201 EC Summer 2007
Multiple Choice Questions
Problem Set No. 2
1. If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are a. inferior goods. b. complements. c. substitutes. d. normal goods. e. none of these answers. 2. The law of demand states that an increase in the price of a good a. increases the quantity supplied of that good. b. decreases the demand for that good. c. increases the supply of that good. d. decreases the quantity demanded for that good. e. none of these answers. 3. If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is a. an inferior good. b. a complementary good. c. a normal good. d. a substitute good. e. none of these answers. 4. All of the following shift the supply of watches to the right except a. an advance in the technology used to manufacture watches. b. a decrease in the wage of workers employed to manufacture watches. c. manufacturers' expectation of lower watch prices in the future. d. an increase in the price of watches. e. All of these answers cause an increase in the supply of watches. 5. If the price of a good is above the equilibrium price, a. the quantity demanded is equal to the quantity supplied and the price remains unchanged. b. there is a shortage and the price will rise. c. there is a shortage and the price will fall. d. there is a surplus and the price will fall. e. there is a surplus and the price will rise. 6. An increase (rightward shift) in the demand for a good will tend to cause a. a decrease in the equilibrium price and quantity. b. an increase in the equilibrium price and a decrease in the equilibrium quantity. c. an increase in the equilibrium price and quantity. d. a decrease in the equilibrium price and an increase in the equilibrium quantity. e. none of these answers. 7 Suppose there is an increase in both the supply and demand for personal computers. In the market for personal computers, we would expect a. the equilibrium quantity to rise and the equilibrium price to fall. b. the equilibrium quantity to rise and the change in the equilibrium price to be ambiguous. c. the equilibrium quantity to rise and the equilibrium price to rise. d. the change in the equilibrium quantity to be ambiguous and the equilibrium price to rise. e. the equilibrium quantity to rise and the equilibrium price to remain constant.
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8. Suppose there is an increase in both the supply and demand for personal computers. Further, suppose the supply of personal computers increases more than demand for personal computers. In the market for personal computers, we would expect a. the change in the equilibrium quantity to be ambiguous and the equilibrium price to fall. b. the equilibrium quantity to rise and the change in the equilibrium price to be ambiguous. c. the equilibrium quantity to rise and the equilibrium price to rise. d. the equilibrium quantity to rise and the equilibrium price to fall. e. the equilibrium quantity to rise and the equilibrium price to remain constant. 9. Suppose a frost destroys much of the Florida orange crop. At the same time, suppose consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium price and quantity in the market for orange juice? a. The impact on both price and quantity is ambiguous. b. Price will increase; quantity is ambiguous. c. Price will decrease; quantity is ambiguous. d. Price will increase; quantity will increase. e. Price will increase; quantity will decrease. 10. Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today? a. The impact on both price and quantity is ambiguous. b. Price will decrease; quantity is ambiguous. c. Price will increase; quantity is ambiguous. d. Price will increase; quantity will decrease. e. Price will increase; quantity will increase. 11. In general, a steeper supply curve is more likely to be a. price inelastic. b. price elastic. c. unit price elastic. d. none of these answers. 12. Which of the following would cause a demand curve for a good to be price inelastic? The a. good is a luxury. b. The good is inferior. c. The good is a necessity. d. There are a great number of substitutes for the good. 13. The demand for which of the following is likely to be the most price inelastic? a. taxi rides b. airline tickets c. transportation d. bus tickets 14. If the cross-price elasticity between two goods is negative, the two goods are likely to be a. complements. b. substitutes. c. necessities. d. luxuries. 15. If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught the fisherman's price elasticity of supply for fresh fish is a. infinite. b. one. c. zero. d. unable to be determined from this information.
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16. A decrease in supply (shift to the left) will increase total revenue in that market if a. supply is price elastic. b. supply is price inelastic. c. demand is price inelastic. d. demand is price elastic. 17. If consumers always spend 15% of their income on food, then the income elasticity of demand for food is a. 1.00. b. 1.50. c. 1.15. d. 0.15. 18. If there is excess capacity in a production facility, it is likely that the firm's supply curve is a. price elastic. b. price inelastic. c. unit price elastic. d. none of these answers. 19. If demand is linear (a straight line), then price elasticity of demand is a. elastic in the upper portion and inelastic in the lower portion. b. inelastic in the upper portion and elastic in the lower portion. c. inelastic throughout. d. elastic throughout. e. constant along the demand curve. 20. If the income elasticity of demand for a good is negative, it must be a. an inferior good. b. a luxury good. c. an elastic good. d. a normal good.
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True/False Questions
INSTRUCTIONS: When answering true/false questions, you need to decide whether the following statements are true or false. If you believe that the statement is true, write "True" as an answer and continue on to the next question. If you believe that the statement is false, however, write "False" and provide a short (up to 5 sentences) explanation as to why the statement is false.
1. A perfectly competitive market consists of products that are all slightly different from one another.
2. If there is an increase in supply accompanied by a decrease in demand for coffee, then there will be a decrease in both the equilibrium price and quantity in the market for coffee.
3. Using the midpoint method to calculate elasticity, if an increase in the price of pencils from 10 cents to 20 cents reduces the quantity demanded from 1000 pencils to 500 pencils, then the demand for pencils is unit price elastic.
4. If a demand curve is linear, the price elasticity of demand is constant along it.
5. If the income elasticity of demand for a bus ride is negative, then a bus ride is an inferior good.
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Short Answer Questions
Question No. 1
Consider the supply and demand scheduled below and answer the questions that follow: Price $10 9 8 7 6 5 4 3 2 1 A. B. C. Quantity Demanded 0 1 2 3 4 5 6 7 8 9 Quantity Supplied 10 9 8 7 6 5 4 3 2 1
Graph the demand and supply schedules: What is the price in equilibrium and how much will be bought and sold at that price? If price were at $7, discuss how price, quantity supplied, and quantity demanded have to change so that the market returns to equilibrium.
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Question No. 2
You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.
A. What is your current total revenue for both groups? B. Which market has the more inelastic demand? C. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? D. What is the elasticity of demand between $5 and $3 in the children's market? Is this elastic or inelastic? E. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?
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