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Economics 503
Foundations of Economic Analysis
Quiz
1. Which of the following expressions equals GDP?
A) compensation of employees + consumption + depreciation + net investment
B) compensation of employees + net interest + rental income + depreciation + corporate
profits + proprietors' income + indirect taxes - subsidies
C) compensation of employees + net exports + depreciation + corporate profits
D) compensation of employees + gross investment + rental income + depreciation +
corporate profits + indirect taxes - subsidies
______B____
2. If workers who make DVDs get a pay raise, the equilibrium price of a DVD
________ and the equilibrium quantity of DVDs ________.
A) rises; increases
B) rises; decreases
C) falls; decreases
D) falls; increases
____B______
3. The exchange rate for Candyland is S = 4 and the exchange rate for Donutland is S =
2. The PPP for Candyland is PPP = 4.5 and the PPP for Donutland is PPP = 1.5.
A) the cost of living in Candyland is cheaper than the US; the cost of living in Donutland
is cheaper than the US.
B) the cost of living in Candyland is cheaper than the US; the cost of living in Donutland
is more expensive than the US.
C) the cost of living in Candyland is more expensive than the US; the cost of living in
Donutland is cheaper than the US.
D) the cost of living in Candyland is more expensive than the US; the cost of living in
Donutland is more expensive than the US.
_____C_____
4. Which of the following statements is correct?
A) When demand decreases, both the price and the quantity increase.
B) When demand increases, both the price and the quantity decrease.
C) When supply increases, the quantity increases and the price falls.
D) When supply decreases, both the price and the quantity decrease.
_____C_____
5. The figure below depicts the market for fruit snacks. Which movement reflects how
consumers would react to an increase in the price of a non-fruit snack?
A) from point a to point e
B) from point a to point b
C) from point a to point c
D) from point a to point d
______D______
6. Jeep Cherokees are a normal good. If people's incomes increase, the direct
result will be
A) an increase in the supply of the vehicles.
B) a decrease in the demand for the vehicles.
C) an increase in the demand for the vehicles.
D) Both answers A and C are correct.
______C______
7. Which of the following does NOT describe a function of money?
A) a unit of account
B) a hedge against inflation
C) a medium of exchange
D) a store of value
______B______
8. Use the data in Table 1 to calculate GDP.
Table 1
Component
Net taxes
Personal consumption
expenditure
Depreciation
Government expenditure
Gross investment
Exports
Imports
Household saving
Amount
(billions of
dollars)
1,635
5,566
622
1,784
1,234
957
1,138
1,202
C+I+G + X – IM = 5,566 +1,234 + 1,784+957 – 1,138 = 8,403
9. Foot massages are sold at a price of $40. The number of foot massages sold is
10,000. The average income of foot massage customers is $1,000,000. People’s
income rises to $1,400,000. The number of foot massages sold rises to 15,000.
Assume that the supply curve of foot massages is perfectly elastic. What is the
income elasticity of demand for foot massages using the midpoint method?
The income elasticity is
Q1D  Q0D
Q1D  Q0D
Q1D  Q0D
Q1D  Q0D
Income1D  Income0D
Income1D  Income0D

Income1D  Income0D
Income1D  Income0D
5000
. In this case,
1
6
 5
400, 000
1
5
6
2, 400, 000
25000
10. In Prices rise by 1%. The elasticity of demand is .05 (calculated using the midpoint
method). The quantity demanded changes by 5. What was the original quantity level?
The elasticity of demand to be .05. If elasticity of demand is:
Q0  Q1
Q0  Q1
Q0  Q1
Q0  Q1
D
2
2
.If Q0-Q1 = 5, then Q1 =Q0-5. Input
elasticity 

P1  P0
.01
P0  P1
2
Q  Q1
5
5
.01* elasticity D  0



Q0  Q1 2Q0  5 Q0  2.5
this into the equation to get:
2
2
500
500
Q0  2.5 
Q0  2.5 
D
elasticity
elasticity D
If you set elasticityD = 5, then Q0 = 102.5. If you set elasticityD = .05 then Q0 =
10,002.5.
11. Table gives the demand and supply schedules for cat food. If the price is $3.00 per
pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium
price? If there is a shortage, how much is the shortage? If there is a surplus, how
much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium
quantity?
Price
Quantity
Quantity
(dollars per
demanded
supplied
pound of cat (tons of cat
(tons of cat
food)
food per year) food per year)
1.00
52
15
1.50
46
26
2.00
43
34
2.50
40
30
3.00
35
44
Answer: At a price of $3.00 per pound of cat food, there is a surplus. The surplus equals
44 tons (the quantity supplied) minus 35 tons (the quantity demanded), or 9 tons of cat
food.
12. The information in the table above gives the 2008 reference base period CPI basket
and prices used to construct the CPI for a small nation. It also has the 2009 prices.
What is the value of the CPI for the reference base period, 2008? What is the value of
the CPI in 2009?
Item
Movie tickets
Bags of
popcorn
Drinks of soda
Quantity
4
2008
Price
$5.00
2009
Price
$7.50
2
$3.00
$3.00
4
$1.00
$1.50
Price of Market Basket in 2008 is (4*5)+ (2*3) + (4*1) = 30
Price of Market Basket in 2009 is (4*7.50)+ (2*3) + (4*1.50) = 42
42
CPI 
100  140
30
140