Econ 101, sections 2 and 6, S06 Schroeter Exam #2, Red Choose the single best answer for each question. 1. If the own-price elasticity of demand for a good is -2.0, this implies that consumers would a. demand twice as much of the good if price were to fall by 10%. b. require a 2% cut in price to increase quantity demanded of the good by 1%. *. demand 2% more of the good in response to a 1% reduction in price. d. respond to a doubling of price with a 1% decrease in quantity demanded. 2. If a 5% decrease in the price of a good results in a 10% increase in quantity demanded, demand for the good is *. elastic. b. inelastic. c. unit elastic. d. completely inelastic. 3. The ISU bookstore reduces its price on Cyclone logo T-shirts from $25 to $20. As a result, purchases of Cyclone logo T-shirts increase from 70 per month to 80 per month. Over this range of prices, the own-price elasticity of demand (calculated by the "midpoint method") for Cyclone logo T-shirts is *. -0.600. b. -0.833. c. -1.200. d. -1.667. 4. BLTN (Better-Late-Than-Never) Airlines' operating costs have increased sharply due to rising jet fuel prices and the sky-rocketing costs of employee health insurance. In order to raise the revenue to cover these costs, the CEO of BLTN has decided to increase ticket prices. She must believe that the demand for tickets on BLTN Airlines is a. upward sloping. *. inelastic. c. elastic. d. perfectly inelastic. 5. The market for widgets is competitive. While demand remains stable, supply increases as a result of a decrease in the price of a raw material used to make widgets. Under what circumstances will the revenue of widget suppliers increase? *. Only if the demand for widgets is elastic. b. Only if the supply of widgets is elastic. c. When supply increases, the revenue of widget suppliers will increase regardless of the elasticity of supply and demand. d. None of the above. (The revenue of widget suppliers must fall when supply increases.)
2 6. If the cross price elasticity of demand for good A with respect to the price of good B is negative, we say that goods A and B are a. normal. b. inferior. c. substitutes. *. complements. 7. Remember the terminology I used in lecture: By "drug crime," I mean the production and sales of illegal addictive drugs. By "drug-related crime," I mean the robberies and muggings that addicts commit to raise the money to support their addiction. If drug crime penalties and enforcement efforts were reduced, the street price of illegal addictive drugs would a. increase and the amount of drug-related crime would increase. b. decrease and the amount of drug-related crime would increase. c. increase and the amount of drug-related crime would decrease. *. decrease and the amount of drug-related crime would decrease. 8. Which of the following is true? a. Demand tends to be more elastic in the long-run than in the short-run. b. The demand for laptop computers is less elastic than the demand for Dell Latitude D610 laptop computers. c. The demand for a life-saving drug is less elastic than the demand for cosmetic surgery. *. All of the above are true. 9. If the equilibrium price of bread is $2 and the government imposes a $1.50 price ceiling on the price of bread, a. more bread will be produced to meet the increase in quantity demanded. b. there will be no impact on the market because the price ceiling will be non-binding. *. there will be a shortage of bread. d. the demand for bread will decrease because suppliers will reduce their supply. 10. A government imposed minimum price at which a good can be sold is called a *. price floor. b. rebate price. c. price ceiling. d. market-clearing price. 11. Government-created price floors are typically imposed with the intention of a. helping consumers. *. helping producers. c. raising tax revenue d. shifting the supply curve to the right.
3 12. Rent controls typically have which of the following effects? They tend to a. increase rents received by landlords. b. increase the market value of rental properties. c. encourage landlords to invest in maintenance and renovations. *. discourage construction of new rental housing. 13. Normally, an excise tax of $1.00/unit on the market for a good will a. raise the price buyers pay (inclusive of the tax) by $1.00/unit. b. reduce the price sellers receive (net of the tax) by $1.00/unit. c. have no effect on either the price buyers pay (inclusive of the tax) or the price sellers receive (net of the tax). *. none of the above. 14. When an excise tax is imposed on a market for a good, the effects of the tax depend on the elasticity of demand. For a given supply elasticity, and a given dollar-per-unit amount of the tax, as demand becomes more elastic the tax's impact on unit sales will a. increase and the buyers' share of the tax will increase. *. increase and the buyers' share of the tax will decrease. c. decrease and the buyers' share of the tax will increase. d. decrease and the buyers' share of the tax will decrease. 15. In the interest of increasing turnip growers' income, the government establishes a binding price floor in the turnip market. In order to carry through on its intention of helping turnip growers, the government will also have to a. establish programs to reduce the public's demand for turnips. b. begin growing turnips on government-owned farms. *. purchase surplus turnips. d. issue ration tickets to consumers to insure equal access to the limited supply. 16. Unemployment is another term for a. equilibrium employment in a labor market. b. excess demand in a labor market. c. a shortage in a labor market. *. a surplus in a labor market. 17. Which of the following best explains the source of consumer surplus in the market for pizzas? *. Many consumers would be willing to pay more than the market price of a pizza. b. Many consumers pay more than the equilibrium price for pizzas. c. Many consumers believe that the market price of pizzas is greater than sellers' cost. d. Many consumers buy more than the equilibrium number of pizzas.
4 18. All else equal, consumer surplus tends to be small when *. demand is elastic. b. supply is elastic. c. demand is inelastic. d. supply is inelastic. Question 19 refers to the following information on willingness to pay for a gizmo for each of five potential consumers. (Potential consumers because, for each of them, the decision to buy and consume a gizmo will depend on price.) Potential Consumer Willingness to pay for a gizmo ($/gizmo) Abby $2.80 Bart $2.35 Claire $1.85 Dieter $1.30 Emily $0.75 19. If the price of a gizmo is $2.00, *. only Abby and Bart will buy. b. only Bart and Clair will buy. c. only Clair, Dieter, and Emily will buy. d. Abby, Bart, Claire, Dieter, and Emily will all buy. Question 20 refers to the following information on opportunity cost of a widget for each of five potential suppliers. (Potential suppliers because, for each of them, the decision to produce and sell will depend on price.) Potential Supplier Opportunity cost of a widget ($/widget) Frank $10.00 Guillermo $8.50 Hongli $7.95 Isaac $6.30 Jin $5.50 20. If the price of a widget is $8.00, the total producer surplus for these five potential suppliers is a. $1.75. b. $2.50. c. $3.25. *. $4.25.
5 21. We say that a resource allocation is efficient if it a. satisfies every consumer's desires. b. makes economy-wide profits of firms as large as possible. c. achieves a fair distribution of well-being among the members of society. *. maximizes total surplus. The following graph depicts supply and demand in a hypothetical market. Use it to answer questions 22, 23, 24, and 25. ($/unit) 4.0 3.0 2.8 2.0 1.8 1.5 Supply Demand 50 60 100 (units/day) 22. When this market is in equilibrium (with no excise tax). producer surplus is *. $25/day. b. $50/day. c. $75/day. d. $100/day. 23. If the government were to levy an excise tax of $1.00/unit on this market, it would collect tax revenue of a. $50/day. *. $60/day. c. $80/day. d. $100/day. 24. With the excise tax of $1.00/unit in effect, consumer surplus in this market would be a. $9/day. b. $25/day. *. $36/day. d. $48/day.
6 25. The deadweight loss of a $1.00/unit excise tax on this market would be a. $4/day. b. $12/day. c. $16/day. *. $20/day. 26. If the supply curve is perfectly elastic, an excise tax a. does not increase the price buyers pay (inclusive of the tax). *. does not reduce the price sellers receive (net of the tax). c. does not reduce consumer surplus. d. does not create a deadweight loss. 27. Arthur Laffer's famous conjecture about tax rates and tax revenues was refuted by data from the 1980s that showed a. increases in income tax revenues when income tax rates increased. b. increases in income tax revenues when income tax rates decreased. c. decreases in income tax revenues when income tax rates increased. *. decreases in income tax revenues when income tax rates decreased. 28. An excise tax on a good creates deadweight loss because a. it makes demand more elastic. b. it makes supply more elastic. c. it increases the volume of trade beyond the efficient level. *. it prevents some mutually beneficial trades. 29. The demand price at any given quantity represents a. the price actually paid by the marginal buyer. *. the willingness to pay of the marginal buyer. c. the consumer surplus associated with the marginal unit of the good. d. the lowest price that anyone would pay for the marginal unit of the good. 30. Economic efficiency requires production, trade, and consumption of all units of a good for which a. willingness to pay is less than price. b. opportunity cost is greater than consumer surplus. c. marginal cost is below the ceiling price. *. marginal value is greater than marginal cost.