Test 2. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Name R# ECO Roach Test 2 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Air pollution generated by a steel mill is an example of 1) A) a negative production externality. B) the free-rider problem. C) a positive production externality. D) a public good. 2) A government wants to reduce electricity consumption by 5%. The price elasticity of demand for electricity is The government must the price of electricity by. A) raise; 0.1% B) raise; 1.0% C) raise; 10.0% D) lower; 0.5% 2) 3) If the price ceiling is set above the equilibrium price, 3) A) quantity demanded will equal quantity supplied. B) demand will be less than supply. C) there will be a shortage. D) there will be a surplus. Refer to the information provided in Figure 4.6 below to answer the questions that follow. Equilibrium in this market occurs at the intersection of curves S and D. Figure 4.6 4) In figure 4.6 at equilibrium consumer surplus is area 4) A) A. B) E+F+G. C) G. D) A+B+C. 5) In figure 4.6 if price is P1, the deadweight loss due to under production is area 5) A) E+G. B) F+G. C) C+F D) A+C. 6) In figure 4.6 if an effective price ceiling is put in place, consumer surplus is area 6) A) A+B+E. B) G. C) A. D) B+C+E+F+G. 1

2 Refer to the information provided in Table 6.1 below to answer the questions that follow. Table 6.1 Number of Hamburgers per Day Total Utility Marginal Utility Number of Sodas per Day Total Utility Marginal Utility ) Refer to Table 6.1. The marginal utility of the third hamburger per day is 7) A) 5. B) 15. C) 22. D) 67. 8) Refer to Table 6.1. The marginal utility of the second hamburger per day is 8) A) 10. B) 15. C) 22. D) 52. 9) Refer to Table 6.1. Marginal utility is lower with each additional hamburger consumed. This is known as A) the law of diminishing marginal utility B) cost-push inflation C) peak-load pricing D) the law of diminishing marginal product 9) 10) An increase in demand caused no change in the equilibrium price. Thus, supply must be 10) A) inelastic. B) perfectly elastic. C) perfectly inelastic. D) elastic. 11) A firm is currently producing in the inelastic portion of its demand curve. What course of action do you recommend for it assuming it wants to raise revenue? A) Continue producing at the current output level, because it maximizes its total revenue by producing in the inelastic portion of its demand curve. B) Continue selling at the same price, but increase the amount it produces. C) Increase price, because if it increases price and demand is inelastic, total revenue will increase. D) Reduce price, because if it reduces price and demand is inelastic, total revenue will increase. 12) A mass transit authority charges bus fares of $1.25 during morning rush hours but only $1.00 during late morning non-rush hours. Economists explain the fare difference by the fact that the demand for bus rides during the morning rush hours is but during the late morning it is. A) perfectly elastic; perfectly inelastic B) more elastic; more inelastic C) more inelastic; more elastic D) unit elastic; relatively inelastic 11) 12) 2

3 13) Cross-price elasticity of demand measures the response in the 13) A) quantity of one good demanded to a change in the price of another good. B) price of a good to a change in the quantity of another good demanded. C) quantity of one good demanded when the quantity demanded of another good changes. D) income of consumers to the change in the price of goods. 14) If the government wishes to encourage firms to internalize externalities, they should activities resulting in negative externalities and activities resulting in positive externalities A) tax; subsidize B) ban; generate C) subsidize; tax D) place an injunction against; tax 14) 15) Demand determines price entirely when 15) A) demand is downward sloping. B) demand is perfectly inelastic. C) supply is perfectly elastic. D) supply is perfectly inelastic. Refer to the information provided in Figure 6.8 below to answer the questions that follow. Figure ) Refer to Figure 6.8. The total utility of the three movies is and the marginal utility of the third movie is. A) 0; 0 B) 28; 3 C) 15; 0 D) 25; 10 17) The market price of a basketball is $35 and the full cost of producing it is $20, then a basketball producing firm gets producer surplus of A) 1 basketball. B) $35. C) $20. D) $15. 16) 17) 18) Consumer surplus is 18) A) current market price. B) the difference between the maximum a person is willing to pay and full costs of productions for the firm. C) the difference between current market price and full costs of production for the firm. D) the difference between the maximum a person is willing to pay and current market price. 3

4 19) The income elasticity of demand for education is 3.5. Thus, a 4% increase in income will 19) A) increase the quantity of education demanded by 4%. B) decrease the quantity of education demanded by 14%. C) decrease the quantity of education demanded by 3.5%. D) increase the quantity of education demanded by 14%. 20) If the elasticity of labor supply is positive, the labor-supply curve would be 20) A) downward sloping. B) vertical. C) upward sloping. D) horizontal. 21) Price and total revenue are directly related when demand is 21) A) price inelastic. B) unit price elastic. C) price elastic. D) perfectly price elastic. 22) If the quantity of peanut butter demanded increases by 4% when the price of jelly decreases by 2%, the cross-price elasticity of demand between peanut butter and jelly is A) -4. B) -2. C) D) 2. 23) If the market price of coffee is $3.00 per pound but the government will not allow coffee growers to charge more than $2.00 per pound of coffee, which of the following will happen? A) There will be a shortage of coffee. B) Supply must eventually increase so that the market will come into equilibrium at a price of $2.50. C) The market will be in equilibrium at a price of $2.00. D) Demand must eventually decrease so that the market will come into equilibrium at a price of $ ) The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the price elasticity of demand is -2.5, the company must A) decrease price by 0.5%. B) decrease price by 2.0%. C) increase price by 0.5%. D) increase price by 2.0%. 22) 23) 24) 4

5 Refer to the information provided in Figure 5.3 below to answer the questions that follow. Figure ) Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger is increased from $6 to $8, the price elasticity of demand equals in absolute value and demand is. A) 2.0; elastic B) 1.9; inelastic C) 0.57; inelastic D) 1.75; elastic 26) Refer to Figure 5.3. Using the midpoint formula, if the price of a gardenburger is decreased from $7 to $6, the price elasticity of demand equals and the decrease results in a(n) in total revenue. A) 1.44; increase B).13; decrease C) 13; increase D).69; increase 25) 26) 27) The income elasticity of demand 27) A) measures the responsiveness of quantity demanded to changes in income. B) measures the responsiveness of income to changes in quantity demanded. C) is the ratio of the percentage change in income to the percentage change in quantity demanded. D) measures the change in income necessary for a given change in quantity demanded. 28) The cross-price elasticity of demand between good X and good Y is -3. Given this information, which of the following statements is TRUE? A) The demand for goods X and Y is elastic. B) Goods X and Y are substitutes. C) The demand for goods X and Y is income elastic. D) Goods X and Y are complements. 28) 29) When there are more substitutes for a product, the for the product is. 29) A) demand; less price elastic B) income elasticity; smaller C) income elasticity; greater D) demand; more price elastic 5

6 30) Kathy eats five slices of pizza on a Saturday night but admits each slice of pizza doesn't taste as good as the previous one. This suggests that for Kathy the A) marginal utility of a slice of pizza is negative. B) marginal utility of a slice of pizza is positive but decreasing. C) total utility of slices of pizza is increasing by larger and larger increments. D) total utility of slices of pizza is declining. 30) BONUS. Write your answer in the space provided or on a separate sheet of paper. Worth 5 points. 31) The most common argument in favor of strict immigration is that immigration lowers wages for domestic (American) workers. Using a supply and demand graph show why this may not be the case. What is the cross-price elasticity of domestic and immigrant labor in this case? 6