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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