Principles of Economics II Modules 1-11 test

If the price of chocolate-covered peanuts decreases from $1.10 to $0.90 and the quantity demanded does not change, then the price elasticity of demand (using the midpoint method) is:

0

Mountain River Adventures offers whitewater rafting trips down the Colorado River. It costs the firm $100 for the first raft trip per day, $120 for the second, $140 for the third, and $160 for the fourth. If the market price for a raft trip is $150, Mountain River Adventures will offer _____ trips per day and will have producer surplus equal to _____.

3; $90

Assuming that ice cream is a normal good, which statement could cause an increase in the demand for ice cream?

An increase in the price of substitutes for ice cream, such as frozen yogurt

The terms decrease in demand and decrease in quantity demanded can be used interchangeably.

FALSE

"Many economists agree that income taxes should be increased for rich people" is a positive statement.

False

In Colorado, there has been a drought, and rural communities are fighting with urban areas over water. This statement best represents this economic concept:

Resources are scarce.

If demand decreases and supply increases, the direction of change in the equilibrium quantity is unpredictable unless the relative magnitudes of the demand and supply changes are known.

TRUE

If the input costs associated with supplying gasoline increases in Wisconsin, the supply of gasoline will decrease in Wisconsin.

TRUE

In the factor market, firms spend money to buy resources.

TRUE

One way to measure the gain to consumers from a drug that has the potential to reduce obesity is to measure what people are willing to pay for the good and subtract the amount they have to pay.

TRUE

Which statement best describes the price elasticity of demand?

The price elasticity of demand measures the responsiveness of the change in quantity demanded to a change in price.

Which statement will lead to a decrease in total revenue?

The price increases and demand is price-elastic.

The price elasticity of demand for milk has been estimated to be somewhere between 0.49 and 0.63. If a new system of feeding and milking cows yields a 15% increase in the production of milk throughout the country, how will that affect total expenditures on milk, all other things equal?

Total expenditures will fall.

A new wonder diet that results in a dramatic weight loss sweeps through America. The key to the diet is to eat unlimited amounts of red meat (beef) but no poultry or carbohydrate-rich foods. As millions of Americans switch to the new diet, one would expect to see:

a decrease in the demand for poultry, leading to a shift to the left in the demand curve for poultry and lower poultry prices.

Which change is likely to cause a rightward shift in the demand for home-delivered pizza?

a larger population

If the supply and demand curves intersect at a price of $14, then any price below that would result in:

a shortage.

"All other relevant factors remain unchanged" is another way of saying:

all other things equal.

In the market for tacos, you observe that the equilibrium price and quantity have increased. This can be caused only by:

an increase in the incomes of people who eat tacos.

When the United States and Mexico trade:

both Mexico and the United States will be better off.

A farmer finds that when he produces more corn, he also has more corn stalks that he can sell as decorations. To the farmer, corn and corn stalks are:

complements in production.

A Giffen good is one in which the _____ curve is _____ sloped.

demand; positively

A rancher in Oklahoma decides to raise the price of her beef by 19% over the prevailing market price. If the demand for beef is perfectly elastic, this rancher's quantity demanded will:

fall to 0.

The simplest circular-flow model shows the interaction between households and firms. In this model:

firms supply goods and services to households, which in turn supply factors of production to firms.

Greta starts using a new baking technique and she can now do twice as much of everything—in a single day Greta can now make 10 cakes or 8 pies, rather than the 5 cakes and 4 pies she could previously bake. Greta's production possibility frontier:

has shifted right, but her opportunity costs of making pies have not changed.

Because one person's spending is another person's income:

if one group in the economy spends more, the incomes of other groups will increase.

Along a given supply curve, an increase in the price of a good will:

increase producer surplus.

More readily available inputs and a longer period for adjustment to a price change will tend to:

increase the price elasticity of supply.

After a price decrease, the quantity effect tends to:

increase total revenue.

An increase in demand, all other things unchanged, will result in a(n) _____ in equilibrium price and a(n) _____ in equilibrium quantity.

increase; increase

As the population of a city grows, this will cause a(n) _____ in the demand for pizza, and the demand for pizza will shift to the _____.

increase; right

When the absolute value of the percentage change in quantity demanded is less than the absolute value of the percentage change in price, demand is:

inelastic.

It can be predicted the long-run price elasticity of demand of gasoline would be _____ the short-run price elasticity of demand of gasoline.

larger than

Economists create _____ by applying specific assumptions to a set of basic principles.

models

The slope of a typical production possibility frontier is:

negative.

Zoe's grandparents are excited about finally paying off their mortgage, because, as they say, "Our cost of housing is now zero." Zoe should explain to them the economic principle of:

opportunity cost: by living in the house, they are giving up the opportunity to sell the house, buy a smaller one, and pocket the difference.

Assume the supply curve shifts to the right by a given amount at each price. The price in the market will decline the most if demand is more:

price-inelastic and supply is more price-inelastic.

If the quantity demanded of agricultural output is very unresponsive to a fall in price, the demand for agricultural output is:

price-inelastic.

Suppose that the cross-price elasticity of demand for Mountain Dew with respect to the price of Coke is 0.7. This implies that the two goods are:

substitutes.

Margo spends $10,000 on one year's college tuition. The opportunity cost of spending one year in college for Margo is:

whatever she would have purchased with the $10,000 and whatever she would have earned had she not been in college.