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1 HW 2 - Micro - Machiorlatti MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is measured by the price elasticity of supply? 1) A) The price elasticity of supply measures how responsive producers are to changes in the cost of producing a product. B) The price elasticity of supply measures how responsive producers are to changes in the price of other goods. C) The price elasticity of supply measures how responsive producers are to changes in the price of a product. D) The price elasticity of supply is a measure of the slope of the supply curve. E) The price elasticity of supply measures how responsive producers are to changes in income. 2) Using the midpoint method, if the price of an airline ticket from Orlando to Pittsburgh falls from $275 to $238, the percentage change in price is A) percent. B) 1442 percent. C) percent. D) percent. E) percent. 2) 3) If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the income elasticity of demand equals A) 3 and the good is an inferior good B) 1/3 and demand for the good is income elastic. C) 3 and the good is a normal good. D) -3 and the demand for the good is income inelastic. E) -1/3 and the good is an inferior good. 3) 4) Total revenue equals 4) A) cost price. B) price quantity sold. C) quantity sold - cost. D) price. E) profit - cost. 5) If Pepsi goes on sale and decreases its price by 10 percent, and as a result, the quantity demanded of Coca Cola decreases by 5 percent, then Pepsi and Coke are goods. A) substitute B) normal C) inferior D) unrelated E) complementary 5) 1

2 6) When the marginal benefit and marginal cost of sodas are equal, then 6) A) fewer sodas should be produced to reach the allocatively efficient quantity. B) the production of sodas might be allocatively efficient but it is definitely production inefficient. C) the allocatively inefficient amount of sodas is being produced. D) more sodas should be produced to reach the allocatively efficient quantity. E) the allocatively efficient amount of sodas is being produced. 7) If a seller charges a buyer the exact price the buyer is willing to pay, then the buyer would 7) A) receive no consumer surplus from that unit of the good. B) receive the maximum consumer surplus. C) not buy the good. D) receive no benefit from the good. E) suffer a deadweight loss from buying the good. 8) When a product benefits people other than the buyer of the product, the product is said to have 8) A) a subsidized benefit. B) an external cost. C) an excludable benefit. D) an excludable cost. E) an external benefit. 9) Mark loves ice cream. At any point in time, he will buy an additional ice cream cone if 9) A) the marginal benefit from it exceeds the price. B) his willingness to pay is less than the price. C) the marginal benefit from it is zero. D) there is no deadweight loss produced by his purchase of a cone. E) None of the above answers is correct. 10) Any point on the production possibility frontier is 10) A) less production efficient than a point in the interior of the PPF. B) attainable and might be allocatively inefficient. C) always allocatively efficient but might or might not be production efficient. D) always production efficient and always allocatively efficient. E) attainable and must be allocatively efficient. 11) Rent ceilings set below the equilibrium rent i. create a deadweight loss. ii. increase search activity. iii. encourage landlords to charge a high price for new locks and keys, called "key money." A) i, ii, and iii. B) i and ii. C) ii only. D) i and iii. E) i only. 11) 2

3 12) One result of the minimum wage is 12) A) a decrease in unemployment among poor and unskilled workers. B) a black market for labor that pays more than the minimum wage. C) a black market for labor that pays less than the minimum wage. D) decreased job search activity. E) an increase in employment among poor and unskilled workers. 13) In a housing market with a rent ceiling set below the equilibrium rent, as time passes the supply of apartments A) increases while the demand for apartments decreases. B) increases. C) decreases. D) becomes fixed by the government. E) does not change. 13) 14) The figure above shows the labor market in a region. For a minimum wage to change the wage rate and amount of employment, it must be A) set above $6 an hour. B) set at $12 per hour. C) set equal to $6 an hour. D) set below $6 an hour. E) left to the forces of supply and demand. 15) A flawed argument for protection from foreign trade is that i. tariffs save domestic jobs. ii. tariffs protect the national culture. iii. quotas bring about diversity and stability. A) i only. B) ii only. C) i, ii, and iii. D) iii only. E) i and ii. 14) 15) 3

4 16) After a nation starts importing a good from overseas, the domestic price of the good 16) A) rises. B) falls. C) might change, but more information about what else the country imports is needed to determine if the price rises, falls, or does not change. D) might change, but more information about what the country exports is needed to determine if the price rises, falls, or does not change. E) stays the same. 17) U.S. tariffs on Canadian lumber have led to production of lumber within the United States. A) no change in B) making illegal the C) the elimination of D) a decrease in E) an increase in 17) 18) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. Suppose the marginal private cost of the 5th concert is $10,000. Then, for the 5th concert, the marginal A) external cost equals $30,000. B) external cost equals $10,000. C) social cost equals $30,000. D) external cost equals the marginal private cost. E) external cost equals $40, ) 4

5 19) A noisy party that keeps neighbors awake is an example of a 19) A) negative consumption externality. B) positive consumption externality. C) positive production externality. D) negative production externality. E) Both answers B and C are correct. 20) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal benefit. There is no external benefit. If the city of Seattle puts on 5 concerts per year, then the marginal benefit will A) will equal the marginal social cost. B) equal the marginal private cost. C) exceed the marginal social cost. D) be less than the marginal social cost. E) None of the above answers is correct. 20) 5

6 21) The figure above shows the marginal cost and marginal benefit of police protection in the city of Hugo, Oklahoma. Police protection is a public good. If the city of Hugo hires 5 officers, marginal A) benefit exceeds marginal cost, so therefore more officers should be hired. B) benefit exceeds marginal cost, so therefore no more officers should be hired. C) benefit equals marginal cost. D) cost exceeds marginal benefit, so therefore fewer officers should be hired. E) benefit exceeds marginal cost but not by as much as possible, so 5 officers is not the efficient number to be hired. 21) 22) One reason the size of the government is large is because 22) A) voters' incomes grow, thereby causing an increased demand for private goods. B) budget maximization by bureaucrats and rational ignorance by voters lead to overproduction. C) politicians do not support spending on things such as education and public health. D) rational ignorance by politicians who follow the principle of minimum differentiation. E) people's demand for private goods grows faster than their demand for public goods. 23) The cross elasticity of demand 23) A) means that an increase in the price of one good leads to an increase in the price of another good. B) means that an increase in the demand for one good leads to a decrease in demand for another good. C) measures how a change in supply impacts the demand for the good. D) measures how a change in income impacts the demand for the good. E) measures how a change in the price of one good impacts the demand for another good. 24) Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza, the cross elasticity of demand equals A) -2. B) 2. C) 1/2. D) -1/2. E) 4. 24) 6

7 25) Allocative efficiency refers to 25) A) using the least amount of labor to produce output. B) producing at any point on the PPF. C) obtaining the least output with the most inputs. D) producing the goods and services most highly valued. E) producing the maximum possible amount of output. 26) A price ceiling in the market for fuel oil that is below the equilibrium price will 26) A) lead to the quantity supplied of fuel oil exceeding the quantity demanded. B) lead to the quantity demanded of fuel oil exceeding the quantity supplied. C) increase the supply of fuel oil. D) decrease the demand for fuel oil. E) have no effect in the market for fuel oil. 27) If a quota is imposed on imports of shrimp into the United States, U.S. producer surplus from shrimp will and U.S. total surplus from shrimp will. A) decrease; decrease B) increase; decrease C) increase; not change D) increase; increase E) decrease; increase 27) 28) When studying pollution and the environment, economists 28) A) concentrate on the physical aspects of the environment. B) think pollution is good if it occurs when production takes place. C) emphasize costs and benefits. D) attempt to reduce pollution at all costs. E) have no role to play. 29) One way to overcome the tragedy of the commons is to 29) A) take away property rights so that no one owns the resource. B) leave the market alone because the market will reach an equilibrium in which the efficient amount of the resource is used. C) assign property rights so that someone owns the resource. D) educate people in order to overcome the problem of rational ignorance. E) None of the above answers is correct. 30) The price elasticity of demand for wheat is less than one. If a drought caused the supply curve for wheat to shift leftward, then A) wheat farmers' total revenue will increase. B) wheat farmers' total revenue will not change because people will buy the same amount as before. C) wheat farmers' total revenue will decrease D) the demand curve for wheat also will shift leftward. E) wheat farmers' total revenue will probably change but we need information on whether the price of wheat rises or falls. 30) 7

8 31) A marginal cost curve can be the same as the 31) A) supply curve. B) marginal benefit curve. C) deadweight production curve. D) consumer surplus curve. E) producer surplus curve. 32) In a market with a rent ceiling set below the equilibrium rent, the producer and consumer surplus 32) A) do not change. B) are eliminated. C) both decrease but generally not to zero. D) are both totally converted into deadweight loss. E) both increase. 33) A major reason why it is difficult to lower the barriers to free trade is 33) A) that the barriers allow us to compete with cheap foreign labor. B) the uneven distribution of gains and losses from free trade. C) that total benefits are less than total costs from free trade. D) the loss of jobs without any gain of jobs from free trade. E) the inability to compensate losers from free trade. 34) MSB equals 34) A) MC + the marginal external benefit. B) MC + the marginal external cost. C) MB + the marginal external cost. D) MB + MC. E) MB + the marginal external benefit. 35) When two competitors try to make themselves identical, they are 35) A) appealing to rational ignorance. B) trying to appeal to a maximum number of customers. C) carrying out the principle of minimum differentiation. D) Both answers B and C are correct. E) Both answers A and B are correct. 8

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