Economics 2301 Exam 2 Review

If the elasticity of supply of a good was 2, how much would the price have to increase to lead to an increase in output of 6 percent? A. 3 percent. B. 4 percent. C. 8 percent. D. 12 percent.

A. 3 percent.

If the price elasticity of demand was 4.0 (in absolute terms), a 10% off sale would lead to: A. a 40% increase in purchases by customers. B. a 40% decrease in purchases by customers. C. a 2.5% increase in purchases by customers. D. a 2.5% decrease in purchases by customers. E. none of the above

A. a 40% increase in purchases by customers.

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, there would probably be: A. an increase in consumption. B. a decrease in consumption. C. a greater misallocation of resources. D. a decrease in the market price of the product.

A. an increase in consumption.

If a negative externality results from the refining of oil, the cost of production as seen by the oil refinery: A. does not include the external cost. B. includes the external cost. C. does not include the external benefit. D. includes the external benefit. E. equals the social cost of oil refining.

A. does not include the external cost.

A steel mill raises the price of steel by 7%, which results in a 20% reduction in the quantity of steel demanded. The demand curve facing this firm is: A. elastic. B. inelastic. C. unit elastic. D. unit inelastic.

A. elastic

A price cut will increase the total revenue a firm receives if the demand for its product is: A. elastic. B. inelastic. C. unit elastic. D. unit inelastic.

A. elastic.

If the supply curve for a product is vertical, then the elasticity of supply is: A. equal to zero. B. equal to one. C. greater than one but less than infinity. D. equal to infinity.

A. equal to zero.

A free-rider problem arises whenever: A. goods cannot be provided exclusively to those who pay for them. B. the price of a good is very low. C. the government provides goods or services. D. goods cease to be scarce.

A. goods cannot be provided exclusively to those who pay for them.

If the demand for apples is highly elastic and the supply is highly inelastic, then if a tax is imposed on apples it will be paid: A. largely by the sellers of apples. B. largely by the buyers of apples. C. equally by the sellers and buyers of apples. D. by the government.

A. largely by the sellers of apples.

A change in which of the following variables does not cause a change in demand? A. prices of unrelated goods B. incomes of demanders C. the number of demanders D. tastes of demanders E. expectations of demanders

A. prices of unrelated goods

To internalize a positive externality: A. the consumers of a good could receive a subsidy equal to the external benefit resulting from the consumption of the good. B. a producer's costs could be increased by an amount equal to the external benefit resulting from the production of the good. C. consumers of the good could pay a tax equal to the external benefit resulting from the consumption of the good. D. None of the above are correct.

A. the consumers of a good could receive a subsidy equal to the external benefit resulting from the consumption of the good.

Which of the following is true of a competitive market? A. The rules of supply and demand do not apply to it. B. Buyers and sellers have little market power. C. Each buyer's or seller's effect on market price is substantial. D. Few sellers offer similar products

B. Buyers and sellers have little market power.

Supply is said to be ____ when the quantity supplied is not very responsive to changes in price. A. independent B. inelastic C. unit elastic D. elastic E. flexible

B. inelastic

Which of the below is true? A. A binding price ceiling reduces the quantity exchanged on the market, but a price floor increases the quantity exchanged on the market. B. A price ceiling increases the quantity exchanged on the market, but a price floor decreases the quantity exchanged on the market. C. Both price floors and price ceilings generally reduce the quantity exchanged in the market. D. Both price floors and price ceilings generally increase the quantity exchanged in the market.

C. Both price floors and price ceilings generally reduce the quantity exchanged in the market.

A shortage currently exists in the market for strawberries. Which of the following statements is correct? A. The quantity of strawberries supplied exceeds the quantity demanded and the market price is below the equilibrium price. B. The quantity of strawberries supplied exceeds the quantity demanded and the market price is above the equilibrium price. C. The quantity of strawberries demanded exceeds the quantity supplied and the market price is below the equilibrium price. D. The quantity of strawberries demanded exceeds the quantity supplied and the market price is above the equilibrium price. E. The quantity of strawberries demanded exceeds the quantity supplied and the market price equals the equilibrium price.

C. The quantity of strawberries demanded exceeds the quantity supplied and the market price is below the equilibrium price.

Which of the following is most likely to be an inferior good? A. Porsches. B. Lobster. C. Used clothing. D. An Ivy League education.

C. Used clothing.

Which of the following is a rival good that is nonexcludable? A. a public good B. a private good C. a common resource D. both a. and c.

C. a common resource

A warranty offered by a seller is one way to overcome: A. a positive externality problem. B. a negative externality problem. C. an adverse selection problem. D. a free-rider problem.

C. an adverse selection problem.

When a good is nonrivalrous in consumption, then: A. consumption by an additional individual will significantly reduce the benefits derived by others from a public good. B. individuals who refuse to pay for a public good cannot be excluded from benefiting from it. C. consumption by an additional individual does not prevent others from benefiting from a public good. D. individuals who refuse to pay for a public good can be excluded from benefiting from it.

C. consumption by an additional individual does not prevent others from benefiting from a public good.

The law of demand refers to the: A. decrease in price that results as more units of a product are demanded. B. increase in price that results from an increase in demand for a good of limited supply. C. inverse relationship between the price of a good and the quantity demanded. D. increase in the quantity of a good made available when its price increases.

C. inverse relationship between the price of a good and the quantity demanded.

Demand is said to be ____ when the quantity demanded changes the same proportion as the price. A. independent B. inelastic C. unit elastic D. elastic E. flexible

C. unit elastic

Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? A. 0.05 B. 0.10 C. 0.15 D. 0.33 E. 3.0

D. 0.33

Which of the following is true? A. The private market provides too much of goods and services that generate external benefits. B. In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the supply curve would shift to the right, increasing output. C. In the case of external benefits, a tax equal to external benefits would result in an efficient level of output. D. In the case of public goods, when people act as free-riders, some goods and services having benefits greater than costs will not be produced.

D. In the case of public goods, when people act as free-riders, some goods and services having benefits greater than costs will not be produced.

In a market where firms are able to reduce their private costs by shifting costs onto others, which of the following will NOT happen? A. Inefficiencies will occur. B. Negative externalities will be observed. C. The market prices of products produced by firms will be too low relative to the social optimum. D. Output of the good being produced will be too low.

D. Output of the good being produced will be too low.

If Stephanie buys a laptop for $700 and the maximum she would have paid was $1,000, which of the following is true? A. Stephanie received consumer surplus of $1,000. B. Stephanie received producer surplus of $700. C. Stephanie received a consumer surplus of $700. D. Stephanie received a consumer surplus of $300.

D. Stephanie received a consumer surplus of $300.

Interpret the following statement: "Demand exceeds the available quantity of apartment housing. If the price of apartment rentals were increased, demand would decrease and an equilibrium could be achieved." A. The statement is correct. B. The statement is incorrect because the price should be decreased, not increased, in order to achieve equilibrium. C. The statement would be correct if it read "supply would decrease" in response to a price increase. D. The statement is incorrect because it confuses "demand" with "quantity demanded." E. The statement would be correct only if the terms "demand" and "supply" were interchanged.

D. The statement is incorrect because it confuses "demand" with "quantity demanded."

Which of the following would increase the quantity of LCD TVs demanded but would not increase the demand for LCD TVs? A. an increase in the price of plasma TVs, a substitute B. an increase in incomes assuming that LCD TVs are normal goods C. an increase in the expected future price of LCD TVs D. a decrease in the current price of LCD TVs E. an increase in the current price of LCD TVs

D. a decrease in the current price of LCD TV's

When demand is elastic: A. price elasticity of demand is greater than one. B. consumers are relatively responsive to changes in price. C. the percentage change in quantity demanded resulting from a price change is greater than the percentage change in price. D. all of the above are correct.

D. all of the above are correct.

Negative externalities are: A. costs incurred by buyers, sellers, and others. B. costs incurred by individuals other than buyers. C. costs incurred by individuals other than sellers. D. costs incurred by individuals other than buyers and sellers in a particular market.

D. costs incurred by individuals other than buyers and sellers in a particular market.

If the elasticity of demand for bangles is equal to 1, an increase in price will: A. not affect the quantity purchased. B. decrease the quantity demanded and increase total revenue. C. decrease the quantity demanded and decrease total revenue. D. decrease the quantity demanded but leave total revenue unchanged.

D. decrease the quantity demanded but leave total revenue unchanged.

Demand is said to be ____ when the quantity demanded is very responsive to changes in price. A. independent B. inelastic C. unit elastic D. elastic E. flexible

D. elastic

The consumption of public goods is A. excludable and rivalrous B. excludable and non-rivalrous C. non-excludable and rivalrous D. non-excludable and non-rivalrous

D. non-excludable and non-rivalrous

The elasticity of supply is defined as the ____ change in quantity supplied divided by the ____ change in price. A. total; percentage B. percentage; marginal C. marginal; percentage D. percentage; percentage E. total; total

D. percentage; percentage

If a good that features a positive externality is produced in an unregulated free market, the good will be: A. over-produced and over-priced. B. over-produced and under- priced. C. under-produced and over- priced. D. under-produced and under-priced. E. none of the above

D. under-produced and under-priced.

If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation. A. overstates; increase B. understates; increase C. overstates; decrease D. understates; decrease E. overstates; remain the same

D. understates; decrease

Which of the following statements is true? A. Externalities can never refer to costs borne by the seller. B. Both external costs and external benefits can never exist for the same good. C. Externalities can never lead to under-production of a specific good. D. External benefits can never exceed external costs.

A. Externalities can never refer to costs borne by the seller.

Which of the following goods is least likely to be provided by the private sector? A. a good characterized by nonrivalry in consumption from which nonpaying customers can be excluded B. a good characterized by nonrivalry in consumption from which nonpaying customers cannot be excluded C. a good characterized by rivalry in consumption from which nonpaying customers can be excluded D. a good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good

A. a good characterized by nonrivalry in consumption from which nonpaying customers can be excluded

Unlike its competitors, one glass producer can use its equipment to make either windows for houses or windows for cars. Other things equal, compared to its competitors, its supply curve of windows for cars would be: A. more elastic than the supply curves of competitors. B. less elastic than the supply curves of competitors. C. greater than the supply curves of competitors. D. less than the supply curves of competitors.

A. more elastic than the supply curves of competitors.

An externality occurs when: A. people other than those making the demand and supply decisions share the benefits or the costs of an activity. B. only the people making the demand and supply decisions share the benefits or the costs of an activity. C. private costs of production equal the full social costs associated with production of a good. D. private costs of production are ignored.

A. people other than those making the demand and supply decisions share the benefits or the costs of an activity.

If negative externalities are created in the production of a good, then society will: A. produce too much of the good since the marginal private cost to firms is less than the marginal social cost. B. produce too little of the good since the marginal private cost to firms is less than the marginal social cost. C. produce too much of the good since the marginal private cost to firms is greater than the marginal social cost. D. produce too little of the good since the marginal private cost to firms is greater than the marginal social cost. E. always produce the most efficient quantity of output.

A. produce too much of the good since the marginal private cost to firms is less than the marginal social cost.

The difference between a change in quantity supplied and a change in supply is that a change in: A. quantity supplied is caused by a change in a good's own, current price, while a change in supply is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes. B. supply is caused by a change in a good's own, current price, while a change in the quantity supplied is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes. C. quantity supplied is a change in the amount people want to sell, while a change in supply is a change in the amount they actually sell. D. supply and a change in the quantity supplied are the same thing.

A. quantity supplied is caused by a change in a good's own, current price, while a change in supply is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes.

The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product of certain quality is known as: A. the lemon problem. B. moral hazard. C. the winner's curse. D. external costs.

A. the lemon problem.

If, after she buys a car with air bags, Maria Andretti starts to drive recklessly, that would be an illustration of: A. the moral hazard problem. B. the free rider problem. C. the adverse selection problem. D. the "lemon" problem.

A. the moral hazard problem.

The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of: A. the moral hazard problem. B. the free rider problem. C. the adverse selection problem. D. the "lemon" problem.

A. the moral hazard problem.

A 25% decrease in the price of breakfast cereal leads to a 20% increase in the quantity of cereal demanded. As a result: A. total revenue will decrease. B. total revenue will increase. C. total revenue will remain constant. D. the elasticity of demand will increase.

A. total revenue will decrease.

Where a free-rider problem exists, goods tend to be: A. underproduced. B. overproduced. C. high-priced and available only to the rich. D. low priced and available only to the poor.

A. underproduced.

Which of the following is the correct way to describe equilibrium in a market? A. At equilibrium, demand equals supply. B. At equilibrium, quantity demanded equals quantity supplied. C. At equilibrium, market forces no longer apply. D. Equilibrium is a tendency for price to change, a state of perpetual motion. E. At equilibrium, the "fairest" price for output is achieved.

B. At equilibrium, quantity demanded equals quantity supplied.

Which of the following is true? A. Consumption of a public good by one individual reduces the availability of the good for others. B. It is extremely difficult to limit the benefits of a public good to only the people who pay for it. C. Public goods are free whenever the government produces them. D. From an efficiency standpoint, a market economy will generally supply too much of a public good. E. None of the above are correct.

B. It is extremely difficult to limit the benefits of a public good to only the people who pay for it.

Which of the following best explains the source of consumer surplus for Good A? A. Many consumers pay prices that are greater than the equilibrium price of Good A. B. Many consumers would be willing to pay more than the market price for some units of Good A. C. Many consumers think the market price of Good A is greater than its cost. D. Many consumers of Good A place a value on it that is less than the market price.

B. Many consumers would be willing to pay more than the market price for some units of Good A.

Which of the following statements best summarizes the essence of public choice analysis? A. Public choice analysis demonstrates that there is a significant difference between economic and political concerns. B. Public choice analysis applies economic principles to political science issues. C. Public choice analysis applies political science principles to traditionally economic issues. D. Public choice analysis assumes that government leaders are primarily motivated by what is best for the community, unlike private interest groups.

B. Public choice analysis applies economic principles to political science issues.

If the price of music downloads decreases, which of the following is most likely to occur? A. Quantity demanded will decrease. B. Quantity demanded will increase. C. Demand will increase. D. Demand will decrease.

B. Quantity demanded will increase.

A public good is: A. a good or service for which it is relatively easy to exclude nonpaying customers from consumption. B. a good or service that can be consumed by both paying and nonpaying customers. C. any good or service that is produced by the government. D. a good or service that is consumed by private individuals and financed by private contributions

B. a good or service that can be consumed by both paying and nonpaying customers.

Which of the following is an example of an unintended consequence? A. first time tax credits that cause more home sales B. a price ceiling on gasoline that causes a gas shortage C. increased parking fines that lead to fewer violators D. increased taxes on cigarettes and liquor that lead to less smoking & drinking E. none of the above

B. a price ceiling on gasoline that causes a gas shortage

To internalize a negative externality: A. a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good. B. a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good. C. a producer could receive a subsidy equal to the external cost resulting from the production of a good. D. None of the above are correct.

B. a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.

Which of the following would NOT cause a change in the supply of milk? A. an increase in government subsidies to dairy farmers B. an increase in the price of milk C. the discovery of growth hormones to stimulate the milk production of cows D. an increase in the cost of feed for cows E. All of the above will cause a change in the supply of milk.

B. an increase in the price of milk

Sellers may choose not to sell in certain markets because: A. it is possible to practice price discrimination against customers. B. buyers are unable to accurately perceive the quality of their goods and are, therefore, less willing to pay an appropriate price for them. C. they are able to impose negative externalities on third parties. D. an above-average profit potential is projected.

B. buyers are unable to accurately perceive the quality of their goods and are, therefore, less willing to pay an appropriate price for them.

Which of the following is an example of a public good? A. telephone service B. clean air C. a city-owned bus D. electricity generated by a city-owned public utility

B. clean air

The Shoe Emporium reduces the price of its shoes by 50% and finds that the quantity demanded for its shoes more than doubles. The demand for shoes from The Shoe Emporium appears to be: A. inelastic. B. elastic. C. unit elastic. D. unit inelastic. E. perfectly inelastic.

B. elastic

If an increase in price causes total expenditure on a product to decrease, then the price elasticity of demand is: A. inelastic. B. elastic. C. unit elastic. D. zero.

B. elastic.

A supply schedule shows: A. projected sales as ad spending varies. B. how many units producers are willing and able to sell at various prices. C. possible combinations of output as input prices vary. D. how many units consumers would like to buy at various prices.

B. how many units producers are willing and able to sell at various prices.

If the production of a particular good involves significant external costs, to force the externality to be internalized the government might: A. impose a tax on production of the good in order to increase production. B. impose a tax on production of the good in order to decrease production. C. offer a subsidy for production of the good in order to increase production. D. offer a subsidy for production of the good in order to decrease production.

B. impose a tax on production of the good in order to decrease production.

A government mandated price increase for doodads will: A. decrease the quantity of doodads supplied but increase the quantity of doodads demanded. B. increase the quantity of doodads supplied but decrease the quantity of doodads demanded. C. increase the demand for doodads and decrease the supply of doodads. D. decrease the demand for doodads and increase the supply of doodads.

B. increase the quantity of doodads supplied but decrease the quantity of doodads demanded.

If the elasticity of supply of bangles is equal to 1, an increase in the price of bangles will: A. not affect the quantity purchased. B. increase the quantity supplied and increase total revenue. C. increase the quantity supplied and decrease total revenue. D. increase the quantity supplied and leave total revenue unchanged.

B. increase the quantity supplied and increase total revenue.

A recent study at a liberal arts college concluded that demand elasticity is 0.91 for college courses. The administration is considering a tuition increase to help balance the budget. An economist might advise the school to: A. decrease tuition in order to increase revenue by boosting enrollment. B. increase tuition in order to increase revenue. C. leave tuition unchanged as a change in tuition is unlikely to enhance the school's budget by increasing revenue. D. decrease tuition because demand for courses is elastic. E. both a. and d.

B. increase tuition in order to increase revenue.

A steel mill raises the price of steel by 20%, which results in a 7% reduction in the quantity of steel demanded. The demand curve facing this firm is: A. elastic. B. inelastic. C. unit elastic. D. unit inelastic.

B. inelastic.

If a positive externality results from the consumption of higher education, then the marginal benefit students receive from education: A. equals the marginal social benefit. B. is less than the marginal social benefit. C. includes the marginal external benefit. D. exceeds the marginal social benefit.

B. is less than the marginal social benefit.

The tendency of those who are insured to take more risks is a problem of: A. free riding. B. moral hazard. C. adverse selection. D. positive externalities.

B. moral hazard.

The market system fails to provide the efficient output of public goods because: A. people place no value on public goods. B. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them. C. public enterprises can produce those goods at lower cost than private firms. D. public goods create widespread spillover costs.

B. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them.

The free rider problem suggests that competitive markets will tend to: A. produce more than the optimal quantity of a public good. B. produce less than the optimal quantity of a public good. C. produce about the optimal quantity of a public good. D. do none of the above.

B. produce less than the optimal quantity of a public good.

If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will: A. not produce the product at all. B. produce too much of the product. C. produce too little of the product. D. produce the optimal amount of the product.

B. produce too much of the product.

Which of the following will most likely generate positive externalities? A. a hot dog vendor B. public education C. an automobile D. a grocery store E. a polluting factory

B. public education

If the demand is perfectly elastic, what would happen to the quantity demanded if there is a tiny increase in price? A. quantity demanded will increase proportionately B. quantity demanded will fall to zero C. quantity demanded will register a disproportionately high increase D. quantity demanded will decrease proportionately E. quantity demanded will remain the same

B. quantity demanded will fall to zero

Each point on the supply curve shows the: A. amount that people want to buy at that price. B. quantity supplied at that price. C. productive capacity of an individual producer. D. the amount producers want to sell to buyers of different income levels.

B. quantity supplied at that price

Total revenue represents the amount that: A. sellers receive for a good or service which is computed as PxQ. B. sellers receive for a good or service which is computed as PxQ. C. one buyer spends on a good or service which is computed as PxQ. D. one buyer spends on a good or service which is computed as PxQ. E. one buyer spends on a good or service which is computed as QxP.

B. sellers receive for a good or service which is computed as PxQ.

Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs. A. negative; positive B. social; private C. private; social D. positive; negative

B. social; private

If the elasticity of demand coefficient for a good is one-sixth (in absolute terms), we know: A. that for every 1% increase in quantity, there will be a 6% increase in price. B. that for every 1% increase in quantity, there will be a 6% decrease in price. C. that for every 6% increase in quantity, there will be a 1% increase in price. D. that for every 6% increase in quantity, there will be a 1% decrease in price.

B. that for every 1% increase in quantity, there will be a 6% decrease in price.

If the price of tennis rackets were to increase, we would expect: A. the demand for tennis balls to increase. B. the demand for tennis balls to decrease. C. the supply of tennis balls to increase, leading to a movement along the demand curve for tennis balls. D. the supply of tennis balls to decrease. E. both b. and d. to occur.

B. the demand for tennis balls to decrease.

The view that those whose preferences represent the middle position on an issue will tend to determine the outcome of an election is called: A. rent seeking. B. the median voter model. C. the special interest effect. D. the cyclical majority problem.

B. the median voter model.

When there is an excess quantity demanded of a product at the current price, then: A. the price will tend to fall. B. the price will tend to rise. C. the price must be above the equilibrium price. D. producers will reduce output and sales will fall.

B. the price will tend to rise.

Ceteris paribus, if the vacancy rate in an apartment complex increased from 5% to 20% over the past two years, we would expect to see A. the rent decrease leading to an increase in quantity supplied. B. the rent decrease leading to an increase in quantity demanded. C. the rent decrease leading to a decrease in quantity demanded. D. the rent increase leading to a decrease in quantity demanded. E. the rent increase leading to an increase in quantity supplied.

B. the rent decrease leading to an increase in quantity demanded.

In a competitive economy with no government sector: A. goods with spillover benefits will not be produced at all. B. there will be too few public goods produced. C. goods with spillover costs will be underproduced. D. too few resources will be allocated to each industry.

B. there will be too few public goods produced.

In the market for insurance, the moral hazard problem leads: A. those most likely to collect on insurance to buy it. B. those who buy insurance to take fewer precautions to avoid the insured risk. C. those with more prior insurance claims to be charged a higher premium. D. to none of the above.

B. those who buy insurance to take fewer precautions to avoid the insured risk.

In economics, the demand for a good refers to the amount of the good people: A. would like to have if the good were free. B. will buy at various prices. C. need to achieve a minimum standard of living. D. will buy at alternative income levels.

B. will buy at various prices

A situation in which the winner of an auction is worse off than the loser because of inaccurate valuation is known as: A. adverse selection. B. winner's curse. C. free rider problem. D. negative externality.

B. winner's curse.

Which of the following is true? A. Economic reasoning implies that individuals will acquire all possible information about a choice before making it. B. It is not rational for people to make decisions that turn out to be mistaken. C. Reducing information costs to consumers and suppliers could permit more intelligent market decisions and lead to greater satisfaction. D. Occupational licensing laws generally act to protect misinformed consumers from getting shoddy services and enhances competition, leading to lower prices. E. All of the above are true.

C. Reducing information costs to consumers and suppliers could permit more intelligent market decisions and lead to greater satisfaction.

Which of the following is most likely to be an example of asymmetric information? A. a soft drink purchased in a vending machine B. a car wash to benefit the local high school band C. a collectible baseball card purchased on eBay D. wireless service that includes unlimited minutes and texting

C. a collectible baseball card purchased on eBay

The imposition of a price ceiling on a market often results in: A. an increase in investment in the industry. B. a surplus. C. a shortage. D. a decrease in discrimination on the part of sellers. E. none of the above.

C. a shortage.

Assume a price floor is imposed in the wheat market at the equilibrium price and that a price ceiling is imposed in the gasoline market at the equilibrium price. An increase in supply in both the wheat and gasoline markets will create: A. surpluses in both the wheat and gasoline markets. B. shortages in both the wheat and gasoline markets. C. a surplus in the wheat market and an increase the quantity of gasoline traded. D. a surplus in the wheat market and a shortage in the gasoline market. E. a shortage in the wheat market and a surplus in the gasoline market.

C. a surplus in the wheat market and an increase the quantity of gasoline traded.

The price elasticity of demand coefficient for gourmet coffee is estimated to be equal to 1.6. It is expected, therefore, that a 5% increase in price would lead to: A. a 16% decrease in the quantity of gourmet coffee demanded. B. a 16% increase in the quantity of gourmet coffee demanded. C. an 8% decrease in the quantity of gourmet coffee demanded. D. an 8% increase in the quantity of gourmet coffee demanded. E. a 1.6% decrease in the quantity of gourmet coffee demanded.

C. an 8% decrease in the quantity of gourmet coffee demanded.

For a given increase in price, a greater elasticity of demand will result in a greater A. increase in quantity demanded. B. increase in demand. C. decrease in quantity demanded. D. decrease in demand.

C. decrease in quantity demanded.

To the extent that a governmental price control succeeds in affecting price, it can be expected to lead to a corresponding: A. reduction in the volume of sales only if the price is forced down. B. reduction in the volume of sales if the price is forced down and an increase in the volume of sales if the price is forced up. C. decrease in the volume of sales whether the price is forced up or down. D. increase in the volume of sales whether the price is forced up or down.

C. decrease in the volume of sales whether the price is forced up or down.

If a corrective tax equal to the external cost imposed on third parties is levied on polluters it will: A. eliminate all pollution. B. increase the level of pollution. C. force polluters to internalize the external cost resulting from their actions. D. usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.

C. force polluters to internalize the external cost resulting from their actions.

Which of the following would most likely feature elastic demand? A. heart surgery B. a required textbook C. fresh green beans D. all of the above E. none of the above

C. fresh green beans

A surplus will result whenever the: A. government imposes a price floor below the equilibrium price. B. government imposes a price ceiling below the equilibrium price. C. government imposes a price floor above the equilibrium price. D. government imposes a price ceiling above the equilibrium price. E. quantity demanded exceeds the quantity supplied.

C. government imposes a price floor above the equilibrium price.

A perfectly elastic supply curve is: A. upward sloping to the right. B. downward sloping to the left. C. horizontal. D. vertical. E. any of the above.

C. horizontal.

The supply curve shows: A. the same basic information as a demand curve. B. how the average cost of production varies with price. C. how the quantity produced varies with price. D. how the quantity demanded varies with price.

C. how the quantity produced varies with price.

For a given increase in price, the greater is the elasticity of supply, the greater is the resulting A. decrease in quantity supplied. B. decrease in supply. C. increase in quantity supplied. D. increase in supply.

C. increase in quantity supplied.

The longer the time period considered, the elasticity of supply tends to: A. decrease. B. remain constant. C. increase. D. converge to zero.

C. increase.

The demand schedule for a good: A. indicates the quantity that people will buy at the prevailing price. B. indicates the quantities that suppliers will sell at various market prices. C. indicates the quantities that will be purchased at alternative market prices. D. is determined primarily by the cost of producing the good. E. indicates the quantity that people will buy at different times of the day or year.

C. indicates the quantities that will be purchased at alternative market prices.

If the production of a particular good involves significant external benefits, to force the externality to be internalized the government might: A. impose a tax on production of the good in order to increase production. B. impose a tax on production of the good in order to decrease production. C. offer a subsidy for production of the good in order to increase production. D. offer a subsidy for production of the good in order to decrease production.

C. offer a subsidy for production of the good in order to increase production.

The market supply schedule reflects the total quantity: A. supplied at market price. B. supplied by all of the producers at the equilibrium price. C. supplied at each price by all of the producers. D. the vertical summation of the supply curves for individual firms

C. supplied at each price by all of the producers.

An upward-sloping supply curve shows that: A. buyers are willing to pay more for particularly scarce products. B. suppliers expand production as the product price falls. C. suppliers are willing to increase production of their goods if they receive higher prices for them. D. buyers are willing to buy more as the product price falls. E. buyers are not affected either directly or indirectly by the sellers' costs of production.

C. suppliers are willing to increase production of their goods if they receive higher prices for them

Ceteris paribus, if an 8% increase in price leads to a 6% increase in the quantity supplied, then: A. supply is elastic. B. supply is unit elastic. C. supply is inelastic. D. the supply curve is perfectly vertical. E. the supply curve is perfectly horizontal.

C. supply is inelastic.

If a company offers a medical and dental care plan that offers benefits to all of the members of each employee's family for a given monthly premium, an employee who is a mother of five children and who has bad teeth who elects that plan would be an illustration of: A. the moral hazard problem. B. the free rider problem. C. the adverse selection problem. D. the "lemon" problem.

C. the adverse selection problem.

Graphically, consumer surplus is measured by: A. the area below the demand curve. B. the area below the demand curve, but above the upward-sloping supply curve. C. the area below the demand curve, but above the market price. D. the area below the market demand curve, but above the supply curve.

C. the area below the demand curve, but above the market price.

Assume that coffee and tea are substitutes for each other. If weather conditions cause a substantial portion of the available coffee crop to be destroyed, then most probably: A. the price of tea will decrease. B. the price of coffee will decrease. C. the demand for tea will increase. D. the supply of tea will increase. E. both c. and d. are correct.

C. the demand for tea will increase.

If there are important spillover benefits from consumption of a good, A. government should prohibit its production. B. taxes should be imposed on producers of the product. C. the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production. D. the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.

C. the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.

Which of the following is not true of adverse selection? A. It can result when both parties to a transaction have little information about the quality of the goods involved. B. It can cause the quality of goods traded to fall, if quality detection costs are high. C. It can be a difficult problem to overcome, because it is often not in the self-interest of the transactor with the superior information to provide a truthful and complete disclosure. D. All of the above are true.

D. All of the above are true.

Which of the following would not shift the supply curve for swordfish? A. a reduction in the number of available fishing boats B. unusually stormy weather during fishing season C. the development of innovative new fishing equipment that makes it easier to catch swordfish D. an increase in the price of swordfish E. an increase in the wages of fishermen

D. an increase in the price of swordfish

Whenever the price of Good A decreases, the demand for Good B increases. Good A and B appear to be: A. compliments. B. substitutes. C. inferior goods. D. normal goods. E. complements.

D. complements

Ceteris paribus, an increase in the price of a good will cause the: A. quantity demanded of the good to increase. B. quantity supplied of the good to decrease. C. supply of the good to increase. D. consumer surplus derived from the good to decrease. E. Both c. and d. are correct.

D. consumer surplus derived from the good to decrease.

As an additional consumer obtains the benefits of a public good such as national defense, the benefits to existing consumers: A. decline. B. increase. C. increase in the short run, but decrease in the long run. D. do not change.

D. do not change.

If there is a surplus, ____ will be frustrated by their inability to exchange at the current price, and they will ____ the prices as a result. A. buyers; raise. B. buyers; lower. C. sellers; raise. D. sellers; lower.

D. sellers; lower.

Consumer surplus is: A. the area underneath the demand curve. B. the total utility derived from consuming a good. C. the marginal utility of the last unit consumed multiplied by the number of units consumed. D. the difference between what consumers are willing to pay and what they are required to pay for a good. E. the dollar amount spent acquiring a good.

D. the difference between what consumers are willing to pay and what they are required to pay for a good.

Price elasticity of demand is defined as: A. the slope of the demand curve. B. the slope of the demand curve divided by the price. C. the percentage change in price divided by the percentage change in quantity demanded. D. the percentage change in quantity demanded divided by the percentage change in price. E. the inverse of the price elasticity of supply.

D. the percentage change in quantity demanded divided by the percentage change in price.

The Book Nook reduces prices by 20%. If the dollar value of The Book Nook's sales remain constant, it indicates that: A. the quantity of books sold remains constant. B. the demand curve is horizontal. C. the demand curve is vertical. D. the quantity of books sold increases by 20%. E. both a. and c. are correct.

D. the quantity of books sold increases by 20%.

Assume a price floor is imposed at the current equilibrium price in the market for lettuce. If the demand for lettuce then increases: A. a surplus of lettuce will be created. B. a shortage of lettuce will be created. C. the quantity of lettuce traded remains the same. D. the quantity of lettuce supplied will increase. E. the quantity of lettuce supplied will decrease.

D. the quantity of lettuce supplied will increase.

Along a supply curve, a decrease in price will increase total revenue: A. only if supply is elastic. B. only if supply is inelastic. C. only if supply is unit elastic. D. under no circumstances. E. in none of the above situations.

D. under no circumstances.

A secondary effect of an action that may occur after the initial effects is known as a(n): A. direct effect. B. inverse effect. C. correlated consequence. D. unintended consequence. E. indirect conclusion.

D. unintended consequence.

The determination of which goods are public goods depends on: A. public laws. B. normative considerations. C. whether it is produced directly by the government or produced by a private sector firm. D. whether it is possible to exclude additional users from consuming the good if they do not pay for it. E. c. and d.

D. whether it is possible to exclude additional users from consuming the good if they do not pay for it.

Bailey's Barber Shop knows that a 5% increase in the price of their haircuts results in a 15% decrease in the number of haircuts purchased. What is the elasticity of demand facing Bailey's Barber Shop? A. 0.05 B. 0.10 C. 0.15 D. 0.33 E. 3.0

E. 3.0

Which of the following is false? A. The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. B. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. C. If demand is elastic, it means the quantity demanded changes by a relatively larger amount than the price change. D. If demand is inelastic, it means the quantity demanded changes by a relatively smaller amount than the price change. E. All of the above are true.

E. All of the above are true.

Which of the following is true? A. The government may be able to overcome the free rider problem with public goods by providing the public goods and imposing taxes to pay for them. B. The nature of public goods is such that the government cannot accurately assess the benefits and costs of those affected. C. National defense and flood control are illustrations of public goods. D. Just as in the case of external benefits, public goods tend to be underprovided by the private sector. E. All of the above are true.

E. All of the above are true.

Elasticity of demand will ____ as the availability of substitutes ____. A. increase; decreases B. decrease; increases C. increase; increases D. decrease; decreases E. Both c. and d. are correct answers.

E. Both c. and d. are correct answers.

Which of the following activities, if any, represents an external cost? A. The benefits that accrue to society when an individual receives a college education. B. The increase in property values of vacant lots in an area near where a new park is dedicated. C. The pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard. D. The price you pay for a slice of pizza. E. None of the above

E. None of the above

Which of the following would be most likely to cause a reduction in the supply of Nintendo video games? A. a decrease in the price of Nintendo video games B. a decrease in the price of computer chips used to make Nintendo games C. an increase in the demand for Nintendo video games D. a decrease in the demand for Nintendo video games E. an increase in the price of computer chips used to make Nintendo games

E. an increase in the price of computer chips used to make Nintendo games

At the equilibrium price for gasoline: A. everyone with the desire and the income to buy gasoline at that price can do so. B. surpluses are inevitable. C. quantity demanded exceeds the quantity supplied. D. all sellers willing and able to sell gasoline at that price can do so. E. both a. and d. are correct.

E. both a. and d. are correct.

The median voter model implies that: A. most voters will have about the same preferences for goods and services provided through government. B. many people will be dissatisfied with the amount of spending on government funded projects. C. a candidate may adopt more extreme views when seeking her party's nomination than during the general election. D. political voting will be as economically efficient as voting with dollars in competitive markets. E. both b. and c. could be common.

E. both b. and c. could be common.

Public goods are characterized by: A. rivalry in consumption. B. nonrivalry in consumption. C. excludability of nonpayers. D. nonexcludability of nonpayers. E. both b. and d.

E. both b. and d.

If Don paints the outside of his house a horrendous color: A. he probably has lowered the value of his home, but not that of his neighbors' homes. B. he probably has lowered the value of his home and the value of his neighbors' homes. C. he probably has lowered the value of his neighbors' homes but not the value of his own home. D. he is unlikely to bear all the social costs of his actions. E. both b. and d. are true.

E. both b. and d. are true.

When there is an excess quantity supplied of a product at the current price, then: A. the market price must be below equilibrium price. B. the market price will tend to rise. C. the market price must be above equilibrium price. D. the market price will tend to fall. E. both c. and d. will occur.

E. both c. and d. will occur.

Without government intervention, society is likely to get too little production of: A. private goods. B. private goods that generate external costs. C. private goods that generate external benefits. D. public goods. E. both private goods that generate external benefits and public goods.

E. both private goods that generate external benefits and public goods.

Public goods are those that are consumed: A. only by those who have paid for them. B. only by the government that provides them. C. by the private group that funds them. D. only by free riders. E. by the paying and nonpaying public alike.

E. by the paying and nonpaying public alike.

The difference between the value of a good to consumers and its price is known as: A. demand. B. marginal utility. C. total utility. D. opportunity cost E. consumer surplus.

E. consumer surplus.

A 10% decrease in the price of energy bars leads to a 20% increase in the quantity of energy bars demanded. It appears that: A. demand is inelastic and total revenue will decrease. B. demand is inelastic and total revenue will increase. C. demand is unit elastic and total revenue will remain constant. D. demand is elastic and total revenue will decrease. E. demand is elastic and total revenue will increase.

E. demand is elastic and total revenue will increase.

A decrease in consumer incomes will: A. decrease the demand for an inferior good. B. decrease the supply of an inferior good. C. increase the demand for a normal good. D. increase the supply of a normal good. E. do none of the above.

E. do none of the above

If the government wanted to reduce the quantity of a good traded, it could do so by: A. setting a price ceiling for the good below the equilibrium price. B. setting a price floor for the good above the equilibrium price. C. tax the good more heavily. D. tax an input used intensively in the industry more heavily. E. doing any of the above.

E. doing any of the above.

The current supply of Rembrandt paintings: A. is perfectly elastic. B. is elastic. C. is unit elastic. D. is inelastic. E. is perfectly inelastic.

E. is perfectly inelastic.

To an economist, a decrease in supply means a: A. rightward shift of the supply curve. B. movement up along a supply curve. C. downward shift of the supply curve. D. movement down along the supply curve. E. none of the above

E. none of the above

If the demand is perfectly inelastic, what would happen to the quantity demanded if there is a tiny increase in price? A. quantity demanded will increase proportionately B. quantity demanded will fall to zero C. quantity demanded will register a disproportionately high increase D. quantity demanded will decrease proportionately E. quantity demanded will remain the same

E. quantity demanded will remain the same