilibrium. Then a minimum wage is established at the level of $5/hour.
wage
($/hour)
Supply
5
4
Demand
8,000 10,000
13,000
(workers)
13. How will the number of workers employed in this labor market change as a result of the
minimum wage?
a. It will not change.
b. It will increase by 3,000 workers.
*. It will decrease by 2,000 workers.
d. None of the above.
4
14. With the minimum wage in place, unemployment (or the labor surplus) in this labor market
will be
a. zero.
b. 3,000 workers.
*. 5,000 workers.
d. 8,000 workers.
15. Suppose that the government were to raise the federal excise tax on gasoline by another
$0.50/gallon. As a result,
a. the price buyers pay would increase by $0.50/gal.
b. the price sellers receive would decrease by $0.50/gal.
*. the price buyers pay would increase and the price sellers receive would decrease, but each
would change by less than $0.50/gal.
d. Impossible to determine. (To answer, one would have to know whether it is the buyer or seller
who is required to give the tax payment to the government.)
16. Holding constant the elasticity of supply, an excise tax of $1/unit in a competitive market will
raise the buyers price more
a. the more elastic is demand.
*. the less elastic is demand.
c. Impossible to determine. (To answer, one would have to know whether it is the buyer or seller
who is required to give the tax payment to the government.)
d. None of the above. (The buyers price will increase by the same amount regardless of the
elasticity of demand.)
17. The study of how the allocation of resources affects economic well-being is called
a. consumer economics.
b. macroeconomics.
*. welfare economics.
d. econometrics.
18. If you purchase one unit of a good at a price that exactly equals your willingness to pay for
the unit, then your consumer surplus associated with the purchase is
a. equal to the price.
b. greater than the price.
c. equal to the value you place on the unit of the good.
*. zero.
19. When price falls in a market, total consumer surplus increases because
a. buyers who would have been willing to buy the good at the original price are now better off.
b. new buyers enter the market, and they receive some consumer surplus too.
c. total expenditure on the good decreases.
*. both a and b.
5
20. The dollar values of willingness to pay for a gizmo for Frances, George, and Heidi are $1.50,
$1.20, and $0.90 respectively. If the price of a gizmo were $1.25,
a. George and Heidi would buy and Heidi would get the greater consumer surplus.
b. George and Heidi would buy and George would get the greater consumer surplus.
*. only Frances would buy.
d. none of the above.
21. In a competitive market equilibrium, producer surplus is represented by the area
*. below the price and above the supply curve.
b. between the supply and demand curves to the left of the equilibrium point.
c. under the supply curve to the left of the equilibrium point.
d. below the demand curve and above the price.
22. For given supply and demand curves, when the $/unit size of an excise tax is doubled, the
deadweight loss of the tax
a. doubles.
b. remains unchanged.
c. increases, but by a factor less than 2.
*. more than doubles.
23. The supply of (unimproved) land is perfectly inelastic. Therefore, a tax on the rental market
for land would
a. be paid entirely by the landowners (as opposed to the renters of the land).
b. would result in no deadweight loss.
c. would not alter the amount of land in use.
*. all of the above.
24. The views held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage
people to increase the quantity of labor they supplied became known as
a. labor economics.
b. welfare economics.
c. deadweight economics.
*. supply-side economics.
25. Suppose you were trying to argue that the supply of labor is relatively elastic. Which of the
following claims would not help to support your case?
a. Many workers can choose to work overtime, and might be more inclined to do so the higher is
their wage.
b. Some families have second earners - often married women with children - with some
discretion over whether to do unpaid work at home or paid work in the marketplace.
c. Many elderly can choose when to retire, and their decisions are partly based on the wage.
*. Most workers would choose to work full-time regardless of the wage.
6
The following graph depicts supply and demand in a hypothetical market. Use it to answer
questions 26, 27, 28, 29, and 30. (Hint: The area of a triangle is 0.5 x "the base" x "the height.")
26. When this market is in equilibrium (with no excise tax), consumer surplus is
*. $2500/day.
b. $2250/day.
c. $2000/day.
d. none of the above.
27. If a $0.75/unit excise tax were levied on this market, the price the buyers would pay would be
a. $1.75/unit.
*. $1.50/unit.
c. $1.00/unit.
d. none of the above.
28. The amount of tax revenue the government would collect from a $0.75/unit excise tax on this
market would be
a. $3750/day.
b. $2500/day.
*. $1875/day.
d. none of the above.
7
29. With the $0.75/unit excise tax in effect, producer surplus in this market would be
a. $1250/day.
b. $937.50/day.
c. $625/day.
*. none of the above.
30. The deadweight loss of a $0.75/unit excise tax on this market is
a. $1250/day.
*. $937.50/day.
c. $625/day.
d. none of the above.