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Economics 503
Foundations of Economic Analysis
Quiz 1
Saturday, January 15, 2011
1. The consumer price index (CPI)
A) compares the cost of the typical basket of goods consumed in period 1 to the cost of a
basket of goods typically consumed in period 2.
B) compares the cost in the current period to the cost in a reference base period of a
basket of goods typically consumed in the base period.
C) measures the increase in the prices of the goods included in GDP.
D) is the ratio of the average price of a typical basket of goods to the cost of producing
those goods.
_____B______
2. The "law of demand" refers to the fact that, all other things remaining the same, when
the price of a good rises
A) the demand curve shifts rightward.
B) the demand curve shifts leftward.
C) there is a movement down along the demand curve to a larger quantity demanded.
D) there is a movement up along the demand curve to a smaller quantity demanded.
Answer: D
_____D_______
3. When the price of a pizza decreases from $12 to $10, it is definitely the case that the
A) income effect means people buy less pizza.
B) substitution effect means people buy more pizza.
C) quantity demanded of pizza will not change.
D) None of the above answers is correct.
_____B_______
4. In the figure above, which movement reflects an increase in demand?
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_______
5. Use the data in Table 1 to calculate GDP.
Component
Table 1
Amount
(dollars)
10
Net taxes
Personal consumption
expenditure
Depreciation
Government expenditure
Gross investment
Net exports
Compensation of
employees
$86
50
8
20
26
-10
65
6. The diagram above illustrates the market for apartments in Victoria, British Columbia.
a)
If the current rent is $300 per month, is there a shortage or surplus in the
apartment market and how much is the shortage or surplus?
If the rent is $300 per month, there is a shortage of 30,000 apartments.
b)
What is the equilibrium rent and quantity of apartments?
The equilibrium rent is $400 per month and the equilibrium quantity is 40,000
apartments.
7. If the basket of goods and services used to calculate the CPI cost $200 in the base
period and $450 in a later year, what does the CPI for the latter year equal.
CPI = 450/200 * 100 = 9/4 * 100 = 225
8. An airline sells tickets to people traveling to Tokyo on business and to people
traveling for pleasure. The following chart outlines their sales.
QD
QD
Price
Business Travel
Vacation
$300
4200
1200
$400
4100
1000
$500
4000
800
$600
3900
600
Calculate separate own price elasticities of demand for both business travelers and
vacation travelers when the price moves from $400 to $500.
(Q0  Q1 )
(Q0  Q1 )
Price elasticity is elasticity D 
( P1  P0 )
( P0  P1 )
(Q0  Q1 )
(Q0  Q1 )
D
When P0 = 400, elasticity 
. For business travelers,
100
900
(4100  4000)
(8100) 1 81 9 1
D
elasticity 

   .1111 . For vacation travelers
100
1/ 9 81 9
900
(1000  800)
(1800) 2 18
elasticity D 

1
100
1/ 9
900