Microeconomics: Exam 2

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise $750 per month in revenue from the tax. The deadweight loss from the tax is $____. (enter number without dollar sign)

*125

If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase the quantity supplied of ice cream by 20%, then the price elasticity of supply is

*2

Last year, Shelley bought 6 pairs of designer jeans when her income was $40,000. This year, her income is $60,000, and she purchased 10 pairs of designer jeans. This means when income increased 40%, the quantity of designer jeans demanded by Shelly increased 50%.That means Shelley A. has a low price elasticity of demand for jeans. B. has a high price elasticity of demand for jeans. C. considers designer jeans to be a necessity. D. considers designer jeans to be an normal good. E. considers designer jeans to be a inferior good. F. considers designer jeans to be a giffen good.

*D

Which scenario would result in the greatest reduction in the market quantity, if a tax is introduced? A. Both supply and demand are inelastic B. Supply is inelastic; demand is elastic C. Demand is inelastic; supply is elastic D. Both supply and demand are elastic E. Demand is perfectly inelastic

*D

Suppose that when the price of good X decreases 22%, the quantity demanded of good Y rises increase 44%. Then the cross-price elasticity of demand is A. -.5, and X and Y are complements. B. -.5, and X and Y are substitutes. C. .5, and X and Y are substitutes. D. .5, and X and Y are complements. E. -2.0, and X and Y are complements. F. -2.0, and X and Y are substitutes. G. 2.0, and X and Y are complements. H. 2.0, and X and Y are substitutes.

*E

True or false: If we observe that when consumers' incomes rise by 10%, the quantity demanded of ice cream increases by 5%, then ice cream is an inferior good.

*False

True or false: The cross-price elasticity of demand for bacon and eggs likely would be negative because bacon and eggs are complements for many people.

*True

Demand is elastic if the price elasticity of demand is greater than (input a number, not a word):

1

Elasticity is A. a measure of how much buyers and sellers respond to changes in market conditions. B. the study of how the allocation of resources affects economic well-being. C. the maximum amount that a buyer will pay for a good. D. the value of everything a seller must give up to produce a good. E. how far you can shoot a rubber band.

A

For a good that is a necessity, demand A. tends to be inelastic B. tends to be elastic C. has unit elasticity D. cannot be represented by a demand curve in the usual way E. tends to be free

A

Inefficiency exists in an economy when a good is A. not being consumed by buyers who value it most highly. B. not distributed fairly among buyers. C. not produced because buyers do not value it very highly. D. being produced with less than all available resources.

A

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced? A. They are equal. B. The equilibrium quantity is greater than the socially optimal quantity. C. The equilibrium quantity is less than the socially optimal quantity. D. The equilibrium price is greater than the socially optimal price. E. The equilibrium price is less than the socially optimal price. F. There is not enough information to answer the question.

A

The flatter the demand curve through a given point, the A. greater the price elasticity of demand at that point. B. smaller the price elasticity of demand at that point. C. closer the price elasticity of demand will be to the slope of the curve. D. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve. E. steeper the demand curve will be through a given point.

A

When the price of a good is $5, the quantity demanded is 120 units per month; when the price is $7, the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of demand is about A. 0.55 B. 1.83 C. 2 D. 6.5 E. 10

A

Which of the following is not equal to total surplus? A. consumer surplus - producer surplus B. buyers' willingnesses to pay - sellers' costs C. value to buyers - amount paid by buyers + amount received by sellers - cost to sellers D. value to buyers - cost to sellers E. All of them equal total surplus

A

A price ceiling is A. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. B. a legal maximum on the price at which a good can be sold. C. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. D. All of the above are correct.

B

An FM radio signal is an example of a good that is A. private. B. nonrival in consumption. C. social. D. nonexcludable in production

B

Deadweight loss measures the loss A. in revenue to the government when buyers choose to buy less of the product because of the tax. B. in a market to buyers and sellers that is not offset by an increase in government revenue. C. of total revenue to business firms due to the price wedge caused by the tax. D. of equality in a market due to government intervention. E. all of the above are correct.

B

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. Consumer surplus increases. B. Consumer surplus decreases. C. Consumer surplus 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.

B

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded? A. a 7.5 increase in the price of the good B. a 13.33 percent increase in the price of the good C. an increase in the price of the good from $7.50 to $10 D. an increase in the price of the good from $10 to $17.50 E. The quantity of the good demanded decreases from 250 to 150.

B

When a tax is placed on a product, the price paid by buyers A. rises, and the price received by sellers rises. B. rises, and the price received by sellers falls. C. falls, and the price received by sellers rises. D. falls, and the price received by sellers falls.

B

A Little Debbie Swiss Cake Roll is what type of good? A. Public good B. Common Resources C. Private good D. Luxury good E. Club good

C

An externality is an example of A. a corrective tax. B. a tradable pollution permit. C. a market failure. D. Both a and b are correct.

C

If the current allocation of resources in the market for hammers is inefficient, then it must be the case that A. producer surplus exceeds consumer surplus in the market for hammers. B. consumer surplus exceeds producer surplus in the market for hammers. C. the sum of consumer surplus and producer surplus could be increased by moving to a different allocation of resources. D. the costs that sellers of hammers are incurring could be reduced by moving to a different allocation of resources. E. Everybody loves hammers!

C

In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that A. OPEC raised the price of crude oil in world markets. B. U.S. gasoline producers raised the price of gasoline. C. the U.S. government maintained a price ceiling on gasoline. D. Americans typically commuted long distances.

C

Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because A. with rent control, the government guarantees landlords a minimum level of profit. B. they become resigned to the fact that many of their apartments are going to be vacant at any given time. C. with shortages and waiting lists, they have no incentive to maintain and improve their property. D. with rent control, it becomes the government's responsibility to maintain rental housing.

C

When externalities are present in a market, the well-being of market participants A. and market bystanders are both directly affected. B. and market bystanders are both indirectly affected. C. is directly affected, and market bystanders are indirectly affected. D. is indirectly affected, and market bystanders are directly affected.

C

Which of the following is true of markets characterized by positive externalities? A. Social value exceeds private value, and market quantity exceeds the socially optimal quantity. B. Social value is less than private value, and market quantity exceeds the socially optimal quantity. C. Social value exceeds private value, and market quantity is less than the socially optimal quantity. D. Social value seldom exceeds private value; therefore, social quantity is less than private quantity. E. Social value is less than private value, and market quantity is less than the socially optimal quantity.

C

Given: Good Price Elasticity of Demand A 1.3 B 2.1 Which of the following is consistent with the elasticities given: A. A is a luxury, and B is a necessity. B. A is a good several years after a price increase, and B is that same good several days after the price increase. C. A is a Kit Kat bar, and B is candy. D. A has fewer substitutes than B. E. A is an inferior good.

D

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Since the benefit that each citizen receives from having an educated community is a public good, which of the following would NOT be correct? A. The free-rider problem causes the private market to undersupply education to the community. B. The government can potentially help the market reach a socially optimal level of education. C. A tax increase to pay for education could potentially make the community better off. D. The private market is the best way to supply education.

D

When studying how some event or policy affects a market, elasticity provides information on the A. government expenditures associated with the policy. B. costs and benefits of the effect. C. allocative efficiency of the effect. D. direction and magnitude of the effect. E. all of the above

D

Which of the following is likely to have the most price inelastic demand? A. Addias basketballs B. Hot chocolate C. Diamond ring D. Myozyme (Medication for Pompe disease) E. Levi's jeans

D