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ECON 102.004 Problem Set 1 (Deadline February 20, 2007)
Part 1. Multiple Choice (Answer ONLY 30 questions)
Identify the choice that best completes the statement or answers the question.
Each question in this section is worth 3 points
____
1. The primary focus of economics is on
a. government decisions about which wants have to go unsatisfied.
b. implementing a market system.
c. choices that must be made.
d. rising prices.
e. providing consumers with perfect information.
____
2. Each of the following is an essential element in an economist’s study of choice except
a. trade-offs.
b. incentives.
c. exchange.
d. information.
e. money.
____
3. Time
a. is not a scarce resource because there is always tomorrow.
b. is irrelevant to resource allocation decisions.
c. is a scarce resource for producers, but not consumers.
d. is a scarce resource for consumers, but not producers.
e. is a scarce resource for everyone.
____
4. Scarcity
a. reflects greed.
b. indicates the need for a central planning authority.
c. indicates the need for free markets.
d. requires making choices among alternatives.
e. denies real choice.
____
5. Households are _____ in the product market, _____ in the labor market, and _____ in the capital market.
a. lenders; consumers; sellers
b. consumers; lenders; sellers
c. consumers; sellers; lenders
d. consumers; sellers; consumers
e. consumers; buyers; borrowers
____
6. Markets in which firms sell their output are called
a. capital markets.
b. stock markets.
c. labor markets.
d. farmers’ markets.
e. product markets.
____
7. We observe causation, and not just correlation, if
a. two variables move in the same direction.
b. a change in one variable is responsible for change in some other variable.
c. two variables move in opposite directions.
d. a change in one variable is later followed by a change in some other variable.
e. two variables change at the same time.
____
8. Anthony spends all his income on loaves of bread and fish. Bread costs $2 per loaf, and fish are $5 each.
Anthony’s income is $20. Which of the following combinations of loaves and fish lies on Anthony’s budget
constraint?
a. 4 loaves and 3 fish
b. 5 loaves and 2 fish
c. 6 loaves and 2 fish
d. 7 loaves and 2 fish
e. 8 loaves and 1 fish
____
9. Karen sleeps eight hours a night and works eight hours a day. She spends the remaining eight hours
swimming and watching television. If we were to ignore the time she spends working and sleeping, her time
constraint would indicate
a. the various combinations of hours she can devote to swimming and watching television.
b. which television shows she watches.
c. how many television shows she could watch if she did not go swimming.
d. which television shows she could watch and how many lengths of the pool she could
swim.
e. how many lengths of the pool she could swim after she had watched all the television
shows she likes.
____ 10. Figure 2.4 shows a country’s production possibilities curve defined over hamburgers and machines. If the
country operates at point A,
a. all resources are allocated to the production of machines.
b. resources are being used inefficiently.
c. resources are equally allocated to hamburgers and machines.
d. all resources are allocated to the production of hamburgers.
e. some resources are being left idle.
____ 11. Opportunity costs is a consequence of
a. selfish consumers.
b. narrow-minded producers.
c. greed.
d. scarcity.
e. inefficiencies.
____ 12. All of the following, except one, will increase the quantity of coffee demanded at each price. Which will not?
a. an increase in the price of tea bags
b. a reduction in the price of coffee cream
c. a reduction in consumers’ incomes
d. a large increase in the size of the population
e. reduced concerns about the effects of caffeine
____ 13. As price rises, quantity supplied rises along an individual firm’s supply curve because
I. the higher price encourages the firm to offer more units of the good for sale.
II. as the price rises, new firms enter the market.
Which of the following is correct?
a. Both I and II apply.
b. Neither I nor II applies.
c. Either I or II can apply, but not simultaneously.
d. Only II applies.
e. Only I applies.
____ 14. An increase in the price of butter is likely to result in
a. a movement along the demand curve for butter such that quantity demanded increases.
b. a rightward shift in the demand curve for margarine.
c. an increase in the quantity of butter demanded.
d. a leftward shift in the demand curve for margarine.
e. a movement along the demand curve for margarine such that quantity demanded increases.
____ 15. The increase in demand for SUVs, minivans, and pickups in the late 1990s relative to 1980 could have
resulted from all of the following except
a. decreases in the level of interest rates.
b. changes in consumer preferences toward larger vehicles.
c. increased consumer income.
d. a decrease in the real price of gasoline.
e. None of the above.
____ 16. At the equilibrium price,
a. price will tend to fall.
b. the quantity supplied exceeds the quantity demanded.
c. price will tend to increase.
d. the quantity supplied is less than the quantity demanded.
e. there is no reason for the price to change.
____ 17. When the quantity of a good that consumers are willing to buy equals the quantity of the good that firms are
willing to sell, economists refer to this situation as
a. excess demand.
b. equilibrium.
c. excess supply.
d. comparative advantage.
e. None of the above.
____ 18. Which of the following is not one of the determinants of the elasticity of demand?
a. the availability of substitutes
b. the relative price of the good consumed
c. the time necessary to make a change
d. Both b and c.
e. None of the above.
____ 19. If the price elasticity of demand for a product is 2, a price increase from $1.00 to $1.02 will cause quantity
demanded to
a. rise by 4 percent.
b. rise by 2 percent.
c. fall by 4 percent.
d. fall by 2 percent.
e. fall by $.04.
____ 20. If a firm lowers the price of its product and finds that total revenue has fallen, this indicates that
a. demand for the product is price inelastic.
b. demand for the product is price elastic.
c. demand for the product has unit price elasticity.
d. the demand curve for the product is downward sloping.
e. the price elasticity is greater than 1.
____ 21. Figure 4.1 shows four different demand curves. Which of the graphs shows a demand curve that is perfectly
inelastic?
a. graph A
b. graph B
c. graph C
d. graph D
e. None of the above.
____ 22. In the long run it is _____ than it is in the short run to find suitable substitutes for products, with the result
that the price elasticity of demand tends to be _____ in the long run.
a. easier; lower
b. more difficult; higher
c. much easier; lower
d. more difficult; lower
e. easier; higher
____ 23. The formula for the price elasticity of supply is the
a. percentage change in quantity supplied divided by the percentage change in price.
b. change in quantity supplied divided by the change in price.
c. percentage change in price divided by the percentage change in quantity supplied.
d. change in price divided by the change in quantity supplied.
e. percentage change in quantity supplied divided by the change in price.
____ 24. Demand and supply curves are _____ in the long run than in the short run, which means that shifts in demand
and supply curves will be reflected more in _____ changes in the short run, and more in _____ changes in the
long run.
a. more price elastic; quantity; price
b. less price elastic; price; quantity
c. more price inelastic; quantity; price
d. more price elastic; price; quantity
e. less price elastic; quantity; price
____ 25. If the quantity supplied of a product decreases at every price (shifting the supply curve leftward) and the
demand curve of the product is downward sloping, equilibrium quantity will _____ and equilibrium price will
_____.
a. decrease; increase
b. increase; decrease
c. decrease; decrease
d. increase; increase
e. decrease; remain unchanged
____ 26. Figure 4.6 shows a market in which the going price is P1. At this price, there is a
a. shortage of Q3 – Q2 units.
b. surplus of Q3 – Q2 units.
c. shortage of Q2 – Q1 units.
d. surplus of Q2 – Q1 units.
e. shortage of Q3 – Q1 units.
____ 27. A surplus occurs in a market when the going price is _____ the equilibrium price, and as a result there is
excess _____.
a. below; supply
b. above; demand
c. equal to; supply
d. above; supply
e. below; demand
____ 28. Price ceilings, which are legally established prices _____ the equilibrium price, result in _____.
a. below; shortages
b. above; shortages
c. below; surpluses
d. above; surpluses
e. equal to; market clearing
____ 29. Which of the following is not a possible consequence of rent controls?
a. Apartment buildings are abandoned.
b. Apartment buildings are converted to condominiums.
c. All those who wish to rent apartments at going rents are able to find apartments that are
available.
d. There is less incentive for the construction of new apartments.
e. There is a shortage of available apartments, and the shortage becomes more pronounced in
the long run.
____ 30. The individual’s opportunity set is defined by the
a. production possibilities curve.
b. demand curve.
c. supply curve.
d. indifference curve.
e. budget constraint.
____ 31. All except one in the following list are alternative measures of the same thing. Which is not?
a. the relative price
b. the slope of the budget constraint
c. the trade-off facing the individual
d. the price of one good valued in terms of the other
e. the slope of the demand curve
____ 32. Which of the following statements about Figure 5.3 is untrue?
a. The budget line containing points C and D represents more income.
b. Point C is preferable to point D.
c. The slope of each budget constraint indicates that the price of Good X has not changed.
d. For an increase in income, moving from point A to point C is typical.
e. For the individual beginning at point B and ending at point D, Good X is income normal.
____ 33. Anne buys only glasses of wine and gourmet pizzas. If the price of a glass of wine decreases, the
a. income and substitution effects each lead to increased consumption of pizzas.
b. income and substitution effects each lead to reduced consumption of pizzas.
c. income effect will increase consumption of pizzas, but the substitution effect will reduce
it.
d. substitution effect will increase the consumption of pizzas, but the income effect will
reduce it.
e. income and substitution effects will cancel each other out and leave the demand for the
good unchanged.
____ 34. Katie buys only bottles of beer and pizza. A bottle of beer costs $2 and pizzas are $8 each. The relative price
of a beer is _____ pizzas.
a. .25
b. 2
c. 4
d. 8
e. 16
____ 35. Figure 5.1 shows Mark’s budget constraint. If Mark’s income is $90, the price of beer is
a. $30.
b. $15.
c. $6.
d. $3.
e. $2.
____ 36. Figure 5.1 shows Mark’s budget constraint. The absolute value of the slope of Mark’s budget constraint is
a. .5.
b. 2.
c. 6.
d. 15.
e. 30.
____ 37. Economists refer to a good as income normal when
a. it is primarily purchased by high-income individuals.
b. it is not of inferior quality relative to most other goods.
c. consumers purchase more of it as income increases.
d. there is a wide variety of substitutes available for it.
e. it is primarily purchased by middle-income consumers.
____ 38. The consumer’s basic problem is to
a. maximize utility within the budget constraint.
b. minimize the budget constraint within the level of utility.
c. minimize utility within the budget constraint.
d. maximize the budget constraint within the level of utility.
e. maximize the difference between utility and the budget constraint.
____ 39. Kathy is willing to pay $20 for the first T-shirt she buys and $35 for the first two T-shirts. The marginal utility
of the second T-shirt is
a. 55.
b. 35.
c. 20.
d. 15.
e. 7.5.
____ 40. A consumer is willing to pay $11 for his first beer, $7 for his second beer, $4 for his third beer, $2 for his
fourth beer, and $1 for his fifth beer. If the price is $2, and he purchases beer up to this point, his total
consumer surplus is
a. $24.
b. $22.
c. $20.
d. $18.
e. $16.
Part 2. Problems
Following two questions are 5 points each.
41. A student has an entertainment budget of $200 per term and spends it on either concert tickets at $40 apiece
or movie tickets at $10 apiece. Suppose movie tickets decrease in price, first falling to $5, then $2. Graph the
three budget constraints, with movies on the horizontal axis.
42. The following table gives Sarah’s willingness to pay for music CDs and movie DVDs. Calculate Sarah’s
marginal utility for CDs and DVDs by filling in the columns of the table labeled “marginal utility.”
CDs
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Willingness
to pay
0
24
46
66
84
100
114
126
136
144
150
154
156
156
Marginal
utility
DVDs
0
1
2
3
4
5
6
7
8
Willingness
to pay
0
42
78
108
132
150
162
168
168
Marginal
utility