ECON 130 Midterm 2

Consider two substitute goods: coffee and tea. As a result of a change in the price of coffee from $2 to $3, the quantity demand for tea increased from 1,200 to 1,400 cups. Calculate cross-elasticity of demand for tea using the midpoint formula. A. 0.38 B. 0.49 C. 0.54 D. 0.66

A. 0.38

The Law of Demand is: A. An inverse relationship between price and quantity B. A direct relationship between price and quantity C. An inverse relationship between price and quality D. A direct relationship between price and quality

A. An inverse relationship between price and quantity

When demand for a good is inelastic, prohibition of that good will... A. Increase total expenditure of the prohibited good. B. Decrease total expenditure of the prohibited good. C. Not change the total expenditure on the good. D. Decreases the cost of evading the prohibition.

A. Increase total expenditure of the prohibited good.

Inelastic demand, prohibition A. Increases total expenditures on the banned product B. Decreases total expenditures on the banned product C. Does not change total expenditures on the product D. Decreases the cost of evading the prohibition

A. Increases total expenditures on the banned product

TAX burden generally falls on the group that is more... A. Inelastic B. Elastic C. Unit elastic D. None of the above, it is always shared equally.

A. Inelastic

Suppose McDonalds sells 500 burgers at the price of $3 per burger. If it increases its price to $7, the sales drop to 300. Calculate the new revenue and determine price elasticity of demand. A. Revenue=$2,100, inelastic B. Revenue=$2,100, elastic C. Revenue=$1,500, inelastic D. Revenue=$1,500, elastic

A. Revenue=$2,100, inelastic

The cross elasticity of demand for good Q with respect to good Z is -1.9, the goods are A. Substitutes B. Compliments C. Normal goods D. Inferior goods

A. Substitutes

Imagine you are producing Nalgene bottles. Preference change and consumers begin to prefer Hydroflasks. How does this affect the demand for Nalgenes? For Hydroflaks? A. The demand curve for Nalgene shifts to the left; demand curve for Hydroflasks shifts to the right B. There will be a decrease in quantity demanded of Nalgenes and an increase in the quantity demanded for Hydroflasks C. The demand curve for Nalgenes shifts to the right; demand curve for hydroflasks shifts to the left D. None

A. The demand curve

The passage of a law prohibiting the use of a drug leads to an increase in expenditure on that drug when A. The demand for the drug is perfectly inelastic. B. The demand for the drug is highly elastic. C. The demand curve is relatively flat. D. Both b) and c)

A. The demand for the drug is perfectly inelastic.

The elasticity of demand has a negative value because A. The quantity demanded changes in the opposite direction of price B. The demand curve has a positive slope C. The good is an inferior good D. Cannot be determined

A. The quantity demanded changes in the opposite direction of price

Possible solutions to the Farm Problem include supply restrictions, price supports and subsidies. A. True B. False

A. True

Suppose the government imposes an "alcohol TAX" on the sellers. The more elastic the demand curve, the... A. less TAX revenue will be generated B. more TAX revenue will be generated C. no effect on the TAX revenue D. since TAX is imposed on the sellers, state of demand curve is not important

A. less TAX revenue will be generated

If an increase in the price of a good leads to no change in the quantity demanded, this means the demand for this good is A. perfectly inelastic B. perfectly elastic C. elastic D. unit elastic

A. perfectly inelastic

Deadweight loss represents..... A. the total loss in consumer and producer surplus due to a change in policy B. the total loss in consumer surplus due to a change in consumer preferences C. an increase in demand D. the partial loss in producer surplus due to a change in policy

A. the total loss in consumer and producer surplus due to a change in policy

The price increased from $18 to $24 and the quantity decreased from 35 to 28 units, what is the elasticity of demand? A. 0.9 B. 0.6 C. 0.12 D. 1.01

B. 0.6

Suppose for a given good the demand curve is perfectly inelastic and the equilibrium price in the market is A. If the government imposes k amount of tax on the suppliers, what would be the new price? A. A B. A+k C. A D. new price

B. A+k

If a 5% rise in price results in an 8% change in demand, the product is A. Perfectly elastic B. Elastic C. Inelastic D. Perfectly inelastic

B. Elastic

Which of the following was NOT an effect of alcohol prohibition in the US? A. Small reduction in quantity consumed. B. Large increase in the price of alcohol. C. Large increase in household spending on alcohol. D. Large increase in imported wine consumption.

B. Large increase in the price of alcohol.

Which of the following was NOT a result of higher prices for alcohol during prohibition? A. Total expenditure increased B. Quantity consumed dramatically decreased C. People prefered to consumer hard alcohol D. Revenue to criminals dramatically increased

B. Quantity consumed dramatically decreased

Which of the following is an example of a good with inelastic demand? A. Ramen noodles B. Salt C. Luxury boats D. Land

B. Salt

If you want to generate the most government revenue, with the least deadweight loss, you should A. TAX goods with elastic demand B. TAX goods with inelastic demand C. TAX goods with elastic supply D. Increase TAXES on all goods

B. TAX goods with inelastic demand

The elasticity of a good depends on which of the following A. The supply B. The number of substitutes C. The production method D. The general economic activity

B. The number of substitutes

If there is a shortage of good x, which of the following must be true? A. The price of good x is greater than the equilibrium price P B. The price of good x is lower than the equilibrium price P C. Quantity demanded is less than quantity supplied D. There is downward price pressure

B. The price of good x is lower than the equilibrium price P

If the price elasticity of a certain good is elastic, what would happen to the revenue earned from that good if its price goes down? A. decrease B. increase C. no change D. disappear

B. increase

For a given supply curve, the more elastic the demand curve is, the _______ after a TAX is imposed. A. smaller the deadweight loss B. larger the deadweight loss C. producer surplus increases D. consumer surplus increases

B. larger the deadweight loss

The passage of a law prohibiting the purchase of a drug is likely to be most effective at reducing the use of this drug when A. the supply for drug is elastic. B. the demand for the drug is elastic. C. the demand for the drug is inelastic. D. The cost of supplying the drug remains low.

B. the demand for the drug is elastic.

It is generally true that the more substitutes a good has, .... A. the more inelastic is the demand curve of that good B. the more elastic is the demand curve of that good C. the demand curve of that good is unit elastic D. it does not matter - availability of substitutes does not determine price elasticity of demand

B. the more elastic is the demand curve of that good

To COMPUTE elasticity A. It is the change in quantity divided by the change in price B. It is the average change in quantity divided by the change in price C. It is the percentage change in quantity divided by the percentage change in price D. It is the percentage change in price divided by the percentage change in quantity

C. It is the percentage change in quantity divided by the percentage change in price

When trying to decide what to TAX, the government must A. Know the demand of the good or service B. Understand the supply of the good C. Know the price elasticity of the demand and supply D. Know the INCOME elasticity of demand

C. Know the price elasticity of the demand and supply

If rent control was imposed in Honolulu, which of the following would NOT result? A. Housing would become scarce B. Discrimination of tenants would increase C. Rent prices would increase D. Housing would be rationed

C. Rent prices would increase

A potential unintended consequence of prohibition is A. a decrease in the consumption of the good. B. a decrease in the supply of the good. C. an increase in expenditure on the good. D. none of above

C. an increase in expenditure on the good.

Suppose there a price control imposed above market equilibrium. If this price control is removed, what is likely to occur? A. the price will increase B. the supply win increase C. the supply will decrease D. the demand curve will shift left

C. the supply will decrease

Suppose demand for gasoline is highly inelastic whilst supply is elastic. If the government imposes $0.50 TAX (per gallon) on suppliers, how much is paid by buyers and suppliers? A. $0.05 paid by buyers, $0.45 paid by suppliers B. $0.20 paid by buyers, $0.30 paid by suppliers C. $0.25 paid by buyers, $0.25 paid by suppliers D. $0.45 paid by buyers, $0.05 paid by suppliers

D. $0.45 paid by buyers, $0.05 paid by suppliers

If bananas have an equilibrium price of $2.25 per pound, which of the following price floors would be binding? A. $1.25 B. $2.00 C. $2.20 D. $3.50

D. $3.50

Making goods with inelastic demand illegal tends to have which of the following effects? A. Increases total expenditure on the good B. Increases the price of the good C. Transfers money to criminals D. All of the above

D. All of the above

Which of the following is an example of a price floor? A. Rent controls B. Minimum wages C. Agricultural price supports D. Both b) and c)

D. Both b) and c)

Which of the following is an example of a good with inelastic supply? A. Luxury boats B. Marijuana C. Alcohol D. Land

D. Land

Making drugs illegal has a similar economic effect to ________ A. Making the good cheaper B. Increasing demand C. Increasing supply D. TAXING drugs

D. Taxing drugs

The deadweight loss of a tax represents... A. The tax revenue lost to criminals. B. The consumer surplus that is given to the government. C. The producer surplus that is given to the government. D. The producer and consumer surplus that is lost because of the tax.

D. The producer and consumer surplus that is lost because of the tax.