Download Practice Exam 2 Key

Economics 101
Section 5-Alley
Spring 2002
Practice Exam 2
1. The price elasticity of demand measures the
a.
b.
c.
d.
e.
responsiveness of a good's price to a change in quantity demanded
adaptability of suppliers when a change in demand alters the price of a good
responsiveness of quantity demanded to a change in a good's price
adaptability of buyers when there is a change in demand
responsiveness of quantity supplied to a change in quantity demanded
2. If a 20 percent decrease in the price of chicken results in a 10 percent increase in the quantity
demanded, the price elasticity of demand has a value of
a.
b.
c.
d.
e.
-0.5
-2
-1
-0.1
none of these
3. Suppose that when the price of aspirin rises from $2 to $3 per bottle, the quantity demanded falls
from 800 bottles per day to 700 bottles per day. Over this range, the demand for aspirin is
a.
b.
c.
d.
e.
Elastic
unitary elastic
perfectly elastic
Inelastic
perfectly inelastic
4. When demand is price elastic, a decrease in total expenditure on a good would result from a(n)
a.
b.
c.
d.
e.
decrease in price
increase in quantity demanded
increase in price
decrease in income for an inferior good
increase in total revenue to the seller
5. For which of the following medical services is the income elasticity of demand likely to be the smallest?
a.
b.
c.
d.
e.
face-lifts
plastic surgery
Manicures
emergency services after a car accident
hair transplants
6. The percentage change in demand divided by the percentage change in income is referred to as the
a.
b.
c.
d.
e.
price elasticity of demand
income elasticity of demand
cross-price elasticity of demand
slope of the demand curve
demand curve
7. If the income elasticity of demand is negative, this means that the good is
a.
b.
c.
d.
e.
an inferior good
at a lower than equilibrium price
provided by a monopoly producer
provided by competitive producers
a normal good
8. When there is a positive cross-price elasticity of demand between two goods,
a.
b.
c.
d.
e.
they are independent goods
they are complementary goods
they are substitute goods
they are luxury goods
the income elasticity of demand is positive
9. If food is measured on the horizontal axis of a budget line diagram, and clothing is measured on the
vertical axis, the slope of the budget line
a.
b.
c.
d.
may be positive if the price of clothing is high enough
may be positive if the price of food is high enough
may be positive if income is large enough
equals minus the maximum consumption of food divided by the maximum consumption of
clothing
e. equals minus the maximum consumption of clothing divided by the maximum
consumption of food
10. If income and the prices of both goods all double, the budget line will
a.
b.
c.
d.
e.
become flatter
become steeper
remain unchanged
experience a parallel outward shift
experience a parallel inward shift
11. The law of diminishing marginal utility
a.
b.
c.
d.
e.
is valid only after basic necessities (e.g., food, shelter) have been obtained
says that marginal utility decreases as more of a good is consumed
implies that spending on a good will decrease as more of that good is consumed
says that marginal utility decreases as income increases
implies that spending on a good will decrease as income increases
12. If bread costs $1 per pound and meat costs $4 per pound, a consumer whose marginal utility of meat
equals 80 utils per pound is maximizing utility only if the marginal utility per pound of bread equals
a.
b.
c.
d.
e.
4 utils
5 utils
10 utils
20 utils
80 utils
13. The Jones family is going to Disney World and has set a budget of $1000 for food and souvenirs. If Mr.
Jones finds a $50 bill on the ground during their trip and uses it to purchase additional souvenirs, then
a.
b.
c.
d.
e.
souvenirs are a normal good
food is an inferior good
the budget line has shifted to the left
the slope of the budget line has changed
souvenirs are a luxury good
14. For an inferior good, a rise in price causes
a.
b.
c.
d.
e.
negative income and substitution effects
positive income and substitution effects
a negative income effect and a positive substitution effect
a positive income effect and a negative substitution effect
a positive income effect, but no substitution effect
Use the following table to answer questions 15 and 16 where the data in the table gives the cost per unit for
each item.
Per kilogram tea
Per kilogram rice
Sri Lanka
225 rupees
25 rupees
Thailand
150 bhat
12.50 bhat
15. What is the opportunity cost of producing one more kilo of tea in Sri Lanka?
a. 9 kilos tea
b. 12 kilos rice
c. 9 kilos rice
d. 1/9 kilo rice
e. 25 rupees
16. Which of the following is true?
a. Thailand has a comparative advantage in producing tea
b. Sri Lanka has a comparative advantage in producing tea
c. The opportunity cost of tea in Thailand is 10 kilograms of rice
d. Thailand has an absolute advantage in producing rice
e. Sri Lanka has an absolute and a comparative advantage in producing tea
17. Consider the following data on consumption of q1 and q2. The price of q1 is $8.00. The price
of q2 is $4.00. Income is $64. Which of the following combinations of goods maximizes utility?
q1
8
7.5
7
6.5
6
5.5
5
4.5
a.
b.
c.
d.
e.
q2
0
1
2
3
4
5
6
7
MU1
0.592178
0.6496
0.6965
0.737707
0.775771
0.812062
0.847467
0.882909
MU2
0.6662
0.460133
0.34825
0.27664
0.226267
0.188514
0.1589
0.134889
q2 = 0, q1 = 8
q2 = 1, q1 = 7.5
q2 = 2, q1 = 7
q2 = 3, q1 = 6.5
q2 = 5, q1 = 5.5
18. If MUx/Px exceeds MUy/Py, then the consumer should
a.
b.
c.
d.
e.
consume more of good X and less of good Y
consume less of good X and more of good Y
consume less of both goods X and Y
not change the consumption levels of X and Y
consume more of good Z
19. The marginal rate of substitution measures
a. The additional utility from consuming one more unit of a product
b. The additional product produced from one more unit of an input
c. The amount of one good that must be given up to acquire more of another good while
holding total utility constant
d. The percentage change in the quantity demanded of a product when the price of a
substitute product changes
e. The rate at which weak hitting infielders may be traded for slow outfielders
20. For this problem p1 = 8, p2 = 1 and I = 40. Below is a table of alternative consumption
choices q1 and q2, their cost and the marginal utility (MU) they provide. Which is the optimal
choice?
q1
5.0000
4.5000
4.0000
3.5000
3.0000
2.5000
1.2500
0.0000
a.
b.
c.
d.
e.
q1 = 4.5
q1 = 4
q1 = 3.5
q1 = 3
q1 = 1.25
q2
0.0000
4.0000
8.0000
12.0000
16.0000
20.0000
30.0000
40.0000
cost
40.0000
40.0000
40.0000
40.0000
40.0000
40.0000
40.0000
40.0000
MU1
0.6423
0.8141
0.9190
1.0039
1.0808
1.1557
1.3607
1.6896
MU2
0.4817
0.1866
0.1149
0.0807
0.0600
0.0460
0.0239
0.0101
q2 = 4
q2 = 8
q2 = 12
q2 = 16
q2 = 30
21. What is the elasticity of demand (mid-point formula) for a demand curve given by
D
Q = 400 - 2 P as price goes from $90 to $100?
a.
b.
c.
d.
e.
-11/9
-19/21
-21/19
.85
-9/13
22. One the graph on the attached page, there is a decrease in the price of good 1. The initial
situation is = 12, p2 = 4, and income = 64. The equilibrium is at point A. Then the price of p1
falls to 2. The consumer buys more of good one as its price falls. The new equilibrium is at
point B. Substitution and income effects are evaluated at the new utility level. Which of the
following statements is true.
a.
b.
c.
d.
e.
The income effect is the movement from point A to point B
The substitution effect of the price change is from point C to point B.
The income effect of the price change is from point B to point D.
The substitution effect of the price change is from point D to point A
Both c and d are correct.
23. The law of demand tells us that
a.
b.
c.
d.
e.
price and quantity demanded are inversely related
price and quantity go up together
price and quantity demanded are directly related
price and demand are inversely related
an increase in supply produces an increase in demand
24. Daniel's consumption of pizzas drops from 6 per week to 4 per week when the price rises from $9
to $11. His price elasticity of demand for pizza equals
a.
b.
c.
d.
e.
-0.5
-1
-2
-0.08
-1.7
25. For which of the following categories of goods is demand likely to be the most elastic?
a.
b.
c.
d.
e.
pepper
BMW automobiles
laundry detergent
shoes
shampoo
Practice Exam 2 Key
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