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Unit 2 Test: How Markets Work Name:_______________________ Date:_______________________ ______________________________________________________________________________ 1 When shoes at a local shoe store went on sale at 50 percent off the regular price, the store sold almost every pair of shoes it had in less than a day. By the time the stock was replenished, the sale was over and shoes were being purchased at a much slower rate. Which of the following does this illustrate? A B C D 2 the income effect the law of supply the law of demand the substitution effect Which of the following government actions would be most likely to increase competition among firms? A B C D minimum wage laws licensing price ceilings deregulation ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 1 of 6 Unit 2 Test: How Markets Work ______________________________________________________________________________ 3 Directions: Use the chart to answer the following question. Market Demand Schedule Price (per cup) Quantity demanded (per day) $.50 300 $1.00 250 $1.50 200 $2.00 150 $2.50 100 $3.00 50 Milly’s Tea Pot sells cups of tea for $2.00. According to the market demand schedule and assuming ceteris paribus, what happens when Milly’s raises the price to $2.50 a cup? A B C D 4 The quantity demanded per day stays the same. The quantity demanded falls from 100 cups a day to 50 cups a day. The quantity demanded falls from 150 cups a day to 100 cups a day. The quantity demanded rises to 250 cups a day. Mariah is buying fewer boxes of macaroni and cheese, used cars, fast-food dinners, and generic products because her income has increased. This shift in the demand curve caused by Mariah’s income has resulted in A B C D a decreased demand for inferior goods. a decreased demand for tangible goods. a decreased demand for normal goods. a decreased demand for expendable goods. ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 2 of 6 Unit 2 Test: How Markets Work ______________________________________________________________________________ 5 When the price of delivered pizza goes up by 40 percent, Kate’s quantity demanded falls by 60 percent. Therefore, Kate’s demand for pizza delivery is best described as A B C D 6 According to the law of supply, the higher the price, A B C D 7 a market supply schedule diminishing marginal returns variable costs subsidies To calculate profits, a firm subtracts total costs from total revenues. What makes up the firm’s production costs? A B C D 9 the more consumers are willing to pay. the larger the quantity produced. the smaller the quantity produced. the more the availability of a good is reduced. Lily is opening a new coffee shop and is having trouble deciding on the price to charge for a cup of cappuccino. What should she look for? A B C D 8 elastic. inelastic. unitary elastic. unitary inelastic. variable costs and rent raw materials and salaries marginal costs and labor fixed and variable costs Suppose you are running a pie company with five employees. Orders increase, so you hire a sixth pie maker. Your profits go down. Which of the following might explain the decrease? A B C D Your marginal returns increased. Your fixed costs increased. Your marginal product of labor decreased. Your output level decreased. ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 3 of 6 Unit 2 Test: How Markets Work ______________________________________________________________________________ 10 In which category do subsidies, excise taxes, and regulation belong? A B C D 11 effects of rising costs national limitations on imports government influences on supply benefits of marginal costs Directions: Use the graph to answer the following question. Study the graph showing the number of hats sold at local summer baseball games. Which of the following can be said about the equilibrium price and the equilibrium quantity? A B C D The quantity supplied and the quantity demanded are equal at 40 hats per game. The quantity demanded and the quantity supplied are equal at $8.00 per hat. The quantity supplied is not equal to the quantity demanded in this market, which should be at 40 per game. The maximum quantity demanded, 70 per game, is more than the quantity supplied. ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 4 of 6 Unit 2 Test: How Markets Work ______________________________________________________________________________ 12 Which of the following government actions is an attempt to control the high cost of living for lower-income families? A B C D 13 Compared with a perfectly competitive market, a monopolist usually produces fewer goods at a higher price. Which statement is true about a monopoly? A B C D 14 a negative result on the change in demand graph. a flattening of the demand curve. a sharp drop in the marginal product demand ratio. a rapid shift to the right in a market demand curve. Which of the following BEST explains why rationing, not a price-based system, was used during World War II? A B C D 16 Its marginal revenue is lower than the market price. Its marginal revenue is half the market price. Its marginal revenue is the same as market price. Its marginal revenue is higher than the market price. The economic impact of a holiday fad is illustrated by A B C D 15 farm subsidies rent control minimum wage price floors Rationing controlled production so that suppliers and manufacturers could concentrate on supporting the war effort. Rationing made it possible for the government to control people’s behavior during the war. Rationing helped ease shortages and guaranteed every American a minimum standard of living. Rationing more severely restricted consumers’ buying habits, and it temporarily shifted distribution of food and goods to the military. Factors that make it difficult for new firms to enter a market are called A B C D start-up costs. barriers to entry. perfect competition. commodities. ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 5 of 6 Unit 2 Test: How Markets Work ______________________________________________________________________________ 17 In a free market economy, which best describes how suppliers decide which goods or services to offer? A B C D 18 Suppliers seek to fulfill consumer demand. Suppliers seek to maximize productive output. Suppliers seek to sell expensive products. Suppliers seek to provide great vareiety. Which phrase best completes the following sentence? When a market is at equilibrium, A B C D 19 Which of the following is the correct mathematical formula for calculating average cost? A B C D 20 buyers are willing to purchase goods. sellers are happy with prices. both buyers and sellers seek disequilibrium. both buyers and sellers benefit. total revenue divided by market price total cost divided by variable cost total cost divided by quantity produced total revenue divided by marginal cost Which of the following is most likely to happen when a monopolistically competitive firm starts earning profits well above its costs? A B C D The firm becomes an oligopoly by eliminating the competition. The firm floods the market with defective products. The firm faces competition as rivals differentiate their products to increase market share. The firm eventually goes out of business because demand decreases. ______________________________________________________________________________________________ Copyright © 2005 - 2006 by Pearson Education Page 6 of 6