ECON 520 Exam 1

11. Butter and margarine are called substitutes since a. an increase in the price of butter causes more margarine to be bought. b. an increase in the price of butter causes less margarine to be bought. c. an increase in the price of butter causes less butter to be bought. d. an increase in the priceof margarine causes less margarine to be bought.e. an increase in income causes more of both butter and margarine to be bought.

a

12. When the airfare of a transatlantic air travel increases, total expenditures for the transatlantic air travel decrease. This implies that a. market demand for transatlantic air travels is elastic. b. market demand for transatlantic air travels is inelastic c. transatlantic air travel is a "normal good." d. transatlantic air travel is an "inferior good." e. none of the above .

a

15. The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices) a. elastic, unit elastic, inelastic. b. unit elastic, inelastic, elastic. c. inelastic, unit elastic, elastic. d. elastic, inelastic, unit elastic.

a

18. Electricity and natural gas are called substitutes since a. an increase in the price of electricity causes more natural gas to be bought. b. an increase in the price of electricity causes less natural gas to be bought. c. an increase in the price of natural gas causes less natural gas to be bought. d. an increase in income causes more of both electricity and natural gas to be bought.

a

3. An individual consumer's marginal rate of substitution of softdrink for beer is 1/2. That is, at the current consumption choice the consumer is willing to give up half bottle of beer to get one extra can of softdrink. Suppose also that softdrink costs 75cents per can and beer costs $2per bottle. Then in order to maximize utility the consumer should a. buy more softdrink and less beer. b. but more beer and less soft drink. c. continue with current consumption.

a

9. Given that the price elasticity of demand for cigarettes in the United States was estimated to be -0.35, an increase in cigarette price will cause the total spending (price times quantity) on cigarettes to a. rise. b. fall. c. remain unchanged. d. rise or fall.

a

1. A simultaneous decrease in the supply and demand of cauliflower must result in a. an increase in quantity. b. a decrease in quantity. c. an increase in price. d. a decrease in price.

b

10. Which of the following statements is false? a. In a competitive market, if the prevailing price exceeds equilibrium price, there is a tendency for the price to fall. b.The slope of a market demand curve equals the price elasticity of the demand curve. c. The cross-price elasticity of demand for two complements (e.g., automobiles and gasoline) is negative. d. An increase in an individual's income without changing relative prices will shift the budget constraintoutward (i.e., rightward) in a parallel way.

b

14. The price elasticity of demand for a commodity is -2. If the quantity demanded for the commodity increased by 10 percent, then the price a. increased by 5 percent. b. decreased by 5 percent. c. increased by 10 percent. d. decreased by 10 percent.

b

19. If market demand for owner-occupied housing is elastic, an increase in price will cause the total spending (price times quantity) to a. rise. b.fall. c. remain unchanged. d. change in a way that cannot be determined.

b

20. Automobiles and gasoline are called complements since a. an increase in the price of automobiles causes more gasoline to be bought. b. an increase in the price of automobiles causes less gasoline tobe bought. c. and increase in the price of gasoline causes less gasoline to be bought. d. an increase in income cause more of both automobiles and gasoline to be bought.

b

3. A budget line depicts a. combinations of goods which provide the consumer the same marginal rate of substitution. b.combinations of goods which are affordable for the consumer. c. combinations of goods which provide the consumer the same utility. d. combinations of goods which provide the consumer the same marginal utility.e. none of the above

b

4. Which of the following statements is false? a. A linear market demand curve has a constant slope. b. In a competitive market for mountain bikes, if the prevailing price exceeds market equilibrium price,there istendency for the quantity demanded for mountain bikes to go down. c. A decrease in an individual's income without changing relative prices will shift the budgetconstraintinward in a parallel way. d. An individual's demand curve represents the various quantities that a consumer is willing topurchaseof a good at various price levels.e. Market demand curve for wheat is the horizontal summation of individuals' demand curves forwheat.

b

6. Suppose an individual's MRS of steak for beer is 3:1. That is, at the current consumption choices he or she is willing to give up 3 beers to get an extra steak. Suppose also that the price of a steak is $12 and a beer is $3. Then in order to increase utility theindividual should a. buy more steak and less beer. b. but more beer and less steak. c. continue with current consumption.

b

6. Which of the following statements is false? a. Proportionate changes in all prices and income will not affected consumption choices. b. The cross-price elasticity of demand for coffee and tea is negative. c. By examining the income elasticity ofdemand for a good, one can determine whether the good is inferior or normal. d. The slope of a consumer's indifference curve measures the rate at which the consumer is willing tosubstitute one good for another.

b

7. Some studies showed cocaine is an inferior good. If income were to rise, ceteris paribus, the equilibrium price of cocaine would a. rise. b. fall. c. remain unchanged. d. a or c e. b or c

b

10. The price elasticity of demand for imports is -0.50. What percentage change in price would bring about an increase in the demand for imports of 10 percent? a. a 10 percent decrease in the price of imports. b. a 10 percent increase in the price of imports. c. a 20 percent decrease in the price of imports. d. a 20 percent increase in the price of imports.e. a 5 percent increase in the price of imports.

c

11. Which of the following statements is false? a. An individual's demand curve represents the various quantities that a consumer is willing to purchaseof a good at various price levels of the good. b. The cross-price elasticity of demand for two substitutes (e.g., coffee and tea) is positive. c.The slope of the budget constraint depicts the rate at which the consumer is willing to substitute onegood for another.

c

12. Which of the following statements is false? a. In a competitive market, if the prevailing price is less than the equilibrium price, there is a tendency for the price to increase. b. An decrease in an individual's income without changing relative prices will shift the budget constraint inward (i.e., leftward) in a parallel way. c. For an acreage reduction program to effectively raise the aggregate income earned by corn farmers, the market demand for corn must be elastic.

c

13. The market demand curve for tomatoes is a. independent of individuals' demand curves for tomatoes. b. the vertical summation of individuals' demand curves for tomatoes. c. the horizontal summation of individuals' demand curves for tomatoes. d. derived from the tomato farmers' demand curves for tomatoes.

c

16. When the price of sugar was "low," consumers in the United States spent a total of $3 billion annually on its consumption. When the price doubled, consumer expenditures actually increasedto $4 billion annually. This indicates that a. sugar is a Giffen good. b. sugar prices violate the law of demand. c. the demand for sugar is inelastic. d. the demand curve for sugar is upward sloping.

c

2. A consumer prefers commodity bundle A to commodity bundle B, and prefers commodity bundle B to commodity bundle C. Therefore, A is preferred to C. The assumption that leads to this conclusion is: a. all goodsmust be economic "goods." b. complete preferences. c. transitivity of preferences. d. diminishing marginal rate of substitution. e. normal goods.

c

4. Given the prices of good X and Y, the (negative of the) slope of the budget constraint (i.e., -PX/PY) measures a. the amount of good Y the consumer is willing to forgo in order to consume one more unit of good X. b. the ratio of the consumer's income to the price of the X good. c.the quantity of the Y good that must be forgone in order to purchase one more unit of the X good. d. the quantity of the X good that must be forgone in order to purchase one more unit of the Y good.

c

5. Suppose that Mrs. Smith has a weekly income of $1,000 available to spend on goods X and Y. If Mrs. Smith's income and the prices of X and Y all increase by 20%, her budget constraint will a. shift outward by rotating about the X-intercept. b. shift outward by rotating about the Y-intercept. c.remain the same as before. d. shift outward in parallel fashion.e. shift inward in parallel fashion.

c

8. The price elasticity of demand for a linear demand curve follows the pattern (moving from low prices to high prices) a. elastic, unit elastic, inelastic. b. unit elastic, inelastic, elastic. c. inelastic, unit elastic, elastic. d. elastic, inelastic, unit elastic.

c

8. Which of the following statements is incorrectfor an inferior good? a. An inferior good may have an upward-sloping demand curve. b. The income elasticity of demand for an inferior good is negative. c.An inferior good is an economic "bad." d. All of the above.

c

9. The substitution effect of a price decrease will a. increase the consumption of normal goods only. b. decrease the consumption of normal goods only. c.increase the consumption of both normal and inferior goods. d. decrease the consumption of both normal and inferior goods.e. none of the above.

c

1. Economists use indifference curvesto characterize the preferences of a rational consumer. There are some plausible assumptions that lead to a set of "well-behaved" (i.e., downward-sloping and strictly convex) indifference curves. Which one of the following is NOT among the assumptions? a. All goods must be economic "goods." b. Preferences are complete. c. Preferences are transitive. d.All goods are normal goods.

d

17. If income doubles and the quantity demanded of automobiles more than doubles, then automobiles can be described as a a. substitute good. b. complement good. c. necessity. d. luxury.

d

5. An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing choice? a. MRSxyis at a maximum. b. Px/Py= money income. c. MRSxy= money income. d. MRSxy= Px/Py.

d

7. The substitution effect of a price decrease will a. decrease the consumption of normal goods only. b. increase the consumption of normal goods only. c. decrease the consumption of both normal and inferior goods. d. increase the consumption of both normal and inferior goods.

d

An indifference curve depicts a. all combinations of goods which are just affordable for the consumer. b. all combinations of goods which provide the consumer the same marginal rate of substitution. c. all combinations of goods which are of equal cost to the consumer. d. all combinations of goods which provide the consumer the same utility.

d