Basic Economics Test #1 Study Guide

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1 Basic Economics Test #1 Study Guide Note: Below is a list of study questions for the upcoming Test #1. The test covers Ch. 4, 5, 6, 7 and 8 of the (Mankiw) textbook and supplementary materials presented in class/website and during in-class participation exercises. Please answer the questions (all of them or as many as you can) as a way of preparing for your test. Many of the study questions here will appear in the test. (Some of them could also appear in a slightly different format than shown here.) Since you don t know which ones will be in the test, it would be a good idea to answer all of them. Please don t ask me for the answers although you can ask me for a clarification of a question. Also, there could be some other questions on the test that are not found on this list. Not all questions in the study guide or the test can be answered using the handouts only. You might also need to refer to the (Mankiw) textbook. The best way to use this study guide is to try to answer all the questions as best as you can on your own and then compare your answers with those of your classmates. Then discuss why your answers are different so that you learn the reason why. Form a study group if you can. Prof. Rudy Ledesma. Instructions: This test is closed notes, closed book, meaning you are not allowed to use your notes or your book. No mobile phones, tablets or computers allowed. No sharing of pens, pencils, erasers or other items allowed during the test. Bring your own. Bring a dedicated calculator with you, your own. No sharing of calculator allowed. On the multiple choice questions, circle the correct answer. There is only one correct answer in each question. If during the test you have more than one answer or if you choose not to answer it will be marked wrong. On the multiple choice questions, circle the letter of the best (only one) answer. Ch Assume the market for tennis balls is perfectly competitive. When one tennis ball producer exits the market, a. the (equilibrium) price of tennis balls increases. b. the price of tennis balls decreases. c. the price of tennis balls does not change. d. there is no longer a market for tennis balls. 2. A movement upward and to the left along the same demand curve is called a(n) a. increase in demand. b. decrease in demand. c. decrease in quantity demanded. d. increase in quantity demanded. 3. Which of the following demonstrates the law of demand? a. After Jon got a raise at work, he bought more pretzels at $1.50 per pretzel than he did before his raise. b. Melissa buys fewer muffins at $0.75 per muffin than at $1 per muffin, other things equal. c. Dave buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal. d. Kendra buys fewer Snickers at $0.60 per Snickers after the price of Milky Ways falls to $0.50 per Milky Way. 4. The market demand curve a. is found by vertically adding the individual demand curves. b. slopes upward. c. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good. d. represents the sum of the quantities demanded by all the buyers at each price of the good. 5. When quantity demanded has increased at every price, it might be because a. the number of buyers in the market has decreased. b. income has increased, and the good is an inferior good. c. the costs incurred by sellers producing the good have decreased. d. the price of a complementary good has decreased. 6. A movement along the supply curve might be caused by a change in a. production technology. b. input prices. c. expectations about future prices. d. the price of the good or service that is being supplied. 1

2 Table 4-1 Price Quantity Demanded by Michelle Quantity Demanded by Laura Quantity Demanded by Hillary $ $ $ $ $ $ Refer to Table 4-1. If the market consists of Michelle, Laura, and Hillary and the price falls by $1, the quantity demanded in the market a. decreases by 2 units. b. increases by 3 units. c. decreases by 4 units. d. increases by 5 units. e. decreases by 5 units 8. Wheat is the main input in the production of flour. If the price of wheat decreases, then we would expect the a. demand for flour to increase. b. demand for flour to decrease. c. supply of flour to increase. d. supply of flour to decrease. 9. If suppliers expect the price of their product to fall in the future, then they will a. decrease supply now (or today). b. increase supply now (or today). c. decrease supply in the future but not now (or today). d. increase supply in the future but not now (or today). 10. Which of the following is a determinant of the market supply curve but not a determinant of an individual seller s supply? a. production technology b. expectations c. input prices d. the number of sellers 11. Equilibrium price must decrease when demand a. increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously. b. increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously. c. decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously. d. decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously. 12. When supply and demand both increase, equilibrium a. price will increase. b. price will decrease. c. quantity may increase, decrease, or remain unchanged. d. price may increase, decrease, or remain unchanged. Ch The greater the price elasticity of demand, the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to a change in price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to a change in price. 2

3 14. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of a. changes in total revenue in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market (whether broad or narrow) in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. 15. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases a new home only 10 miles from her place of employment. These examples illustrate the importance of a. the availability of substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market (whether broad or narrow) in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. 16. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. 17. Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit. 18. Which of the following is likely to have the most price elastic demand? a. clothing b. blue jeans c. Tommy Hilfiger jeans d. All three would have the same elasticity of demand because they are all related. 19. Demand is elastic if the price elasticity of demand is a. less than 1. b. equal to 1. c. equal to 0. d. greater than Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers total expenditure (total revenue) on the good is unchanged. 21. The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing (maximizing) revenue, she should a. lower the price of the cinnamon rolls. b. leave the price of the cinnamon rolls unchanged. c. raise the price of the cinnamon rolls. d. reduce costs. 22. In which of the following situations will total revenue increase? a. Price elasticity of demand is 1.2, and the price of the good decreases. b. Price elasticity of demand is 0.5, and the price of the good increases. c. Price elasticity of demand is 3.0, and the price of the good decreases. d. All of the above are correct. e. (a) and (b) above only 3

4 23. Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the other having an elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the elastic demand and decrease the price charged to customers with the inelastic demand. b. decrease the price charged to customers with the elastic demand and increase the price charged to customers with the inelastic demand. c. decrease the price to both groups of customers. d. increase the price for both groups of customers. Ch Price controls (price ceilings or price floors) are usually enacted/decreed by the government a. as a means of raising revenue for public purposes. b. when policymakers believe the market price of a good is unfair to buyers or sellers and to help the poor c. when policymakers detect inefficiencies in a market. d. All of the above are correct. 25. In a free, competitive market, what is the rationing mechanism? a. seller bias, for example, using gender or race or religion to decide on who to sell the goods to b. buyer bias, for example, deciding to buy only from white sellers or women sellers c. government law d. price 26. Price ceilings and price floors that are binding a. are desirable because they make markets more efficient and more fair. b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price. c. can have the effect of restoring a market to equilibrium. d. are imposed because they can make the poor in the economy better off without causing adverse effects. 27. When a tax is placed on the sellers of cell (mobile) phones, the size of the cell phone market a. and the effective price received by sellers both increase. b. increases, but the effective price received by sellers decreases. c. decreases, but the effective price received by sellers increases. d. and the effective price received by sellers both decrease. 28. The term tax incidence refers to a. whether buyers or sellers of a good are required to send tax payments to the government. b. whether the demand curve or the supply curve shifts when the tax is imposed. c. the distribution of the tax burden between buyers and sellers. d. widespread view that taxes (and death) are the only certainties in life. Figure 6-17 Price S S 2 1 Demand Quantity 29. Refer to Figure In the after-tax equilibrium, how much revenue does the government collect from the tax on this good? a. $210 b. $345 c. $420 d. $480 4

5 Ch Consumer surplus is a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. b. the amount a buyer is willing to pay for a good minus the cost of producing the good. c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good. d. a buyer's willingness to pay for a good plus the price of the good. 31. On a graph, consumer surplus is represented by the area a. between the demand and supply curves. b. below the demand curve and above price. c. below the price and above the supply curve. d. below the demand curve and to the right of equilibrium price. 32. Producer surplus is a. measured using the demand curve for a good. b. always a negative number for sellers in a competitive market. c. the amount a seller is paid minus the cost of production. d. the opportunity cost of production minus the cost of producing goods that go unsold. 33. Ronnie operates a lawn-care service. On each day, his cost of mowing the first lawn is $10, the cost of mowing the second lawn is $12, and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is a. $25. b. $30. c. $36. d. $ Total surplus in a market is equal to a. value to buyers - amount paid by buyers. b. amount received by sellers - costs of sellers. c. value to buyers - costs of sellers. d. amount received by sellers - amount paid by buyers. 35. Efficiency in a market is achieved when a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. b. the sum of producer surplus and consumer surplus is maximized. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good. 36. Laissez-faire is a French expression which literally means a. to make do. b. to get involved. c. whatever works. d. allow them to do. Ch To fully understand how taxes affect economic well-being, we must compare the a. consumer surplus to the producer surplus. b. price paid by buyers to the price received by sellers. c. reduced welfare of buyers and sellers to the revenue raised by the government. d. consumer surplus to the deadweight loss. 38. A tax on a good a. raises the price that buyers effectively pay and raises the price that sellers effectively receive. b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive. c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive. d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive. 5

6 39. When a tax is imposed on the sellers of a good, the a. demand curve shifts downward (leftward) by less than the amount of the tax. b. demand curve shifts downward by the amount of the tax. c. supply curve shifts upward (leftward) by less than the amount of the tax. d. supply curve shifts upward by the amount of the tax. 40. One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that the a. size of the market is unchanged. b. price the seller effectively receives is higher. c. supply curve for the good shifts upward by the amount of the tax. d. tax reduces the welfare of both buyers and sellers. 41. Total surplus with a tax is equal to a. consumer surplus plus producer surplus. b. consumer surplus minus producer surplus. c. consumer surplus plus producer surplus minus tax revenue. d. consumer surplus plus producer surplus plus tax revenue. 42. A deadweight loss is a consequence of a tax on a good because the tax a. induces the government to increase its expenditures. b. induces buyers to consume less, and sellers to produce less. c. increases the equilibrium price in the market. d. imposes a loss on buyers that is greater than the loss to sellers. 43. The price elasticities of supply and demand affect a. both the size of the deadweight loss from a tax and the tax incidence. b. the size of the deadweight loss from a tax but not the tax incidence. c. the tax incidence but not the size of the deadweight loss from a tax. d. neither the size of the deadweight loss from a tax nor the tax incidence. 44. When a good is taxed, the burden of the tax a. falls more heavily on the side of the market that is more elastic. b. falls more heavily on the side of the market that is more inelastic. c. falls more heavily on the side of the market that is closer to unit elastic. d. is distributed independently of relative elasticities of supply and demand. 6