Download Econ 101, Sections 5 and 7, S03

Econ 101, Sections 5 and 7, S03
Schroeter
Exam #2, Red
Choose the single best answer for each question.
1. If the own-price elasticity of demand for a good is -0.8, then a 5% increase in the price
of the good will result in a
a. 8% decrease in the quantity demanded.
b. 6.25% decrease in the quantity demanded.
*. 4% decrease in the quantity demanded.
d. none of the above.
2. For a particular good, the quantity supplied increases from 100 units/day to 140
units/day when the price increases from $8/unit to $10/unit. Over this range of prices, the
own-price elasticity of supply (calculated by the “midpoint method”) is
a. 0.67.
b. 0.80.
c. 1.25.
*. 1.50.
3. Demand for a good tends to be more elastic
a. in the short-run than in the long-run.
b. the greater the availability of complements.
c. the more broadly the good is defined.
*. none of the above.
4. Which of the following provides the best description of the demand relationship
represented by a perfectly elastic demand curve?
a. Consumers will desire to purchase and consume exactly the same amount regardless of
price.
b. Changes in price and quantity are always equal in percentage terms (although opposite
in sign).
*. There is a critical price level above which quantity demanded is zero and below which
quantity demanded is essentially unlimited.
d. To increase the quantity demanded, price must be raised.
5. Heroin is a strongly addictive, narcotic drug. Which of these anti-drug policy
measures is likely to reduce total expenditure in the (illegal) market for heroin?
*. More government expenditure on rehabilitation programs for heroin addicts.
b. New laws imposing more severe punishments for convicted heroin dealers.
c. Increased law enforcement efforts to intercept shipments of heroin into the country.
d. None of the above – all would likely increase expenditure on heroin.
2
6. Which of the following is true? The inflation-adjusted price of crude oil on the world
market
a. has increased steadily since 1973 to the present.
b. decreased sharply in the late 70s through the early 80s, but has increased since 1985.
c. remained relatively stable through the 70s and 80s, but has fallen substantially since
1993.
*. increased significantly during the mid-to-late 70s but, by 2001 had fallen back below
1973 levels.
7. Assume that a particular bakery faces an elastic demand curve for its donuts. A 10%
increase in the price it charges for donuts will have what effect on its total donut sales
revenue? Total donut sales revenue will
a. remain unchanged.
*. decrease.
c. increase, but by less than 10%.
d. increase by more than 10%.
8. Which of the following would you expect to see in a market with a binding price floor?
a. Customers lining up at stores before they open for business.
b. Buyers secretly offering to pay illegally high prices for the good.
*. Persistent surpluses.
d. None of the above.
9. The discovery of a new genetically-modified variety of corn increases the supply of
corn. Under what circumstances would this lead to an increase in the revenue of corn
growers?
a. the supply of corn is elastic.
b. the supply of corn is inelastic.
*. the demand for corn is elastic.
d. the demand for corn is inelastic.
Questions 10 and 11 refer to the following information. The rental housing market in a
particular city is in (long- and short-run) equilibrium to begin. The short-run supply of
rental housing is perfectly inelastic while the long-run supply is elastic.
10. Suppose that the market is subject to no price controls. When demand increases (due
to a sudden big influx of population) the effects will include:
a. a short-run increase in rent that is partially offset in the long-run.
b. a long-run increase in the amount of rental housing space occupied.
c. persistent excess supply of rental housing space.
*. both a and b.
3
11. Suppose that the market is subject to a rent control ordinance that caps rents at their
current level. Then demand increases. The effects will include:
a. a long-run increase in the amount of rental housing space occupied.
b. a short-run decrease in rent.
*. persistent excess demand for rental housing space.
d. none of the above.
12. Currently (that is, in February 2003) the federal minimum wage is
a. $4.25/hour.
b. $4.75/hour.
*. $5.15/hour.
d. $5.80/hour.
13. Suppose that the demand for low-skill labor is elastic and that the federal minimum
wage is a binding price floor in this labor market. Under these circumstances, if the level
of the minimum wage were increased, the total wage income of all low-skill workers
combined would
a. increase and employment of low-skill workers would decrease.
*. decrease and employment of low-skill workers would decrease.
c. increase and employment of low-skill workers would increase.
d. decrease and employment of low-skill workers would increase.
14. Normally, an excise tax of $1.00/unit on the market for a good will
a. be passed along entirely to buyers.
b. will decrease sellers’ price by $1.00/unit.
*. will increase buyers’ price by some amount less than $1.00/unit.
d. Impossible to determine. (It depends on whether buyer or seller is required to send the
tax payment to the government.)
15. An excise tax is imposed on a market with inelastic demand and elastic supply.
a. Buyers’ price will increase by less than half of the $/unit size of the tax.
*. Sellers’ price will decrease by less than half of the $/unit size of the tax.
c. Buyers’ price will increase by half of the $/unit size of the tax.
d. Impossible to determine. (It depends on whether buyer or seller is required to send the
tax payment to the government.)
16. Widgets are traded in a competitive market. At a quantity of 5000 widgets/day, the
demand price (height of the demand curve) is $3.25/widget and the supply price (height
of the supply curve) is $2.50/widget. If an excise tax of $1.00/widget were imposed on
this market, the volume of widgets traded would be
*. fewer than 5000 widgets/day.
b. more than 5000 widgets/day.
c. impossible to determine – we would need to know equilibrium quantity in the market
before the tax was imposed.
d. impossible to determine – we would need to know equilibrium price in the market
before the tax was imposed.
4
17. Welfare economics is
a. the study of government programs designed to help the disadvantaged.
*. the study of how the allocation of resources affects economic well-being.
c. the study of the relationship between tax rates and labor effort.
d. the study of supply and demand elasticities and their effects on tax incidence.
18. The "marginal buyer" of a good refers to
a. the buyer who has the greatest willingness to pay.
b. the buyer who gets the largest consumer surplus.
*. the buyer who would be the first to leave the market if price increased.
d. the buyer who would be least affected by the introduction of an excise tax.
19. In the equilibrium of a competitive market for a good (with no excise taxes),
consumer surplus is represented by the area
a. between the supply and demand curves to the left of the equilibrium quantity.
b. below the demand curve to the left of the equilibrium point.
c. below the price and above the supply curve.
*. below the demand curve and above the price.
20. Alice, Bill, and Carrie are potential suppliers of gizmos. Their opportunity costs of
supply of the first gizmo per day are $4.25, $3.80, and $3.15 for Alice, Bill, and Carrie,
respectively. (It's impossible to supply more than one gizmo per day.) If the market
price of gizmos were $3.75,
a. Only Alice and Bill would supply, and Alice would get the greater producer surplus.
b. Only Alice and Bill would supply, and Bill would get the greater producer surplus.
*. Only Carrie would supply.
d. None of the above.
21. Dennis, Emily, and Fred are potential demanders of doo-dads. Their values of
willingness to pay for the first doo-dad of the day are $1.50, $1.25, and $0.90 for Dennis,
Emily, and Fred, respectively. (Each has zero willingness to pay for the second doo-dad
per day.) If the market price of doo-dads were $1.00,
*. Only Dennis and Emily would buy, and Dennis would get the greater consumer
surplus.
b. Only Dennis and Emily would buy, and Emily would get the greater consumer surplus.
c. Only Fred would buy.
d. None of the above.
22. Total surplus in a market equals
a. Value to buyers minus amount paid by buyers.
*. Consumer surplus plus producer surplus.
c. Amount received by sellers minus costs of sellers.
d. Producer surplus minus consumer surplus.
5
23. Which of the following is the best description of the relationship between the $/unit
size of an excise tax and total tax revenue? As tax size increases from zero, revenue
a. decreases at first, then increases.
*. increases at first, then decreases.
c. increases.
d. decreases.
24. Other things equal, the deadweight loss of an excise tax will be smallest when
demand is
*. inelastic and supply is inelastic.
b. inelastic and supply is elastic.
c. elastic and supply is inelastic.
d. elastic and supply is elastic.
The following graph depicts supply and demand in a hypothetical market. Use it to
answer questions 25, 26, 27, 28, and 29. (Hint: The area of a triangle is 0.5 x "base" x
"height.")
($/unit)
4.00
Supply
2.60
2.00
1.55
Demand
0.50
1750 2500
5000 (units/day)
25. When this market is in equilibrium (with no excise tax), total surplus is
a. $1875/day.
b. $2500/day.
*. $4375/day.
d. $5000/day.
6
26. If an excise tax of $1.05/unit were levied on this market, the price buyers would pay
would be
a. $1.55/unit.
b. $2.00/unit.
*. $2.60/unit.
d. $3.05/unit.
27. With the $1.05/unit excise tax in effect, consumer surplus in the market would be
a. $918.75/day.
b. $1050.00/day.
*. $1225.00/day.
d. $1837.50/day.
28. The government's tax revenue from a $1.05/unit excise tax would be
*. $1837.50/day.
b. $2712.50/day.
c. $4550.00/day.
d. none of the above.
29. The deadweight loss of a $1.05/unit excise tax on this market is
a. $168.75/day.
b. $225.00/day.
*. $393.75/day.
d. $787.50/day.
30. During the 1980 Presidential campaign, one of the arguments that President Reagan
used to promote his proposal for large cuts in federal income tax rates was Arthur Laffer's
belief that the economy was located
a. below the "Laffer curve."
b. at the peak of the "Laffer curve."
c. to the left of the "Laffer curve's" peak.
*. to the right of the "Laffer curve's" peak.