Sample Questions for Unit II

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1 Sample Questions for Unit II 1. Which of the following is true in competitive markets? (A) Price reflects the marginal value consumers place on the last unit purchased. (B) Price reflects the average value consumers derive from the consumption of all units of the good. (C) Price reflects the total value consumers derive from the consumption of all units of the good. (D) The total area under the demand curve, but above the price, indicates the surplus producers derive from the production and sale of the good. (E) The total area above the supply curve, but below the price, indicates the surplus consumers derive from the consumption of the good. 2. In a supply and demand graph, the triangular area that represents the difference between the market price consumers pay and the height of the demand curve is called (A) consumer surplus (B) producer surplus (C) total surplus (D) triangular arbitrage (E) deadweight loss 3. The graph in Figure 1 shows conditions in the market for beef. A reduction in the price of the grain used to feed cattle and an increase in the price of catsup (a complement for beef) will result in which of the following? Supply Demand Equilibrium Price Equilibrium Quantity (A) increase increase increase increase (B) increase decrease indeterminate increase (C) increase decrease increase indeterminate (D) increase decrease decrease indeterminate (E) decrease increase increase indeterminate Figure 1

2 4. The graph in Figure 2 shows the initial demand for margarine at D 1, an increase in the price of butter (which is a substitute for margarine) would tend to cause which of the following changes in the market for margarine? (A) a shift in the demand curve from D 1 to D 2 (B) a shift in the demand curve from D 2 to D 1 (C) a movement along demand curve D 1 from a to b (D) a movement along demand curve D 1 from b to a (E) a shift in the curve coupled with a movement along the new curve Figure 2 5. Given the demand (D) and supply (S) for gasoline in Figure 3, if the price of gasoline were $1 per gallon, (A) a shortage of 40 gallons would exist (B) a shortage of 30 gallons would exist (C) a shortage of 20 gallons would exist (D) a surplus of 30 gallons would exist (E) a surplus of 20 gallons would exist Figure 3

3 6. As a result of the events of September 11, 2001, passengers became more reluctant to fly and there was a substantial increase in air travel security. How did the increased fear of flying and the higher cost of providing air travel security affect the market for air travel? (A) Demand increased and supply decreased, causing the price of air travel to rise. (B) Demand decreased and supply increased, causing a reduction in the price of air travel. (C) Demand decrease and supply decreased, causing the price of air travel to fall. (D) Demand increased, supply decreased, and therefore the net impact on the price of air travel was uncertain. (E) Demand decreased, supply decreased, and therefore the net impact on the price of air travel was uncertain. Use Figure 4 illustrating the impact of an excise tax to answer the following questions. Figure 4 8. The amount of the excise tax is (A) $.50 (B) $1.00 (C) $1.50 (D) $1.75 (E) $ The amount of the actual tax burden paid by consumers and producers is (A) $1.00 for consumers and $.50 for producers (B) $1.00 for consumers and $1.00 for producers. (C) $.25 for consumers and $.75 for producers. (D) $.75 for consumers and $.25 for producers (E). $.50 for consumers and $.50 for producers. 10. The deadweight loss of the tax illustrated is given by the area (A) ABEH (B) DFE (C) EKG (D) EFG (E) BEKM

4 11. The revenue generated by the tax illustrated is given by the area (A) ACLH (B) BEKM (C) ACFG (D) MCLK (E) EKG 12. The fact that a gallon of bottled water commands a higher market price than a gallon of gasoline indicates that (A) bottled water is an inferior good and gasoline is a normal good (B) the marginal utility of bottled water is greater than the marginal utility of a gallon of gasoline (C ) the average utility of a gallon of bottled water is greater than the average utility of a gallon of gasoline (D) the total utility of bottled water exceeds the total utility of gasoline (E) gasoline is an inferior good and bottled water is a normal good 13. If the demand for a product increases as the result of a decline in income, it can be concluded that the (A) product is an inferior good (B) product is a superior good (C) demand for the product is inelastic (D) price elasticity of demand for the product equals unity (E) demand for the product is elastic 14. All things equal, the price elasticity of supply (A) will be greater in the short run than the long run (B) will be greater in the long run than the short run (C) is the same for the short run and the long run (D) approaches zero in the long run (E) is perfectly inelastic in the long run 16. (I) Private Markets will tend to produce too little of a good that generates external costs from the standpoint of economic efficiency. (II) The market supply curve for a good that generates external costs will understate the true social opportunity cost of production. (III) Private markets will tend to produce too much of a good that generates external benefits from the standpoint of economic efficiency. (A) (I) is true, (II) is false, (III) is true. (B) (I) is false, (II) is true, (III) is false. (C) (I) is false, II is false, (III) is true. (D) (I), (II), and (III) are true. (E) (I), (II), and (III) are false.

5 Figure Figure 2 illustrates the market for a product that generates an externality. S 1 is the private market supply curve, while S 2 is the supply curve including the externality. Which of the following is true? (A) Point a illustrates the competitive private market outcome while point b illustrates the outcome consistent with economic efficiency for a negative externality. (B) Point a illustrates the competitive private market outcome while point b illustrates the outcome consistent with economic efficiency for a positive externality. (C) Point b illustrates the competitive private market outcome while point a illustrates the outcome consistent with economic efficiency for a negative externality. (D) The competitive private market outcome is consistent with the conditions for economic efficiency. (E) The good will tend to be undersupplied relative to the conditions for economic efficiency. 19. When the consumption of a good generates an external benefit, then (A) the private benefit consumers receive from the good will be higher than the true social benefit (B) too much of the good will tend to be produced from the viewpoint of economic efficiency (C ) the community generally suffers an exactly offsetting external cost from the production of the good (D) the market demand curve will understate the total benefits derived from consumption of the good and as a result too little of it will be produced and consumed (E) the market demand curve will overstate the total benefits derived from consumption of the good and as a result too much of it will be produced and consumed 20. Which of the following is the best example of a public good? (A) long distance telephone service (B) national defense (C) an amusement park (D) the electric service of a public utility (E) taking this test Answers to Unit II Micro Sample Questions

6 1. A 2. A 3. D 4. A 5. C 6. E 7. A 8. B 9. E 10. C 11. B 12. B 13. A 14. B 15. D 16. B 17. A 18. A 19. D 20. B

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