ECON 300 Test 1
The figure at right shows a graph of the market for pizzas in a large town. No pizzas will be demanded unless price is less than
$14
Given the following market equations: Supply: Qs = 0 + 3p Demand: Qd = 99 - 3p Solve for the equilibrium price =$
$16.50
A consumer has $200200 per month to be spent on books (good B) and DVDs (good D). Market prices are as follows: Pb = $20 and PD = $40. Given this data, what is the marginal rate of transformation?
(5,10) -0.50
Suppose the demand function for a good is expressed as Q = 100 minus− 4p. If the good currently sells for $10, then the price elasticity of demand equals?
-0.67.
Suppose the demand equation is: Q = 80 - 1.50p What is the price elasticity of demand if the price is $40 and output is 20 units? The price elasticity of demand is (blank) This means that if the price increases by 9%, the quantity demanded will (blank) by (blank) %?
-3 decrease by 27%
Suppose Jim has a demand curve of: Q(J/D)= 8-p, and Sam has a demand curve of: Q(S/D)= 6-0.5p. How much is the total demand at a price of $8.50? How much is total demand at a price of $5.00?
1.75 units 6.50 units
The figure at right shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's price − consumption curve?
10 snacks and 15 juices
The figure at right shows Bobby's indifference map for soda and juice. Upper B1 indicates his original budget line. Upper B2 indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?
3
The figure at right shows a graph of a market for pizzas in a large town. At a price of $7, what is the amount of excess demand?
30 Units
A consumer has $130 in monthly income to be spent on two goods Z and B. The price of good Z (Pz) is $8.00 The Marginal Rate of Transformation (MRT) is equal to −2. That is 2 units of good B can be traded for 1 unit of good Z. What is the price of good B? How many units of good B can be purchased if all income is used for that good?
4$ 32.50 Units
A consumer has $220 in monthly income to be spent on two goods Z and B. The price of good Z (Pz) is $8.00 The Marginal Rate of Transformation (MRT) is equal to minus−2. That is 2 units of good B can be traded for 1 unit of good Z. What is the price of good B? How many units of good B can be purchased if all income is used for that good?
4$ 55$
The figure at right shows a graph of the market for pizzas in a large town. No pizzas will be supplied unless the price is above
5$
Max has allocated $100 toward meats for his barbecue. His budget line and an indifference map are shown in the figure at right. Which of the following best describes Max's preferences?
a = b ≻ e
A specific tax on sellers will
shift the supply curve to the left.
What is the effect of a 50% income tax on Dale's budget line and opportunity set? A 50% income tax
shifts the budget line inward, decreasing the opportunity set.
If the price of one good increases while the price of the other good and the consumer's income remain unchanged, what will happen to the budget line?
The budget line rotates inward from the intercept on the axis of the good that did not change in price.
If the consumer's income increases while the prices of both goods remain unchanged, what will happen to the budget line?
The budget line shifts outward without a change in slope.
Which of the following is true?
The elasticity of demand varies along most demand curves.
What might explain a professional baseball player having lower production the year after signing a multi−million dollar contract?
The income effect.
Michelle spends all her money on food and clothing. When the price of clothing decreases, she buys more clothing. In the diagram to the right, the substitution effect is defined by the movement from point? In the diagram to the right, the income effect is defined by the movement from point? The income effect causes her to buy ? clothing?? Clothing is a ? good??
A to B B to C More Normal
Given the following data: Consumer Income Y = $40 Px = $4 Pz = $5 Which of the following bundles are attainable with these prices and income? If the price of good X were to increase to $5, which of the following bundles would be attainable?
A, B, E A, E
Which of the following statements is true?
A. More tax revenue is raised if a tax is collected from consumers. B. More tax revenue is raised if a tax is collected from producers. C. More tax revenue is raised if a tax is collected from both consumers and producers. D. The same tax revenue is raised regardless of whether the government collects the tax from consumers or producers. E. There is no way to identify with any certainty the collection conditions under which more tax revenue will be raised D.
Which of the following statements is true?
A. The equilibrium price after a specific tax will be the same whether the tax is collected from consumers or producers. This is the correct answer. B. The equilibrium price after a specific tax will depend on whether the tax is collected from consumers or producers. C. The tax incidence on consumers will be higher if the tax is collected from consumers. D. The tax incidence on producers will be higher if the tax is collected from producers. A
A consumer's willingness to trade one good for another can be expressed by the consumer's
Both: marginal rate of substitution. indifference curve.
In tracing out a price-consumption curve (PCC) for good X, which of the following variables is held constant?
Consumer Income
If the demand curve for a good always has unitary price elasticity, what does this imply about consumer behavior?
Consumers will spend a constant total amount on the good.
The figure at right shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, Bobby's utility
Decreases
When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in the above figure best represents John's Engel curve for dining out?
Graph B. Up to the left.
The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for coffee after severe weather destroys a large portion of the coffee crop?
Graph C
The figure at right shows Larry's indifference map and budget lines for ham and pork. Which of the following statements is TRUE?
Ham is an inferior good.
The U.S. supply of frozen orange juice comes from Florida and Brazil. What is the effect of a freeze that damages oranges in Florida? The price of frozen orange juice in the United States will (blank) Furthermore, the quantity of orange juice sold by Floridian firms will (blank), and the quantity sold by Brazilian firms will (blank)?
Increase Decrease, Increase
The figure at right shows a graph of the market for pizzas in a large town. If the price falls from $10 to $7 per pizza, the quantity of pizzas demanded will
Increase by 30
A rightward shift of the supply curve will lead to a(n)
Increase in quantity demanded. Decrease in equilibrium price. Excess supply at the old equilibrium price.
Gillen and Hasheminia (2013) estimate that the elasticity of demand for air travel is negative 0.17−0.17 for people traveling alone and negative 3.09−3.09 for couples. Are these elasticities elastic or inelastic? The elasticity of demand for single travelers is (blank) and for couples is (blank) For which type of traveler is demand less elastic? Why do you think these elasticities differ in this way? The demand is less elastic for singles because they are more likely to be traveling for
Inelastic Elastic Singles Business
Cranfield (2012) estimated that the demand elasticities were negative 0.83−0.83, negative 0.61−0.61, and negative 0.76−0.76 for Canadian beef, chicken, and pork, respectively. Are these demand elasticities elastic or inelastic? The elasticity of demand for Canadian beef chicken, and pork is? Which product is least ELASTIC?
Inelastic, Inelastic, Inelastic Chicken
Max has allocated $100 toward meats for his barbecue. His budget line and an indifference map are shown in the figure at right. What happens if Max's mother gives him 10 pounds of burger?
Max is indifferent between this gift and the dollar value of the burger.
The diagram to the right contains several consumption bundles labeled A to G. A consumer reports that she prefers bundle B to bundle F. What property has been violated? A consumer reports that he prefers bundle E to bundle B but can not tell you about preferences for C relative to E. What property has been violated? A consumer reports that she prefers bundle B to C, prefers bundle E to B, but prefers bundle C to E. What property has been violated?
More is preferred to less Completeness Transitivity
Given the income-consumption curve to shown to the right. Good X (Blank) and good Y is (blank)?
Normal Good, Normal Good
Lionfish is an aquatic invasive species in the southeastern U.S. and the Caribbean. Current removal policies focus on harvesting the lionfish for human consumption. However, a fishing license is required to fish in most southern states. Assume the supply of fishing licenses is Qs = 50 + 0.05L + 40P, where Upper L equals lionfish populationL = lionfish population and P = price of a fishing license, and the demand for fishing licenses is Qd equals 1400 minus 60 Upper PQd = 1400 − 60P. What is the equilibrium price and quantity of fishing licenses when L = 1,000?
P= 13 Q= 620
The substitution effect for a wage increase in terms of hours worked must be? If leisure is a normal good then the substitution effect and income effect work in ?
Positive Opposite Directions
Suppose that the price of a good decreased. The substitution effect shows the change in consumption for all goods in reaction to a change in (blank) holding (blank) constant The income effect shows the change in consumption for all goods in reaction to a change in (blank) holding (blank) constant
Relative Prices, Utility Purchasing Power, Relative prices
The substitution effect can be measured holding ________ constant.
Utility
Clifford lives by the motto "Eat drink and be merry today, for tomorrow doesn't matter." If today's consumption is represented by "x" and tomorrow's consumption is represented by "y", then which of the following best represents Clifford's utility function?
U = x
Which of the following is true?
When ε = −1, demand is considered unitary elastic. When ε < −1, demand is considered elastic. When −1 < ε ≤ 0, demand is considered inelastic.
An inferior good exhibits
a downward sloping Engel curve. A decline in the quantity demanded as income rises. A negative income elasticity.
Government prohibition of advertising cigarettes on television would most likely result in
a leftward shift in the demand curve for cigarettes.
An increase in the price of a good will lead to: An increase in production costs will lead to:
a movement up along the supply curve for that good. a leftwardleftward shift of the supply curve.
Given the indifference curve shown to the right: a. What is the marginal rate of substitution as you move from point Upper C to point Upper E? b. Would you expect the absolute value of the MRS to be higher, lower, or the same as you continue to substitute audio CDs for books?
a. -1/7 b. lower
The short − run elasticity of supply is less than the long − run elasticity of supply
because producers can adjust the amount of machinery in the long run but not in the short run.
For a given positively sloped supply curve, the price increase to consumers resulting from a specific tax imposed on sellers will be
greater the less price elastic demand is.
If the price of orange juice rises 10%, and as a result the quantity demanded falls by 10%, then one can conclude that the demand for orange juice
has a unitary elasticity.
If Fred's marginal utility of pizza equals 10 and his marginal utility of salad equals 2, then
he would give up 5 salads to get the next pizza.
The market supply curve is found by
horizontally summing all individual supply curves.
What is the effect of a $1 specific tax collected from producers on equilibrium price and quantity if demand is perfectly inelastic? Price (blank) and quantity (blank)? What is the incidence on consumers? Explain. The incidence of the tax that falls on consumers is (blank) %? because consumers are (blank) price sensitive?
increased by 1, is unchanged, 100, Not
Governments often use a sales tax to raise tax revenue, which is the tax per unit times the quantity sold. Will a specific tax raise more tax revenue if the demand curve is inelastic or elastic? A specific tax will raise more tax revenue if the demand curve is
inelastic because consumers will be less sensitive to price.
One characteristic of a Giffen good is that it
is an inferior good.
The price of leisure
is measured as foregone earnings.
Usury laws place a ceiling on interest rates that lenders such as banks can charge borrowers. Why would we expect low-income households in states with usury laws to have significantly lower levels of consumer credit (loans) than comparable households in states without usury laws? (Hint: The interest rate is the price of a loan, and the amount of the loan is the quantity measure.) Low-income households in states with usury laws have lower levels of loans because
loan demand likely exceeds loan supply at the rate ceiling.
After a major disaster such as the Los Angeles earthquake and hurricanes such as Katrina, retailers often raise the price of milk, gasoline, and other staples because supplies have fallen. In some states, the government forbids such price increases. What is the likely effect of such a law? As a result of the price ceiling,
more will be demanded than is supplied, resulting in a shortage.
Equilibrium is defined as a situation in which
neither buyers nor sellers want to change their behavior.
The figure at right shows the market for apples. If a consumer group convinces the government to set a maximum price of $2 per pound, then
no apples will be supplied.
If the demand curve for a good is horizontal and the price is positive, then a leftward shift of the supply curve results in
no change in price
Under what conditions does the income effect reinforce the substitution effect? The income effect will reinforce the substitution effect for (blank) good. Under what conditions does it have an offsetting effect? The income effect will have an offsetting effect for (blank) good. If the income effect more than offsets the substitution effect for a good, what do we call that good? The income effect more than offsets the substitution effect for a (blank) good.
normal good inferior good Giffen good
A vertical demand curve for a particular good implies that consumers are
not sensitive to changes in the price of that good.
Suppose the quantity of x is measured on the horizontal axis. If the price consumption curve is vertical when the price of x changes, then the demand for x is
perfectly inelastic.
The percentage change in the quantity supplied in response to a percentage change in the price is known as the
price elasticity of supply.
If a good is considered a normal good, the demand curve will shift ________ when income increases because ________.
right; the income and substitution effects move in the same direction
If the supply curve of a product changes so that sellers are now willing to sell 2 additional units at any given price, the supply curve will
shift rightward by 2 units.
According to the Law of Demand, the demand curve for a good will: An increase in the price of a good will lead to: An increase in consumer's income will lead to:
slope downward a movement up along the demand curve for that good. a rightward shift of the demand curve for a normal good.
According to the Law of Demand, the demand curve for a good will
slope downward.
If both prices increases by 50%
slope of the budget constraint stay the same.
Max has allocated $100 toward meats for his barbecue. His budget line and indifference map are shown in the figure at right. If Max is currently at point e,
the absolute value of his MRS is less than the trade-off offered by the market. He is willing to give up more burger than he has to given market prices. He is not maximizing his utility.
If two bundles are on the same indifference curve, then
the consumer derives the same level of utility from each.
The above figure shows the supply and demand curves for rice in the U.S. and in Japan. Assume there is no trade between the two countries. If bad weather causes the supply curves in each country to shift leftward by the same amount, then
the price will increase more in Japan than in the U.S.
If a person supplies more hours of labor in response to a wage increase, then
the substitution effect is greater than the income effect.
Consumers and firms are known as price takers only if
they cannot unilaterally affect the market price.
An indifference curve represents bundles of goods that a consumer
views as equally desirable.
It is appropriate to use the supply − and − demand model in which of the following markets?
wheat market
