Exam 2

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the a. Productive function of government b. Protective function of government c. Construction function of government d. Income redistribution function of government

a

How does the concept of elasticity allow us to improve upon our understanding of supply and demand? a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept b. Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus c. Without elasticity, we would not be able to address the direction in which price is likely to move in response to a shortage d. Without elasticity, it is very difficult to assess the degree of competition within a market

a

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by a. Raising price and reducing output b. Raising price and expanding output c. Lowering price and expanding output d. Raising price and leaving output unchanged

a

If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ______, indicating the demand is ________. a. 2; elastic b. 2; inelastic c. 0.5; elastic d. 0.5, inelastic

a

Kathy works full time during the day as an economist and faces a 90 percent marginal tax rate. If Kathy were to get an offer to work a second job in the evenings doing consulting work for a local business for $10,000 per year, how much of this additional income would be able to keep as net pay after taxes? a. $1,000 b. $4,000 c. $6,000 d. $10,000

a

Other things equal, the demand for a good tends to be more inelastic when a. There are fewer available substitutes b. A longer time period is considered c. The good is considered a luxury good d. The market for the good is more narrowly defined

a

Sally recently got a 15 percent raise. She now purchases 7.5 percent more steak dinners. Sally's income elasticity for steak dinner is a. 0.5 b. 0.75 c. 1.5 d. 2

a

Suppose the Pleasant Snack Corporation cuts the price of its tortilla chips by 10 percent, and as a results the quantity of salsa sold increases by 25 percent. This indicates that the cross price elasticity of demand for chips and salsa is a. 2.5 and are complements b. 0.4 and are complements c. 0.5 and are substitutes d. 5 and is elastic e. Inelastic

a

Which of the following best explains why making air travel completely safe is not efficient? a. After some level of safety is reached, making airplanes even safer is not worth the opportunity cost that would be incurred b. Because one can't put a price on human life, airplane safety generally doesn't matter economically c. The benefit from additional airplane safety will generally rise as airplanes are made safer, more than offsetting the opportunity cost involved d. The question is misleading - making airplanes safer is always efficient

a

A 15 percent increase in the price of beef reduces the quantity of beef consumed by 30 percent. Thus, the demand for beef is ______, and total consumer expenditure (or total firm revenue) will ______ as a result of the price increase. a. Elastic; Increase b. Elastic; Decrease c. Inelastic; Increase d. Inelastic; decrease

b

An increase in the number of students graduating with a major in engineering would result in a. A decrease in the supply of engineers that would decrease the wage of engineers and decreases the number employed b. An increase in the supply of engineers that would decrease the wage of engineers and increase the number employed c. A decrease in the demand for engineers that would decrease the wage of engineers and decrease the number employed d. An increase in the demand for engineers that would increase the wage of engineers and increase the number employed

b

Holding all other factors constant, when the price of gasoline rises, the number of gallows of gasoline demanded would fall substantially over a ten-year period because a. Buyers tend to be much less sensitive to a change in price when given more time to react b. Buyers tend to be much more sensitive to a change in price when given more time to react c. Buyers will have substantially more income over a ten-year period d. The quantity supplied of gasoline increases very little in response to an increase in the price of gasoline

b

If Clark's income increases from $30,000 to $40,000 and his tax liability increases from $6,000 to $10,000, which of the following is true? a. His marginal tax rate is 20 percent in this range b. His average tax rate is 25 percent at his new income level of $40,000 c. He faces a regressive tax in this income range d. He faces a progressive tax in this income range

b

If an economic action generates more costs than benefits, the action a. By definition increases the nation's economic welfare b. Should not be undertaken from an efficiency standpoint c. Should be subsidized by the government in order to make sure that it is undertake d. Is desirable from a public welfare standpoint even though many individuals will be harmed

b

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then: a. Product A is more price elastic than product B b. Product B is more price elastic than product A c. Consumers are more sensitive to price changes in product A than in product B d. Product B is more price inelastic than product A e. Products A and B must be substitutes

b

If the price of apples decrease, total expenditures on apples will decline if a. The demand for apples is inelastic b. The demand for apples is elastic c. The quantity of apples is unresponsive to changes in price d. There are few good substitutes for apples

b

Suppose that a tax is placed on DVDs. If the sellers end up bearing most of the tax burden, this indicates that the a. Demand is more inelastic than supply b. Supply is more inelastic than demand c. Government has required that buyers remit the tax payments d. Government has required that sellers remit the tax payments

b

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the a. Productive function of government b. Protective function of government c. Transfer function of government d. Illegitimate function of government

b

When economists say that an activity meets the criterion for economic efficiency, they mean a. A majority of citizens favor the activity b. The benefits that result from the activity exceeds the costs c. The number of people who gain from the activity exceeds the number of whom costs are imposed d. The costs that result from the activity exceed the benefits

b

Which of the following would tend to increase the price of lumber? a. A technological advance that lowers the cost of cutting timber b. An increase in the demand for newly constructed homes c. A decrease in the demand for wooden rocking chairs d. A decrease in the tax imposed on firms who produce lumber

b

If you were the mayor of a town recently hit by a hurricane or other natural disaster that caused the prices of some goods (like lumber, electric generators, and chainsaws) to increase dramatically, the best way to ensure that there will be an increase in the inflow of these items to your town and that the items will be allocated to their highest valued used would be to a. Impose price ceilings on the items that increase in price. This will ensure that these goods remain affordable and available to everyone b. Pass laws limiting the number of items any single family can purchase. This will allow the existing supply of goods to reach more families c. Let the market prices of these goods rise. This will encourage an inflow of these items into your town, encourage conservation by consumers, and increase the efficiency of their allocation among alternative uses d. Pass a law that makes it illegal for sellers to sell items for more than their cost of production. Profits are a waste of resources during a natural disaster.

c

Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would a. Create a surplus of rental housing b. Promote a rapid increase in the future supply of housing c. Result in poor service and quality deterioration of many rental units d. Lead to a reduction in housing discrimination against minorities

c

Suppose the equilibrium price of a physician examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, a. The demand curve for physicals shifts to the right b. The supply curve for physicals shifts to the left c. The quantity demand of physicals increases and the quantity supplied of physicals decreases d. The number of physicals performed will decrease

c

Tele-Com, Inc., a large cable TV company tested the effect of a price reduction for the Disney Channel. It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled. This means a. Demand curve for the Disney Channel shifted to the right b. Supply curve of the Disney Channel shifted to the left c. Demand for the Disney Channel is elastic in this price range d. Demand for the Disney Channel is inelastic in this price range

c

The demand for salt is a. Inelastic because there are few substitutes for salt and it represents a large percentage of a consumer's budget b. Inelastic because there are many substitutes and it represents a large percentage of a consumer's budget c. Inelastic because there are few substitutes for salt and it represents a small percentage of a consumer's budget d. Elastic because there are no substitutes and it represents a large percentage of a consumer's budget e. Elastic because there are many substitutes for salt and it represents a large percentage of a consumer's budget

c

Which of the following is a major disadvantage of setting the price of a good below equilibrium and using waiting in line rather than price to ration the good? a. Compared to price rationing, waiting in line is unfair since it is easier for those with higher incomes to wait in line b. Waiting in line imposes a cost on the consumer, paying higher prices does not c. Both waiting in line and higher prices are costly to consumers, but unlike the payment of a higher price, waiting in line does not provide suppliers with an incentive to expand future output d. Waiting in line benefits consumers at the expense of producers

c

Which of the following is a true statement regarding the economic impact of a subsidy? a. The distribution of the benefits from a subsidy will depend on whether the subsidy is legally granted to the buyer or seller b. When demand is relatively inelastic, the benefits of a subsidy will mainly accrue to sellers c. When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers d. When demand is relatively elastic, the benefits of a subsidy will mainly accrue to buyers

c

An inferior good is distinguished by a a. Negative price elasticity of demand b. Positive price elasticity of demand c. Positive income elasticity of demand d. Negative income elasticity of demand

d

If Lex's income increases from $30,000 to $40,000 and his tax liability increases from $6,000 to $10,000, which of the following is true? a. His marginal tax rate is 20 percent in this range b. His average tax rate is 40 percent at his new income level of $40,000 c. He faces a regressive tax in this income range d. He faces a progressive tax in this income range

d

If a 20 percent reduction in the price of airline tickets between Chicago and New York leads to a 50 percent increase in the quantity of tickets purchases, the price elasticity of demand for the tickets is a. -0.20 b. -0.40 c. -.50 d. -2.50

d

When a good is more broadly defined, a. The more substitutes it has, so demand will be more price-elastic b. The less substitutes it has, so demand will be more price-elastic c. The more substitutes it has, so demand will be less price- elastic d. The less substitutes it has, so demand will be less price-elastic

d

When competitive forces in an industry are weak, a. The absence of competition generally leads to overproduction b. Prices may exceed the amount consumers are willing to pay c. The operational efficiency of private firms will be enhanced d. Higher prices and less than optimal production may result

d

Which of the following is correct? a. An increase in the number of students choosing to major in marketing would likely lead to an increase in the wage earned by marketing graduates b. A new law allowing nurses to offer patients some of the medical services that are currently only available through doctors would increase the wage rate earned by doctors c. An increase in the demand for newly constructed homes would lead to a reduction in the price of lumber d. New licensing requirements that substantially lowered the number of plumbers would likely lead to an increase in the wage rate of plumbers

d

Which of the following is the most likely explanation for the imposition of a price floor in the market for corn? a. Policy makers have studied the effects of the price floor carefully and they recognize that the price floor will improve the efficiency of resource use b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into enacting the price floor c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor

d

Which of the following describes a situation in which demand must be elastic? a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50 b. The price of pens rises by 10 cents, and total revenue rises c. A 20 percent in crease in the price of pens leads to a 20 percent decrease in the quantity of pens demanded d. Total revenue does not change when the price of pens rises e. Total revenue decreases when the price of pens rises

e