ECON 520 Intermediate Microeconomics Exam 1

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing choice? a. MRSxy is at a maximum. b. Px/Py = money income. c. MRSxy = money income. d. MRSxy = Px/Py.

d. MRSxy = Px/Py.

The demand curve for a good will shift outward whenever (a) the price of the good falls. (b) consumers wish to purchase more of the good at any given price. (c) firms experience an increase in their marginal costs of production. (d) both a and b

(b) consumers wish to purchase more of the good at any given price

What provided the "invisible hand" that Adam Smith viewed as directing resources into their most valuable uses? (a) the government (b) prices (c) firm managers (d) none of the above

(b) prices

A simultaneous increase in supply of and demand for corn in a competitive corn market must result in (a) a price increase. (b) a price decrease. (c) an increase in quantity. (d) a decrease in quantity.

(c) an increase in quantity

The problem of scarcity (a) arises only in poor countries. (b) exists because the price of goods is too high. (c) exists because of limited resources. (d) will eventually be solved by better planning

(c) exists because of limited resources

Microeconomics is the study of (a) the overall level of unemployment, output, and inflation in an economy. (b) how to increase our scarce resources. (c) how firms and individuals make economic choices and how those choices create markets. (d) both b and c (e) both a and c

(c) how firms and individuals make economic choices and how those choices create markets.

Which of the following would not cause a rightward shift in the demand for taxi service in a city? (a) bus fares increase after a strike by bus drivers. (b) the population of the city increases. (c) taxi drivers must pass a competency test, and a third fail. (d) half the downtown parking lots are converted to office buildings.

(c) taxi drivers must pass a competency test, and a third fail.

Which of the following statements is a normative statement? (a) Rent controls lead to a reduction in the quality of rental housing. (b) The dairy price support program gives rise to large surpluses of milk. (c) Import quotas reduce overall economic welfare. (d) The government should increase taxes on vice goods such as alcohol and cigarettes.

(d) The government should increase taxes on vice goods such as alcohol and cigarettes.

If the prevailing price in a market were BELOW the market equilibrium price, (a) a surplus would exist. (b) the market is in equilibrium. (c) excess supply would exist. (d) a shortage would exist. (e) none of the above

(d) a shortage would exist.

The model of supply and demand developed by Alfred Marshall recognizes that price determination is dependent upon (a) production costs. (b) the willingness of consumers to pay for firms' production. (c) a central planner. (d) both a and b

(d) both a and b

When a market is in equilibrium, I. no surplus or shortage exists II. the quantity of output consumers are willing to purchase is equal to the quantity producers are willing to supply III. there is no tendency for the price or output level to change, other things being equal (a) I only (b) I and II only (c) I and III only (d) II and III only (e) I, II, and III

(e) I, II, and III

Butter and margarine are called substitutes since a. an increase in the price of butter causes more margarine to be bought. b. an increase in the price of butter causes less margarine to be bought. c. an increase in the price of butter causes less butter to be bought. d. an increase in the price of margarine causes less margarine to be bought. e. an increase in income causes more of both butter and margarine to be bought

a. an increase in the price of butter causes more margarine to be bought.

Electricity and natural gas are called substitutes since a. an increase in the price of electricity causes more natural gas to be bought. b. an increase in the price of electricity causes less natural gas to be bought. c. an increase in the price of natural gas causes less natural gas to be bought. d. an increase in income causes more of both electricity and natural gas to be bought.

a. an increase in the price of electricity causes more natural gas to be bought.

An individual consumer's marginal rate of substitution of softdrink for beer is 1/2. That is, at the current consumption choice the consumer is willing to give up half bottle of beer to get one extra can of softdrink. Suppose also that softdrink costs 75 cents per can and beer costs $2 per bottle. Then in order to maximize utility the consumer should a. buy more softdrink and less beer. b. but more beer and less softdrink. c. continue with current consumption

a. buy more softdrink and less beer.

The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices) a. elastic, unit elastic, inelastic. b. unit elastic, inelastic, elastic. c. inelastic, unit elastic, elastic. d. elastic, inelastic, unit elastic.

a. elastic, unit elastic, inelastic.

When the airfare of a transatlantic air travel increases, total expenditures for the transatlantic air travel decrease. This implies that a. market demand for transatlantic air travels is elastic. b. market demand for transatlantic air travels is inelastic c. transatlantic air travel is a "normal good." d. transatlantic air travel is an "inferior good." e. none of the above .

a. market demand for transatlantic air travels is elastic

Given that the price elasticity of demand for cigarettes in the United States was estimated to be -0.35, an increase in cigarette price will cause the total spending (price times quantity) on cigarettes to a. rise. b. fall. c. remain unchanged. d. rise or fall.

a. rise

Which of the following statements is false? a. A linear market demand curve has a constant slope. b. In a competitive market for mountain bikes, if the prevailing price exceeds market equilibrium price, there is tendency for the quantity demanded for mountain bikes to go down. c. A decrease in an individual's income without changing relative prices will shift the budget constraint inward in a parallel way. d. An individual's demand curve represents the various quantities that a consumer is willing to purchase of a good at various price levels. e. Market demand curve for wheat is the horizontal summation of individuals' demand curves for wheat

b. In a competitive market for mountain bikes, if the prevailing price exceeds market equilibrium price, there is tendency for the quantity demanded for mountain bikes to go down

Which of the following statements is false? a. Proportionate changes in all prices and income will not affected consumption choices. b. The cross-price elasticity of demand for coffee and tea is negative. c. By examining the income elasticity of demand for a good, one can determine whether the good is inferior or normal. d. The slope of a consumer's indifference curve measures the rate at which the consumer is willing to substitute one good for another.

b. The cross-price elasticity of demand for coffee and tea is negative.

Which of the following statements is false? a. In a competitive market, if the prevailing price exceeds equilibrium price, there is a tendency for the price to fall. b. The slope of a market demand curve equals the price elasticity of the demand curve. c. The cross-price elasticity of demand for two complements (e.g., automobiles and gasoline) is negative. d. An increase in an individual's income without changing relative prices will shift the budget constraint outward (i.e., rightward) in a parallel way.

b. The slope of a market demand curve equals the price elasticity of the demand curve.

A simultaneous decrease in the supply and demand of cauliflower must result in a. an increase in quantity. b. a decrease in quantity. c. an increase in price. d. a decrease in price.

b. a decrease in quantity.

Automobiles and gasoline are called complements since a. an increase in the price of automobiles causes more gasoline to be bought. b. an increase in the price of automobiles causes less gasoline to be bought. c. and increase in the price of gasoline causes less gasoline to be bought. d. an increase in income cause more of both automobiles and gasoline to be bought.

b. an increase in the price of automobiles causes less gasoline to be bought.

Suppose an individual's MRS of steak for beer is 3:1. That is, at the current consumption choices he or she is willing to give up 3 beers to get an extra steak. Suppose also that the price of a steak is $12 and a beer is $3. Then in order to increase utility the individual should a. buy more steak and less beer. b. buy more beer and less steak. c. continue with current consumption.

b. buy more beer and less steak.

A budget line depicts a. combinations of goods which provide the consumer the same marginal rate of substitution. b. combinations of goods which are affordable for the consumer. c. combinations of goods which provide the consumer the same utility. d. combinations of goods which provide the consumer the same marginal utility. e. none of the above

b. combinations of goods which are affordable for the consumer.

The price elasticity of demand for a commodity is -2. If the quantity demanded for the commodity increased by 10 percent, then the price a. increased by 5 percent. b. decreased by 5 percent. c. increased by 10 percent. d. decreased by 10 percent.

b. decreased by 5 percent.

If market demand for owner-occupied housing is elastic, an increase in price will cause the total spending (price times quantity) to a. rise. b. fall. c. remain unchanged. d. change in a way that cannot be determined.

b. fall

Some studies showed cocaine is an inferior good. If income were to rise, ceteris paribus, the equilibrium price of cocaine would a. rise. b. fall. c. remain unchanged. d. a or c. e. b or c.

b. fall.

Which of the following statements is incorrect for an inferior good? a. An inferior good may have an upward-sloping demand curve. b. The income elasticity of demand for an inferior good is negative. c. An inferior good is an economic "bad." d. All of the above.

c. An inferior good is an economic "bad."

Which of the following statements is false? a. In a competitive market, if the prevailing price is less than the equilibrium price, there is a tendency for the price to increase. b. An decrease in an individual's income without changing relative prices will shift the budget constraint inward (i.e., leftward) in a parallel way. c. For an acreage reduction program to effectively raise the aggregate income earned by corn farmers, the market demand for corn must be elastic.

c. For an acreage reduction program to effectively raise the aggregate income earned by corn farmers, the market demand for corn must be elastic.

Which of the following statements is false? a. An individual's demand curve represents the various quantities that a consumer is willing to purchase of a good at various price levels of the good. b. The cross-price elasticity of demand for two substitutes (e.g., coffee and tea) is positive. c. The slope of the budget constraint depicts the rate at which the consumer is willing to substitute one good for another

c. The slope of the budget constraint depicts the rate at which the consumer is willing to substitute one good for another

The price elasticity of demand for imports is -0.50. What percentage change in price would bring about an increase in the demand for imports of 10 percent? a. a 10 percent decrease in the price of imports. b. a 10 percent increase in the price of imports. c. a 20 percent decrease in the price of imports. d. a 20 percent increase in the price of imports. e. a 5 percent increase in the price of imports.

c. a 20 percent decrease in the price of imports.

The substitution effect of a price decrease will a. increase the consumption of normal goods only. b. decrease the consumption of normal goods only. c. increase the consumption of both normal and inferior goods. d. decrease the consumption of both normal and inferior goods. e. none of the above

c. increase the consumption of both normal and inferior goods.

The price elasticity of demand for a linear demand curve follows the pattern (moving from low prices to high prices) a. elastic, unit elastic, inelastic. b. unit elastic, inelastic, elastic. c. inelastic, unit elastic, elastic. d. elastic, inelastic, unit elastic.

c. inelastic, unit elastic, elastic.

Suppose that Mrs. Smith has a weekly income of $1,000 available to spend on goods X and Y. If Mrs. Smith's income and the prices of X and Y all increase by 20%, her budget constraint will a. shift outward by rotating about the X-intercept. b. shift outward by rotating about the Y-intercept. c. remain the same as before. d. shift outward in parallel fashion. e. shift inward in parallel fashion.

c. remain the same as before.

When the price of sugar was "low," consumers in the United States spent a total of $3 billion annually on its consumption. When the price doubled, consumer expenditures actually increased to $4 billion annually. This indicates that a. sugar is a Giffen good. b. sugar prices violate the law of demand. c. the demand for sugar is inelastic. d. the demand curve for sugar is upward sloping

c. the demand for sugar is inelastic.

The market demand curve for tomatoes is a. independent of individuals' demand curves for tomatoes. b. the vertical summation of individuals' demand curves for tomatoes. c. the horizontal summation of individuals' demand curves for tomatoes. d. derived from the tomato farmers' demand curves for tomatoes.

c. the horizontal summation of individuals' demand curves for tomatoes.

Given the prices of good X and Y, the (negative of the) slope of the budget constraint (i.e., - PX/PY) measures a. the amount of good Y the consumer is willing to forgo in order to consume one more unit of good X. b. the ratio of the consumer's income to the price of the X good. c. the quantity of the Y good that must be forgone in order to purchase one more unit of the X good. d. the quantity of the X good that must be forgone in order to purchase one more unit of the Y good

c. the quantity of the Y good that must be forgone in order to purchase one more unit of the X good.

A consumer prefers commodity bundle A to commodity bundle B, and prefers commodity bundle B to commodity bundle C. Therefore, A is preferred to C. The assumption that leads to this conclusion is: a. all goods must be economic "goods." b. complete preferences. c. transitivity of preferences. d. diminishing marginal rate of substitution. e. normal goods.

c. transitivity of preferences

Economists use indifference curves to characterize the preferences of a rational consumer. There are some plausible assumptions that lead to a set of "well-behaved" (i.e., downward-sloping and strictly convex) indifference curves. Which one of the following is NOT among the assumptions? a. All goods must be economic "goods." b. Preferences are complete. c. Preferences are transitive. d. All goods are normal goods

d. All goods are normal goods

An indifference curve depicts a. all combinations of goods which are just affordable for the consumer. b. all combinations of goods which provide the consumer the same marginal rate of substitution. c. all combinations of goods which are of equal cost to the consumer. d. all combinations of goods which provide the consumer the same utility.

d. all combinations of goods which provide the consumer the same utility

The substitution effect of a price decrease will a. decrease the consumption of normal goods only. b. increase the consumption of normal goods only. c. decrease the consumption of both normal and inferior goods. d. increase the consumption of both normal and inferior goods.

d. increase the consumption of both normal and inferior goods

If income doubles and the quantity demanded of automobiles more than doubles, then automobiles can be described as a a. substitute good. b. complement good. c. necessity. d. luxury.

d. luxury.