Microeconomics Midterm 2 Practice Problems
A good that takes up a very large percentage of the consumer's budget will tend to have
an elastic demand.
The deadweight loss (or excess burden) resulting from levying a tax on an economic activity is the
loss of potential gains from trade from activities forgone because of the tax
According to the law of supply,
more of a good will be offered by suppliers as the price rises
Refer to Figure 4-18. If the government imposes a price ceiling of $2.00 in this market, the result is a
shortage of 50 units of the good.
When the price of a good falls, consumers buy more of the good because it is cheaper relative to competing goods. This statement describes the
substitution effect.
Other things constant, which of the following would most likely cause the supply of garden hoses to decrease?
an increase in the price of plastic used to make the garden hoses.
Which of the following is the most likely outcome of minimum wage laws?
an increase in the quantity of labor supplied by workers and a decrease in the quantity of labor demanded by firms
If demand price elasticity measures 2, this implies that consumers would
buy 2% more of the product in response to a 1% drop in price
Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry
has an income elasticity of two. is a normal good. is a luxury good.
In a market economy, which of the following will most likely cause a prolonged milk shortage?
imposition of a price ceiling below the equilibrium price of milk
With a price ceiling above the equilibrium price,
the market would be in equilibrium.
According to the income effect, when the price of automobiles rises, people buy fewer automobiles because
the purchasing power of their income is reduced
If a 30 percent decline in the price of gasoline leads to a 15 percent rise in the quantity of gasoline being bought by consumers, the price elasticity of demand for gasoline in this range must be
0.5, making the demand for this good inelastic in this range.
Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the absolute value of the price elasticity of demand for Starbucks coffee is
1.25
When the price of Nike tennis shoes goes from $100 to $80, the quantity demanded increases from 20 to 30 million. Over this price range, the absolute value of the price elasticity of demand is
1.8
If a household has $40,000 in taxable income and its tax liability is $4,000, the household's average tax rate is
40000/4000 = 10%
If Heather's tax liability increases from $10,000 to $16,000 when her income increases from $30,000 to $40,000, her marginal tax rate is
60%
If Drake's tax liability increases from $10,000 to $16,000 when his income increases from $30,000 to $40,000, his marginal tax rate is
6000/10000 = 60%
Refer to Figure 4-18. If this graph represents a labor market in a fictional country, which of the following would be the result of $5 minimum wage?
A) it would cause a surplus of labor, also known as unemployment, equal to 35 workers. B) it would make 20 workers worse off because they would go from a job making $4.00 an hour to having no job at all. C) it would make 25 workers better off because now they make $5.00 an hour instead of $4.00 an hour. D) All of the above are correct.
A good that takes up a very large percentage of the consumer's budget will tend to have
An inelastic demand
Suppose Microsoft announces it is cutting the prices of some of its software titles (mainly games) by 25 percent. Assuming that Microsoft is seeking to increase revenues, it must believe that the elasticity of demand for these products is
Elastic
The invention of more efficient slaughtering methods has made bologna (an inferior good) easier to make. The general level of consumers' income has increased. Given these two effects, what can we say about the equilibrium price and quantity of bologna?
Equilibrium price will decrease; the effect on quantity is ambiguous
In an effort to reduce skin cancer rates, the government removes all taxes from the production and sale of sunscreen. At the same time, sunny weather and the upcoming spring break season has increased people's desire to have sunscreen. Given these two effects, what will happen to the current equilibrium quantity and price of sunscreen?
Equilibrium quantity will increase; the effect on price is ambiguous.
If a $5,000 tax is placed legally (statutorily) on the sellers of new automobiles and as a result the price of automobiles to consumers rises by $4,000, then the actual burden of the tax
Is a $4000 on automobile buyers and $1000 on sellers
In which statement(s) is "supply" used correctly? (I) "An increase in the price of eggs will increase the supply of eggs." (II) "As the cost of producing eggs rises, the supply of eggs will tend to fall."
Only in option II
Suppose when the price of its software titles (mainly games) increased by 20%, it decides to increase its production of video games by 40%. Which of the following best describes what just happened?
The income elasticity of demand is 2, which makes video games a luxury good.
Suppose a new law requires all piercing studios to pass tougher licensing tests and to begin using more costly sterilization methods. Other things constant, this law would cause
a decrease in the supply of piercings and an increase in price of piercings
A subsidy is defined as
a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased.
Refer to Figure 4-18. In this market, which of the following price controls would be binding?
a price floor of $5.00, and it would cause a surplus
In the supply and demand model, a subsidy granted to buyers is illustrated by
a rightward shift in the demand curve, by the per unit amount of the subsidy.
The price of coffee beans (used to make coffee) has increased. The price of tea (a substitute good) has increased. Given these two effects, what can we say about the equilibrium price and quantity of coffee?
a. Equilibrium price will increase; the effect on quantity is ambiguous.
The local government imposes a tax on the production of beer in Riverside in an effort to reduce excessive alcohol consumption. At the same time, UC Riverside students (beer consumers) leave for summer break. Given these two effects, what can we say about the equilibrium price and quantity of beer in Riverside?
a. Equilibrium quantity will decrease; the effect on price is ambiguous.
The price of wheat used to make cereal has decreased. At the same time, the price of milk (a compliment good) has decreased. Given these two effects, what can we say about the equilibrium price and quantity of cereal?
a. Equilibrium quantity will increase; the effect on price is ambiguous.
If a surplus exists in a market we know that the actual price is
above the equilibrium price and quantity supplied is greater then quantity demanded
An increase in the demand for a product will cause the
demand for and prices of the resources used to produce the product to increase
The burden of a tax will fall primarily on buyers when the
demand for the product is highly inelastic and the supply is relatively elastic.
Suppose Microsoft announces it is cutting the prices of some of its software titles (mainly games) by 25 percent. Assuming that Microsoft is seeking to increase revenues, it must believe that the elasticity of demand for these products is
elastic
If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
inelastic.
The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
other flavors of the ice cream that are good substitutes for this particular flavor
If a 10 percent increase in income induced a group of consumers to reduce their yearly purchases of potatoes by 5 percent, for these consumers,
potatoes are an inferior good.
A tax imposed on the sellers of a good
raises the price buyers pay and lowers the net price received by sellers.
Economic analysis indicates minimum wage legislation has
reduced the on-the-job training opportunities available to teenagers
If admission to a Kevin Hart comedy show in a football stadium is lowered from $60 to $40, and attendance increases from 20,000 to 30,000, then the demand for Kevin Hart tickets is
unitary elastic
According to the Laffer curve,
when marginal tax rates are high, a reduction in tax rates may increase tax revenue.
