Economics (Micro): Exam#2

T

Necessities tend to have inelastic demands, whereas luxuries have elastic demands. T or F

a. Very small changes in price lead to very large changes in quantity supplied.

Which of the following would be true as the price elasticity of supply approaches infinity? a. Very small changes in price lead to very large changes in quantity supplied. b. Very large changes in price lead to very small changes in quantity supplied. c. Very small changes in price lead to no change in quantity supplied. d. Very large changes in price lead to no change in quantity supplied.

T

A binding minimum wage in a competitive labor market creates unemployment. T or F

c. how much a buyer values a good.

A consumer's willingness to pay directly measures a. the extent to which advertising and other external forces have influenced the consumer's decisions regarding his or her purchases of goods and services. b. the cost of a good to the buyer. c. how much a buyer values a good. d. consumer surplus.

b. induces buyers to consume less, and sellers to produce less, of the good.

A deadweight loss is a consequence of a tax on a good because the tax a. induces the government to increase its expenditures. b. induces buyers to consume less, and sellers to produce less, of the good. c. causes a disequilibrium in the market. d. imposes a loss on buyers that is greater than the loss to sellers.

F

A government subsidy would improve upon the market efficiency because such a policy makes both consumers and producers better off. T or F

T

A government-imposed tax on a market shrinks the size of the market. T or F

a. raise the price paid by buyers and lower the equilibrium quantity.

A tax imposed on the sellers of a good will a. raise the price paid by buyers and lower the equilibrium quantity. b. raise the price paid by buyers and raise the equilibrium quantity. c. raise the effective price received by sellers and raise the equilibrium quantity. d. raise the effective price received by sellers and lower the equilibrium quantity.

T

A tax on golf clubs will cause buyers of golf clubs to pay a higher price, and the equilibrium quantity will decrease. T or F

c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee.

A tax on the buyers of coffee will a. increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and increase the equilibrium quantity of coffee. b. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. d. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and increase the equilibrium quantity of coffee.

a. Alice's demand for banana splits is perfectly inelastic.

Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth, a. Alice's demand for banana splits is perfectly inelastic. b. Alice's price elasticity of demand for banana splits is 1. c. Alice's income elasticity of demand for banana splits is 0. d. None of the above answers is correct.

b. the quantity supplied of labor will exceed the quantity demanded.

At a minimum wage that exceeds the equilibrium wage, a. the quantity demanded of labor will exceed the quantity supplied. b. the quantity supplied of labor will exceed the quantity demanded. c. the minimum wage will not be binding. d. the market for skilled workers is affected, but the market for unskilled workers remains unaffected.

F

Binding price ceilings benefit consumers because they allow consumers to buy all the goods they demand at a lower price. T or F

a. the supply is more elastic than the demand.

Buyers of a good bear the larger share of the tax burden when a tax is placed on a product for which a. the supply is more elastic than the demand. b. the demand in more elastic than the supply. c. the tax is placed on the sellers of the product. d. the tax is placed on the buyers of the product.

a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Consumer surplus is a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. b. the amount a buyer is willing to pay for a good minus the cost of producing the good. c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good. d. a buyer's willingness to pay for a good plus the price of the good.

T

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes. T or F

a. loss in a market to buyers and sellers that is not offset by an increase in government revenue.

Deadweight loss measures the a. loss in a market to buyers and sellers that is not offset by an increase in government revenue. b. loss in revenue to the government when buyers choose to buy less of the product because of the tax. c. loss of equity in a market due to government intervention. d. loss of total revenue to business firms due to the price wedge caused by the tax.

d. greater than 1.

Demand is elastic if elasticity is a. less than 1. b. equal to 1. c. equal to 0. d. greater than 1.

a. quantity demanded changes by the same percent as the price.

Demand is said to be unit elastic if a. quantity demanded changes by the same percent as the price. b. quantity demanded changes by a larger percent than the price. c. the demand curve shifts by the same percentage amount as the price. d. quantity demanded does not respond to a change in price.

F

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic. T or F

F

Economists use the term tax incidence to refer to who is legally responsible for paying the tax. T or F

b. flatter the demand curve will be.

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit.

a. government's benefit from the tax.

For the purpose of analyzing the gains and losses from a tax on a good, we use tax revenue as a direct measure of a. government's benefit from the tax. b. government's loss from the tax. c. the deadweight loss of the tax. d. the overall net gain to society of the tax.

T

Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost. T or F

T

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes. T or F

b. 0.417.

Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is a. 0.567. b. 0.417. c. 1.429. d. 2.200.

T

If a price ceiling is below equilibrium price, the quantity demanded will exceed the quantity supplied. T or F

F

If a price ceiling of $2 per gallon is imposed on gasoline, and the market equilibrium price is $1.50, the price ceiling is a binding constraint on the market. T or F

T

If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply approaches infinity. T or F

F

If a tax is imposed on the buyers of a product, the tax burden will fall entirely on the buyers. T or F

c. all potential gains from trade among buyers are sellers are being realized.

If an allocation of resources is efficient, then a. consumer surplus is maximized. b. producer surplus is maximized. c. all potential gains from trade among buyers are sellers are being realized. d. the allocation is necessarily equitable as well.

T

If demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0. T or F

T

If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a result, then the price elasticity of demand is 3. T or F

b. supply is said to be inelastic.

If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. supply is said to be inelastic. c. an increase in price will not shift the supply curve very much. d. even a large decrease in demand will change the equilibrium price only slightly.

T

In a competitive market, sales go to those producers who are willing to supply the product at the lowest price. T or F

T

In general, a tax burden falls more heavily on the side of the market that is more inelastic. T or F

d. quantity demanded stays the same whenever price changes.

In the case of perfectly inelastic demand, a. the change in quantity demanded equals the change in price. b. the percentage change in quantity demanded equals the percentage change in price. c. infinitely-large changes in quantity demanded result from very small changes in the price. d. quantity demanded stays the same whenever price changes.

d. All of the above are correct.

In which of the following circumstances would a buyer be indifferent about buying a good? a. The amount of consumer surplus the buyer would experience as a result of buying the good is zero. b. The price of the good is equal to the buyer's willingness to pay for the good. c. The price of the good is equal to the value the buyer places on the good. d. All of the above are correct.

a. the quantity demanded changes as consumer income changes.

Income elasticity of demand measures how a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level.

c. not being produced by the lowest-cost producers.

Inefficiency exists in an economy when a good is a. being produced with less than all available resources. b. not distributed fairly among buyers. c. not being produced by the lowest-cost producers. d. being consumed by buyers who value it most highly.

F

Supply tends to be more elastic in the short run and more inelastic in the long run. T or F

c. wheat farmers would experience an increase in their total revenue.

Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed under 10 percent of their wheat crop, then a. consumers of wheat would buy more wheat. b. wheat farmers would suffer a reduction in their total revenue. c. wheat farmers would experience an increase in their total revenue. d. the demand for wheat would decrease.

T

Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot legislate the true burden of a tax. T or F

b. $20.

Marjorie is willing to pay $68 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48. Marjorie's consumer surplus is a. $10. b. $20. c. $48. d. $68.

c. 30 percent more football tickets.

Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy a. 150 percent more football tickets. b. 50 percent more football tickets. c. 30 percent more football tickets. d. 20 percent more football tickets.

b. $0.85.

Noah drinks Dr. Pepper. He can buy as many cans of Dr. Pepper as he wishes at a price of $0.50 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Noah is rational in deciding how many cans to buy. His consumer surplus is a. $0.50. b. $0.85. c. $1.05. d. $1.20.

F

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand. T or F

T

Normally, both buyers and sellers of a good become worse off when the good is taxed. T or F

T

OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run. T or F

b. below the demand curve and above price.

On a graph, consumer surplus is the area a. between the demand and supply curves. b. below the demand curve and above price. c. below the price and above the supply curve. d. below the demand curve and to the right of equilibrium price.

d. All of the above are correct.

Opponents of the minimum wage point out that the minimum wage a. encourages teenagers to drop out of school. b. prevents some workers from getting needed on-the-job training. c. contributes to the problem of unemployment. d. All of the above are correct.

b. increase, because the demand for, and supply of, housing are more elastic in the long run.

Over time, housing shortages caused by rent control a. increase, because the demand for, and supply of, housing are less elastic in the long run. b. increase, because the demand for, and supply of, housing are more elastic in the long run. c. decrease, because the demand for, and supply of, housing are less elastic in the long run. d. decrease, because the demand for, and supply of, housing are more elastic in the long run.

F

Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls. T or F

a. the benefits to sellers of participating in a market.

Producer surplus measures a. the benefits to sellers of participating in a market. b. the costs to sellers of participating in a market. c. the price that buyers are willing to pay for sellers' output of a good or service. d. the benefit to sellers of producing a greater quantity of a good or service than buyers demand.

T

Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower. T or F

b. $30.

Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10; the cost of mowing the second lawn is $12; and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is a. $25. b. $30. c. $36. d. $45.

c. $1.00.

Sally sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife for as many knives as Sally is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $1.75, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.25. Assume Sally is rational in deciding how many knives to sharpen. Her producer surplus is a. $0.25. b. $0.50. c. $1.00. d. $1.75.

a. For the three individuals together, consumer surplus amounts to $35.

Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendras's willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct? a. For the three individuals together, consumer surplus amounts to $35. b. Having bought the cell phone, Kristen is better off than she would have been had she not bought it. c. Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been buyers and Kristen definitely would not have been a buyer. d. The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed the same value on that cell phone.

c. $600.

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweight loss of the tax is a. $200. b. $400. c. $600. d. $1,200.

b. the equilibrium price increases and the equilibrium quantity is unchanged.

Suppose demand is perfectly inelastic and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases and the equilibrium price is unchanged. b. the equilibrium price increases and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers' total expenditure on the good is unchanged.

d. may increase, decrease, or remain unchanged.

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged.

c. might increase or decrease.

Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus a. would necessarily increase even if the higher price resulted in a surplus of widgets. b. would necessarily decrease because the higher price would create a surplus of widgets. c. might increase or decrease. d. would be unaffected.

b. any possible increase in consumer surplus would be smaller than the loss of producer surplus.

Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4, a. any possible increase in consumer surplus would be larger than the loss of producer surplus. b. any possible increase in consumer surplus would be smaller than the loss of producer surplus. c. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus. d. the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.

b. It decreases.

Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons? a. It increases. b. It decreases. c. It is not affected by this change in market forces. d. We would have to know whether the demand for lemons is elastic or inelastic to make this determination.

T

Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. T or F

a. demand for wheat is inelastic.

Technological advances in wheat production can lower farmers' total revenue because the a. demand for wheat is inelastic. b. demand for wheat is elastic. c. supply of wheat is elastic. d. supply of wheat is inelastic.

T

The area below the price and above the supply curve measures the producer surplus in a market. T or F

c. more on the middle class than on the rich.

The burden of a luxury tax falls a. more on the rich than on the middle class. b. more on the poor than on the middle class. c. more on the middle class than on the rich. d. equally on the rich, the middle class, and the poor.

T

The demand for Rice Krispies is more elastic than the demand for cereal in general. T or F

F

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years. T or F

c. buyers of salt and the sellers of caviar.

The demand for salt is inelastic and the supply of salt is elastic. The demand for caviar is elastic and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on a. sellers of salt and the buyers of caviar. b. sellers of salt and the sellers of caviar. c. buyers of salt and the sellers of caviar. d. buyers of salt and the buyers of caviar.

T

The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of participating in that market. T or F

F

The flatter the demand curve that passes through a given point, the more inelastic the demand. T or F

F

The incidence of a tax depends on whether the tax is levied on buyers or sellers. T or F

T

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income. T or F

b. only those workers who cannot find jobs.

The minimum wage, if it is binding, lowers the incomes of a. no workers. b. only those workers who cannot find jobs. c. only those workers who have jobs. d. all workers.

c. maximizes the combined welfare of buyers and sellers.

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it a. maximizes costs of the seller. b. maximizes tax revenue for the government. c. maximizes the combined welfare of buyers and sellers. d. minimizes the expenditure of buyers.

T

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good. T or F

d. increases in farm technology and an inelastic demand for food.

There are fewer farmers in the United States today than 200 years ago because of a. more educational opportunities and increases in farm technology. b. increased government regulations in farming and increased farm technology. c. an elastic demand for food and more attractive urban alternatives to farming. d. increases in farm technology and an inelastic demand for food.

a. the demand for motor oil would tend to be inelastic.

There are very few, if any, good substitutes for motor oil. Therefore, a. the demand for motor oil would tend to be inelastic. b. the demand for motor oil would tend to be elastic. c. the demand for motor oil would tend to respond strongly to changes in prices of other goods. d. the supply of motor oil would tend to respond strongly to changes in people's tastes for large cars relative to their tastes for small cars.

c. compare the reduced welfare of buyers and sellers to the amount of revenue the

To fully understand how taxes affect economic well-being, we must a. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed. b. know the dollar amount of all taxes raised in the country each year. c. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises. d. take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and raise revenue for the government.

d. between the demand and supply curves up to the point of equilibrium.

Total surplus in a market is represented by the total area a. under the demand curve and above the price. b. above the supply curve and up to the equilibrium price. c. under price and up to the point of equilibrium. d. between the demand and supply curves up to the point of equilibrium.

d. consumer surplus plus producer surplus plus tax revenue.

Total surplus with a tax is equal to a. consumer surplus plus producer surplus. b. consumer surplus minus producer surplus. c. consumer surplus plus producer surplus minus tax revenue. d. consumer surplus plus producer surplus plus tax revenue.

b. lower rent and lower quality housing.

Under rent control, tenants can expect a. lower rent and higher quality housing. b. lower rent and lower quality housing. c. higher rent and a shortage of rental housing. d. higher rent and a surplus of rental housing.

c. total surplus is maximized.

We can say that the allocation of resources is efficient if a. producer surplus is maximized. b. consumer surplus is maximized. c. total surplus is maximized. d. sellers' costs are minimized.

F

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax. T or F

a. buyers of tea and sellers of tea both are made worse off.

When a tax is imposed on tea and buyers of tea are required to send in the tax payments to the government, a. buyers of tea and sellers of tea both are made worse off. b. buyers of tea are made worse off and the well-being of sellers is unaffected. c. buyers of tea are made worse off and sellers of tea are made better-off. d. the well-being of both buyers of tea and sellers of tea is unaffected.

F

When demand is inelastic, a decrease in price increases total revenue. T or F

b. vertical, because buyers purchase the same amount as before whenever the price rises or falls.

When demand is perfectly inelastic, the demand curve will be a. negatively sloped, because buyers decrease their purchases when the price rises. b. vertical, because buyers purchase the same amount as before whenever the price rises or falls. c. positively sloped, because buyers respond by increasing the market quantity demanded of the good when price rises. d. positively sloped, because buyers respond by increasing their total expenditure on the good when price rises.

a. price no longer serves as a rationing device.

When government imposes a price ceiling or a price floor in a market, a. price no longer serves as a rationing device. b. efficiency in the market is enhanced. c. shortages and surpluses are eliminated. d. buyers and sellers both become better off.

T

When market price increases, producer surplus increases because (1) producer surplus received by existing sellers increases, and (2) new sellers enter the market. T or F

a. elastic and the demand curve will be horizontal.

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly a. elastic and the demand curve will be horizontal. b. inelastic and the demand curve will be horizontal. c. elastic and the demand curve will be vertical. d. inelastic and the demand curve will be vertical.

F

When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent. BYC's price elasticity of supply of knee braces is 0.33. T or F

b. percentage change in quantity demanded of apples divided by percentage change in price of pears

Which of the following expressions represents a cross-price elasticity of demand? a. percentage change in quantity demanded of apples divided by percentage change in quantity supplied of apples b. percentage change in quantity demanded of apples divided by percentage change in price of pears c. percentage change in price of apples divided by percentage change in quantity demanded of apples d. percentage change in quantity demanded of apples divided by percentage change in income

d. higher quality housing

Which of the following is not a result of government-imposed rent control? a. fewer new apartments offered for rent b. less maintenance provided by landlords c. bribery d. higher quality housing

b. A tax burden falls most heavily on the side of the market that is less elastic.

Which of the following is the most correct statement about tax burdens? a. A tax burden falls most heavily on the side of the market that is more elastic. b. A tax burden falls most heavily on the side of the market that is less elastic. c. A tax burden falls most heavily on the side of the market that is closer to unit elastic. d. A tax burden is distributed independently of relative elasticities of supply and demand.

d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.

Which of the following statements does not help to explain why government drug interdiction increases drug-related crime? a. The demand for illegal drugs is inelastic. b. Interdiction results in drug addicts having a greater need for quick cash. c. Interdiction results in an increase in the amount of money needed to buy the same amount of drugs. d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.

d. Consumer surplus will be equal to producer surplus.

Which of the following statements is not correct about a market in equilibrium? a. The price determines which buyers and which sellers participate in the market. b. Those buyers who value the good more than the price choose to buy the good. c. Those sellers whose costs are less than the price choose to produce and sell the good. d. Consumer surplus will be equal to producer surplus.

b. Who actually pays a tax depends on the price elasticities of supply and demand.

Which of the following statements is true? a. A tax levied on buyers will never be even partially paid by sellers. b. Who actually pays a tax depends on the price elasticities of supply and demand. c. Government can decide who actually pays a tax. d. A tax levied on sellers always will be passed on completely to buyers.