Econ Unit 3

Assume that demand for bottled water is relatively price elastic. An increase in supply of bottled water will result in which of the following? A A decrease in price, leading to an increase in total revenue B A decrease in price, leading to a decrease in total revenue C An excess supply of bottled water D An excess demand for bottled water E A relatively small decrease in price and no change in equilibrium quantity

A A decrease in price, leading to an increase in total revenue

Suppose that the market supply curve for shoes is upward sloping and the market demand curve is downward sloping. How will the imposition of a sales tax on shoes affect the consumer surplus, the producer surplus, and the total surplus? A Consumer SurplusProducer SurplusTotal SurplusDecreaseDecreaseDecrease B Consumer SurplusProducer SurplusTotal SurplusDecreaseIncreaseIncrease C Consumer SurplusProducer SurplusTotal SurplusDecreaseIncreaseDecrease D Consumer SurplusProducer SurplusTotal SurplusIncreaseDecreaseDecrease E Consumer SurplusProducer SurplusTotal SurplusIncreaseIncreaseIncrease

A CS: Decrease PS: Decrease TS: Increase

If a perfectly competitive market with no government intervention is allocatively efficient, which of the following must be true? A Consumer surplus plus producer surplus is at its maximum. B Consumer surplus is larger than producer surplus. C Producer surplus is larger than consumer surplus. D All surplus is producer surplus. E All surplus is consumer surplus.

A Consumer surplus plus producer surplus is at its maximum.

Which of the following will tend to make the demand for a product more elastic? A New firms which produce similar products enter the industry. B A change in taste and preferences makes the product more desirable. C The product is necessary for use with a complement. D Production of the product is protected by a patent. E Production cost of the product decreases.

A New firms which produce similar products enter the industry.

The difference between the price a consumer would be willing to pay for a cone of ice cream and the actual market price that she pays gives a measure of her A consumer surplus B producer surplus C marginal utility D marginal cost E ability to pay

A consumer surplus

For a normal good, the income effect of a price change refers to the change in the consumption of the good that occurs because of the change in A consumers' purchasing power B the demand for a substitute good C the supply of the good D relative price E marginal utility

A consumers' purchasing power

If the government imposes a per-unit tax on personal computers, consumer surplus in the personal computer market will A decrease, because the price paid by consumers for personal computers will have increased B decrease, because there will be more personal computers on the market C increase, because personal computer manufacturers will pass the tax on to consumers D increase, because consumers will buy more imported personal computers E not change because the demand is unit elastic

A decrease, because the price paid by consumers for personal computers will have increased

The quantity of peanuts supplied increased from 40 tons per week to 60 tons per week when the price of peanuts increased from $4 per ton to $5 per ton. The price elasticity of supply for peanuts over this price range is A elastic B inelastic C unit elastic D perfectly elastic E perfectly inelastic

A elastic

Country Z is both a producer and an importer of green tea. If country Z imposes a tariff on imports of green tea, which of the following will occur in the domestic market of green tea? A Consumer surplus will increase. B Domestic production will increase. C Total consumption of green tea will increase. D Producer surplus will decrease. E The price paid by domestic consumers will decrease.

B Domestic production will increase.

Assume that the price of good X decreases from $10 to $9 per unit and that the quantity demanded of good X increases from 25 to 30 units. In this price range, the demand for good X is A inelastic B elastic C unit elastic D perfectly inelastic E perfectly elastic

B Elastic

Carmen consumes both entertainment and medical care. For Carmen, entertainment is a normal good, and the income elasticity of her demand for medical care is zero. If Carmen's income increases, which of the following will be the immediate impact on her consumption? A Entertainment: Increase; Medical care: Increase EntertainmentMedical careIncreaseIncrease B EntertainmentMedical careIncreaseNo change C EntertainmentMedical careNo changeIncrease D EntertainmentMedical careIncreaseDecrease E EntertainmentMedical careDecreaseIncrease

B Entertainment: increase Medical care: no change

Which of the following is true of the cross-price elasticity of demand? A It can indicate if a good is a necessity or a luxury. B It is greater than zero for two goods that are substitutes. C It is close to zero if the two goods are closely related. D It is always negative because demand curves are downward sloping. E It increases as income increases.

B It is greater than zero for two goods that are substitutes.

Which of the following is true of the substitution effect of an increase in the price of a normal good? A It works to offset the income effect. B It works to reinforce the income effect. C It is less than the income effect. D It causes an increase in the quantity demanded of the good. E It causes an increase in the demand for the good.

B It works to reinforce the income effect.

A city transit authority increases the price of sub- way and bus tickets from $1.25 to $1.50. If the demand for these tickets is price inelastic, the number of people riding buses and subways and the city's revenues will most likely change in which of the following ways? A Number of People RidingCity's ReveuesIncreaseIncrease B Number of People RidingCity's ReveuesDecreaseIncrease C Number of People RidingCity's ReveuesDecreaseDecrease D Number of People RidingCity's ReveuesDecreaseRemain constant E Number of People RidingCity's ReveuesRemain constantIncrease

B Number of people riding: decrease City revenue: increase

The diagram above shows the demand curve for a good. If the price increases from P1 to P2, and quantity consumed decreases from Q1 to Q2, consumer surplus decreases by the area A BDC B P1P2BC C P1P2BD D Q1DCQ2 E P2P3B

B P1P2BC

If a 10 percent increase in the price of a good leads to a 25 percent decrease in the quantity demanded of the good, demand is A relatively inelastic B relatively elastic C unit elastic D perfectly elastic E perfectly inelastic

B Relatively elastic

Assume that ice cream is a normal good. If the price of ice cream decreases, the substitution effect and the income effect will lead to which of the following changes in ice cream consumption? A Substitution EffectIncome EffectIncreaseDecrease B Substitution EffectIncome EffectIncreaseIncrease C Substitution EffectIncome EffectIncrease No change D Substitution EffectIncome EffectDecreaseIncrease E Substitution EffectIncome EffectDecreaseNo change

B Sub: Increase Income: Increase

Assume that good X is a normal good. If the price of good X increases, what will happen? A The substitution and income effects will both lead to more of good X being purchased. B The substitution and income effects will both lead to less of good X being purchased. C The substitution effect will lead to more of good X being purchased, while the income effect will lead to less of good X being purchased. D The substitution effect will lead to less of good X being purchased, while the income effect will lead to more of good X being purchased. E There will be no income effect because only the price of good X has changed.

B The substitution and income effects will both lead to less of good X being purchased.

Suppose that the demand for soft drinks is price elastic and the supply is price inelastic. If the government imposes a sales tax on soft drinks, which of the following will occur in the short run? A The tax burden will fall equally on both consumers and producers. B The tax burden will fall more on producers. C The tax burden will fall more on consumers. D The percentage increase in the price of soft drinks will be greater than the percentage increase in the quantity demanded. E The percentage decrease in total revenue will be greater than the percentage decrease in the quantity demanded.

B The tax burden will fall more on producers.

Assume that the price elasticity of demand for good X is constant and equal to -0.5 and the price elasticity of demand for good Y is constant and equal to -2. Assume that goods X and Y have identical upward-sloping elastic supply curves. If a per-unit excise tax of the same amount is levied on good X and on good Y, which of the following would be true? A The percentage decrease in the quantity of good X demanded would be greater than the percentage decrease in the quantity of good Y demanded. B The tax share paid by consumers of good X would be relatively higher than that paid by consumers of good Y. C The tax share paid by consumers of good Y would be relatively higher than that paid by consumers of good X. D The tax share paid by sellers of good Y would be relatively lower than that paid by sellers of good X. E The tax share paid by sellers of goods X and Y would be the same.

B The tax share paid by consumers of good X would be relatively higher than that paid by consumers of good Y

Assume that the market demand for a good is perfectly inelastic, the market supply for the good is perfectly elastic, and the market is in equilibrium. If there is a decrease in the price of a key input used in the production of the good, which of the following will occur? A There will be a decrease in the equilibrium quantity. B There will be no change in the producer surplus. C There will be a decrease in the producer surplus. D There will be a decrease in the consumer surplus. E There will be an increase in the equilibrium price.

B There will be no change in the producer surplus.

If the demand for product X is perfectly elastic and the supply of product X decreases, which of the following will occur in the market for X ? A Total revenue will increase. B Total revenue will decrease. C Total revenue will remain the same. D Quantity demanded will exceed quantity supplied. E Quantity supplied will exceed quantity demanded.

B Total revenue will decrease.

Consumer surplus in a market for a good exists because A binding price floors encourage producers to increase the supply of the good B some consumers would be willing to pay more than the equilibrium price of the good C when the price of the good decreases, most consumers increase their demand for the good D producers do not have market power to set their own price E some producers charge different prices for the good in different markets

B some consumers would be willing to pay more than the equilibrium price of the good.

Assume the income elasticity of demand for good Z equals −5.0. Which of the following is true? A Good Z is a normal good. B Good Z must have an inelastic demand. C An increase in income will lead to a decrease in demand. D An increase in income will lead to an increase in demand. E The income effect of a price increase will be a decrease in quantity demanded at every price.

C An increase in income will lead to a decrease in demand.

Based on the graph above, the producer surplus at the market equilibrium price and quantity is shown by which area? A GMKGMK B GMNGMN C GZNGZN D ZMNZMN E MNK

C GZN

In which of the following cases would a firm's total revenue increase? A Price increases and demand is elastic. B Price decreases and supply is inelastic. C Price decreases and demand is elastic. D Price decreases and supply is elastic. E Price decreases and demand is inelastic.

C Price decreases and demand is elastic.

The cross-price elasticity of demand between good X and good Z measures the percentage change in the quantity demanded of good X in response to a percentage change in A the price of good X B income C the price of good Z D the supply of good Z E total expenditures on good Z

C The price of good Z

Assume that the price elasticity of supply for good Y is 0.5. If the price of good Y decreases by 30 percent, the quantity supplied of good Y will A decrease by 60 percent B decrease by 30 percent C decrease by 15 percent D increase by 0.5 percent E increase by 0.15 percent

C decrease by 15 percent

Which of the following statements about the price elasticity of demand is true? A When demand is price inelastic, total revenue will decrease as price increases. B When demand is price elastic, an increase in price will increase total revenue. C Demand tends to be more elastic in the short run compared to the long run. D As more close substitutes become available, demand tends to be more price elastic. E As a good becomes viewed as a necessity, demand becomes more price elastic.

D As more close substitutes become available, demand tends to be more price elastic

Moving from left to right along a downward- sloping linear demand curve, price elasticity varies in which of the following ways? A First unit elastic, then inelastic throughout B First unit elastic, then elastic throughout C First inelastic, then unit elastic throughout D First elastic, then unit elastic, and finally inelastic E First inelastic, then unit elastic, and finally elastic

D First elastic, then unit elastic, and finally inelastic

In the diagram above, if there is a price ceiling set at P1, consumer surplus will be represented by the area A ABC B P2BP0 C P3BP2 D P3ACP1 E P3BCP1

D P3ACP1

Assume that the price of orange juice increases by 40 percent following a crop failure. If the quantity demanded falls by 10 percent, which of the following is true? A The demand for orange juice is elastic. B The price of grapefruit juice, a substitute good, will fall. C The absolute value of the price elasticity of demand for orange juice is 4. D The absolute value of the price elasticity of demand for orange juice is 0.25. E The absolute value of the price elasticity of demand for orange juice is 10.

D The absolute value of the price elasticity of demand for orange juice is 0.25.

Following the imposition of a $4 per-unit tax in a competitive market, the seller's after-tax price falls from the original equilibrium price of $12 to $11. Which of the following statements relating to the imposition of the tax is true? A The seller bears 75 percent of the tax burden. B The new after-tax equilibrium price is $16. C There is no deadweight loss from this tax. D The new after-tax equilibrium price is $15. E The buyer bears 25 percent of the tax burden.

D The new after-tax equilibrium price is $15.

Based on the graph above, the consumer surplus at the market equilibrium price and quantity is shown by which area? A GMKGMK B GMNGMN C GZNGZN D ZMNZMN E MNK

D ZMN

To determine whether two goods are complements, one would calculate the A price elasticity of demand B price elasticity of supply C income elasticity of demand D cross-price elasticity of demand E input-price elasticity of supply

D cross-price elasticity of demand

Assume that the supply of corn is relatively price inelastic, while the demand for corn is relatively price elastic. If the government imposes a per-unit excise tax on the production of corn, the incidence of the tax will fall A entirely on buyers B more on buyers than on sellers C entirely on sellers D more on sellers than on buyers E equally on both buyers and sellers

D more on sellers than on buyers

If the demand for a good is perfectly price inelastic in the short run and the supply curve is upward sloping, imposing a sales tax on the good will A leave the price paid by consumers unchanged B decrease the after-tax revenues received by suppliers C increase the after-tax revenues received by suppliers D not change the after-tax revenues received by suppliers E not change the total expenditures by consumers on the good

D not change the after-tax revenues received by suppliers

Assume that the government imposes an excise tax on the consumption of a good. The tax will have the least impact on the market equilibrium quantity for which of the following combinations of the price elasticities of demand and supply? A Absolute Value of Elasticity of DemandElasticity of Supply44 B Absolute Value of Elasticity of DemandElasticity of Supply40.50 C Absolute Value of Elasticity of DemandElasticity of Supply11 D Absolute Value of Elasticity of DemandElasticity of Supply0.504 E Absolute Value of Elasticity of DemandElasticity of Supply0.500.50

E Absolute Value of Elasticity of demand: .50 Elastic of Supply: .50

As the population of a country ages, the demand for health care is projected to increase. As a result, the health care industry is likely to experience all of the following EXCEPT A an increase in demand for health care workers B an increase in demand for medicine C an increase in the quantity of health care workers supplied D an increase in the wages of health care workers E a decrease in the prices of medicine

E A decrease in the prices of medicine