Choose the single best answer for each question. Do all of your scratch-work in the side and bottom margins of pages.

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1 Econ 101, Sections 3 and 4, S11, Schroeter Exam #2, Special code = 0002 Choose the single best answer for each question. Do all of your scratch-work in the side and bottom margins of pages. 1. The cross-price elasticity of demand for good A with respect to the price of good B is positive. This means that goods A and B are a. both normal goods. b. both inferior goods. *. substitutes. d. complements. 2. If the demand for a good is elastic then an X% increase in the price of the good will result in a. no change in the quantity demanded. b. a decrease in the quantity demanded of X%. *. a decrease in the quantity demanded of more than X%. d. a decrease in the quantity demanded of less than X%. 3. In the competitive market for a certain good, demand is inelastic. Then supply decreases. As a result the absolute value of the percentage change in equilibrium price will be a. equal to the absolute value of the percentage change in equilibrium quantity. *. greater than the absolute value of the percentage change in equilibrium quantity. c. less than the absolute value of the percentage change in equilibrium quantity. d. Impossible to determine without more information. (You would have to know the elasticity of supply.) 4. Consider airfares on roundtrip flights between New York and Des Moines. When the airfare is $310, the number of tickets demanded is 1000 per week. When the airfare is $340, the number of tickets demanded is 920 per week. Over this range of airfares, the elasticity of demand (calculated by the midpoint method) for roundtrip flights between New York and Des Moines is a b * d

2 2 5. In the competitive market for widgets, supply is more elastic in the long-run than in the short-run, however demand has roughly equal elasticities in the long-run and in the shortrun. What would be the effect of a permanent decrease in demand? a. Equilibrium price decreases in the short-run, and decreases further in the long-run. *. Equilibrium quantity decreases in the short-run and decreases further in the long-run. c. Equilibrium quantity decreases in the short-run, and then returns part of the way toward its original level in the long-run. d. Both a and c. 6. Suppose that a seller is able to charge different prices to two separate groups of customers. One group of customers has elastic demand, and the other group has inelastic demand for her product. Which of the following would result in the greatest increase in her sales revenue? a. increasing the price she charges to both groups of customers. b. decreasing the price she charges to both groups of customers. c. increasing the price she charges to the customers with elastic demand and decreasing the price she charges to the customers with inelastic demand. *. increasing the price she charges to the customers with inelastic demand and decreasing the price she charges to the customers with elastic demand. 7. Imagine two supply curves having different positive slopes at a common point of intersection. At that point of intersection, a. the supply curve with the steeper slope is more elastic than the other. *. the supply curve with the flatter slope is more elastic than the other. c. both supply curves have the same elasticity. d. It could be a, b, or c, depending on the coordinates of the point of intersection. 8. A binding price ceiling in a competitive market *. must be at a level below the equilibrium price. b. results in a surplus. c. creates excess supply of the good. d. both a and c. 9. Rent control laws dictate a. the exact rent that landlords must charge tenants. *. a maximum rent that landlords may charge tenants. c. a minimum rent that landlords may change tenants. d. a range of rents (from minimum to maximum) that is permissible under the law. 10. Which of the following would you expect to see in a housing market subject to rent control? a. Landlords offering special enticements (like free internet) to try to attract tenants. *. Landlords skimping on routine building maintenance. c. High vacancy rates; that is, a high proportion of apartments are unoccupied. d. All of the above.

3 3 11. As of today (February 23, 2011), the federal minimum wage is a. $10.25 per hour. *. $7.25 per hour. c. $5.75 per hour. d. $5.15 per hour. 12. There is currently a binding price floor in the competitive market for gizmos. The government strictly enforces the price floor but does not "support" it; that is, the government does not routinely purchase the surplus that results. If the price floor is removed, then the price received by sellers will a. decrease and the quantity sold in the market will decrease. b. increase and the quantity sold in the market will decrease. *. decrease and the quantity sold in the market will increase. d. increase and the quantity sold in the market will increase. 13. Currently, the equilibrium price and quantity in the competitive market for a particular good are $1.00/unit and 1,000 units/day. If the government imposes an excise tax of $0.25/unit on the market, which of the following will occur? a. The price buyers pay (inclusive of the tax) will increase to $1.25/unit. b. The price sellers receive (net of the tax) will fall to $0.75/unit. *. The quantity of the good traded in the market will fall below 1,000 units/day. d. All of the above. 14. The term tax incidence refers to a. the variation in tax rates from one state to another. b. whether buyers or sellers of a good are required to send the tax payment to the government. c. whether the demand curve or the supply curve shifts when the tax is imposed. *. the distribution of the tax burden between buyers and sellers. 15. Initially, there is a binding price floor on the competitive market for a good. Assuming that the floor price remains at the same level, which of the following events could convert the price floor from one that is binding to one that is not binding? *. Supply of the good decreases. b. Demand for the good decreases. c. Both a and b. d. None of the above. 16. The fact that the demand for cigarettes is less elastic than the supply of cigarettes means that cigarette buyers a. bear the full burden of cigarette excise taxes. b. bear none of the burden of cigarette excise taxes. c. bear a smaller share of the burden of cigarette excise taxes than cigarette manufacturers. *. bear a larger share of the burden of cigarette excise taxes than cigarette manufacturers.

4 4 17. Workers bear a larger share of the FICA payroll tax burden than do employers. This is because a. the supply of labor is generally more elastic than the demand for labor. *. the demand for labor is generally more elastic than the supply of labor. c. the legislation that created the FICA payroll tax specified a workers' share of greater than 50%. d. employers cut back on the number of workers they hire in order to reduce their payroll tax liability. Questions 18 and 19 refer to the following demand and supply schedules for a good traded in a competitive market. Price is in $/unit and quantities demanded and supplied are in units/day. When the price is... the quantity demanded is... and the quantity supplied is If an excise tax of $0.30/unit is imposed on this market, the quantity traded will be a. 110 units/day. b. 100 units/day. *. 90 units/day. d. none of the above. 19. If an excise tax of $0.30/unit is imposed on this market, the price that buyers will pay (inclusive of the tax) will be *. $3.20/unit. b. $3.10/unit. c. $3.00/unit. d. none of the above. 20. Willingness to pay *. measures the value that a buyer places on a good. b. is the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept. c. is the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept. d. is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

5 5 Questions 21 and 22 refer to the following information. The table lists willingness to pay for the first, second, and third pizzas 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 Brandon $22 $17 $10 Brooke $12 $8 $4 Bryce $16 $14 $ If the price of pizzas is $13.00, the number of pizzas purchased each month by each consumer would be: a. Brandon - 3; Brooke - 1; Bryce - 2. b. Brandon - 2; Brooke - 2; Bryce - 1. *. Brandon - 2; Brooke - 0; Bryce - 2. d. Brandon - 1; Brooke - 0; Bryce If the price of pizzas decreases from $13.00 to $10.00, a. Brandon's consumer surplus would increase from $13/month to $19/month. b. Brooke's demand for pizzas would increase of 0 to 1 pizza/month. c. Bryce's consumer surplus would increase by $8/month. *. All of the above. 23. We say that the allocation of resources is efficient if total surplus is a. zero. *. maximized. c. equal to the market value of all goods and services traded. d. equally divided among the market's participants. 24. Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the competitive market for lemons? *. Consumer surplus decreases. b. Consumer surplus increases. c. Consumer surplus remains unchanged. d. It could be any one of a, b, or c, depending on the elasticity of demand for lemons. 25. When the government imposes an excise tax on the competitive market for a good, consumer and producer welfare are both reduced. Denote the combined losses (measured as a positive number) in consumer and producer surplus by ( CS + PS). The tax revenue generated is CS + PS. a. equal to ( ) *. less than ( CS + PS). c. greater than ( CS + PS). d. It could be any one of a, b, or c, depending on the elasticities of supply and demand.

6 6 26. In the competitive market for good X, the supply-curve is an upward sloping straight line and the demand curve is a downward-sloping straight line. The market is subject to an excise tax. As a result of an increase in the excise tax from $10 per unit to $12 per unit a. the government's tax revenue must increase. b. consumer surplus must increase. *. the quantity traded in the market must decrease. d. All of the above. 27. In the competitive market for good X, the supply curve is an upward-sloping straight line, and the demand curve is a downward-sloping straight line. A tax of $10 per unit is imposed on good X. The tax reduces the quantity traded in the market by 200 units/day. The deadweight loss from the tax is a. $500/day. *. $1000/day. c. $2000/day. d. impossible to determine without more information. Questions 28, 29, and 30 refer to the following information. In the competitive market for widgets, supply and demand curves are straight lines. With no excise tax on widgets, the market's equilibrium quantity is 350 widgets/day. But with an excise tax of $1.00/widget, market quantity is 300 widgets/day, the price consumers pay (inclusive of the tax) is $4.20/widget, and the price sellers receive (net of the tax) is $3.20/widget. 28. The tax revenue generated by this tax is a. $960/day. b. $350/day. *. $300/day. d. impossible to determine without more information. 29. The deadweight loss of this tax is *. $25/day. b. $50/day. c. $1000/day. d. impossible to determine without more information. 30. The decrease in consumer surplus that results from this tax is a. $167.50/day. b. $150/day. c. $12.50/day. *. impossible to determine without more information.