Micro Exam 1

Suppose a university raises its tuition by 6 percent, and as a result the enrollment of students decreases by 3 percent. The absolute value of the price elasticity of demand is

0.5.

(Table 1.3) What is gained by producing at point M rather than point N?

1 comb

If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price elasticity of demand in absolute value is

2

(Table 1.3) What is the opportunity cost of producing at point M rather than point N?

2 brushes

(Figure 20.1) In the $160 to $180 price range, the absolute value of the price elasticity of demand is closest to

5.7.

Suppose movie downloads cost $2 apiece and game downloads cost $4. If the marginal utility of movie downloads at the optimal mix of consumption is 25 utils, what is the marginal utility of a game download?

50 utils

Based on the accompanying figure, how many consumers would you expect the Porsche Spyder to sell to if the dealer used price discrimination? (Assume it costs less than $500,000 to make and sell the car.)

8

Government failure means that government intervention fails to move us closer to our economic goals.

True

The difference between public goods and private goods rests on technical considerations of exclusion of use and not political philosophy.

True

The market tends to underproduce public goods.

True

A Front Page Economics article titled "State Lotteries: A Tax on the Uneducated and the Poor" reports that poor people spend a larger percentage of their income on government-promoted gambling than do rich people. Based on this information, we can conclude that lotteries function as

a regressive tax.

Ceteris paribus, which of the following is most likely to shift both the demand and the supply curves?

expectations

In real terms, the cost of government spending is measured by

the private sector output sacrificed when the government employs scarce resources.

If the elasticity of demand is 3, and the price rises by 15 percent, then

the quantity demanded will fall by 45 percent.

The goal of the consumer in a market economy is to use their limited income to buy

the set of goods and services that maximizes the consumer's total utility.

Total utility is

the sum of the marginal utilities from the consumption of a good.

A monopoly occurs when

there is only one producer of a particular good or service.

(Figure 3.2) If the actual market price were fixed at $6 per unit, then

there would be a shortage of 20 units.

When sellers price discriminate,

they are attempting to charge a price that is the maximum price each individual is willing to pay.

(Figure 20.1) If the price is reduced from $100 to $80, ceteris paribus,

total revenue will decrease.

The optimal mix of output may not be produced by an economy because of the existence of

underproduction of public goods.

In the market for digital cameras, what would we expect to happen if the price of digital cameras rises?

A decrease in the quantity demanded of digital cameras.

Assume that computers are an input into the production of smart watches. In the market for smart watches, what would we expect to happen if the price of computers rises?

A decrease in the supply of smart watches.

Which of the following is the best example of an externality?

A nonsmoker gets sick from secondhand smoke.

Assume that pens and pencils are substitutes. In the market for pens, what would we expect to happen if the price of pencils rises?

An increase in the demand for pens.

In the market for running shoes, what would we expect to happen to equilibrium price and quantity if the number of sellers increases?

Equilibrium price will fall and equilibrium quantity will rise.

Government intervention that fails to improve economic outcomes is known as market failure.

False

State governments receive half of their tax revenue from property taxes.

False

The market mix of output and the optimal mix of output are always the same.

False

Assume Amanda always maximizes her total utility given her budget constraint. Every morning for breakfast she has two eggs and three sausages. If the marginal utility of the last egg is 10 utils and the price of eggs is $1 each, what can we say about the marginal utility of the last sausage if the price of each sausage is $2?

It must be equal to 20 utils.

Which statement is true about price discrimination?

No one is hurt by price discrimination.

Which of the following is an assumption under which the production possibilities curve is drawn?

The supply of resources is fixed.

If a product has a high marginal utility, then

a consumer is willing to pay a high price for it.

Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume?

a decrease in the price of perfume

Ceteris paribus, if the price of a digital camera rises, then we can expect

a decrease in the quantity demanded of digital cameras.

Ceteris paribus, if the subsidies given to corn syrup producers decrease, then we can expect

a decrease in the supply of corn syrup.

Ceteris paribus, lower quantity demanded of a good occurs if there is

a higher price of the good.

Government intervention may be appropriate to correct market outcomes when _______________ exist.

externalities

Which of the following is an example of a public good?

flood control

Opportunity cost may be defined as the

goods or services that are forgone in order to obtain something else.

According to the law of demand, a demand curve

has a negative slope.

Ceteris paribus means

holding everything constant except for the variables you are interested in examining.

Price elasticity looks at

how much the quantity demanded or quantity supplied changes after as a result of a change in price.

As compared to sociologists and psychologists, economists accept consumer tastes as given and instead focus on

how price will affect actual consumer purchases.

Economics can be defined as the study of

how scarce resources are allocated.

Price elasticity of demand refers to

how sensitive buyers are to a change in price.

From an economic standpoint, government intervention may be justified

if the market mechanism fails to achieve the optimal mix of output.

Most federal expenditures are spent on

income transfers.

According to the law of demand, during a given period of time, the quantity of a good demanded

increases as its price falls, ceteris paribus.

Price discrimination

is a way for sellers to elicit the maximum willingness to pay from buyers.

A private good

is consumed by one person and excludes consumption by others.

A public good

is subject to the free-rider dilemma.

The additional pleasure or satisfaction from a good will decline as more of it is consumed in a given period. This is the definition of the

law of diminishing marginal utility.

Price discrimination is ________ in the United States and ________ practiced.

legal; often

Which of the following occurs when the economy experiences inflation?

macro instability

Maximum utility is achieved when

marginal utility is zero.

Any imperfection in the market mechanism that prevents optimal outcomes is known as a(n)

market failure.

A change in demand means there has been a shift in the demand curve, and a change in quantity demanded

means that price has changed and there is movement along the demand curve.

If production in the economy is efficient, then changes in market prices

move us along the edge of the production possibilities curve.

The most desirable combination of output attainable with existing resources, technology, and social values is known as the

optimal mix of output.

The law of diminishing marginal utility suggests that

people are willing to buy additional quantities of a good only if its price falls.

(Figure 20.2) Comparing the price elasticity of demand at points A and C, we can say that

point A has a greater price elasticity of demand in absolute value.

(Figure 4.2) Suppose that point A represents the optimal mix of public and private goods for the society with this production possibilities curve. Which point(s) will reflect what the economy is more likely to produce each year if it produces efficiently?

points B, C, D, and E

When demand is price-inelastic, ceteris paribus, an increase in

price leads to greater total revenue.

Which of the following is not held constant along a given demand curve for a good?

price of the good itself (own price)

As a result of a shortage

producers increase output and raise price.

Governments usually build highways because it is difficult to exclude individuals who don't pay for the highways from using them. What type of market failure is involved?

public goods

Market failure may lead to

public goods being underproduced.

The four specific sources of market failure are

public goods, market power, externalities, and inequity.

Total revenue is

quantity sold times price.

The optimal mix of output is the most desirable combination of output attainable with existing

resources, technology, and social values.

A change in the price of a good

results in a change in quantity supplied.

The demand for normal goods

rises when incomes rise.

Price discrimination occurs when

sellers charge two separate prices for the same product to separate consumers.

An increase in the price of gasoline will

shift the demand curve for gas-guzzling automobiles to the left.

Which of the following industries is unlikely to exhibit price discrimination?

supermarkets

If there is a surplus at a given price, then

that price is greater than the equilibrium price.

Maximum total revenue occurs when

the absolute value of the price elasticity of demand is 1.0.

The opportunity cost of studying for an economics test is

the activity that is the best alternative use of your time.

The marginal utility for a good is computed as

the change in total utility divided by the change in quantity.

Which of the following is not a determinant of demand?

the cost of the factor inputs

If two goods are complementary goods, then

the cross-price elasticity sign will be negative.

A point on a nation's production possibilities curve represents

the full employment of resources to achieve a particular combination of goods and services.

Ceteris paribus, if corn and wheat are alternative pursuits for a farmer, a change in the supply of corn will take place when

the price of wheat changes.

Opportunity cost is

what is given up in order to get something else.

Ceteris paribus, which of the following would generally cause an increase in the demand curve for new automobiles?

an increase in consumers' income

Which of the following is most likely to occur because of an increase in the price of electricity in California?

an increase in electricity imported into California

The "guns versus butter" dilemma that all nations confront is that

an increase in national defense implies more sacrifices of civilian goods and services.

Ceteris paribus, which of the following would you not expect to have an affect on the demand curve for new automobiles?

an increase in the price of new automobiles

Which of the following is likely to have the most inelastic price elasticity of demand?

automobiles

If a price ceiling is to be effective, it should be set

below the equilibrium price and it will create a market shortage.

Which of the following is most likely a private good?

bicycles

Table 1.2 shows the hypothetical trade-off between different combinations of Stealth Bombers and B-1 Bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus.

both B-1 Bombers and Stealth Bombers.

Who participates in markets?

business firms, consumers, and government agencies

Restaurants like to give away free salty peanuts while you wait for your food to encourage you to

buy more beverages.

Suppose Caesar allocates his entire budget to the purchase of soft drinks and chips. The marginal utility of the last bottle of soft drink purchased is 12 utils, and each bottle costs $1.20. The marginal utility of the last bag of chips purchased is 8 utils, and each bag costs $1. In order to maximize his utility, Caesar should

buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks.

In economics, a public good

cannot be denied to consumers who have not paid.

An increase in the price of gasoline above equilibrium will

cause a surplus of gasoline.

When economists refer to the determinants of demand, they are referring to factors that when changed,

cause the demand curve to shift left or right.

Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees demanded will

decrease by 14.3 percent.