# exam - University of Illinois at Urbana-Champaign ECON302...

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University of Illinois at Urbana-Champaign ECON302 Intermediate Microeconomics Exam 1 June 30, 2008 Solutions PART I: Multiple Choice Questions (50 points) 1. Which of the following represents an example of normative analysis? a) How will the equilibrium price of coffee be affected by drought? b) How will a government subsidy affect the quantity demanded of public housing? c) What is the best method for allocating tax revenues? d) How will a tax cut affect a typical consumer’s disposable income? Ans: c 2. Suppose in a market with Q d = 100 - 5P and Q s = 5P , the government imposes a price floor of \$15. If the government is required to purchase any excess supply at the price floor, how much will the government have to pay to purchase the excess in this market? a) Nothing; there is no surplus b) \$1,000 c) \$1,500 d) \$750 Ans: d 3. Suppose that the market for newspaper is initially in equilibrium. Further suppose that there is both an increase in the price of ink and a decrease in the price of magazines, which people may read in place of a newspaper. Which of the following accurately describes the new equilibrium? a) The equilibrium price will rise; the equilibrium quantity is ambiguous. b) The equilibrium price is ambiguous; the equilibrium quantity will fall. c) The equilibrium price will fall; the equilibrium quantity is ambiguous. d) The equilibrium price is ambiguous; the equilibrium quantity will rise. Ans: b 4. Suppose demand is given by Q d = 1000 – 25P and supply is given by Q s = 75P . At the equilibrium price and quantity, the price elasticity of demand is a) –3 b) –25 c) –1/3 d) –10 Ans: c 5. An income elasticity of demand for milk of 0.1 could mean that a) as income rises by 10 percent, quantity demanded rises by 1 percent. b) as income rises by 100 percent, quantity demanded rises by 1 percent. c) as income rises by 20 percent, quantity demanded rises by 10 percent. d) as income rises by 50 percent, quantity demanded rises by 25 percent.

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Ans: a 6. Which of the following statements is true? a) The price elasticity of demand is positive when there is an inverse relationship between price and quantity demanded. b) A positive income elasticity indicates that demand for a good rises as consumer income falls. c) A positive cross-price elasticity for two goods A and B would arise if A and B were complements. d) A negative cross-price elasticity for two goods A and B would arise if A and B were complements. Ans: d 7. Which of the following statements best describes the relationship between short-run supply elasticity and long-run supply elasticity? a) For many products, long-run supply is likely to be more price elastic than short- run supply. b)
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## This note was uploaded on 10/27/2008 for the course ECON 302 taught by Professor Toossi during the Fall '08 term at University of Illinois at Urbana–Champaign.

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exam - University of Illinois at Urbana-Champaign ECON302...

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