Midterm Review

13) The cross-price elasticity of demand for coffee and coffee-cream is likely to be (Ch. 4)

B) less than zero.

6) If an item has several good substitutes, the demand curve for that item is likely to be (Ch. 4)

B) relatively elastic.

3) If OPEC increases its price of oil, and still the demand for oil decreases by a very small amount, we can conclude that the demand for oil is (Ch. 4)

B) relatively inelastic.

9) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded falls from 10 units to 6 units. In this example, the demand for beans is said to be (Ch. 4)

B) relatively inelastic.

36) An increase in input prices will cause (Ch. 3)

B) supply to shift leftward, equilibrium price to rise, and equilibrium quantity to fall.

20) Coke and Pepsi are substitutes if (Ch. 3)

B) the demand for Coke increases when the price of Pepsi rises.

18) If a firm decreases the price of a good and total revenue decreases, then (Ch. 4)

B) the demand for this good is price inelastic.

32) The derived demand curve for a good component will be more inelastic (Ch. 4)

B) the more inelastic is the demand curve for the final good.

1) How long is the "short-run" time period in the economic analysis of the market? (Ch. 3)

B) total time in which sellers already in the market respond to changes in demand and equilibrium price

19) When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches (Ch. 4)

B) zero.

4) If the consumption of sugar does not change at all following a price increase from 50 cents per pound to 65 cents per pound, the demand for sugar is considered to be (Ch. 4)

C) perfectly inelastic.

10) All of the following are non-price determinants of demand except (Ch. 3)

C) technology.

22) Which of the following would cause a short-run decrease in the quantity supplied of personal computers? (Ch. 3)

A) The price of CPUs decreases.

38) Which of the following would indicate that price is temporarily above its market equilibrium? (Ch. 3)

A) There are a number of producers who are left with unwanted inventories.

18) Which of the following will not cause the demand curve for good X to shift? (Ch. 3)

A) a change in the price of X

14) Which of the following can result in a decrease in the demand for I-Pods in the short run? (Ch. 3)

A) a decrease in the population

35) When a government imposes a price floor on a good that is above the market equilibrium price (Ch. 4)

A) a surplus will develop.

32) Which of the following would cause a decrease in the price of a good? (Ch. 3)

A) an increasing shift in the supply of a good and no shift in demand

11) The sensitivity of the change in quantity consumed of one good to a change in the price of a related good is called (Ch. 4)

A) cross-elasticity.

36) A tax that is imposed as a specific amount per unit of a good is a(n) (Ch. 4)

A) excise or specific tax.

30) If the price elasticity of supply of a good is elastic and the good price increases, then the increase in the good's supply should be (Ch. 4)

A) greater than the increase in price.

12) The cross-price elasticity of demand for coffee and tea is likely to be (Ch. 4)

A) greater than zero.

40) Holding supply constant, an increase in demand will (Ch. 3)

A) increase both the quantity and price.

39) Other things remaining the same, an increase in the price of butter can be expected to (Ch. 4)

A) increase margarine sales.

7) Remembering that demand elasticity is defined as the percentage change in quantity divided by the percentage change in price, if price decreases and, in percentage terms, quantity rises more than price has dropped, total revenue will (Ch. 4)

A) increase.

5) If the demand for a product is said to be relatively inelastic, the "absolute" value of the elasticity coefficient will be (Ch. 4)

A) less than one.

23) In Table 1, steaks are classified as a(n) (Ch. 4)

A) normal good.

35) Comparative statics analysis in economics is best illustrated as (Ch. 3)

A) the comparison of equilibrium points before and after changes in the market have occurred.

1) The price elasticity of demand is a measure of (Ch. 4)

A) the responsiveness of the quantity demanded to price changes.

25) Which of the following could cause a long-run shift in demand as part of the "guiding function of price"? (Ch. 3)

B) an increase in price caused by a shift in supply

31) Which of the following would cause a leftward shift in the demand curve for a good? (Ch. 3)

B) an increase in the price of a complementary good

15) When purchases of tennis socks decline following an increase in the price of tennis sneakers (other things remaining equal), the relationship between these two items can be described as (Ch. 4)

B) complementary.

26) Which of the following is a common determinant of both supply and demand? (Ch. 3)

B) future expectations

21) In Table 1, Tony's income elasticity of demand for steaks is (Ch. 4)

B) greater than 1.0.

27) If the price of a good is increased and total revenue received from the sale of this good increases, then the price elasticity of demand for the good is (Ch. 4)

B) inelastic.

37) If government imposes an excise tax on a good and the tax burden is borne equally by buyers and sellers, then (Ch. 4)

C) the absolute values of price elasticities of demand and supply are equal.

2) The elasticity of demand for a product is likely to be greater (Ch. 4)

C) the larger the number of substitute products available.

33) A market is in equilibrium when (Ch. 3)

C) the quantity supplied is equal to the quantity demanded.

28) If the price of a good is decreased and total revenue received from the sale of this good does not change, then the price elasticity of demand for the good is (Ch. 4)

C) unitary.

14) The cross-price elasticity of demand for coffee and caskets is likely to be (Ch. 4)

C) zero.

6) Governments impose excise taxes on goods that have inelastic demand, such as cigarettes, more often than in other cases. Why? (Ch. 4)

Imposing an excise tax reduces the supply of the good, reducing equilibrium quantity and raising the price. If demand is elastic, taxes will tend to reduce quantity by a significant amount, and thus government tax revenues will be relatively small. However, if demand is inelastic, the reduction in quantity will be small, and government tax revenues will be higher. (Governments may also impose taxes to deter consumption, but this is likely to be ineffective if elasticity is low.)

1) Suppose that the demand for oranges increases. Explain the long-run effects of the guiding function of price in this scenario. (Ch. 3)

In the long run, the higher price of oranges will signal more firms to enter the orange market, as it will seem more profitable than some other markets. As firms enter, supply increases, causing the price to fall relative to the short-run price and quantity to increase further. The higher short-run price has guided more resources into the market.

11) List the major non-price determinants of supply. (Ch. 3)

Input costs, technology, prices of other goods that can be sold by the firm (complements and substitutes), future expectations, weather conditions, and number of sellers.

13) Which of the following refers to a shift in the demand curve? (Ch. 3)

A) "This new advertising campaign should really increase our demand."

3) Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good wheat crop (which increases the supply of wheat) be likely to increase or decrease the revenues of farmers? Carefully explain. (Ch. 4)

A good wheat crop that increases the supply of wheat will cause the equilibrium price of wheat to decrease (and quantity to increase). Since demand is inelastic, total revenues will fall, as the percentage change in quantity will be less than the percentage change in price.

8) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded falls from 10 units to 6 units, the coefficient of elasticity of demand for beans using the arc elasticity approach is (Ch. 4)

B) -0.75.

16) The owner of a produce store found that when the price of a head of lettuce was raised from 50 cents to $1, the quantity sold per hour fell from 18 to 8. The arc elasticity of demand for lettuce is (Ch. 4)

B) -1.15.

30) Which of the following would lead to a short-run market surplus for tomatoes? (Ch. 3)

B) A new government study shows that tomatoes have a greater risk of contamination from salmonella.

37) The switch to the use of ethanol in gasoline is driven primarily by its relatively lower price. Assuming a competitive market, what effect would this change have on the equilibrium price and output for gasoline? (Ch. 3)

B) Price falls, output rises.

24) Which of the following applies most generally to supply in the long run? (Ch. 3)

B) Producers are able to make change in all their factors of production.

6) Which of the following best describes the "guiding function" of price? (Ch. 3)

B) The guiding function of price is the movement of resources into or out of markets in response to a change in the equilibrium price of a good or service.

31) Which of the following examples best illustrates the concept of derived demand? (Ch. 4)

B) The higher the demand for automobiles, the greater the demand for steel.

34) If government imposes a price ceiling on a good that is below the market equilibrium price (Ch. 4)

B) a shortage will develop.

17) If the price of a substitute increases, which of the following is most likely to happen in the market for the product under consideration in the short run? (Ch. 3)

C) Firms will devote more variable inputs in the production of this good.

27) Which of the following indicates that there is a shortage in the market? (Ch. 3)

C) Price is rising.

26) Which of the following instances will total revenue or receipts decline? (Ch. 4)

C) Price rises and demand is elastic.

12) Which of the following would cause a decrease in the demand for fish? (Ch. 3)

C) The price of chicken decreases.

2) Which of the following best applies to the distinction between the "long run" and the "short run"? (Ch. 3)

C) The rationing function of price is a short-run phenomenon whereas the guiding function is a long-run phenomenon.

19) Which of the following will change only the quantity demanded of oranges? (Ch. 3)

C) a change in the price of oranges

23) Which of the following will not cause a short-run shift in the supply curve? (Ch. 3)

C) a change in the price of the product

11) Which of the following will result in a decrease in demand for residential housing in the short run? (Ch. 3)

C) a decrease in real household incomes

7) The guiding function of price is (Ch. 3)

C) a long-run function resulting in the movement of resources into or out of markets.

4) In the long run if there is a shortage in the market for a product, the guiding (allocation) function of price can be expected to cause (Ch. 3)

C) an increasing shift in the supply of the product.

20) If the income elasticity of a particular good is negative 0.2, it would be considered (Ch. 4)

C) an inferior good.

10) A perfectly elastic demand curve (Ch. 4)

C) can be represented by a line parallel to the horizontal axis.

16) Two goods are ________ if the quantity consumed of one increases when the price of the other decreases. (Ch. 3)

C) complementary

24) In Table 1, Tony's income elasticity of demand for pizzas is (Ch. 4)

C) greater than 1.0.

25) The government unit that wants to achieve "revenue enhancement" will find it considerably more favorable to enact an excise tax on goods whose demand is (Ch. 4)

C) highly inelastic.

21) All of the following are non-price determinants of supply except (Ch. 3)

C) income.

38) Assuming mustard and burgers are complements, a decline in the price of burgers will (Ch. 4)

C) increase the demand for mustard.

29) If the demand for a good is price inelastic and the good price is increased, then the marginal revenue (MR) received by the seller will (Ch. 4)

C) increase.

22) In Table 1, pizzas are classified as a(n) (Ch. 4)

C) inferior goods.

5) The rationing function of price (Ch. 3)

C) occurs when consumers change their tastes and preferences.

10) List the major non-price determinants of demand. (Ch. 3)

Consumer preferences (tastes), income, prices of related goods (complements and substitutes), future expectations, and number of buyers.

17) Suppose the price of crude oil drops from $150 a barrel to $120 a barrel. The quantity bought remains unchanged at 100 barrels. The coefficient of price elasticity of demand in this example would be (Ch. 4)

D) 0.

39) Which of the following statements is false? (Ch. 3)

D) A decrease in supply causes equilibrium price to rise and quantity to rise.

3) In the short-run if there is a surplus in the market for a product, the rationing function of price can be expected to cause (Ch. 3)

D) a decrease in the market price of the product.

8) The "law" of demand can be best described by (Ch. 3)

D) a fall in price will increase quantity demanded.

15) A good that is similar to another, and can be consumed in place of it, is called (Ch. 3)

D) a substitute good.

34) In the short run, a change in the equilibrium price will (Ch. 3)

D) cause a change in the quantity demanded or supplied.

9) A movement along a demand curve may be caused by a change in (Ch. 3)

D) the change in supply.

9) You are told that the price elasticity of demand for widgets is -0.75, the income elasticity of widgets is 2, and the cross-price elasticity of widgets and gadgets is 4. Carefully explain what information you can gather from each of these figures. (Ch. 4)

Demand for this good is inelastic with respect to price. This is a normal good as income elasticity is greater than zero, and it is a luxury/superior good as income elasticity is greater than one. Widgets and gadgets are substitutes, and they are good substitutes because cross-price elasticity is elastic (large).

33) The minimum wage is an example of a government imposed (Ch. 4)

E) Both A and C

29) A fall in the price of pesticide use in the production of cotton will (Ch. 3)

E) None of the above

28) Which of the following is correct? The supply curve will shift when (Ch. 3)

E) production technology and input prices change.

13) Suppose that macroeconomic forecasters predict that the economy will be expanding in the near future. How might managers use this information? (Ch. 3)

Economic expansion increases consumer incomes, which will increase the demand for normal goods and decrease the demand for inferior goods. Thus a producer of normal goods might be anticipating a future increase in demand and thus considering expansion, while a producer of inferior goods might be preparing for a decrease in demand and considering contraction or a movement into a different good line.

4) The demand for salt is relatively price inelastic, while the demand for pretzels is relatively price elastic. How can you best explain why? (Ch. 4)

Salt has few substitutes, and takes up a small percentage of the consumer's budget, and thus demand is likely to be inelastic. While pretzels are also a small part of the budget, there are many substitutes available.

12) The market for milk is in equilibrium. Recent health reports indicate that calcium is absorbed better in natural forms such as milk, and at the same time, the cost of milking equipment rises. Carefully analyze the probable effects on the market. (Ch. 3)

The heath reports are likely to cause an increase in the demand for milk. Alone, this would increase both the equilibrium price and quantity of milk. The increase in equipment costs will cause a decrease in the supply of milk, and this alone would cause an increase in equilibrium price and a decrease in equilibrium quantity. Taken together, both effects will lead to an increase in price, and thus we can be certain that the equilibrium price will rise. The effect on quantity is unclear as the supply and demand shifts move quantity in different directions.

2) Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium. (Ch. 3)

The increase in demand causes a shortage at the original equilibrium price; the quantity supplied is less than the new quantity demanded at that price. The existence of the shortage will cause the price to rise. As price rises, the quantity supplied will increase and the quantity demanded will decrease (along the new demand curve) until equilibrium is reached at a higher price (and quantity).

5) Unions have generally been far more successful in organizing and raising wages in skilled trades such as carpentry than in unskilled trades. Use the laws of derived demand to explain why. (Ch. 4)

There are at least two reasons. One is that the elasticity of substitution between skilled workers and other factors of production is low; thus firms cannot substitute some other factor of production if wages rise. Secondly, skilled labor is likely to be a relatively small percentage of total costs, and thus raising wages does not cause a large increase in total costs (which would lead to a reduction in supply, an increase in price, and a decrease in output). Unskilled labor has more substitutes and is likely to be a larger share of costs for firms that employ it, and thus if unions raise wages, firms employ other factors of production, and many workers will be laid off.