Question

ECO 101-S70: Final Quiz 2

CHAPTER 3: Demand, Supply and Equilibrium

1. Which of the following could cause a decrease in consumer demand for product X?

a.   a decrease in consumer income

b.   an increase in the prices of goods which are good substitutes for product X

c. an increase in the price which consumers expect will prevail for product X in the future

d. a decrease in the supply of product X

2. If two goods are substitutes for each other, an increase in the price of one will necessarily

a. decrease the demand for the other

b. increase the demand for the other

c. decrease the quantity demanded of the other

d. increase the quantity demanded of the other

3. The income of a consumer decreases and his/her demand for a particular good increases. It can be concluded that the good is:

a. normal

b. inferior

c. a substitute

d. a complement

4. An increase in demand and a decrease in supply will:

a. increase price and increase the quantity exchanged

b. decrease price and decrease the quantity exchanged

c. increase price and the effect upon quantity exchanged will be indeterminate

d. decrease price and the effect upon quantity exchanged will be indeterminate

5. Which of the following could NOT cause an increase in the supply of cotton?

a. an increase in the price of cotton

b. improvements in the art of producing cotton

c. a decrease in the price of machinery and tools employed in cotton production

d. a decrease in the price of corn

6. Market equilibrium refers to a situation in which market price

a. is high enough to allow firms to earn a fair profit

b. is low enough for consumers to buy all that they want

c. is at a level where there is neither a shortage nor a surplus

d. is just above the intersection of the market supply and demand curves

Problem A.      In December 1992, the federal government began requiring that all foods display information about fat content and other ingredients on food packages. The displays had to be verified by independent laboratories. The price of an evaluation of a food product could run as much as $20,000. Draw a diagram of the market for meat (carefully labeled, of course) and explain the likely effect this law had on the market for meat in detail.

Chapter 4: Elasticity

7. If when the price of a product rises from $1.50 to $2, the quantity demanded of the product decreases from 1000 to 900, the price elasticity of demand coefficient is

a. 3.00

b. 2.71

c. 0.37

d. 0.33

8. If a 1% fall in the price of a commodity causes the quantity demanded of the commodity to increase 2%, demand is

a. inelastic

b. elastic

c. of unitary elasticity

d. perfectly elastic

9. The chief determinant of the price elasticity of supply of a product is

a. the number of good substitutes the product has

b. the length of time sellers have to adjust to a change in price

c. whether the product is a luxury or a necessity

d. whether the product is a durable or a nondurable good.

Problem B:   Suppose that you are the manager of a firm. You notice that when you raised your price from $10 to $11, sales fell from 500 to 400 units.

a. Sketch the demand curve, labeling carefully.

b. Write down the entire, detailed formula used to calculate elasticity of demand.

c. Use the formula to calculate the elasticity of demand. Show every step.

d. Calculate the Total Revenue at each price.  

e. Show the Total Revenue at each price on your graph in part a.

f. What is the relationship between part c and part d?

Chapter 5: Market Outcomes and Tax Incidence

7.   Which of the following is not guaranteed by the efficiency of the market equilibrium?

a. Price represents the value of an extra unit of consumption

b. rich and poor will have adequate access to the good

c. price represents the cost of an extra unit of production

d. neither shortage nor surplus will exist

e. all mutually beneficial trades will have been made

8. The more inelastic is the supply the ______is the burden of the tax borne by ___________.

a. smaller; consumers and producers

b. larger; consumers

c. larger; producers

d. smaller; producers

e. larger; consumers and producers

Problem C:

This chapter pulls previous chapters together to demonstrate that markets reveal a process of coordination among buyers and sellers, coordinating through the “invisible hand” of the marketplace. The goal of this question is for you to demonstrate that you understand how a market economy works.

a.   We know that millions of Americans change their residences each year, many moving long distances to new and strange areas. How is it that every individual or family moving to a new state expects to and, in fact, finds someone in that state willing to sell or rent them a house or apartment that suits their tastes and circumstances? (It might help to start by explaining what markets are and how they work.)

b.   How is construction planning coordinated so that those states that are growing most rapidly manage to expand their stock of housing at a rate that matches their population growth?

Chapter 6: Price Ceilings and Price Floors

9. If the market price is below equilibrium, then

a. there is excess demand

b. there is excess supply

c. consumers will want to raise the price

d. firms will want to lower the price

e. all of the above

10. Laws used to keep market prices from rising are called:

a. wage and/or price ceilings

b. rationing and subsidies

c. allocations and redemptions

d. arbitrage and arbitration

e.   none of the above

11. Long term price ceilings are likely to cause

a. shortages

b. queues

c. black markets and corruption

d. economic inefficiency

e. All of the above

12. Minimum wage laws are examples of

a. government assistance that aids people on welfare

b. direct benefits from union membership

c. price floors, and create surplus labor and unemployment

d. arbitrage exercised by government bureaucrats

e. price ceilings that create labor shortages

13. Ignoring economic factors when designing social policies is:

a. appropriate because morality does not depend on money

b. likely to cause results incompatible with intentions

c. recommended by advocates of laissez-faire policies

d. a major reason why income is equitably distributed

e. mandated by the 27^th amendment to the U.S. Constitution

14. Curing shortages in the market for ice cream requires

a. increases in the price of ice cream

b. decreases in the supply of ice cream

c. increases in the demand for ice cream

d. decreases in the price of ice cream

Problem D.   The table below summarizes information about the market for Principles of Economics textbooks.

Price	Quantity Demanded	Quantity Supplied
20	2000	0
30	1000	200
40	500	500
50	250	900
60	125	1400

a. Sketch a graph of this market. You do not need to plot every number, but make sure to label everything and note important numbers.

b. in order to quell outrage over tuition increases, the college places a $30 limit on the price of textbooks. How many textbooks will be sold now? Are students likely to be happier? Why and why not? Show this on the graph you already drew, IN DETAIL.

Answer 1

Q1. A. An decrease in the income of the consumer- this will surely reduce the demand for good X as people will not have money to buy the good.

Q2. B. Increase t demand for the other.- an increase in the price of the substitute will bring its consumers to the available low priced substitute and hence its demand will increase.

Q3. B inferior good- as with the fall in income of the consumer he will now consume those goods which are low in price than the normal and hence inferior goods demand will increase.

Q4.c. increase in price and indeterminate change in the quantity supplied - as how much will the supply increase and when this cannot be determined.