AP MICRO Week 4 Practice Quiz: M, 20

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1 1 1. A marketing survey shows that gate receipts would increase if the price of tickets to a summer rock concert increased, even though the number of tickets sold would fall. What does this imply about the price elasticity of demand for concert tickets? (A) Demand is inelastic (B) Demand is elastic (C) Demand is unit elastic (D) Demand is perfectly inelastic 4. If a 10 percent increase in price leads to no change in quantity demanded, the demand curve is (A) indeterminate (B) downward sloping (C) vertical (D) horizontal (E) asymptotic (E) Demand is perfectly elastic 2. If the price of lunch at the school cafeteria increases and cafeteria revenue remains constant, the elasticity of demand for a school lunch must be (A) elastic (B) perfectly elastic (D) inelastic (E) perfectly inelastic 5. When price elasticity of demand is less than 1, what should a firm do if it wants to increase its total revenue? (A) decrease the price (B) raise the price (C) produce less (D) reduce costs (E) sell more 3. If the price of a good decreases by 3 percent and total revenue increases, the elasticity of demand for the good could possibly be (A) 1.3 (B) 1 (C) 0.8 (D) 0.2 (E) 0 6. When Yolanda's income increases from $40,000 to $60,000, she increases her purchases of good X from 90 to 110. Which of the following is true? Yolanda's income elasticity of demand for good X is (A).5 and X is a normal good (B).5 and X is an inferior good (C) 2 and X is a normal good (D) 2 and X is an inferior good (E) -2 and X is an inferior good

2 2 7. If a 10 percent increase in income leads to a 20 percent decrease in the quantity of a good purchased, which of the following is true? The income elasticity of demand for the good is (A) 0.5 and it is a normal good (B) 2 and it is a normal good (C) -0.5 and it is a normal good (D) -2 and it is an inferior good 10. Which factor contributes to price elasticity of supply? (A) Time (B) Inflexibility of sellers (C) Consumer expectations regarding future prices (D) Producer tastes and preferences (E) The availability of a producer surplus (E) -0.5 and it is an inferior good 8. If the cross-price elasticity of demand between two goods is +2, it means that the two goods are (A) normal goods (B) inferior goods (C) complements (D) substitutes (E) elastic 11. If a firm raises its prices by 5 percent and its total revenue increases by 5 percent, which of the following must be true of the price elasticity of demand for its product? It is (A) less than zero (B) greater than zero (C) equal to zero (D) greater than one (E) unitary elastic 9. When the price of a good increases, total revenue for the sale of the good will (A) decrease if demand is price elastic (B) increase if demand is price elastic (C) decrease if demand is price inelastic (D) increase if demand is unit elastic (E) decrease if demand is unit elastic 12. Which of the following must be true if total revenue increases when a firm decreases price? (A) The supply is price elastic (B) The supply is income elastic (C) The supply is income inelastic (D) The demand is price elastic (E) The demand is price inelastic

3 3 13. How do economists know that a good is a viable substitute? (A) Calculate cross-elasticity and the result is a positive number 15. If a one-of-a-kind Etruscan vase is offered for sale at an auction, which, if any, of the following correctly shows the supply curve for the vase? (B) Calculate cross-elasticity and the result is a negative number (C) The product is price inelastic (D) Wait to see if the market forces of supply and demand balance to equilibrium for the potential substitute (E) None of the above 14. If a store raises its prices by 20 percent and its total revenue increases by 10 percent, the demand it faces in this price range must be (A) inelastic (B) elastic (D) perfectly elastic (E) perfectly inelastic

4 4 16. Which of the following must be true if the revenues of wheat farmers increase when the price of wheat increases? (A) The supply of wheat is price elastic. (B) The supply of wheat is income elastic. (C) The supply of wheat is income inelastic. (D) The demand for wheat is price elastic. (E) The demand for wheat is price inelastic. 19. If a 5 percent wage increase in a particular labor market results in a 10 percent decrease in employment, the demand for labor is (A) perfectly elastic (B) relatively elastic (D) relatively inelastic (E) perfectly inelastic 17. Which of the following is true in the elastic range of a firm s demand curve? (A) The firm should expand output to increase economic profits. (B) An increase in price will also lead to an increase in total cost. (C) A decrease in price will likely lead to an increase in total revenue. (D) Marginal revenue is negative. (E) The firm is maximizing total revenue. 20. If the income elasticity of demand for good X is negative and the cross-price elasticity of demand between good X and good Y is negative, which of the following must be true of good X? (A) X is a normal good and is a substitute for Y. (B) X is a normal good and is a complement to Y. (C) X is an inferior good and is a substitute for Y. (D) X is an inferior good and is a complement to Y. (E) X is a normal good and Y is an inferior good. 18. To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is (A) inelastic (B) unit elastic (C) elastic (D) equal to the price elasticity of supply (E) equal to one 21. Assume that the price of good X decreases from $10 to $9 per unit and that the quantity demanded of good X increases from 25 to 30 units. In this price range, the demand for good X is (A) inelastic (B) elastic (D) perfectly inelastic (E) perfectly elastic

5 Price Elasticity of Demand = % change in quantity demanded % change in price *take absolute value Name Possible Values Significance Perfectly inelastic demand 0 Price has no effect on quantity demanded (vertical demand curve) Between 0 and 1 Unit-elastic demand Greater than 1, less than A rise in price reduces total revenue. A rise in price causes quantity demanded to fall to 0. A fall in price leads to an infinite quantity demanded (horizontal demand curve). Cross-price elasticity of demand = Complements Quantity demanded of one good rises when the price of another rises. = % in quantity demanded % in income Inferior good Normal good, income-elastic Quantity demanded rises when income rises, and more rapidly than income. Price elasticity of supply = Perfectly inelastic supply Greater than 0, less than Ordinary upward-sloping supply curve. Perfectly elastic supply

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