Week 2 Knowledge Check

The accompany graph depicts demand. At point A, demand is

elastic

When the price of NBA tickets is $25 each, 30,000 tickets are sold. After the price rises to $30 each, 20,000 tickets are sold. At the original price, the demand for NBA tickets is:

elastic

Refer to the accompanying figure. At P=8 and Q=4, D1 is _______ elastic than D2, which is shown graphically as D1 being ______ D2.

less ; steeper than

Demand tends to be _______ in the short run than in the long run.

less elastic

Jeans in general have fewer close substitutes than any specific brand of jeans. Therefore, the demand for jeans in general would be _______ than the demand for a specific brand of jeans.

less elastic

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ________ lead to the most efficient allocation of resources.

often

If consumers completely cease purchasing a product when its price increases by any amount, the demand is:

perfectly elastic

If the demand curve for open-heart surgery is vertical for people with serious heart conditions, then the demand for open-heart surgery is ______ with respect to price.

perfectly inelastic

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that:

positive economic profit is only possible in the short run.

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the _________ function of price

rationing

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If S3 is the market supply curve, then each firm in this market will earn an economic loss of ________ each week.

$2,000

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:

0.5

The accompanying graph depicts demand. The slope of the demand curve (ignoring the negative sign) is:

0.5 = 1/2

The accompanying graph depicts demand. The price elasticity of demand at point B is:

4/3

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the long run, there will be ________ firms in this market.

10

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If S3 is the market supply curve, then in the short run, the profit-maximizing level of output for a single firm in this market is _____ gallons per week.

200

If 20 percent increase in price of a good leads to a 60 percent decrease in the quantity demanded, then what is the price elasticity of demand?

3

The accompanying graph depicts demand. The price elasticity of demand at point A is:

5/2

Which of the following best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand curve would shift to the right leading to:

a higher equilibrium price in the short run and entry into the market in the long run.

The supplier of a factor of production has a reservation price of $100. The purchaser of the factor of production has a reservation price of $200. If the factor of production is unique then:

a transaction will occur, and the price paid for the factor of production will be $200.

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the _________ function of price.

allocative

The allocative function of price cannot operate unless there is:

both free entry and free exit.

In an industry with free entry and exit, positive economic profit:

cannot be sustained indefinitely

The allocative function of price is to:

direct resources away from markets that are overcrowded and towards markets that are underserved.

In a free market economy, the decisions of buyers and sellers are:

guided by prices.

All else equal, compared to small-budget items such as paper towels, the price elasticity of demand on big-ticket items such as refrigerators is:

higher

Suppose the company that owns the vending machines on your campus has doubled the price of a can of soda. They then notice that they are selling approximately 15 percent fewer sodas. The price elasticity of demand for sodas from the campus vending machines, therefore, is:

inelastic

Assume the price of gasoline doubles tonight and remains at the price for the next two years. Compared with the long-run elasticity of demand for gasoline, the short-run price elasticity for demand for gasoline will be _________.

lower

If the firms in a market are earning an economic profit, then in the long run, the market _______ curve will shift to the _________.

supply ; right

If all firms in a perfectly competitive industry earn a normal profit, then

there is no incentive for firms to enter or exit the industry.