ECON 201 MIDTERM 2 OSU

When the absolute value of the price elasticity of demand is equal to BLANK , we say that demand is unit-elastic.

1

A market has four individuals, each considering buying a grill for his backyard. Further assume that grills come in only one size and model. Abe considers himself a grill-master, and finds a grill a necessity, so he is willing to pay $400 for a grill. Butch is a meat-lover, honing his grilling skills, and is willing to pay $350 for a grill. Collin just met the girl of his dreams, and she loves a good grilled steak, so in his effort to impress her he is willing to pay $320 for a grill. Daniel loves grilled shrimp and thinks it might be cheaper in the long run if he buys a grill instead of eating out every time he wants grilled shrimp, so he is willing to pay $200 for a grill.If the market price of grills is $300, given the scenario described, the total consumer surplus would be: A. $170. B. $200. C. $1,070. D. None of these is true.

A. $170.

The cross-price elasticity of demand for peanut butter and jelly is likely: A. a negative number. B. 1. C. a very high positive number. D. a positive number.

A. a negative number.

Considering the concept of cross-price elasticity, when two goods are substitutes: A. an increase in the price of one will cause an increase in the demand of the other. B. a decrease in the price of one will cause an increase in the demand of the other. C. an increase in the price of one will cause a decrease in the demand of the other. D. Any of these may be true.

A. an increase in the price of one will cause an increase in the demand of the other.

Demand tends to A. be more elastic when price is high and more inelastic when price is low. B. be more elastic when price is low and more inelastic when price is high. C. have a constant elasticity because it is a line. D. be less elastic when price is high and more elastic when price is low.

A. be more elastic when price is high and more inelastic when price is low.

A positive externality ________. A. gives rise to external benefits B. leads to increasing returns to scale C. leads to higher economic profit D. imposes an additional cost on the society

A. gives rise to external benefits

When a small percentage change in price causes a large percentage change in the quantity demanded, we say that a good has: A. highly elastic demand. B. low magnitude of response. C. high magnitude of response. D. highly inelastic demand.

A. highly elastic demand.

Income elasticity of demand describes: A. how much the quantity demanded changes in response to a change in consumers' incomes. B. how quickly the market will change in response to a change in consumers' incomes. C. which way the demand shifts in response to a change in price. D.how much the quantity demanded changes in response to a change in price.

A. how much the quantity demanded changes in response to a change in consumers' incomes.

Markets fail to maximize total surplus when: A. individual choices impose costs or benefits on others. B. when all costs and benefits are received by participants in transactions. C. society's choices impose costs or benefits on other societies. D. producer surplus is not exactly equal to consumer surplus.

A. individual choices impose costs or benefits on others.

A consumer's willingness to pay: A. is the maximum price that a buyer would be willing to pay for a good or service. B. must always equal the seller's willingness to sell. C. is his or her reserved minimum bid-price. D. is the minimum price that a buyer would be willing to pay for a good or service.

A. is the maximum price that a buyer would be willing to pay for a good or service.

When consumers' buying decisions are less sensitive to changes in price, we say that their demand is: A. less elastic. B. highly elastic. C. very sensitive to changes in the price. D. unit elastic.

A. less elastic.

The percentage change in the quantity demanded of a good or service when its price changes by one percent is: A. price elasticity of demand. B. income elasticity of demand. C. price elasticity of supply. D. cross-price elasticity of demand.

A. price elasticity of demand.

When we add private benefits and external benefits together, the result is called: A. social benefits. B. network benefits. C. public costs. D. production benefits.

A. social benefits.

We can calculate deadweight loss by which of the following? A. surplusmarket equil before intervention minus surplusmarket equil after intervention B. The area of the deadweight loss triangle on a graph C. The producer surplus minus the consumer surplus D. (surplusmarket equil before intervention minus surplusmarket equil after intervention.) ÷ 2

A. surplusmarket equil before intervention minus surplusmarket equil after intervention B. The area of the deadweight loss triangle on a graph

A tax wedge is the difference between A. the price paid by buyers and the price received by seller. B. price received by the sellers and government revenue. C. tax paid by the buyers and government revenue. D. the initial price and the new price paid by buyers.

A. the price paid by buyers and the price received by seller.

The effect of a subsidy is: A. the same whether it is paid to producers or consumers. B. more effective if it is paid to producers. C. more effective if it is paid to consumers.

A. the same whether it is paid to producers or consumers.

If the production of a good gives rise to negative externalities, ________. A. the social cost of production exceeds the private cost of production B. the variable cost of production is zero C. the private cost of production exceeds the social cost of production D. the fixed cost of production is zero

A. the social cost of production exceeds the private cost of production

The cross-price elasticity of two goods is -2. This tells us that: A. the two goods are complements. B. the two goods are substitutes. C. the two goods are inelastic. D. the two goods are unrelated.

A. the two goods are complements.

Part of consumer surplus is transfered to producers A. when price is artificially increased. B. when price equals equilibrium price. C. when price is artificially decreased

A. when price is artificially increased.

The concepts of comparative advantage, specialization, and trade: A.can be useful in explaining why we allow ourselves to be interdependent on others. B. can be useful in explaining why countries import and export certain goods. C. can be useful in explaining why individuals typically work at one job, and buy the other goods and services they need. D. All of the statements are true.

All of the statements are true.

The marginal social benefit from the production of the last unit of a good is $4,800. If the willingness to pay for that unit is $3,900, what is the external benefit from its production? A. $4,100 B. $900 C. $8,700 D. $3,800

B. $900

Suppose when the price of calculators is $10, the quantity demanded is 100, and when the price is $12, the quantity demanded drops to 80. Using the mid-point method, the price elasticity of demand is: A. -0.81. B. -1.22. C. -150 percent. D. -81 percent.

B. -1.22.

Which pair of goods is most likely to have a negative cross-price elasticity? A. All cross-price elasticities are negative, but often reported in absolute value. B. Butter and margarine. C. Peanut butter and jelly. D. Milk and filet mignon.

B. Butter and margarine.

Which of the following gives rise to a positive externality? A. Deforestation leading to the extinction of many species B. Consumption of a drug to cure a communicable disease C. Sudden increase in the demand for diamonds leading to an increase in their price D. Sudden increase in the price of oil due to a supply shock

B. Consumption of a drug to cure a communicable disease

If a good has an income elasticity of 0.18, which of the following can be said about it? A. It is an inferior good, and a luxury. B. It is a normal good, and a necessity. C. It is an inferior good, and a necessity. D. It is a normal good, and a luxury good.

B. It is a normal good, and a necessity.

The size of the change in the quantity demanded of a good when its price changes can be described by which of the following? A. Price elasticity of supply B. Price elasticity of demand C. Income elasticity D. Cross-price elasticity of demand

B. Price elasticity of demand

Which of the following statements is true about the income elasticity of demand? A. The income elasticity of demand for inferior goods is always positive. B. The income elasticity of demand for normal goods is always positive. C. The income elasticity of demand for normal goods is always zero. D. The income elasticity of demand for inferior goods is always zero.

B. The income elasticity of demand for normal goods is always positive.

Which of the following are examples of market failure? PICK 2 A. A good becomes too expensive to sell. B. There is only one producer of a good. C. A good becomes undesirable to buyers. D. Pollutants are emitted when gas burns in your car.

B. There is only one producer of a good., D. Pollutants are emitted when gas burns in your car.

When the demand curve is relatively less elastic, _____. A. a small change in price causes a large change in quantity demanded B. a large change in price causes a small change in quantity demanded C. a large change in quantity demanded causes a small change in price D. any change in quantity demanded causes a large change in price

B. a large change in price causes a small change in quantity demanded

Externalities: A. can increase total surplus if it's positive. B. are one of the most common causes of market failure. C.are present in all but perfectly competitive markets. D. are present in most markets.

B. are one of the most common causes of market failure.

The market demand curve for a good shows ________ and the market supply curve shows ________. A. consumers' willingness to pay for the good; producers' total cost of producing the good B. consumers' willingness to pay for the good; producers' marginal cost of producing the good C. consumers' willingness to pay for the good; the opportunity cost of producing the good D. producers' marginal cost of producing the good; consumers' willingness to pay for the good

B. consumers' willingness to pay for the good; producers' marginal cost of producing the good

To describe the overall benefits that buyers received in a market, we can add up each individual's A. ratio of what they are willing to pay and the market price. B. difference between what they are willing to pay and the market price. C. sum of what they are willing to pay and the market price. D. product of what they are willing to pay and the market price.

B. difference between what they are willing to pay and the market price.

If a 1% change in the price of a good causes a 1% change in the quantity demanded, the good has an elasticity of demand: A. equal to 0. B. equal to 1. C. greater than 1. D. less than 1.

B. equal to 1.

When a good has a lot of close substitutes available, it is likely to be: A. less price elastic than those with a lot of complement goods available. B. more price elastic than goods without close substitutes available. C. less price elastic than goods without close substitutes available. D. more price elastic than those with a lot of complement goods available.

B. more price elastic than goods without close substitutes available.

An effective price floor: A. must be set below the equilibrium price, and will likely cause a surplus. B. must be set above the equilibrium price, and will likely cause a surplus. C. must be set above the equilibrium price, and will likely cause a shortage. D. must be set below the equilibrium price, and will likely cause a shortage.

B. must be set above the equilibrium price, and will likely cause a surplus.

An effective price floor: A. must be set at the equilibrium price. B. must be set above the equilibrium price. C. must be set below the equilibrium price. D. can result in an increase in the quantity sold.

B. must be set above the equilibrium price.

When private costs equal social costs, it means that: A. negative externalities are not present in the market. B. no externality of any kind is present in the market. C. positive externalities are present in the market. D. the external cost must be small relative to the private cost in the market.

B. no externality of any kind is present in the market.

We call costs that fall directly on an economic decision maker: A. social costs. B. private costs. C. external costs. D. network costs.

B. private costs.

The free-rider problem is most likely to arise in the case of ________. A. club goods B. public goods C. private goods D. inferior goods

B. public goods

If the supply curve is more inelastic than the demand curve, then: A. the sellers will bear a smaller tax incidence than the buyers. B. the sellers will bear a greater tax incidence than the buyers. C. the sellers will bear an equal tax incidence as the buyers. D. Any of these could be true.

B. the sellers will bear a greater tax incidence than the buyers.

Graphically, assuming an upward sloping supply curve, economic surplus is represented as the A. the square area under the equilibrium price and quantity. B. triangular area between a supply or demand curve and the market price. C. the square area above the equilibrium price and quantity. D. triangular area below the supply and demand curve and the market quantity.

B. triangular area between a supply or demand curve and the market price.

On a graph, consumer surplus is the area BLANK the demand curve and BLANK the price up to the point of consumption.

Below, Above

________ occurs when an individual has no incentive in paying for a good because failure to pay does not prevent consumption. A. The paradox of plenty B. The paradox of thrift C. A free-rider problem D. A tragedy of the commons

C. A free-rider problem

Which of the following would likely have the least elastic price elasticity of demand? A. Expensive furniture B. Designer handbags C. A pack of gum D. A new car payment

C. A pack of gum

What term do we use to describe a measure of how sensitive producers and consumers are to price changes? A. Supply B. Demand C. Elasticity D. Scarcity

C. Elasticity

Which of the following describes how much demand shifts due to the change in a consumer's income? A. Price elasticity of supply B. Price elasticity of demand C. Income elasticity D. Cross-price elasticity of demand

C. Income elasticity

When positive externalities are present, it means that: A. individuals consume more than the social optimum. B. society bears part of the cost borne of private transactions. C. Individuals don't take into account all the benefits associated with their market choice. D. All of these statements are true.

C. Individuals don't take into account all the benefits associated with their market choice.

When the price is artificially high and some transactions no longer take place, what happens? PICK 2 A. Part of the consumer surplus is transferred to producers B. Part of the producer surplus is transferred to consumers C. Part of the consumer and producer surplus is lost to both consumers and producers D. All of the consumer and producer surplus is lost

C. Part of the consumer and producer surplus is lost to both consumers and producers D. All of the consumer and producer surplus is lost

Which of the following statements is true of the cross-price elasticity of demand? A. The cross-price elasticity of demand between substitutes is zero. B. The cross-price elasticity of demand between complements is zero. C. The cross-price elasticity of demand between complements is negative. D. The cross-price elasticity of demand between substitutes is negative.

C. The cross-price elasticity of demand between complements is negative.

Which of the following statements is true of the cross-price elasticity of demand? A. The cross-price elasticity of demand between substitutes is zero. B. The cross-price elasticity of demand between complements is zero. C. The cross-price elasticity of demand between complements is negative. The cross-price elasticity of demand between substitutes is negative.

C. The cross-price elasticity of demand between complements is negative.

Which of the following is true if the production of a good that creates a positive externality? A. The marginal private benefit from production exceeds the marginal social benefit. B. The demand curve for the good shifts to the right in the presence of positive externalities. C. The marginal social benefit from each level of output exceeds the consumers' willingness to pay. D.The demand curve for the good shifts to the left in the presence of positive externalities.

C. The marginal social benefit from each level of output exceeds the consumers' willingness to pay.

If negative externalities are present in a market, ________. A. the price charged in the market is higher than the socially optimal price B. the marginal social cost of production is lower than the marginal private cost C. The quantity supplied in the market is larger than the socially optimal level D. the average cost of production exceeds the marginal cost of production at all output levels

C. The quantity supplied in the market is larger than the socially optimal level

An externality occurs when: A. the quantity demanded of a good exceeds the quantity supplied B. the government regulates production and consumption decisions C. an economic activity affects third parties not engaged in the activity D. the quantity supplied of a good exceeds the quantity demanded

C. an economic activity affects third parties not engaged in the activity

Considering the concept of cross-price elasticity, when two goods are complements: A. an increase in the price of one will cause an increase in the quantity demanded of the other. B. a decrease in the price of one will cause a decrease in the quantity demanded of the other. C. an increase in the price of one will cause a decrease in the quantity demanded of the other. D. None of these is true.

C. an increase in the price of one will cause a decrease in the quantity demanded of the other.

When two goods are complements, we expect their cross-price elasticity of demand to: A. be zero. B. be positive. C. be negative. D. equal 1.

C. be negative.

Cross-price elasticity refers to: A. how much the demand for one good changes in response to a change in its price. B. the magnitude of the shift in demand for a good in response to a change in its price. C. how much the demand for one good changes in response to a change in the price of a different good. D. None of these is true.

C. how much the demand for one good changes in response to a change in the price of a different good.

If the price of a cup of Dunkin' Donuts coffee rises, while the price of a Starbucks latte doesn't, we expect the quantity of lattes demanded to: A.increase as some people switch from coffee to the relatively more expensive latte. B. decrease as some people switch from coffee to the relatively more expensive latte. C. increase as some people switch from coffee to the relatively less expensive latte. D. decrease as some people switch from coffee to the relatively less expensive latte.

C. increase as some people switch from coffee to the relatively less expensive latte.

The price elasticity of demand for a good that is a necessity is likely to be: A. elastic, but not perfectly elastic. B. unit elastic. C. inelastic. D. perfectly elastic

C. inelastic.

When one curve is more elastic than the other, the change in quantity is much A. smaller than when supply and demand are relatively inelastic. B. larger than when supply and demand are relatively elastic. C. larger than when supply and demand are relatively inelastic.

C. larger than when supply and demand are relatively inelastic.

Space on a popular, public beach is ________ in consumption. A.non-excludable and non-rival B. excludable and rival C. non-excludable but rival D. excludable but non-rival

C. non-excludable but rival

The tragedy of the commons occurs because some goods are ________ in consumption. A. non-rival B. non-rival and non-excludable C. non-excludable but rival D. excludable

C. non-excludable but rival

The tragedy of the commons occurs because some goods are ________ in consumption. A. non-rival B. non-rival and non-excludable C. non-excludable but rival D.excludable

C. non-excludable but rival

Benefits that accrue directly to the decision maker of a market exchange are called: A. network benefits. B. social benefits. C. private benefits. D. external benefits.

C. private benefits.

When we say that a country enjoys gains from trade, we mean: A. everyone in that country benefits from the trade. B. the total producer surplus increased in the country. C. the net gain of surplus is positive for that country. D. the total consumer surplus increased in the country.

C. the net gain of surplus is positive for that country.

A retired athlete built a gym near his house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________. A. pecuniary externality B. paradox of thrift C. tragedy of the commons D. prisoners' dilemma

C. tragedy of the commons

You bought a subscription for an online magazine and shared your log-in details with a friend. Your friend is a ________ in this case. A. speculator B. hedger C.free-rider D. rent seeker

C.free-rider

A price BLNK will cause producers to lose an amount of surplus, but consumers might gain surplus from the lowered price.

Ceiling

Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity? A. A gain in producer surplus B. An economic profit C. A gain in consumer surplus D. A positive externality

D. A positive externality

Which of the following pairs of goods is most likely to have a positive cross-price elasticity? A. Coffee and sugar B. Motorcycles and typewriters C. Printers and ink cartridges D. A privately-owned car and public transportation

D. A privately-owned car and public transportation

If a good has an income elasticity of 1.83, which of the following can be said about it? A. The good probably has a lot of close substitutes available. B. It is an inferior good, and a necessity. C. It is a normal good, and a necessity. D. None of these statements is true.

D. None of these statements is true.

________ are non-excludable in consumption. A. Private goods and club goods B. Public goods and private goods C. Club goods and common pool resources D. Public goods and common pool resources

D. Public goods and common pool resources

If demand is relatively elastic, then an increase in price will cause _____. A.an increase in quantity demanded B. no change in total revenue C. an increase in total revenue D. a decrease in total revenue

D. a decrease in total revenue

A good that has an income elasticity of 0.4 is: A. a luxury good. B. a substitute good. C. an inferior good. D. a normal good.

D. a normal good.

Tax incidence: A. depends on the amount of tax revenue generated once administrative burdens are taken into account. B. depends on whether the tax revenue is greater than the deadweight loss caused by the tax. C. depends on whether it is a buyers tax or sellers tax that is being imposed. D. depends on the relative elasticity of the supply and demand curves in a market.

D. depends on the relative elasticity of the supply and demand curves in a market.

A tax that requires those with low incomes to pay a smaller percentage of their income than high-income earners is a: A. regressive tax. B. proportional tax. C. flat tax. D. progressive tax.

D. progressive tax.

If the demand curve is less elastic than the supply curve, then: A. the buyers will bear a smaller tax burden than sellers. B. the sellers will bear a greater tax burden than buyers. C. the sellers will bear a greater tax incidence. D. the buyers will bear a greater tax incidence.

D. the buyers will bear a greater tax incidence.

The concept of BLANK allows economic decision makers to anticipate how others will respond to changes in market conditions.

Elasticity

When the price is lowered below the equilibrium price, sellers gain some well-being at the expense of buyers; although both lose some well-being because there are fewer transactions taking place. (T/F)

False

Part of consumer surplus is transfered to producers when price is artificially (INCR/DECR)

Increased

Goods often have more elastic demand in the BLANK run than in the BLANK run

LONG, SHORT

An effective price ceiling, which is below the equilibrium price, means BLANK producers will be willing to sell the good but BLANK buyers will be willing to buy.

Less, More

The demand curve is a line showing the BLANK willingness to pay for all buyers.

Maximum

The reservation price is the buyers BLANK willingness to pay for a service

Maximum

For BLANK goods, income elasticity is positive.

Normal

When prices are lower than the market equilibrium, some of the BLANK BLANK is transferred to consumers.

Producer Surplus

If close substitutes are available for a particular good, then the demand for that good will be more elastic than if only distant substitutes are available. (T/F)

True

True or false: When a tax is imposed on sellers, demand remains the same because the tax does not change any of the non-price determinants of demand.

True

International trade: A.is efficiency-enhancing. B. will increase total surplus only if the country is a net-exporter of a particular good. C. will decrease total surplus, which creates a role for government. D. will increase total surplus only if the country is a net-importer of a particular good.

is efficiency-enhancing.

If a tax is imposed on a good,________. A. the quantity of the good traded in the market increases B. the equilibrium quantity of the good in the market falls C. producer surplus increases D. consumer surplus increases

the equilibrium quantity of the good in the market falls