Econ 101 - Ch. 5

Necessity

A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities

Price ceiling

A legal maximum price. An effective price ceiling is a legal maximum price that is below the equilibrium price. Examples include laws limiting apartment rents in some cities.

Minimum wage

A legal minimum for wages (the price of one hour of labor) for most categories of workers.

Price floor

A legal minimum price. An effective price floor is a legal minimum price that is above the equilibrium. An example is the federal minimum wage, currently $7.25 per hour.

Rent control

A policy which sets a legal maximum rent that can be charged for some apartments in some major cities

A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one. A. A greater B. A lesser C. The same

A. A greater

A government may impose a price ceiling if which of the following is true? A. Consumers can persuade legislators that lower prices are needed B. Producers can persuade legislators that lower prices are needed C. Consumers can persuade legislators that higher prices are needed D. Producers can persuade legislators that higher prices are needed

A. Consumers can persuade legislators that lower prices are needed

A business should ____ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues. A. Increase B. Decrease

A. Increase

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will_______ and the quantities actually sold will_______ A. Increase; decrease B. Increase; increase C. Decrease; decrease D. Decrease; increase

A. Increase; decrease

If the income elasticity of a good is 0.8, what do we know about the good? A. It is a normal good B. It is an elastic good C. It is an inferior good D. It is an elastic good

A. It is a normal good

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price? A. Lower price B. Increase price C. Do not change price

A. Lower price

If the government taxes car producers, that will happen in the market for cars? A. The supply curve will shift to the left. B. The demand curve will shift to the right C. There will be a movement along the supply curve to the left D. There will be a movement along the demand curve to the right

A. The supply curve will shift to the left.

Sometimes consumers purchase goods because of "conspicuous consumptions", i.e., they want others to know what they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods? A. These are luxury goods, so income elasticity would be greater than 1. B. These are normal goods, so income elasticity would be greater than 1 C. These are inferior goods, so income elasticity would be greater than 1.

A. These are luxury goods, so income elasticity would be greater than 1.

Rank the following in order from the least elastic demand to most elastic Subdafed Cold and Allergy Medicine Any over-the-counter allergy medicine Allergy medicine that is prescribed by a physician

Allergy medicine that is prescribed by a physician Any over-the-counter allergy medicine Subdafed Cold and Allergy Medicine

If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax? A. Cereal B. Bottles of alcohol, such as whiskey and gin C. Dress shoes

B. Bottles of alcohol, such as whiskey and gin

A business should __ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues. A. Increase B. Decrease

B. Decrease

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a ____ elastic supply OR faces a ___ elastic demand than exists in Situation B A. More; more B. More; less C. Less; less D. Less; more

B. More; less

Who is most likely to be in favor of a price ceiling on a good? A. All consumers of that good B. The consumers of the good who can still purchase it after the ceiling is imposed C. All producers of the good D. The producers of the good who can still sell it after the ceiling is imposed

B. The consumers of the good who can still purchase it after the ceiling is imposed

If the government imposes an effective price ceiling in a market, what will be the result? A. Equilibrium B. A surplus C. A shortage D. Demand will shift left and supply will shift right

C. A shortage

When the federal government subsidizes higher education in the form of Pell grants to students, it results in A. An increase in the supply of higher education B. A decrease in the supply of higher education C. An increase in the demand for higher education D. A decrease in the demand for higher education

C. An increase in the demand for higher education

Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer. ​[Image description: The two tables below show the demand (prices and quantities) for movie tickets in the winter and summer.] A. Increased; increased B. Decreased; decreased C. Increased; decreased D. Not changed; decreased

C. Increased; decreased

When will a minimum wage be an effective price control? When it is a____ A. Maximum "price" that is above equilibrium price B. Maximum "price" that is below equilibrium price C. Minimum "price" that is above equilibrium price D. Minimum "price" that is below equilibrium price

C. Minimum "price" that is above equilibrium price

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenue (the price times the quantity sold), what should it do? A. Raise price when demand is elastic, because the quantity demanded will increase B. Lower price when demand is elastic, because the quantity demanded will decrease C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold D. Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold

C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold

Which of the following statements about the effects of a government setting maximum prices is true? A. A maximum price will always cause a surplus of a good to be produced B. A maximum price will always cause a shortage of a good to be produced C. A maximum price will cause a surplus of a good to be produced only if the maximum price is above the equilibrium price D. A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price

D. A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing? A. An increase in the number of rental housing units available, but no change in rent B. An increase in quantity supplies and quantity demanded C. An increase in supply, but no change in quantity demanded D. An increase in demand, but no change in quantity supplied

D. An increase in demand, but no change in quantity supplied

Rank the following from the least elastic (most elastic) to most elastic Demand for food Demand for dessert Demand for cookies Demand for Oreos

Demand for food Demand for dessert Demand for cookies Demand for Oreos

Elastic

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one

Inelastic

Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one.

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices? A. Raise because revenues would increase B. Lower because revenues would increase C. Raise because revenues and costs would decrease D. Lower because revenues would increase and costs would decrease E. I do now know because I cannot tell how much costs would change in relationship to revenues

E. I do now know because I cannot tell how much costs would change in relationship to revenues

Assume that the elasticity of demand is 1.6, is demand elastic or inelastic?

Elastic

Substitutes

Goods or services that consumers consider as serving similar purposes

Taxes

Mandatory payments to governments from consumers and producers

Subsidies

Payments from governments to producers or consumers of specific goods and services

Income elasticity of demand

The percentage change in quantity demanded of a good or service divided by the percentage change in income

Price elasticity of demand

The percentage change in quantity demanded of a good or service divided by the percentage change in price

Price elasticity of supply

The percentage change in quantity supplied divided by the percentage change in the price of the good or service