U2 MCQ
Answer B The demand elasticity can be determined by applying the total revenue test because whether total revenue increases, decreases, or remains the same when price changes depends on the price elasticity of demand. Price and total revenue move in opposite directions if demand is elastic and move in the same direction if demand is inelastic. In this case, an increase in the price resulted in an increase in total revenue. Thus, demand must be inelastic. That is, the percentage increase in price outweighs the percentage decrease in quantity demanded, resulting in a net increase in total revenue.
A 10 percent increase in the price of a good results in a 4 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices A. Is upward sloping B. Is inelastic C. Has a price elasticity of demand equal of 2.5 D. Has increased by 14% E. Has increased by 40%
Answer C A change in the price of the good (an increase or a decrease), all other things remaining constant, causes a movement along a given demand curve for the good as described by the law of demand. An increase in price causes an upward movement resulting in a decrease in quantity demanded, and a decrease in price causes a downward movement along the demand curve, resulting in an increase in quantity demanded.
A change in which of the following causes a movement along a given demand curve for a normal good? A. Consumer income B. The demand for the good C. The price of the good D. The price of a substitute good E. The number of buyers
Answer D A shift of the demand curve to the right will create a shortage at the original equilibrium price, which will be eliminated by a rising price to reach a new equilibrium.
Which of the following will initially result from an increase in the market demand for a good? A. There will be a matching increase in supply B. There will be a decrease in quantity supplied C. The equilibrium price will decrease D. There will be a temporary shortage at the original equilibrium price E. Total producer surplus in the market will decrease
Answer B The goods are substitutes because an increase in the price of good X causes buyers to want to buy more of good Y. An increase in the price of good X results in an increase in demand for the substitute good Y, which is represented by a rightward shift of the demand curve for good Y.
An increase in the price of good X causes buyers to want to buy more of good Y. Which of the following explains the resulting change in the market? A. The demand curve for good X will shift to the right because the goods are substitutes B. The demand curve for good Y will shift to the right because the goods are substitutes C. The demand curve for good X will shift to the left because the goods are complements D. The demand curve for good Y will shift to the left because the goods are complements E. There will be a downward movement along the demand curve for good X because the goods are complements
Answer E The price decrease of a normal good increases the purchasing power of consumer income and allows the consumer to buy more of the good
Which of the following correctly describes the income effect associated with the law of demand? A. If consumer income increases, there will be an upward movement along the demand curve for a normal good B. If consumer income increases, the demand curve will shift to the right for an inferior good C. If the price of a good increases, the demand for the good decreases because the demand for its substitute increases D. If the price of a good increases, the demand for the good increases because the lower price increases the demand for its complement E. If the price of a normal good decreases, the purchasing power of a consumer's income increases and therefore consumers will be willing and able to purchase more of that good
Answer E The country would benefit by important sandalwood from the world market at a price of $600. The consumer surplus before trade is given by area F and the producer surplus is given by area G+H for a total surplus of F+G+H. With trade, the total surplus would increase by area J+K, with the consumer surplus increasing by area G+J+K, which is more than the decrease in producer surplus, which is area G. Area G is transferred from producers to consumers. Thus the total surplus with trade is given by the sum of all the areas: F+G+H+J+K.
The graph shows the domestic market for sandalwood in equilibrium at a price of $800 per kilogram in the absence of international trade. Now assume the country begins to engage in international trade, and sandalwood is selling at a price of $600 per kilogram in the world market. Which of the following would most likely result? A. The country would increase domestic production to become competitive in the world market B. The country would export sandalwood, and its domestic consumer surplus will increase C. The country would export sandalwood, and tis total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases D. The country would import sandalwood, and its total surplus would decrease, with both the domestic consumer surplus and the domestic producer surplus decreasing E. The country would import sandalwood, and its total surplus would decrease, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases
Answer D The absolute value of price elasticity of demand is 2 and is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore, the percentage change in quantity demanded will be 20% (this is calculated by multiplying the 2 by 10%). The price elasticity of demand illustrates the negative relationship between price and quantity demanded. Therefore an increase in price by 10% will result in a decrease in quantity demanded by 20% for an absolute value of a price elasticity of demand of 2.
A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded. A. It will increase by 5 percent B. It will increase by 20 percent C. It will decrease by 5 percent D. It will decrease by 20 percent E. It will remain unchanged
Answer C The improvement in production technology shifts the supply curve to the right. A shift in the supply curve to the right lowers the equilibrium price and raises the equilibrium quantity. Total consumer surplus would increase with the decrease in price and increase in quantity. The change in total producer surplus would be indeterminate because of the offsetting effects of the price and quantity change on producer surplus. However, any loss in producer surplus resulting from a lower price would be transferred to consumer surplus. Thus, total surplus in the market would definitely increase.
Assume that the market for a good is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Suppose that there is an improvement in technology for producing the good. Which of the following would occur? A. The impact on total consumer surplus would be indeterminate, because of the offsetting impact of the changes in equilibrium price and quantity B. The change in equilibrium price would cause total producer surplus to increase C. The total surplus (the sum of consumer and producer surpluses) in the market would increase D. The demand curve would shift right in response to an increase in the equilibrium price E. The supply curve would shift up resulting in an increase in the equilibrium price and the total producer surplus
Answer C The answer can be found through the process of elimination. We can rule out Options A and B because there is always a deadweight loss unless either demand or supply is perfectly inelastic. If demand were perfectly inelastic, the buyer price would have increased by the amount of the tax.if supply were perfectly inelastic, the buyer price would not have increased at all. Since buyer price increased by $3, we know that neither supply nor demand is perfectly inelastic, which rules out Options "A" and "B". We can also rule out Options "D" and "E". The tax collected by the government could only be $500 if the equilibrium quantity did not change after the tax was implemented. The only case in which the equilibrium quantity would not change after the tax is implemented as if either demand or supply is perfectly inelastic. But we know that neither demand nor supply is perfectly inelastic. Therefore, the government revenue must increase by something less than $500. The only option in which there is some deadweight loss and the tax revenue collected by the movement is less than $500 is Option "C".
Assume that the market good is in equilibrium at a price of $20 and a quantity of 100 units. After the government imposes a $5 per-unit excise tax on the good, the price that buyers pay for the good increases by $3. Which of the following are possible values for the government tax revenue and deadweight loss in the market? A. Tax revenue is $200, deadweight loss $0 B. Tax revenue is $300, deadweight loss $0 C. Tax revenue is $300, deadweight loss $100 D. Tax revenue is $500, deadweight loss $200 E. Tax revenue is $500, deadweight loss $300
Answer D The cross-price elasticity of demand between goods X and Y is 0.6, which is the ratio of the percentage change in the quantity of good X demand to the percentage change in the price of good Y. This implies that the 10 percent increase in the price of good Y will result in a 6 percent increase in the quantity demanded of good X. This value is obtained by multiplying the cross-price elasticity by the percentage change in the price of good Y. That is, 0.6 times 10 percent equals 6 percent.
At the current prices of goods X and Y, the quantity demanded of good X is 10 units, and the quantity demanded of good Y is 5 units. The cross-price elasticity of demand between goods X and Y is 0.6. A 10 percent increase in the price of good Y will result in which of the following? A. A 0.5 percent decrease in the quantity demanded of good Y B. A 3 percent increase in the quantity demanded of good Y C. A 1 percent increase in the quantity demanded of good X D. A 6 percent increase in the quantity demand of good X E. A 60 percent increase in the quantity demanded of good X
Answer E An increase in population causes demand to increase. When demand increases, the demand curve shifts to the right. A shift to the right in the demand curve raises the equilibrium price and equilibrium quantity.
Consider the market for arugula, a normal good. Which of the following changes would result in an increase in both the equilibrium price and the equilibrium quantity of arugula? A. A decrease in consumer income B. An increase in the price of salad dressing, a complement C. A decrease in the price of radicchio, a substitute D. An increase in the price of water irrigation for arugula farms E. An increase in population
Answer C Total economic surplus is maximized when the market is in equilibrium. The market equilibrium occurs at a price of P2, and a quantity of Q2. Raising or lowering the quantity relative to the equilibrium reduces total surplus and creates inefficiency (deadweight loss).
In the market described by the diagram above, the total economic surplus will be maximized at which of the following price and quantity combinations? A. P3 and Q1 B. P3 and Q3 C. P2 and Q2 D. P1 and Q1 E. P1 and Q3
Answer E A subsidy provided by the government to producers in effect lowers the cost of producing the product, which increases profitability and will increase the number of sellers, thereby shifting the market supply curve to the right. Binding price floors and price ceilings will always result in a smaller quantity being bought and sold than the equilibrium quantity. In the case of a binding price floor (a minimum price allowed by law), the quantity bought and sold will be the quantity demanded. In the case of a binding price ceiling, the quantity bought and sold will be the quantity supplied.
In which of the following cases would government intervention in a market result in an increase in the quantity sold? A. Setting a price ceiling above the equilibrium price B. Setting a price ceiling below the equilibrium price C. Setting a price floor above the equilibrium price D. Levying a per-unit tax on producers E. Providing producers of a product with a per unit subsidy
Answer C The price elasticity of supply measures the responsiveness of quantity supplied to a change in the price. It is calculated as the ratio of the percentage change in quantity supplied to the percentage in price. Given the value of the elasticity and the percentage change in the price of gasoline, the percentage change in quantity can be obtained by multiplying the elasticity of supply by the percentage in the price. That is, 0.4 times 20 percent, which is equal to 8 percent. Thus, the quantity supplied will increase by 8 percent.
Suppose the price elasticity of supply for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, the quantity supplied of gasoline will A. Increase by 50 percent B. Increase by 20 percent C. Increase by 8 percent D. Decrease by 0.2 percent E. Be impossible to determine from the given information
Answer A Imports are equal to 40,000. The tax collected by the government is $40,000. The tax collected by the government is equal to the tariff times the amount of imports, $4000=tariff*40,000. Therefore, the tariff must be $.10. Given the global price is $.50, the price paid by domestic consumers is the global price plus the tariff, which is $.50+$.10=$.60.
Suppose the small country of Aronow imports 40,000kg of bananas. The global price of bananas is $0.50 per kg. The government of Aronow collects tariff revenues of $4,000 from banana imports. Which of the following is true? A. The consumers in Aronow pay a price of $0.60 per kg of bananas B. The domestic production of bananas in Aronow would increase with the removal of the tariff C. The deadweight loss in the market for bananas in Aronow would increase with the removal of the tariff D. The removal of the tariff would cause domestic consumer surplus in the market for bananas in Aronow to increase but by less than the decrease in domestic producer surplus E. Aronow's total tariff revenue collected in the banana market would be maximized if the per-unit tariff were equal to the difference between its autarky price and the world price
Answer B Total surplus=consumer surplus+producer surplus. Since the total surplus is $650 and consumer surplus is $400, the producer surplus is $650-$400=$250.
The market for tomatoes is in equilibrium at the price of $10, and quantity of 50 tomatoes. If consumer surplus is $400 and total surplus is $650, what is the producer surplus in the tomato market and why? A. The producer surplus is $0, because producer surplus is offset by the costs of producing tomatoes B. The producer surplus is $250, because the total surplus less what consumers receive must go to producers C. The producer surplus is -$400, because consumer and producer surplus must offset one another D. The producer surplus is $500, because the producer surplus is the equilibrium price times the equilibrium quantity= $10*50=$500 E. The producer surplus is $650, because producer surplus and total surplus are always equal
Answer D The supply curve describes the relationship between prices and quantities supplied for each producer in the market. The market supply curve is obtained by horizontally summing the individual supply curves (that is, by adding the quantities supplied at each possible price by each producer in the market).
The market supply curve for a product is derived from the individual firm supply curves by A. Multiplying the equilibrium quantity sold by the number of consumers in the market B. Multiplying the equilibrium quantity sold by the number of producers in the market C. Multiplying the quantities each producer sells by the market price D. Summing the quantities each producer sells at each possible price E. Summing the quantities each producer sells and multiplying by the market price
Answer C The information in the table can be used to draw the supply and demand curves for oranges to find the consumer's surplus and the producer's surplus. The equilibrium price is $10, and the equilibrium quantity is 10. Consumer surplus is measured by the area of the triangle below the demand curve but above the equilibrium price for the quantities between zero and the equilibrium quantity. The area of the triangle representing consumer surplus is CS= (20-1-)*10/2=$50. Producer surplus is the area above the supply curve but below the equilibrium price for the quantities between zero and the equilibrium quantity. The area of the triangle representing producer surplus is PS= (10-0)*10/2=$50. The same calculation can be performed without drawing the graph based on the recognition that the supply and demand curves are linear, the X intercept is 20, and the Y-intercept is 20.
The table shows the supply and demand schedules in the orange market. Assume that the demand and supply curves are linear. At the market equilibrium price, what are the consumer surplus and the producer surplus? A. Consumer surplus is $200; producer surplus is $200 B. Consumer surplus is $100; producer surplus is $100 C. Consumer surplus is $50; producer surplus is $50 D. Consumer surplus is is $45; producer surplus is $15 E. Consumer surplus is $10; producer surplus is $10
Answer C Whether a good is inferior or normal is based on the sign of the income elasticity- with a positive sign indicating that the good is a normal good and a negative sign indicating that the good is an inferior good. The income elasticity of good J is negative (-0.5); therefore, good J is an inferior good.
The table shows the values of different elasticities of demand for good J at the market equilibrium price. What of the following is true about good J? A. Good J is a normal good B. Good J's demand is elastic C. Good J is an inferior good D. Good J is a complement to good Y E. Good J is a substitute to good Z
Answer C Goods J and Y are substitutes since the cross-price elasticity with respect to good Y is positive. Therefore, a 10% increase in the price of good Y will shift the demand for good J to the right by 20% (= % change in price of good Y*cross-price elasticity with respect to good Y=10%*2).
The table shows the values of different elasticities of demand for good J at the market equilibrium price. Which of the following would result in the greatest rightward shift of the demand curve for good J? A. A 50% decrease in the price of good J B. A 20% increase in the price of good X. C. A 10% increase in the price of good Y D. A 10% increase in the price of good Z E. A 10% decrease in income
Answer C At a global price of $3, the domestic demand in Country A is 30, and the domestic supply in Country A is 10. Therefore, demand exceeds supply by 20. The 20 units would be imported. At a global price of $3, the domestic demand in Country B s 5, and the domestic supply in Country B is 15. Therefore, Country B would export the extra 10 units.
The tables below show the domestic demand and domestic supply for two small countries participating in a large global market with a world price of coffee equal to $3. Which of the following would be true given the price in the world market is $3. A. Neither country would export coffee B. Neither country would import coffee C. Country A would import 20 units of coffee, and Country B would export 10 D. Country A would export 20 units of coffee, and Country B would import 10 E. Given the demand and supply schedules, $3 cannot be an equilibrium global price
Answer E All other things remaining constant, an increase in price of a good increases profitability, incentivizing sellers to increase the quantity supplied. Thus, as price increases the quantity supplied increases, implying that the supply curve is upward sloping.
Which of the following explains why the supply curve is upward sloping? A. At a higher price, consumers are willing to buy more of the good B. At a lower price, consumers are able to buy more of the good C. Producers receive subsidies as they increase production D. At a higher quantity, producers are more able to control the market price E. At a higher price, producers are more able to cover the higher marginal cost associated with increasing production
Answer A Recognizing percentage changes is what matters for elasticity. The supply is inelastic. It can be determined by comparing the relative changes in price and quantity. Price increases by 100 percentage, and the quantity supplied increases by 20 percent. Thus, 20 divided by 100 is equal to 0.2.
Which of the following is true about the supply curve between the given points? A. The supply curve is inelastic, because the percentage change in the price is greater than the percentage change in the quantity supplied B. The supply curve is unit elastic, because the change in price is $10 and the change in quantity supplied is 10 units C. The supply curve is perfectly elastic, because the change in price is $10 and the change in quantity supplied is 10 units D. The supply curve is elastic, because the price elasticity of supply is equal to 10 E. The supply curve is unit elastic, because the price elasticity of supply is equal to 1
Answer C A binding price floor raises the legal price, giving an incentive to sellers to produce and sell greater quantities. The binding price floor results in a surplus at the binding price.
Which of the following policies would result in an increase in the quantity supplied of a good in a market? A. Providing a per-unit subsidy to sellers B. Levying a per-unit tax on sellers C. Imposing a binding price floor D. Imposing a non binding price floor E. Imposing a binding price ceiling
Answer B The price elasticity of demand decreases as price falls and quantity rises between point X and Y when moving down along the demand curve. That is, the demand becomes more inelastic along the linear demand curve as price decreases.
Which of the following statements is true about the demand curve above? A. Demand is elastic at each given price because the slope is constant and equal to -2 B. The elasticity of demand decreases when moving from point X to point Y C. The elasticity of demand increases when moving from point X to point Y D. Demand is inelastic between quantities 0 and 4 E. Demand is elastic between quantities 4 and 8
Answer A A decrease in input prices lowers the cost of production and shifts the supply curve to the right. As a result, more of the good will be offered for sale at each possible price for the good.
Which of the following will occur as a result of a decrease in the prices of the inputs used to produce a good? A. The quantity supplied would increase at each possible price for the good B. The price of the good would increase for any given quantity supplied C. The quantity supplied would increase as the price of the good increased D. The quantity supplied would increase as the price of the good decreased E. The price of the good would increase as the quantity supplied decreased
Answer C Elasticity is a measure of responsiveness of quantity supplied to changes in price. The ability to reallocate resources easily allows producers to respond to changes in price quickly. One of the determinants of the elasticity of supply is the time period it takes to respond to changes in market conditions. The ability to easily relocate inputs lessens the time period to adjust and respond. Thus, supply becomes more elastic.
Which of the following would cause the supply of good X to become more elastic? A. Greater availability of substitutes for good X B. Increased prices of inputs required to produce good X C. The ability to easily reallocate inputs to production of good X D. A short time frame for making production decisions E. More elastic demand for good X