ECO 2301 Spring 2015

Sec 002 Klaus Becker

EXAM 2

Form 2

Wednesday, April 1st

Solutions

1. Mathematically, price elasticity of demand is:

A. the percentage change in the quantity of a good that is demanded in response to a given percentage change in

price.

B. the percentage change in the quantity of a good that is supplied in response to a given percentage change in

price.

C. the percentage change in the price of a good that is supplied in response to a given percentage change in

quantity.

D. the percentage change in the price of a good that is demanded in response to a given percentage change in

quantity.

2. If the price of a good increases by 10 percent, its quantity demanded drops by 50 percent. The price elasticity

of demand is:

A. 5.

B. 2.

C. 0.2.

D. 1.

3. When a good has a lot of close substitutes available, it is likely to be:

A. more price elastic than those with a lot of complement goods available.

B. less price elastic than those with a lot of complement goods available.

C. less price elastic than goods without close substitutes available.

D. more price elastic than goods without close substitutes available.

4. Suppose when the price of movie tickets is $5, the quantity demanded is 500, and when the price is $7, the

quantity demanded is 300. Using the mid-point method, the price elasticity of demand is:

A. 66 percent.

B. 1.51.

C. 151 percent.

D. 0.66.

5. Assuming elasticity is reported in absolute value, an elastic demand has a measured elasticity:

A. of exactly one.

B. greater than one.

C. greater than zero and less than one.

D. less than one.

6. Knowing the price elasticity of demand is important in business because:

A. it allows a manager to determine whether a price increase will cause total revenue to rise or fall.

B. it allows a manager to determine how to maximize the firm's profits.

C. it allows a manager to determine whether an increase in supply will cause total profit to rise or fall.

D. it allows a manager to determine whether a price increase will cause the demand to rise or fall.

7. A good is inelastic if:

A. the quantity effect outweighs the price effect of a price increase.

B. the measured elasticity is greater than 1.

C. None of these is true.

D. total revenue increases as a result of a price increase.

8. A linear demand curve:

A. has a constant slope, but changing elasticity.

B. has a measured slope that is the same as the measured elasticity.

C. has a changing slope, but constant elasticity.

D. has a constant slope and a constant elasticity, but they need not equal one another.

9. Which elasticity measures producers' responsiveness to a change in price?

A. Income elasticity of supply

B. Price elasticity of supply

C. Price elasticity of demand

D. Cross-price elasticity

10. The price elasticity of supply is __________ elastic over time because ___________.

A. less; the ideal number of firms have time to move into or out of the industry

B. more; producers get accustomed to the price changes

C. less; producers get accustomed to the price changes

D. more; producers have a longer time to adjust their production decisions

11. When two goods are substitutes, we expect their cross-price elasticity of demand to:

A. be greater than 1.

B. be positive.

C. be negative.

D. be zero.

12. The cross-price elasticity of two goods is -2. This tells us that:

A. the two goods are substitutes.

B. the two goods are unrelated.

C. the two goods are complements.

D. the two goods are inelastic.

13. Income elasticity will be positive for:

A. only necessities.

B. all normal goods.

C. all inferior goods.

D. only luxury goods with substitutes.

14. Income elasticity of demand describes:

A. which way the demand shifts in response to a change in price.

B. how much the quantity demanded changes in response to a change in price.

C. how quickly the market will change in response to a change in consumers' incomes.

D. how much the quantity demanded changes in response to a change in consumers' incomes.

15.

According to the graph shown, total surplus is area:

A. A.

B. A + B + C.

C. A + B.

D. B.

16.

According to the graph shown, consumer surplus is area:

A. A + B + C.

B. B.

C. A + B.

D. A.

17.

According to the graph shown, producer surplus is area:

A. A + B + C.

B. A + B.

C. A.

D. B.

18.

According to the graph shown, if the market price increased:

A. consumer surplus would increase.

B. consumer surplus would decrease.

C. total surplus would increase.

D. None of these statements is true.

19.

According to the graph shown, if the market price decreased:

A. producer surplus would decrease.

B. producer surplus would increase.

C. None of these statements is true.

D. total surplus would increase.

20. When a market is in equilibrium,

A. consumer surplus is minimized.

B. total surplus is maximized.

C. producer surplus is minimized.

D. All of these are true.

21. When a market is efficient,

A. only increased prices can benefit those involved.

B. there is no exchange that can make anyone better off without someone becoming worse off.

C. a central planner must be involved.

D. None of these is true.

22.

According to the graph shown, if the market is in equilibrium, total surplus is area(s):

A. A.

B. A + B + C + D + E.

C. D + E.

D. A + B + C.

23.

According to the graph shown, if the market goes from equilibrium to having its price set at $10 then:

A. area B is transferred surplus from consumers to producers.

B. All of these is true.

C. area (C + E) is deadweight loss.

24.

Suppose a tax has been imposed in the graph shown. Which kind of tax is most likely demonstrated by this

graph?

A. A tax on big corporations

B. A tax on buyers

C. None of these is true.

D. A tax on sellers

25. Tax incidence:

A. depends on whether the tax revenue is greater than the deadweight loss caused by the tax.

B. depends on the relative elasticity of the supply and demand curves in a market.

C. depends on the amount of tax revenue generated once administrative burdens are taken into account.

D. depends on whether it is a buyers tax or sellers tax that is being imposed.

26. If the demand curve is more elastic than the supply curve, then:

A. None of these is true.

B. the buyers will bear a greater tax incidence than sellers.

C. tax incidence will be shared equally by buyer and seller.

D. the sellers will bear a greater tax incidence than buyers.

27. This graph demonstrates the domestic demand and supply for a good, as well as a tariff and the world price

for that good.

According to the graph shown, if this economy were open to free trade, and decided to impose a tariff, the

domestic quantity demanded would:

A. decrease from 1500 to 1150.

B. decrease from 1150 to 815.

C. increase from 1150 to 1500.

D. increase from 815 to 1150.

28. This graph demonstrates the domestic demand and supply for a good, as well as a tariff and the world price

for that good.

According to the graph shown, if this economy were open to free trade, and decided to impose a tariff, the

domestic quantity supplied would increase from:

A. 250 to 815.

B. 250 to 500.

C. 815 to 1150.

D. 815 to 1500.

29. This graph demonstrates the domestic demand and supply for a good, as well as a tariff and the world price

for that good.

According to the graph shown, the amount of surplus enjoyed by domestic consumers with free trade before the

tariff is area:

A. A

B. ABC

C. ABCDEFG

D. ABCDEFGHIJKL

30. This graph demonstrates the domestic demand and supply for a good, as well as a tariff and the world price

for that good.

According to the graph shown, the amount of deadweight loss created by the imposition of a tariff is area:

A. IL

B. JK

C. IJKL

D. FGJK