Economics Test 1 (Second Attempt)

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:

the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.

When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:

the substitution effect.

Refer to the above diagram. At quantity Q2:

the sum of consumer and producer surplus is maximized

Suppose that the above total revenue curve is derived from a particular linear demand curve. That demand curve must be:

unit elastic for price increases that reduce quantity demanded from 5 units to 4 units.

Which type of goods is most adversely affected by recessions?

Goods for which the income elasticity coefficient is relatively high and positive.

Refer to the above diagram. If actual production and consumption occur at Q3:

an efficiency loss (or deadweight loss) of e + f occurs.

Black markets are associated with:

ceiling prices and the resulting product shortages.

A perfectly inelastic demand curve:

graphs as a line parallel to the vertical axis.

Tennis rackets and ballpoint pens are:

independent goods.

Refer to the above diagram. At quantity Q3:

minimum acceptable price exceeds maximum willingness to pay.

If an economy produces its most wanted goods but uses outdated production methods, it is:

not achieving productive efficiency.

If quantity demanded is completely unresponsive to price changes, demand is:

perfectly inelastic.

Studies show that the demand for gasoline is:

price inelastic in both the short and long run.

In which of the following cases will total revenue increase?

price rises and demand is inelastic

If the supply and demand curves for a product both decrease, then equilibrium:

quantity must decline, but equilibrium price may rise, fall, or remain unchanged.

(Consider This) Elasticity can be thought of as degree of relative:

quantity stretch.

The term quantity demanded:

refers to the amount of a product that will be purchased at some specific price.

The supply curve of antique reproductions is:

relatively elastic.

The demand for a necessity whose cost is a small component of one's total income is:

relatively inelastic.

If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then:

the demand for the product is elastic in the $6-$5 price range.

(Advanced analysis) Answer the next question(s) on the basis of the following information. The demand for commodity X is represented by the equation P = 100 - 2Q and supply by the equation P = 10 + 4Q. Refer to the above information. The equilibrium price is:

$70

Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. If supply is S1 and demand D0, then

0F represents a price that would result in a shortage of AC.

The elasticity of supply of product X is unitary if the price of X rises by:

8 percent and quantity supplied rises by 8 percent.

Which of the above diagrams illustrate(s) the effect of a decrease in incomes on the market for secondhand clothing?

A only

Which of the above diagrams illustrate(s) the effect of a decline in the price of personal computers on the market for software?

A only.

Refer to the above diagram. If price falls from P1 to P2, total revenue will become area(s):

B + D.

Refer to the above diagrams. The case of an inferior good is represented by figure(s):

B only.

Which of the above diagrams illustrate(s) the effect of a decline in the price of irrigation equipment on the market for corn?

C only

Which of the above diagrams illustrate(s) the effect of a governmental subsidy on the market for AIDS research?

C only.

Refer to the above diagrams. In which case would the coefficient of cross elasticity of demand be positive?

D

Refer to the above diagrams. The case of substitute goods is represented by figure:

D

Which of the above diagrams illustrate(s) the effect of an increase in automobile worker wages on the market for automobiles?

D only.

If producers must obtain higher prices than previously to produce various levels of output, the following has occurred:

a decrease in supply.

If the price elasticity of demand for gasoline is 0.20:

a 10 percent rise in the price of gasoline will decrease the amount purchased by 2 percent.

Assume the demand curve for product X shifts to the right. This might be caused by:

a decline in income if X is an inferior good.

Refer to the above table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $6, a:

a shortage of 40 units would occur.

Refer to the above diagram. A price of $60 in this market will result in:

a surplus of 100 units.

One can say with certainty that equilibrium quantity will increase when supply:

and demand both increase.

Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good will:

increase equilibrium price and quantity.

Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. A shift in the demand curve from D0 to D1 might be caused by a(n):

increase in the price of complementary good Y.

Other things equal, an excise tax on a product will:

increase its price.

An unusually large crop of coffee beans might:

increase the supply of coffee.

Refer to the above information and assume the stadium capacity is 5,000. The supply of seats for the game:

is perfectly inelastic.

Consumer surplus:

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

Answer the next question(s) on the basis of the following demand schedule: Refer to the above data. If this demand schedule were graphed, we would find that:

its slope is constant throughout.

Assume that a 3 percent increase in income in the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is:

negative and therefore X is an inferior good.

The price elasticity of demand is generally:

negative, but the minus sign is ignored.

If a legal ceiling price is set above the equilibrium price:

neither the equilibrium price nor equilibrium quantity will be affected.

The above diagram shows two product demand curves. On the basis of this diagram we can say that:

over range P1P2 price elasticity of demand is greater for D1 than for D2.

The basic formula for the price elasticity of demand coefficient is:

percentage change in quantity demanded/percentage change in price.

A demand curve which is parallel to the horizontal axis is:

perfectly elastic.

In the above market, economists would call a government-set minimum price of $50 a:

price floor.

Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to:

rise, the supply of bread to decrease, and the demand for potatoes to increase.

Data from the registrar's office at Gigantic State University indicate that over the past twenty years tuition and enrollment have both increased. From this information we can conclude that:

school-age population, incomes, and preferences for education have changed over the twenty-year period.

If the price of K declines, the demand curve for the complementary product J will:

shift to the right.

Suppose that in 2007 Ford sold 500,000 Mustangs at an average price of $18,800 per car; in 2008, 600,000 Mustangs were sold at an average price of $19,500 per car. These statements:

suggest that the demand for Mustangs increased between 2007 and 2008.

Since their introduction, prices of DVD players have fallen and the quantity purchased has increased. This statement:

suggests that the supply of DVD players has increased.

Compared to coffee, we would expect the cross elasticity of demand for:

tea to be positive, but negative for cream.

Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus:

the demand for peanuts is inelastic.

Graphically, the market demand curve is:

the horizontal sum of individual demand curves.