Exam 1 - Answers and Practice Problems

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for thatlatte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How mucheconomic surplus does the coffee shop receive when Kevin purchases the latte?

$1

When you are willing to pay $5 for a hamburger but you pay $4 for it, your consumer surplus for the hamburger is:

$1

If Maria is willing to pay $50 for a sweatshirt, how much consumer surplus does she earn if the market price for sweatshirts is $27.50 each?

$22.50

If the market price of coffee is $4, how much producer surplus do suppliers earn?

$22.50

Firms are willing and able to sell 100 guitars per day at a price of $250 per guitar.What price will firms require to sell 100 guitars per day if there is a tax of $15 per guitar?

$265

Which of the following would be considered in a cost-benefit analysis to decide if a person should cycle towork or ride the subway? (i) The air pollution that the cyclist has to breathe. (ii) The cost of subway tickets. (iii) The time it takes to cycle to work versus the time it takes to ride the subway to work. (iv) The cost per gallon of gasoline.

(i), (ii), and (iii)

Consider the figure Gain in Producer Surplus from the Sale of Cappuccino Machines. Which areas represent producer surplus when the price is equal to P2?

*at intersection of supply and demand curves, the bottom triangle is producer surplus and top triangle is consumer surplus* (D, E, and F)

The price elasticity of demand for an item is impacted by:

-whether or not the item is a necessity -the time available to adjust price changes -the number of available substitutes -the share of one's budget (income) that is allocated to the product

This summer gasoline prices in the United States increased by 50%, which brought about a fall in the quantity of gasoline purchased of 10%. The price elasticity of demand is equal to _____, and demand is described as _____

0.2; inelastic

Butter producers know that the price elasticity of demand for butter is 0.2. If they want to increase sales by 4%, they will have to lower price by:

20%

Uber cuts the price of a ride in Greenville by 15%. Thereafter, the quantity of rides demanded rises by 45%. The absolute value of the price elasticity of demand for Uber rides is ______ and total revenues would_________ after the price cut.

3, increase

Mark considers 3-D archery and shooting trap substitute activities for each other. As the price of shooting trap increases, Mark's demand to participate in:

3-D archery increases

The elasticity of demand for watermelons is -1.5. A 4% increase in the price will cause a:

6% decrease in quantity demanded

Which statement is CORRECT?

A change in quantity demanded is a movement along the demand curve, and a change in demand is a shift of the demand curve

What correctly illustrates how changes in opportunity costs affect supply?

A farmer produces corn and wheat. The price of wheat rises, so he shifts his resources toward wheat and the supply of wheat rises

Where S1 is the supply of drugs with no prohibition and S2 is the supply of drugs with prohibition, the area that represents total revenue with drug prohibition is _____, and the area that represents total revenue with no prohibition is _____

A+C, C+D

costs of producing output have increased

According to the figure, the:

$80; $20

At a quantity of 80 units, it costs sellers _____ to produce the last unit, but buyers value this last unit at _____

elastic since quantity supplied increases more with an increase in price

Compared to S1, S2 is more:

The key condition for equilibrium to occur in a market is:

quantity demanded equals quantity supplied

Suppose there is an increase in demand in a market and no change in supply. What will happen to the market equilibrium price and quantity?

Equilibrium price will rise; equilibrium quantity will rise

If the figures represent the market for heated blankets, which figure shows the effect of an unseasonably warmwinter?

Figure that shows demand curve shifting left (down)

If prices rise, what happens to producer surplus (all other things being equal)?

It rises because each producer is getting more surplus per good sold

Which variable does NOT shift the demand curve?

None, they all shift the demand curve (population, price of complement goods, income, tastes and preferences)

The graph shows how supply and demand might shift in response to specific events. Suppose a fungus destroys one-quarter on the nation's tomatoes. Which panel BEST illustrates how this event will affect the market for ketchup?

Supply shifts left (up), price increases and quantity decreases; no change in demand

Suppose that wool becomes less expensive. Which panel BEST illustrates how this development will affectthe market for winter socks, which are made from wool?

Supply shifts right, price falls, and quantity increases; no shift in demand

A market can be described by the equations Qd = 50 - 3P and Qs = 2P. What are the equilibrium price and quantity in this market?

The equilibrium price is $10, and the equilibrium quantity is 20 units

16

The equilibrium quantity (in units) is:

Which principle tells you that the true cost of something is the next best alternative you have to give up to get it?

The opportunity cost principle

1

The price elasticity of supply between point A and point B is:

Coke and Pepsi are substitute soft drinks. Which of the following would cause the demand curve for Pepsi to shift to the left?

The price of Coke decreases

Five new sellers enter a market (that previously had seven) and begin producing agood. Which of the following choices explains what happens to the equilibrium Q and P?

The supply curve will shift to the right, the equilibrium P will fall, and theequilibrium Q will rise.

What will happen in the market for cotton as a result of a severe drought?

The supply of cotton will decrease, causing the equilibrium price to rise andequilibrium quantity to fall.

$900

The value of wasted resources at a quantity of 80 units is:

If the price of a good increases from $200 to $250 and quantity supplied increasesfrom 200 units to 400 units, the supply will be classified as elastic.

True

T/F prescription medications have pretty inelastic demand compared to things like cable television, eggs, and McDonald's hamburgers

True

T/F: If a frost destroys half of the orange crop in Florida, the equilibrium price of oranges will rise.

True

T/F: Similar to the elasticity of demand, the elasticity of supply tends to become moreelastic in the long run.

True

T/F: The elasticity of demand measures how responsive consumers are to price changes. For example, when a small decrease in price leads to a large increase in quantity demanded, demand is considered elastic.

True

$1,000

What are the total gains from trade at the free market equilibrium?

$8

What is the equilibrium price per pound in the diagram?

$5

What is the producer surplus of $2 per unit?

$8 and the equilibrium quantity rises to 140

When the demand curve shifts from D0 to D1, the equilibrium price rises to:

At a price of $6 per unit, consumers are willing and able to buy 10 units.

Which statement is TRUE regarding the figure?

If the government institutes a tax on suppliers of Cheesy-Poofs, the market for Cheesy-Poofs will see:

a decrease in supply, a decrease in quantity demanded, and an increase in price

A decrease in the price of one substitute good causes:

a leftward shift in the demand curve for the other substitute good

Imagine a free market in equilibrium. After a sudden decrease in supply (but before the price can adjust), the market experiences:

a shortage

for each good produced in a free market economy, demand and supply determine:

both the price and the quantity of the good

In his book The Wealth of Nations, Adam Smith claimed that individuals:

are motivated by self-interest

In the market for fertilizer, an:

advance in technology will increase the supply of fertilizer

Suppose the demand curve for monthly subscriptions to Netflix has shifted to the right. What could have caused this?

an increase in the incomes of consumers

The demand curve for Hershey's Kisses, a particular brand of chocolate candy, will _____ the demand curve for chocolate candy as a general category.

be more elastic than

In a competitive market:

buyers compete with other buyers, and sellers compete with other sellers

The movie trilogy The Lord of the Rings was hugely successful, and, as a result, the demand for fantasy novels, action figures, and online role-playing games surged. The increase in demand can be explained by a(n):

change in tastes

Spaghetti and salad are related goods. Holding everything else constant, if the price of spaghetti decreases and the demand for salad increases, spaghetti and salad are probably:

complements

The main difference between Saudi Arabian oil production and U.S. oil production is the:

cost of production

When the price of a good increases, quantity demanded for the good will:

decrease

If supply is upward sloping, a decrease in demand with no change in supply will lead to a(n) _____ inequilibrium quantity and a(n) _____ in equilibrium price.

decrease;decrease

You are considering whether you should go out to dinner at a restaurant with your friend. The meal isexpected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You valuethe restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with yourfriend because the benefit of doing so is _____ than the cost.

go; greater

The supply curve:

illustrates the quantity supplied at different prices

Many companies pay their factory employees based on piece rates-- the more they produce, the more they get paid. This practice highlights the use of:

incentives

If price increases from $10 to $20, total revenue will:

increase by $800, so the demand curve must be inelastic

In 1980, when Iraq attacked Iran, the price of oil _____ because of a(n) _____.

increased; disruption in the supply of oil

An increase in a per unit production subsidy:

increases supply

A good is considered normal if demand for it ____ when income ____

increases; increases

A 4% increase in the price of beer will cause a 1% decline in the quantity of beer demanded. The demand for beer is:

inelastic

Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is:

inelastic

In a market characterized by perfect competition in which, at a price of $10, quantity supplied is 40 units and quantity demanded is 50 units. Equilibrium price in this market:

is greater than $10

The long-run demand for oil ____ the short-run demand for oil

is more elastic than

Scarcity:

is when there isn't enough to satisfy all our wants

For suppliers to sell more than the equilibrium quantity, it would mean that:

it costs suppliers more to produce the good than its value to buyers

In markets characterized by perfect competition, surpluses lead to:

lower prices

Holding all else constant, if people eat out more at expensive restaurants when they earn more, then expensive restaurant meals are

normal goods

equilibrium price is found:

on the y-axis corresponding to where supply and demand curves meet

A demand curve shows the relationship between:

price and quantity demanded, which are negatively related

Total revenue is:

price x quantity

If a certain item has many substitutes, its demand curve will be:

relatively flat (very elastic)

If the demand for a good is elastic, then:

revenues decrease when the price goes up

When supply decreases, there is a _____ at the old equilibrium price, which puts_____ pressure on price until the market reaches the new equilibrium.

shortage; upward

If supply decreases, ceteris paribus, the quantity exchanged will be ____ at the new market equilibrium point

smaller

Gun buyback programs will be less effective if the

supply of guns is more elastic

Resource prices in a particular market increase; at the same time, the consumer population declines as migration causes an outflow of population to other regions. What happens to the supply curve and/or demand curve?

supply shifts left, demand shifts left; equilibrium is shifted left

A free market achieves an equilibrium price and quantity due to:

the combined actions of buyers and sellers

To economists, the term "consumer surplus" means:

the consumer's gain from trading

Recently, more substitutes for milk have entered the market. We can expect that

the demand curve for milk has become more elastic

If a market has a surplus, how will the market respond?

the price will fall and the quantity supplied will fall

What effect did the 1997 East Asian recession in countries such as South Korea, Indonesia, and Thailand have on the oil market?

the recession decreased income and reduced the demand for oil and oil prices

When the price of a good equals the equilibrium price:

there are no unexpected gains from trade

Every day, people work at serving people meals at restaurants all around the world. These people work for our benefit because:

they benefit by doing so

An increase in demand shifts the demand curve:

up and to the right

Prior to the pandemic, China produced about 10 million face masks per day which was roughly half of theworld's face mask production. At the time, a box of 50 face masks sold for $10. By March of 2020, China wasproducing 130 million face masks. The price of a box of 50 masks increased to $60. Assuming that China'sproduction was still producing half of the world's face masks, the elasticity of supply for face masks is

1.2

A meat processing plant produces both steak and ground beef. What effect would rising market prices for steak have on the market for ground beef?

The supply of ground beef will decrease

It costs suppliers $1 to produce each additional widget, and widgets sell for $2. Some consumers are not willing to pay $2 for a widget but are nevertheless willing to pay more than $1. Which of the following statements is TRUE?

There are unexploited gains from trade

The COVID-19 pandemic caused many consumers to be quarantined in their homes. The supply and demand model would predict which of the following events in the market for home entertainment equipment for online retailers?

The demand for home entertainment equipment sold by online retailers would increase, resulting in a higher equilibrium price and a higher equilibrium quantity