Econ Exam CH 5
10) Sharon consumes 10 chocolates when the price of one chocolate is $2. If her arc elasticity of demand for chocolates is -1, she consumes ________ chocolates when the price increases to $4. A) 5 B) 6 C) 8 D) 9
A) 5
11) A change in the slope of a budget constraint indicates: A) a change in the price of either good that causes a change in the opportunity cost. B) a change in the consumerʹs income. C) a change in the price of either good without a change in the opportunity cost. D) a change in the consumerʹs tastes and preferences.
A) a change in the price of either good that causes a change in the opportunity cost.
6) In a perfectly competitive market, all consumers: A) are price takers. B) are price makers. C) have exactly the same demand schedules. D) have exactly the same tastes and preferences
A) are price takers.
1) While making a purchase decision using marginal thinking, a buyer should buy the good that yields the: A) highest marginal benefit per dollar spent. B) lowest marginal benefit per dollar spent. C) highest average benefit plus marginal benefit per dollar spent. D) lowest average benefit plus marginal benefit per dollar spent.
A) highest marginal benefit per dollar spent.
36) As a consumer spends a larger share of his income on a particular good, the price elasticity of demand for that good: A) increases. B) decreases. C) initially decreases then increases. D) remains the same.
A) increases.
6) Higher price elasticity of demand means that a consumerʹs demand is: A) more responsive to price changes. B) less responsive to price changes. C) less responsive to income changes. D) more responsive to income changes.
A) more responsive to price changes.
22) If the value of price elasticity of demand for a good is equal to ʺ∞ʺ, it implies that the good has a ________ demand. A) perfectly elastic B) perfectly inelastic C) unit elastic D) relatively inelastic
A) perfectly elastic
15) If quantity of tea is measured on the horizontal axis and quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause the budget constraint to: A) pivot leftward along the vertical axis. B) pivot rightward along the vertical axis. C) pivot leftward along the horizontal axis. D) pivot rightward along the horizontal axis.
A) pivot leftward along the vertical axis.
5) Negative values of the price elasticity of demand of a good can be attributed to: A) the Law of Demand. B) the Law of Supply. C) the Law of Increasing Marginal Utility. D) the Law of Diminishing Marginal Rate of Substitution.
A) the Law of Demand.
Assume that an individual spends his income on sweaters and shirts. If the price of a sweater increases: A) the opportunity cost of buying sweaters increases. B) the opportunity cost of buying sweaters decreases. C) the opportunity cost of buying shirts increases. D) There is no change in the opportunity cost of consuming either good.
A) the opportunity cost of buying sweaters increases.
43) When the price of one pen is $1.50 notebooks are demanded. When the price per pen increases to $5, the number of notebooks demanded decreases to 30. What is the cross-price elasticity of demand between the two goods using the arc method? A) 0.1 B) -0.375 C) 3 D) -3
B) -0.375
9) When the price of milk is $3 per bottle, Steve purchases 20 bottles of milk. When the price increases to $6, Steveʹs consumption falls to 15 bottles. Steveʹs arc elasticity of demand for milk is: A) -0.25. B) -0.43. C) -0.50. D) -0.75.
B) -0.43.
51) Gary consumes 10,000 units of electricity when his income is $500. When his income increases to $1,000, his consumption of electricity increases to 18,000 units. What is Garyʹs income elasticity of demand for electricity? A) 0.5 B) 0.8 C) 1.8 D) 2
B) 0.8
42) When the price of margarine is $2 per unit, 10 units of butter are demanded. When the price of margarine increases to $6 per unit, 30 units of butter are demanded. What is the cross-price elasticity between the two goods? A) -1 B) 1 C) 2 D) 5
B) 1
41) Which of the following pairs of goods is most likely to have a positive cross‐price elasticity? A) Printers and ink cartridges B) A privately-owned car and public transportation C) Coffee and sugar D) Motorcycles and typewriters
B) A privately-owned car and public transportation
49) Which of the following statements best describes an inferior good? A) An inferior good is a good whose quantity supplied always exceeds the quantity demanded. B) An inferior good is a good whose demand decreases with an increase in consumersʹ income. C) An inferior good is a good that is sold at a subsidized price. D) An inferior good is a good that is rationed by the government.
B) An inferior good is a good whose demand decreases with an increase in consumersʹ income.
1) ________ is the difference between the willingness to pay and the price paid for a good. A) Producer surplus B) Consumer surplus C) Sellerʹs profit D) Revenue
B) Consumer surplus
2) ________ is the measure of the sensitivity of one variable to a change in another. A) Multiplier B) Elasticity C) Amplitude D) Buoyancy
B) Elasticity
52) Which of the following goods is likely to have an income elasticity of demand greater than one? A) Salt B) Gasoline C) Diamond jewelry D) Bread
B) Gasoline
Which of the following correctly describes incentives? A) Incentives refer to the maximum price that a buyer is willing to pay for a good. B) Incentives are rewards or penalties that motivate people to behave in a particular way. C) Incentives are prices that are fixed by the government and not by market forces. D) Incentives refer to the minimum price at which a seller is willing to sell a product.
B) Incentives are rewards or penalties that motivate people to behave in a particular way.
3) Which of the following statements is true? A) Consumersʹ tastes and preferences do not change over time. B) Tastes and preferences of a consumer determine the satisfaction she receives from consumption. C) Tastes and preferences of a consumer are not revealed through her buying decisions and consumption patterns. D) Tastes and preferences of a consumer do not play an important role in arriving at a buying decision.
B) Tastes and preferences of a consumer determine the satisfaction she receives from consumption.
35) Greenaqua Corp. is the only supplier of bottled drinking water in the country Lithasia. Due to the profits the firm enjoys, new corporations are interested in entering the market. If a few more companies producing their own line of bottled drinking water enter the market, which of the following statements will be true about Greenaqua Corp.? A) The profit Greenaqua Corp. earns on their line of bottled drinking water is likely to increase. B) The elasticity of demand of Greenaqua Corp.ʹs product is likely to increase. C) The elasticity of demand of Greenaqua Corp.ʹs product is likely to decrease. D) The elasticity of demand of Greenaqua Corp.ʹs product is likely to remain the same.
B) The elasticity of demand of Greenaqua Corp.ʹs product is likely to increase.
29) Which of the following statements correctly differentiates between the slope of the demand curve and price elasticity of demand along a linear demand curve? A) The price elasticity of demand for a good is the same at different points on the demand curve, whereas the slope of the demand curve varies depending on the point where it is measured. B) The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve. C) The price elasticity of demand is a ratio, whereas the slope of a demand curve is a product. D) The price elasticity of demand is a product, whereas the slope of a demand curve is a ratio.
B) The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve.
16) A budget constraint is a straight line because: A) the tastes and preferences of the consumer change along the constraint. B) a consumer faces a fixed price of both goods that do not change with changes in consumption. C) the opportunity cost of buying each of the goods changes along the constraint. D) a consumer has a limited money income.
B) a consumer faces a fixed price of both goods that do not change with changes in consumption.
6) An optimizing consumer makes her purchase decisions based on: A) the total benefits at various levels of consumption. B) benefits per dollar spent at the margin. C) the total benefits per dollar spent at various levels of consumption. D) the benefits from the first dollar spent on consumption.
B) benefits per dollar spent at the margin.
9) If a consumer purchases any combination of goods and services on his ________, he will exhaust his income completely. A) indifference curve B) budget constraint C) demand schedule D) demand function
B) budget constraint
A buyer is said to be a price taker if she: A) can bargain over the prices of the goods she consumes. B) can purchase any amount of a good at a fixed price provided she has the money to pay for it. C) always pays less than the market-determined price for the goods she is consuming. D) ignores the prices of related goods and considers only the price of the goods she is purchasing.
B) can purchase any amount of a good at a fixed price provided she has the money to pay for it.
53) From a firmʹs point of view, when the demand for a good has a price elasticity of 0.5, then, all things remaining the same, a(n): A) increase in the price of the good will decrease the firmʹs revenue. B) increase in the price of the good will increase the firmʹs revenue. C) change in the price of the good will not affect the firmʹs revenue. D) change in the price of the good will not affect the quantity of the good demanded by consumers.
B) increase in the price of the good will increase the firmʹs revenue.
19) A perfectly elastic demand curve: A) is parallel to the price axis. B) is parallel to the quantity axis. C) slopes upward. D) slopes downward.
B) is parallel to the quantity axis.
1) Willingness to pay: A) is the lowest price that a buyer is willing and able to pay for a unit of good. B) is the highest price that a buyer is willing and able to pay for a unit of good. C) is equal to the price of the lowest-priced goods in a consumption bundle. D) is equal to the price of the highest-priced goods in a consumption bundle.
B) is the highest price that a buyer is willing and able to pay for a unit of good.
17) If quantity of milk is measured on the horizontal axis and quantity of juice is measured on the vertical axis, a decrease in the price of milk will cause the budget constraint to: A) pivot rightward along the vertical axis. B) pivot rightward along the horizontal axis. C) shift to the left. D) shift to the right.
B) pivot rightward along the horizontal axis.
14) A decrease in the price of either good will cause a consumerʹs budget constraint to: A) pivot leftward. B) pivot rightward. C) shift leftward. D) shift rightward.
B) pivot rightward.
13) If the price of the good measured along the vertical axis increases without a change in the price of the good measured along the horizontal axis, the consumerʹs budget constraint: A) pivots rightward without a change in the intercept on the horizontal axis. B) pivots leftward without a change in the intercept on the horizontal axis. C) shifts to the right. D) shifts to the left.
B) pivots leftward without a change in the intercept on the horizontal axis
4) The percentage change in the quantity demanded of a good due to a percentage change in its price is referred to as the: A) price multiplier. B) price elasticity of demand. C) shadow price of the good. D) consumer surplus.
B) price elasticity of demand.
2) John is ready to pay $5 for an extra loaf of bread. Due to an ongoing discount in the store, he gets a loaf for $2. Johnʹs consumer surplus from the purchase is ________. A) $2 B) $2.50 C) $3 D) $10
C) $3
10) Assume that a consumer can spend $20 on two goods-pens and pencils. If the price of one pen is $5 and the price of one pencil is $2, which of the following combinations of the two goods represents a point on the consumers budget constraint? A) 3 pens and 2 pencils B) 1 pen and 10 pencils C) 2 pens and 5 pencils D) 2 pens and 3 pencils
C) 2 pens and 5 pencils
8) Which of the following is the formula to calculate arc elasticity of demand? A) Arc elasticity of demand = [(Q2 - Q1) / (Q2/2)] / [(P2 - P1) / (P2/2)] B) Arc elasticity of demand = [(Q2 + Q1) / (Q2/2)] / [(P2 + P1) / (P2/2)] C) Arc elasticity of demand = [(Q2 - Q1) / (Q2+ Q1)/2] / [(P2 - P1) / (P2 + P1)/2] D) Arc elasticity of demand =[(Q1 - Q2) / (Q2 + Q1)] / [(P1 - P2) / (P2 + P1)]
C) Arc elasticity of demand = [(Q2 - Q1) / (Q2+ Q1)/2] / [(P2 - P1) / (P2 + P1)/2]
3) Which of the following statements correctly differentiates between consumer surplus and net benefits? A) Consumer surplus at different levels of consumption can be calculated arithmetically, whereas net benefits at different levels of consumption cannot be estimated. B) Consumer surplus at different levels of consumption cannot be estimated, whereas net benefits at different levels of consumption can be calculated arithmetically. C) Consumer surplus measures difference between willingness to pay for a good and its price, whereas net benefits measure the overall satisfaction gained from consumption of a good. D) Consumer surplus equals the overall satisfaction gained from consumption of a good, whereas net benefits measure the difference between willingness to pay for a good and its price.
C) Consumer surplus measures difference between willingness to pay for a good and its price, whereas net benefits measure the overall satisfaction gained from consumption of a good.
1) Which of the following is NOT a direct determining factor of consumersʹ purchase decisions? A) Consumersʹ tastes and preferences B) Market price of the finished goods C) Cost of factor inputs D) Consumersʹ income
C) Cost of factor inputs
24) Which of the following best describes a good with perfectly elastic demand? A) For a given price change, the percentage change in quantity demanded will be less than the percentage change in its price. B) The demand curve for the good initially slopes upward, reaches its maximum, and then slopes downward. C) Even the smallest increase in the price of the good will cause consumers to stop consuming it completely. D) The quantity demanded of the good is completely unaffected by a price change.
C) Even the smallest increase in the price of the good will cause consumers to stop consuming it completely.
2) Which of the following statements is true of incentives? A) Incentives can be financial or moral, but not coercive. B) Incentives can be financial or coercive, but not moral. C) Incentives are designed to change behavior. D) Incentives are always in the form of rewards.
C) Incentives are designed to change behavior.
7) An optimizing consumer has to choose between two goods-Good A priced at PA and Good B priced at PB. Given that MBA is the marginal benefit from consuming Good A and MBB is the marginal benefit from consuming Good B, the consumerʹs well-being will be maximized at the point where: A) MBA = MBB. B) MBA/PB=MBB/PA. C) MBA/PA = MBB/PB. D) MBA = MBB/PB
C) MBA/PA = MBB/PB.
23) Sandra consumes two goods-tea and coffee. Her demand for tea is inelastic while her demand for coffee is elastic. If there is an increase in the price of both tea and coffee, ________. A) Sandraʹs expenditure on both tea and coffee is likely to increase B) Sandraʹs revenue on both tea and coffee is likely to decrease C) Sandraʹs expenditure on tea will increase and her expenditure on coffee will decrease D) Sandraʹs expenditure on coffee will increase and her expenditure on tea will decrease
C) Sandraʹs expenditure on tea will increase and her expenditure on coffee will decrease
44) Which of the following statements correctly identifies the difference between the cross-price elasticity of demand and the income elasticity of demand? A) The income elasticity of demand can take only positive values, whereas the cross-price elasticity of demand can take both positive and negative values. B) The cross-price elasticity of demand can take only negative values, whereas the income-elasticity of demand can take both positive and negative values. C) The income elasticity of demand for a good is independent of the price changes of related goods, whereas the cross-price elasticity of demand for a good is independent of the income changes of the consumer. D) The income elasticity of demand for a good is zero for normal goods, whereas the cross-price elasticity of demand for a good is always positive for normal goods.
C) The income elasticity of demand for a good is independent of the price changes of related goods, whereas
47) Which of the following statements is true about the income elasticity of demand? A) The income elasticity of demand for normal goods is always zero. B) The income elasticity of demand for inferior goods is always zero. C) The income elasticity of demand for normal goods is always positive. D) The income elasticity of demand for inferior goods is always positive.
C) The income elasticity of demand for normal goods is always positive.
37) Which of the following statements is true about the price elasticity of demand? A) As the number of substitutes for a product increases, the price elasticity of demand for that good decreases. B) If the budget share of a particular good in a consumerʹs bundle increases, the price elasticity of demand for that good is likely to decrease. C) The price elasticity of demand for a good is generally higher in the long run than in the short run. D) The demand for a good with a price elasticity of demand of zero is highly responsive to price changes.
C) The price elasticity of demand for a good is generally higher in the long run than in the short run.
2) A consumerʹs budget refers to the: A) wealth she has acquired over time. B) prices of the goods she buys. C) amount of money she can spend on various goods and services. D) difference between the consumerʹs income and expenditure.
C) amount of money she can spend on various goods and services.
The set of all possible bundles of goods and services that can be purchased with a consumerʹs income is referred to as the: A) demand set. B) supply set. C) budget set. D) universal set.
C) budget set.
45) Suppose that the government enacts a tax on Good X. In order to estimate the effect of the tax on the quantity demanded of a related good, Good Y, we can use the concept of the: A) price elasticity of demand. B) income elasticity of demand. C) cross-price elasticity of demand. D) cost elasticity of demand.
C) cross-price elasticity of demand.
20) If a 1% change in the price of a good causes a 1% change in the quantity demanded, the good has an elasticity of demand: A) equal to 0. B) less than 1. C) equal to 1. D) greater than 1.
C) equal to 1.
26) At the midpoint of a linear demand curve, the price elasticity of demand is: A) equal to zero. B) between zero and one. C) equal to one. D) greater than one
C) equal to one.
28) At all the points above the midpoint on a linear demand curve, the value of price elasticity of demand is: A) equal to one. B) zero. C) greater than one. D) less than one
C) greater than one.
30) If a good has a price elasticity of demand of -3, it implies that: A) if the income of the consumer increases by 3%, the quantity demanded of that good will increase by 1%. B) if the income of the consumer increases by 1%, the quantity demanded of that good will increase by 3%. C) if the price of the good increases by 1%, the quantity demanded of the good will decrease by 3%. D) if the price of the good increases by 3%, the quantity demanded of the good will increase by 1%.
C) if the price of the good increases by 1%, the quantity demanded of the good will decrease by 3%.
25) In case of a linear negatively sloped demand curve, the price elasticity of demand: A) is zero between any two points on the curve. B) is the same between any two points on the curve. C) is different at different points on the curve. D) is equal to the slope between different points on the demand curve.
C) is different at different points on the curve.
27) At all the points below the midpoint on a linear demand curve, the value of price elasticity of demand is: A) zero. B) greater than one. C) less than one. D) equal to one.
C) less than one.
17) The slope of a budget constraint represents: A) the price of the good measured along the horizontal axis. B) the price of the good measured along the vertical axis. C) the opportunity cost of one good in terms of another. D) the money income of the consumer.
C) the opportunity cost of one good in terms of another.
7) The Law of Demand is the reason behind: A) the price elasticity of demand having a positive value. B) the income elasticity of demand having a positive value. C) the price elasticity of demand having a negative value. D) the income elasticity of demand having a negative value.
C) the price elasticity of demand having a negative value.
The general rule for welfare maximization suggests that in personal equilibrium: A) the ratio of total benefits to price should be identical across all goods. B) the ratio of total benefits to income should be identical across all goods. C) the ratio of marginal benefits to price should be identical across all goods. D) the ratio of marginal benefits to income should be identical across all goods.
C) the ratio of marginal benefits to price should be identical across all goods
5) Which of the following statements is true? A) A price maker is a buyer who can purchase any amount of a good he wants, at a fixed price, if he has the money to pay for it. B) All buyers in a perfectly competitive market are price makers. C) The relative prices of goods do not affect a consumerʹs buying decision. D) A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.
D) A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced.
48) Which of the following statements best describes a normal good? A) A normal good is a good that is rationed by the government. B) A normal good is a good that is readily available in the market. C) A normal good is a good whose supply increases as its price decreases. D) A normal good is a good whose demand increases with an increase in consumersʹ income.
D) A normal good is a good whose demand increases with an increase in consumersʹ income.
16) Which of the following will lead to a change in the opportunity cost of buying a pen and a pencil? A) An increase in the consumerʹs income B) A decrease in the consumerʹs income C) A twofold increase in the prices of both pens and pencils D) A twofold increase in the price of pens and a threefold increase in the price of pencils
D) A twofold increase in the price of pens and a threefold increase in the price of pencils
32) Which of the following goods is likely to have the lowest price elasticity of demand? A) Life-saving drugs B) Potato chips C) Chocolates D) Decorative flowers
D) Decorative flowers
31) Which of the following goods is likely to have the highest price elasticity of demand? A) Salt B) Gasoline C) Life-saving drugs D) Potato chips
D) Potato chips
39) Which of the following statements is true of the cross-price elasticity of demand? A) The cross-price elasticity of demand between substitutes is zero. B) The cross-price elasticity of demand between complements is zero. C) The cross-price elasticity of demand between substitutes is negative. D) The cross-price elasticity of demand between complements is negative.
D) The cross-price elasticity of demand between complements is negative.
4) Suppose the prices of a pair of jeans, a shirt, and a tie are $30, $20, and $10 respectively. Which of the following statements is true in this context? A) The opportunity cost of buying a pair of jeans is 2 ties. B) The opportunity cost of buying a tie is 3 pairs of jeans. C) The opportunity cost of buying a tie is 2 shirts. D) The opportunity cost of buying a shirt is 2 ties
D) The opportunity cost of buying a shirt is 2 ties
1) Which of the following examples best describes the Law of Demand? A) When Alex received a pay hike, his consumption of all goods increased. B) When the price of gasoline increased, the demand for cars fell. C) When the price of Nokia phones increased, the demand for Samsung phones increased. D) When the price of tea increased, the quantity demanded of tea decreased.
D) When the price of tea increased, the quantity demanded of tea decreased.
18) A good is said to have a relatively elastic demand if the value of price elasticity is: A) equal to 0. B) between 0 and 0.5. C) between 0.5 and 1. D) greater than 1.
D) greater than 1.
50) Luxury goods have income elasticity: A) of less than zero. B) between zero and one. C) equal to one. D) greater than one.
D) greater than one.
46) The ________ measures the change in the demand of a good due to a percentage change in the consumerʹs income. A) substitution effect of a price change B) income effect of a price change C) cross-price elasticity of demand D) income elasticity of demand
D) income elasticity of demand
34) As the number of available substitutes increases, the price elasticity of demand for a good: A) initially increases then decreases. B) initially decreases then increases. C) decreases. D) increases
D) increases
33) The price elasticity of demand for a good that is a necessity is likely to be: A) unit elastic. B) perfectly elastic. C) elastic, but not perfectly elastic. D) inelastic.
D) inelastic.
38) The cross-price elasticity of demand for a good is the: A) percentage change in the quantity demanded for a good due to a percentage change in the consumerʹs income. B) percentage change in the quantity demanded for a good due to a percentage change in the goodʹs price. C) percentage change in the quantity demanded for a good due to a percentage change in tax rates. D) percentage change in the quantity demanded for a good due to a percentage change in the price of related goods.
D) percentage change in the quantity demanded for a good due to a percentage change in the price of related goods.
2) As the ________ increases, ________. A) quantity demanded of a good; its price increases B) quantity demanded of a good; its price decreases C) price of a good; its quantity demanded increases D) price of a good; its quantity demanded decreases
D) price of a good; its quantity demanded decreases
21) A consumer has $100 to be spent on tables and chairs. If his income increases to $200, the prices of the goods remaining unchanged, his budget constraint: A) pivots to the left along the vertical axis. B) pivots to the right along the horizontal axis. C) shifts to the left. D) shifts to the right.
D) shifts to the right.
4) If the price of a good increases, ________. A) the budget constraint shifts to the right B) the budget constraint shifts to the left C) the consumer surplus increases D) the consumer surplus decreases
D) the consumer surplus decreases
21) If a good has a price elasticity of demand equal to 0, ________. A) the percentage change in quantity demanded for the good will be greater than the percentage change in its price B) the demand curve of the good is upward sloping C) the smallest increase in its price causes consumers to stop consuming it completely D) the quantity demanded is completely unaffected by a change in its price
D) the quantity demanded is completely unaffected by a change in its price
3) Elasticity is: A) the sum of the percentage change in two variables. B) the difference of the percentage change in two variables. C) the product of the percentage change in two variables. D) the ratio of the percentage change in two variables.
D) the ratio of the percentage change in two variables.