Econ 101, section 3, F06 Schroeter Exam #2, Red. Choose the single best answer for each question.

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1 Econ 101, section 3, F06 Schroeter Exam #2, Red Choose the single best answer for each question. 1. Which of the following is consistent with elastic demand? a. A 10% increase in price results in a 5% decrease in quantity demanded. b. If price were to fall by half, quantity demanded would increase by 10%. *. Consumers demand twice as much of the good in response to a 10% decrease in price. d. none of the above. 2. Other things equal, the demand for a good tends to be less elastic *. the fewer the available substitutes. b. in the long-run than in the short-run. c. the larger the current expenditure on the good, as a percentage of consumers' budgets. d. the narrower the definition of the good. 3. When the price of the local newspaper is \$0.50, 400 copies are sold each day. When the price is reduced to \$0.40, 430 copies are sold each day. Over this range of prices, the own-price elasticity of demand (calculated by the "midpoint method") for newspapers is * b c d Suppose that you're in the business of selling gizmos. Raising the price of your product will lead to an increase in your sales revenue a. only if the demand for your gizmos is elastic. *. only if the demand for your gizmos is inelastic. c. as long as the demand for your gizmos is NOT perfectly elastic. d. as long as the demand for your gizmos is NOT perfectly inelastic. 5. If a 10% increase in the price of a product results in a 16% increase in quantity supplied, the elasticity of supply is a b c * Justin says that he will spend exactly \$20 per month on hamburgers, regardless of the price of hamburgers. Justin's demand for hamburgers is a. perfectly elastic. *. unit elastic. c. perfectly inelastic. d. none of the above.

2 2 7. If two goods are substitutes a. the demands for each of them are likely to be elastic. b. they will have a negative cross-price elasticity of demand. c. their income elasticities of demand must be of opposite signs. *. none of the above. 8. The price elasticity of demand measures *. buyers' responsiveness to a change in the price of a good. b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the effect on equilibrium price of a shift in demand. 9. A legal maximum price at which a good can be sold is a price a. floor. b. support. c. surplus. *. ceiling. 10. In the 1970s, long lines at gas stations in the United States were primarily the result of the fact that a. OPEC reduced production leading to a big increase in the price of crude oil. b. U.S. gasoline producers colluded in raising the price of gasoline. *. the U.S. government maintained a price ceiling on gasoline. d. an increase in average household income led to an increase in the demand for gasoline. 11. Which of the following is correct? a. Rent control and the minimum wage are both examples of price ceilings. b. Rent control and the minimum wage are both examples of price floors. *. Rent control is an example of a price ceiling and the minimum wage is an example of a price floor. d. Rent control is an example of a price floor and the minimum wage is an example of a price ceiling. 12. Which of the following would NOT be among the effects of a rent control ordinance that held rents at below-equilibrium levels? a. There would be an excess demand for rental housing. b. There would be little or no incentive to invest in new rental housing construction. *. Landlords would use extra enticements (no security deposit required, first-month's rent free, special gifts, etc.) to try to attract new tenants. d. Some people would offer secret bribes in an effort to get landlords to rent to them. 13. The current level of the federal minimum wage is a. \$4.85/hour. *. \$5.15/hour. c. \$5.65/hour. d. \$6.25/hour.

3 3 14. If a \$1.00/unit excise tax is imposed on a competitive market with inelastic demand and elastic supply, *. the price buyers pay (inclusive of the tax) will increase by more than \$0.50/unit. b. the price sellers receive (net of the tax) will decrease by more than \$0.50/unit. c. both a and b. d. impossible to determine without knowing whether buyers or sellers are required to send the tax payment to the government. 15. Most labor economists believe that the supply of labor is a. less elastic than the demand for labor and, therefore, employers bear most of the burden of the payroll tax. *. less elastic than the demand for labor and, therefore, workers bear most of the burden of the payroll tax. c. more elastic than the demand for labor and, therefore, employers bear most of the burden of the payroll tax. d. more elastic than the demand for labor and, therefore, workers bear most of the burden of the payroll tax. 16. The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for a. unemployment compensation. b. hurricane insurance. *. Social Security and Medicare. d. housing subsidies for low-income families. 17. Suppose you participate, as a prospective buyer, in an auction of a work of art. As the auction begins, you have in mind a maximum amount that you are willing to bid. This maximum amount represents your a. consumer surplus. *. willingness to pay. c. opportunity cost. d. equilibrium price. 18. Welfare economics is the study of *. how the allocation of resources affects economic well-being. b. how technology is best put to use in the production of goods and services. c. government welfare programs for disadvantaged people. d. government tax and subsidy policies and their effects.

4 4 19. In the competitive market for widgets, supply increases while demand remains unchanged. Compared to consumer surplus in the old equilibrium, consumer surplus in the new equilibrium *. is higher. b. is lower. c. is unchanged. d. may be higher, lower, or unchanged, depending on the elasticities of demand and supply. Questions 20 and 21 refer to the following information. The table lists willingness to pay for the first, second, and third pizzas (large, thin crust, pepperoni and black olive, of course) of the month for three hypothetical consumers. All three have zero willingness to pay for pizzas after the third of the month. First pizza Second pizza Third pizza Aaron \$20.00 \$15.00 \$8.00 Brianna \$18.00 \$13.00 \$3.00 Chengyan \$15.00 \$9.00 \$ If the price of pizzas were \$14.00, the numbers of pizza purchased each month by each consumer would be: a. Aaron - 1; Brianna - 2, Chengyan - 0. b. Aaron - 3; Brianna - 1; Chengyan - 1. c. Aaron - 2; Brianna - 2; Chengyan - 2. *. Aaron - 2; Brianna - 1; Chengyan If the price of pizzas were to decrease from \$14.00 to \$12.00, who would experience the largest gain in consumer surplus? *. Aaron. b. Brianna. c. Chengyan. d. All three would experience the same gain in consumer surplus. 22. Efficiency in a market is achieved when a. all firms are producing the good at the same low cost per unit. b. no buyer is willing to pay more than the equilibrium price for any unit of the good. c. output is allocated to the buyers who have the lowest willingness to pay. *. the sum of producer surplus and consumer surplus is maximized. 23. Which of the following is NOT a correct statement about a market in equilibrium? a. The price determines which potential buyers and sellers will participate in the market. b. Potential buyers who value the good more than the equilibrium price will buy. *. Potential sellers whose opportunity cost is more than the equilibrium price will sell. d. The buyers who would have been willing to pay more than the equilibrium price will get some consumer surplus.

5 5 The following graph depicts supply and demand in a hypothetical market. Use it to answer questions 24, 25, 26, and 27. (\$/unit) Supply Demand (units/day) 24. When the market is in equilibrium (with no excise tax), consumer surplus is a. \$87.50/day. b. \$125.00/day. c. \$175.00/day. *. \$250.00/day. 25. If the government were to levy an excise tax of \$3.50/unit on this market, it would collect tax revenue of a. \$50/day. b. \$125/day. *. \$175/day. d. \$350/day. 26. With the excise tax of \$3.50/unit in effect, producer surplus in this market would be *. \$25/day. b. \$50/day. c. \$75/day. d. \$100/day. 27. The deadweight loss of a \$3.50/unit excise tax on this market would be a. \$50.00/day. *. \$87.50/day. c. \$125.00/day. d. \$132.50/day.

6 6 28. When the government increases the dollar-per-unit size of an excise tax on a good traded in a competitive market, the tax revenue collected a. increases. b. decreases. c. remains the same. *. may increase, decrease, or remain the same. 29. The argument that reducing income tax rates from their current level will increase income tax revenues a. is clearly wrong. b. is valid for all countries that have income taxes. *. is most likely to have merit for a country with very high marginal tax rates. d. is most likely to have merit for a country with very low marginal tax rates. 30. Suppose that a tax of \$4/unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2000 units/week to 1700 units/week. The tax reduces consumer surplus by \$3000/week and it reduces producer surplus by \$4400/week. The deadweight loss of the tax is a. \$200/week. b. \$400/week. *. \$600/week. d. \$1200/week.

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