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Econ 1110 Prelim 1 Additional Practice Questions 1. A director of a big bus company said, "For each 1 percent fare hike, we lose 0.2 percent of our riders." We can conclude that: a. a fare increase will increase total revenue. b. demand for bus service will go up as fares increase. c. demand is price elastic. d. a 10 percent fare hike will produce a 20 percent reduction in riders. e. the price elasticity is -5. Answer: a . Since demand is inelastic, a fare increase will increase total revenue. 2. In equilibrium a downward movement along the demand curve for a good may occur when a. the price of the good falls. b. a decrease in demand occurs. c. the cost on an input falls. d. more than one of the above. e. all of the above. Answer: d , since a and c are both correct. 3. Andy is selling Old Ezra Finance Club T-shirts. The vertical axis of his demand curve measures the price of t-shirts in dollars and the horizontal axis measures the quantity demanded in t-shirts per week. The slope of his demand curve is -2, and if Andy's goal is to maximize revenue from selling the T-shirts, the price he should charge, in dollars, will be a. half as large as the number of shirts he will sell at that price. b. twice as large as the number of shirts he will sell at that price. c. equal to the number of shirts he will sell at that price. d. low enough to sell as many t-shirts as possible. e. there is not enough information here to answer this question. Answer: b . Total revenue is maximized at the point for which elasticity of demand = 1.0 = (P/Q)(1/slope), so (P/Q) = 2, or P = 2Q. Answer questions 4 and 5 on the basis of the demand curve shown. P Q 100 75 50 25 200 100 50 150 A B C D E 4. The price elasticity of demand at point B is equal to a. 3. b. 2 c. 0.5 d. 0.25 e. none of the above. Answer: a . (P/Q)(1/slope) = 3. 5. If the seller raises his price slightly from the current price of 60 per unit, a. demand will fall.

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b. total expenditure on the product will go down. c. total expenditure on the product will remain the same. d. total expenditure on the product will rise. e. more than one of the above are correct. Answer: b , because demand is elastic at that price. 6. What will happen to the equilibrium price and quantity of oranges if the price of ladders, which are used by orange pickers, rises? a. Both price and quantity will rise. b. Both price and quantity will fall. c. Price will rise and quantity will fall. d. Price will fall and quantity will rise. e. None of the above. Answer: c , because of the leftward shift in supply. 7. The Department of Public Works has just announced plans to construct bike lanes alongside all major city streets and the price of steel, an input used in the manufacture of bicycles, goes up. Which of the following will always occur? a. A fall in the equilibrium quantity of bicycles.
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