ECON 2100 (Summer 2016 Sections 10 & 11) Exam #2B

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1 ECON 21 (Summer 216 Sections 1 & 11) Exam #2B Multiple Choice Questions: (3 points each) 1. I am taking of the exam. B. Version B 2. Rent Controls are an example of ; a Minimum Wage is an example of. A. a price ceiling; a price floor. B. a price floor; a price ceiling. C. a price curtain; a price wall. D. a price wall; a price curtain. 3. Consider a market in which the unique efficient level of trade is 12, units. If 9,4 units are traded, then Deadweight Loss A. may be positive or negative (it depends upon how elastic demand and supply are). B. will be positive. C. will be equal to zero. D. will be negative. 4. Suppose that a 1% increase in consumer income leads to a 6% increase in consumption of Good X and a 4% decrease in consumption of Good Y. This observation would imply that Good X is and Good Y is. A. a normal good; a normal good. B. an inferior good; an inferior good. C. a normal good; an inferior good. D. an inferior good; a normal good. 5. Gene pays Caleb $2 to mow his lawn every week. When the government imposes a $4 tax on Caleb s services he increases his price to $23. Gene continues to hire Caleb at this higher price. As a result of this tax, Gene s Consumer s Surplus and Caleb s Producer s Surplus. A. decreases by $7; decreases by $5. B. decreases by $4; does not change. C. decreases by $3; decreases by $1. D. does not change; decreases by $4. 6. My brother manages a city-owned golf course in Wilkes-Barre, PA. He wants to increase the total revenue generated by the golf course in order to more easily cover operating expenses. The mayor suggests that total revenue could be increased by decreasing the price of a round of golf. The parks and recreations manager believes that total revenue could be increased by increasing the price of a round of golf. Based upon this information it appears as if the mayor believes that demand is while the parks and recreations manager believes demand is. A. elastic; unit elastic. B. elastic; inelastic. C. inelastic; unit elastic. D. inelastic; elastic.

2 7. Suppose that the value of Price Elasticity of Supply for pens is 2.5. This value would suggest that a 1% increase in the price of pens would result in supplied A. decreasing by approximately 4%. B. decreasing by approximately 25%. C. increasing by approximately 4%. D. increasing by approximately 25%. 8. Greg, Peter, and Bobby are debating the potential effectiveness of decreasing drinking by imposing higher per unit taxes on alcohol. Greg states that, The most effective way to substantially decrease consumption would be to impose the tax on buyers if supply is very elastic and instead impose the tax on sellers if demand is very elastic. Peter claims that, In terms of discouraging consumption, it doesn t matter if we tax buyers or sellers. In either case a per unit tax of $T would decrease consumption by the exact same amount. Bobby argues that, The only way to reduce consumption would be to tax buyers directly, because if the tax is imposed on sellers it is hidden from buyers and nobody will change their behavior in the marketplace. Based upon our discussion in lecture, A. Bobby s statement is the only correct statement. B. Peter s statement is the only correct statement. C. Greg s statement is the only correct statement. D. None of the statements are correct. 9. When the price of corn is $4, the demanded of corn is 5. If an increase in supply causes the price of corn to drop to $3, Total Consumers Surplus A. increases by less than $5. B. increases by exactly $5. C. increases by more than $5. D. does not change. For questions 1 and 11, consider a firm facing demand given by the linear function illustrated below: price Demand is Unit Elastic at a price of. A. $5. B. $8. C. $12. D. None of the above answers is correct. 11. Which of the following price changes would increase Total Consumer Expenditures on this good? A. Increasing price from $4 up to $6. B. Decreasing price from $7 down to $5. C. Decreasing price from $14 down to $12.

3 12. The Incidence of a Tax refers to A. the difference between the efficient level of trade and the level of trade with the tax in place. B. who bears the burden of a tax in terms of decreased welfare. C. the amount of tax revenue received by the government. D. None of the above answers is correct. 13. Consider demand for DVD s of the movie Farce of the Penguins (directed by the comedic genius Bob Saget) and demand for DVD s (in general). If the price elasticity of demand for DVD s (in general) is 1.374, then it would be reasonable to expect that the price elasticity of demand for DVD s of the movie Farce of the Penguins is: A. less than (i.e., more negative than ) B. also equal to C. somewhere between and zero. D. exactly equal to zero. 14. Consider a market in which there is currently inefficiency from too little trade. Which of the following statements is a correct observation about the current outcome in this market? A. Deadweight Loss is positive at the current level of trade. B. Total Social Surplus could be increased by decreasing the level of trade. C. the efficient level of trade must be infinite. For questions 15 and 16, consider a market with demand and supply as illustrated below: price 6 Supply Demand If a per unit tax of $12 was imposed on sellers in this market, then units of the good would be traded. A. fewer than 16 B. exactly 16 C. more than 16 but fewer than 2 D. more than 2 but fewer than Consider the following two proposed Per Unit Taxes: Tax (A): a $1.5 Per Unit Tax imposed on sellers and Tax (B): a $2.25 Per Unit Tax imposed on buyers. Deadweight Loss would be A. larger under Tax (A) than under Tax (B). B. larger under Tax (B) than under Tax (A). C. of exactly the same magnitude under Tax (A) as under Tax (B). D. None of the above answers are correct (since it is in general not possible to compare outcomes from imposing a tax on buyers to outcomes from imposing a tax on sellers).

4 17. A widespread series of price controls were administered in the United States by the Cost of Living Council in an unsuccessful attempt to combat inflation during the time when was President. A. Bill Clinton B. Jimmy Carter C. Richard Nixon D. Lyndon Johnson 18. Price Elasticity of Demand is A. a measure of the sensitivity of demanded to a change in price, defined as the slope of the demand curve at its flattest point. B. a measure of the sensitivity of demanded to a change in price, defined as the percentage change in demanded divided by the percentage change in price. C. the unique price at which Total Consumer Expenditures on a good are maximized. D. None of the above answers are correct. 19. Imposing a price ceiling will generally A. make all sellers of the good worse off. B. make some buyers of the good better off and some buyers of the good worse off. C. decrease the traded of the good. For questions 2 and 21, consider the two different demand curves illustrated below: price Demand B 18 Demand A 15 Demand A Demand B 2. If the value of Price Elasticity of Demand along Demand B at a price of $18 is 1.23, then the value of Price Elasticity of Demand along Demand A at a price of $18 must A. be less than (i.e., more negative than) B. also be exactly equal to C. be greater than (i.e., closer to zero than) D. None of the above answers are correct, since the above graph does not convey enough information to make this type of comparison. 21. Continue to assume that the value of Price Elasticity of Demand along Demand B is 1.23 at a price of $18. If a drop in price from $18 to $15 were to increase Total Consumer Expenditures by $2,5 along Demand A, then along Demand B a drop in price from $18 to $15 would A. decrease Total Consumer Expenditures. B. increase Total Consumer Expenditures, but by less than $2,5. C. also increase Total Consumer Expenditures by exactly $2,5. D. increase Total Consumer Expenditures, but by even more than $2,5.

5 22. At the efficient level of trade is maximized. A. Total Consumers Surplus. B. Total Producers Surplus. C. Total Consumers Surplus plus Total Producers Surplus. D. Total Consumers Surplus minus Total Producers Surplus. 23. When a per unit tax is imposed on sellers of a good, the area of the relevant graph of supply and demand which represents the tax revenue of the government is a A. circle. B. rectangle. C. triangle. D. trapezoid. For questions 24 through 27, consider a market with demand and supply as illustrated below: price 38 Supply a 26 b f 18 i Demand c g 8 d h e If consumers were given 14 units for free, then Total Consumers Surplus would be equal to A. area (a)+(b). B. areas (a)+(b)+(c)+(d)+(e). C. areas (a)+(b)+(f). D. areas (a)+(b)+(c)+(d)+(f)+(g). 25. The level of trade which maximizes Total Social Surplus in this market is units. A. 92 B. 365 C. 295 D Imposing a price floor of $26 would result in a Deadweight-Loss equal to A. area (i). B. areas (b) (g). C. areas (b)+(f). D. areas (f)+(g). 27. In comparison to the free market outcome, imposing a price ceiling of $8. in this market would: A. increase Total Social Surplus by areas (f)+(g)+(h). B. decrease Total Producers Surplus by areas (c)+(g). C. change Total Consumers Surplus by areas (c) (f).

6 28. Demand will tend to be relatively more elastic A. for necessities (and less elastic for luxuries). B. for goods for which close substitutes are readily available (and less elastic for goods for which no close substitutes are available). C. for items that constitute a small fraction of total budget (and less elastic for items that constitute a large fraction of total budget). D. over short time horizons (and less elastic over longer time horizons). 29. is defined as the difference between the maximum possible level of Total Social Surplus and the realized level of Total Social Surplus. A. Elasticity B. A per unit tax C. The efficient level of trade D. Deadweight loss 3. Madison is contemplating the purchase of a new tennis racket. Her reservation price as a buyer of this item is r b 55. The PGA Superstore is selling tennis rackets for p 6. If Madison buys a tennis racket at The PGA Superstore she would realize a Consumer s Surplus of: A. (55)(6) = 3,3. B = 115. C = 5. D = 5. Answer questions 31 through 33 based upon the estimated values of elasticities stated below: (Price Elasticity of Demand for X ) = 1.33 (Price Elasticity of Demand for Y ) =.92 (Income Elasticity of Demand for X ) =.45 (Income Elasticity of Demand for Y ) =.27 (Cross Price Elasticity of Demand for X with respect to the price of Y ) =.59 (Cross Price Elasticity of Demand for Y with respect to the price of X ) = Based upon the values reported above, we know that A. demand for X violates the Law of Demand. B. demand for X is unit elastic. C. X is a substitute for Y. 32. If consumer income were to increase, then demand for A. both X and Y would increase. B. X would increase but demand for Y would decrease. C. X would decrease but demand for Y would increase. D. both X and Y would decrease. 33. If the price of X were to increase slightly, then Total Consumer Expenditures on X would A. decrease, since demand for X is elastic. B. decrease, since demand for X is inelastic. C. increase, since demand for X is elastic. D. increase, since demand for X is inelastic.

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