Study set Micro Test (Chapters 1-7)
Your roommate just bought a used iPad mini for $200. She would have been willing to pay $500 for a device that could store and replay that much music and movies. How much consumer surplus does your roommate enjoy from the iPad?
$300
After a public information campaign highlighting that bacteria spreads disease, will the demand curve for hand sanitizer be more elastic or more inelastic?
More inelastic
What effect do wage subsidies have on employment?
Wage subsidies increase employment
When will people search harder for substitutes for cotton?
When the price of cotton is high
One question that economics students often ask is "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question: "Everyone" and "No one." What is meant by "Everyone?"
"In a market with many participants, each person's actions push the supply or the demand just a little bit, so everyone has some small influence."
When the price of a good increases the quantity demanded ____
Decreases
The price you pay for a security system for your home
Private costs
If the market price is above the equilibrium price, this creates ___________. Pic
A surplus
When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?
$40
Germain is an economist. He loves being an economist so much that he would do it for a living even if he only earned $35,000 per year. Instead, he earns $85,000 per year. (Note: This is the average salary of new economists with a Ph.D. degree as of 2020) How much producer surplus does Germain enjoy?
$50,000
The long-run elasticity of oil demand has been estimated at -0.5. If the price of oil rises by 10%, how much will the quantity of oil demanded fall?
5%
What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?
A fall in supply
What's the best way to think about the rise in oil prices in the last 10 years, as China and India have become richer?
A rise in demand
If the market price is above the equilibrium price, this creates ___________. pic
A surplus
Consider the following figure for the total demand for LED TVs. Copy the figure electronically or by hand, then answer the following questions, drawing on the figure if the question requires it. pic a. If the price for a 60-inch LED TV is $500, and Newhart is willing to pay $3,000, what is Newhart's consumer surplus? b. At $500 per TV, 1,200 TVs were demanded. What would be the total consumer surplus? Calculate the total, and identify it on the diagram. c. Where is Newhart in the figure? Indicate him on the figure.
A) $3000 - $500 = $2500 B) Total consumer surplus = (1/2) * 1200 * (5000 - 500) = $2.7 million C)
a. If a tax of $2 were imposed, what price would buyers pay and what price would suppliers receive? How much revenue would be raised by the tax? How much deadweight loss would be created by the tax? b. If a subsidy of $5 were imposed, what price would buyers pay and what price would suppliers receive? How much would the subsidy cost the government? How much deadweight loss would be created by the subsidy? Pic
A) pic B) pic
Andy enters in a futures contract allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much did Andy make or lose?
Andy made $250,000.
Fill in the blanks: When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _________the activity that is taxed and will tend to gravitate ________ activity that is not taxed.
Away from; toward
You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?
Bermuda shorts
We saw that a gun buyback program was unlikely to work in Washington, D.C. If the entire United States ran a gun buyback program, would that be better at eliminating guns or worse? (Hint: Is the supply of guns at a national level more elastic or more inelastic?)
Better
How does a free market eliminate a shortage? (Hint: Draw the supply and demand curves for a shortage.)
By letting the price rise.
Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?
Consumer surplus decreases.
If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? Though there are several solutions to this problem, only one of the options below is correct.
Create gasoline rations.
Which of the following two goods is more likely to be inelastically demanded?
Demand for fruit
Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars cheap to make, and he passed some of the savings to the consumer in the form of low prices. Cars became common in the United States thereafter. Keeping total revenue and its relationship with price in mind, do you expect the demand for cars to be elastic or inelastic given the story of Henry Ford?
Elastic
In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, should you hope that demand for apartments is elastic or inelastic? (hint: graphing this situation helps to answer this question)
Elastic
Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. The research is unclear on this--it's very likely that "junk food" is supplying energy more efficiently (for lower cost) and therefore is, economically, a rational choice for those who are sensitive to food prices. However, suppose that the state of New York isn't aware of this research and imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?
Elastic
If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:
Elastic supply and elastic demand
If housing developers started to build lots of residential buildings in your college town, would they prefer demand for apartments is elastic or inelastic? (Hint: Revenue = Price * Quantity)
Elastic.
Trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. Even though bumper stickers complaining about losing domestic jobs to globalization are common, you are very unlikely to ever encounter bumper stickers that say things like "Out of money yet? Keep taxing foreign sugar!" or "Hungry? It's probably because domestic sugar is so expensive!" Why?
Even doubled, the price increase of sugar per person is small compared to the cost of other food items.
The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms
External benefits
The supply curve for rice in Japan slopes upward, just like any normal supply curve. If Japan eliminated its trade barriers to rice, what would happen to the number of workers employed in the rice-producing industry in Japan: Would it rise or fall?
Fall
Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curve has a negative slope while supply curves have appositive slope), if there is a tax, the equilibrium quantity must _______ and the price that sellers receive must _______.
Fall; fall
Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curves have a negative slope while supply curves have a positive slope), if there is a tax, the equilibrium quantity must _______ and the price that buyers pay must _______.
Fall; rise
If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?
Fewer people will be covered because health insurance companies will supply less.
In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don't pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?
From the low-cost South to the high-tax North.
In 1993, then President Clinton passed a law raising income taxes. This tax hike was fully expected: He campaigned on it in 1992. What do you expect happened to executive income in the first year of the tax increases? What about in subsequent years? (Hint: Top executives have a lot of power over when they get paid for their work: They can ask for bonuses a bit earlier, or they can cash out their stock options a bit earlier. Literally, this isn't their "labor supply," it's more like their "income supply.")
In the first year income will decrease; in the long run it will remain nearly the same.
Fill in the blanks: Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.
Increase; decrease
If the Oklakansas government wants to strongly discourage people from watching too much TikTok, when will it need to set a higher tax-per-screen-minute rate: When demand for streaming TikTok is elastic or when it is inelastic?
Inelastic
If thousands of apartments are condemned in your college town, do landlords hope price for apartments is elastic or inelastic? (Hint: Revenue = Price * Quantity)
Inelastic.
Select the ways in which international trade similar to domestic trade.
International trade increases productivity through specialization and the division of knowledge. International trade makes people better off when preferences differ. Trade increases productivity through comparative advantage.
What does it mean that elasticity equals escape? (This is worth remembering: Elasticity is one of the toughest ideas for most economics students.)
It is easy for market participants to escape to another market if they have elastic demand or supply
One way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries?
It is elastic
Along a supply curve, if the price of cotton falls, what will happen to the quantity of cotton supplied?
It will decrease
Antibiotics are often given to people with colds (even though they are not useful for that purpose), but they are also used to treat life-threatening infections. If there was a price control on antibiotics, what do you think would happen to the allocation of antibiotics across these two uses?
It would go to a mix of the two.
The Japanese people currently pay about four times the world price for rice because of trade barriers. Who is more likely to make a greater effort lobbying for or against a reduction in trade barriers?
Japanese rice farmers.
Fill in the blank: The process of market creation is most similar to the creation of a country's __________.
Language
How are rent controls related to building collapses in India?
Low rent means landlords may not take in enough revenue to fund repairs.
Airline regulation of the 1970s produced a similar result to which of the following government interventions?
Minimum wage laws
2020 saw a huge shift towards remote work for certain kinds of jobs. After more employers allow employees to work remotely, will the demand curve for cars be more elastic or more inelastic?
More elastic
During the Middle Ages, the African city of Taghaza quarried salt in 200-pound blocks to be sent to the salt market in Timbuktu, in present-day Mali. Travelers report that Taghazans used salt instead of wood to construct buildings. Compared with other towns without big salt mines, was the demand for wood more elastic or more inelastic in Taghaza?
More elastic
If a new process for manufacturing diamonds is created, will the supply curve for diamonds become more elastic or more inelastic?
More elastic
If pesticides and fertilizers are banned, will the supply curve for food become more elastic or more inelastic?
More inelastic
NIMBY means "Not In My Backyard," and it refers to current residents of a town that use local political obstacles like restrictive zoning to keep out new residents. What is the economic incentive for NIMBYs to restrict the housing supply of their city?
Real estate prices tend to increase when housing supply is kept unnaturally low.
If a nation's government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy? (Hint: Steven Davis and John Haltiwanger. 1999. "Gross Job Flows." In Handbook of Labor Economics (Amsterdam: North-Holland) found than in the United States, 60% of the increase in U.S. manufacturing efficiency was caused by people moving from weak firms to strong firms.)
Poorer.
When demand for kidneys decreases, what happens to the price and quantity of kidneys in equilibrium?
Price and quantity both decrease
When demand for server space to host TikTok videos increases, what happens to the price and quantity of server space to host TikTok videos in equilibrium?
Price and quantity both increase
When the supply of digital news articles increases, what happens to the price and quantity of digital news articles in equilibrium?
Price decreases and quantity increases
When the supply of self-published books decreases, what happens to the price and quantity of self-published books in equilibrium?
Price increases and quantity decreases
Two major-party presidential candidates are running against each other in the 2026 election. The Democratic Party candidate promises more money for corn-based ethanol research and the Republican Party candidate promises more money for defense contractors. In the weeks before the election, defense stocks take a nosedive. Who is probably going to win the election: the pro-ethanol candidate or the pro-defense spending candidate?
Pro-ethanol research, or the Democratic Party, candidate
When the price for a good or service is above the equilibrium price, self-interested behavior tends to ________
Push the price down
Suppose a benevolent dictator promises her citizens that no one will ever starve because she will enforce a strict low price on bread. With these price controls on bread, would you expect bread quality to rise or fall?
Quality falls
When the supply of circuitboards falls, what happens to the quantity of circuitboards demanded in equilibrium?
Quantity demanded decreases
When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied? (Hint: Graph it!)
Quantity demanded.
Suppose the elasticity of demand is 1.1. Is the demand curve relatively steep or flat? Will a fall in price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
Relatively flat; raise total revenue
Suppose the elasticity of demand is 2.0. Is the demand curve relatively steep or flat? Will a fall in price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
Relatively flat; raise total revenue
Suppose the elasticity of demand is 0.2. Is the demand curve relatively steep or flat? Will a fall in price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
Relatively steep; lower total revenue
Suppose the elasticity of demand is 0.9. Is the demand curve relatively steep or flat? Will a fall in price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
Relatively steep; lower total revenue
In the following figure, how many pounds of sugar are sellers willing to sell at a price of $20? How much is demanded at this price? What is the buyer's willingness to pay when the quantity is 20 pounds? Is this combination of $20 per pound and a quantity of 20 pounds an equilibrium? If not, graphically identify the unexploited gains from trade. Pic
Sellers are willing to sell 20 lbs of sugar at $20 per pound. Consumers are willing to buy 40 lbs of sugar at $20 per pound. Buyers are willing to pay up to $45 per pound for 20 lbs of sugar. ($20 per pound, 20 lbs) is not an equilibrium. Not an equilibrium. Graphical unexploited gains from trade: Pic
Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, then President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much money did speculators lose or make on each barrel?
Speculators lost $16 per barrel.
Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?
Supply curve will decrease, that is, a shift to the left (up).
Do taxes usually increase the supply of a good or service, or reduce the supply of a good or service?
Taxes reduce the supply of the good or service
Which one of the following options is a real life example of a wage subsidy?
The Earned Income Tax Credit
When the price of Apple computers goes down, what probably happens to the demand for Linux-based computers?
The demand for Linux-based computers decreases
Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing: perhaps a new device about the size of a washing machine can bleach, re-weave, and re-dye cotton fabric to closely imitate any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as the "market for new clothing," does this shift the demand or the supply of clothing, and in which direction?
The demand for clothing shifts left: a fall in demand
When the price of peanut oil goes up, what probably happens to the demand for corn oil?
The demand for corn oil increases.
When the price of petroleum goes up, what probably happens to the demand for natural gas?
The demand for natural gas increases
What should happen to the 'demand for speed' (measured by the average speed on highways) once airbags are included on cars?
The demand for speed increases
If everyone thinks that the price of the XBox Series X will go up next week, what is likely to happen to demand for the XBox Series X today?
The demand for the XBox Series X increases
In 1980, University of Maryland, Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people would find good substitutes, just as earlier people developed iron as a substitute for scarce bronze. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. What does the falling price tell us about the relative scarcity of these metals?
The falling price indicates that the metals are less scarce than they were before.
The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?
The impact on quantities
Suppose that drug addicts pay for their addiction by stealing: So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic?
The overall amount of stealing will decrease
Throughout our discussion of taxation, we've acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let's think about what kind of taxes are easiest to collect, just based on the basic ideas we've covered. Who will make the most effort to escape a tax?
The party who is inelastic
Let's apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your significant other live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?
The person with more inelastic demand for the relationship will bear the tax: they will do most of the driving.
Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?
The price of laptops decreases.
If oil executives read in the newspaper that new wind-power technologies have been discovered but will likely only become useful in 10 years, what is the likely equilibrium impact on the price and quantity of oil today?
The price of oil will decrease, the quantity of oil will increase
f the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?
The quantity demanded decreases by 2%
Imagine that a technological innovation reduces the costs of producing high-quality aluminum. What happens to the supply of aluminum?
The supply of aluminum increases
If you instead think of the "market for clothing" as the "market for clothing, whether it's new or used," does this shift the demand or supply of clothing, and in which direction?
The supply of clothing shifts right: a rise in supply.
Brooklyn was a relatively dangerous place to work in the 1980s. Over the last two decades, Brooklyn has become a safer place to work (although there are still more violent crimes per person in this area compared with another NYC neighborhood, Greenwich Village). When an area becomes a safer place to work, what probably happens to the 'supply of labor' in that area?
The supply of labor increases
If oil executives read in the newspaper that massive new oil supplies have been discovered in a shale formation in the Yukon but will likely only be useful in 10 years, what is likely to happen to the supply of oil today?
The supply of oil will rise today
Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?
There was no price control on gasoline at the time.
Which job exists in part because time-sensitive wealthy individuals want to pay someone else to wait in line for them?
Ticket scalpers
What effect do wage subsidies have on the demand for welfare payments?
Wage subsidies decrease the demand for welfare payments
Fill in the blanks: When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate __________ the activity that is subsidized and will tend to gravitate ___________ activity that is not subsidized.
Toward; away from
President Jimmy Carter didn't just deregulate airline prices. He also deregulated much of the trucking industry, as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation?
Trucking salaries decreased & Trucking companies increased
Some people argue for protectionism by pointing out that other countries with whom we trade engage in "unfair trade practices," and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. China, for example, subsidizes its steel industry. Who is hurt by this subsidy?
US steel producers
Sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops do so because their land isn't all that great for sugar production. If we translate this into the language of the supply curve, where would these sugar farmers be on the supply curve?
Upper-right
Let's calculate the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the following data to calculate the lost gains from trade, just as in Figure 8.3 from the textbook. Supply and demand are straight lines. Show your work. pic a. What is the total value of wasted time in the price-controlled market? b. What is the value of the lost gains from trade? c. Note that we haven't given you the original market price of simple bicycles—why don't you need to know it? (Hint: The answer is a mix of geometry and economics.)
a. (refer to the book, Fig 8.2) The total value of wasted time is the area of the rectangle between prices P = $80 and $30, and quantities = 0 and 100. So base = 100, height = 80 - 30 = 50. The area is b*h=$50 per bicycle*100 bicycles = $5000. b. (refer to the book, Fig 8.3) The total value of lost gains from trade is the area of the triangle with base = $80 - $300 = $50 and height = 200 - 100 = 100. That area is 1/2 b*h=1/2 $50 per bicycle*100 bicycles = $2500 c. We just need to know the quantity supplied under the price control, which is the intersection of the horizontal dashed line drawn from the controlled price and the supply curve, and the willingness to pay at that quantity, which is given by the intersection of a vertical dashed line drawn from the quantity supplied and the demand curve, and the equilibrium quantity. This is all we need to calculate the base and height for (a) and (b).
Suppose that 200,000 Uber trips are taken every day in New York City and suppose that the elasticity of demand for an Uber trip is -0.5. If the price increased by 10% how many Uber trips would be taken in a day? Show your work.
pic