Econ 2113 Test 2A Pledge: I have neither given nor received aid on this exam.

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1 Econ 2113 Test 2A Dr. Rupp Spring 2011 Name: Pledge: I have neither given nor received aid on this exam. Signature: Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. 0. b. -1. c. -6. d If the price elasticity of demand for a good is -0.94, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded? a. a percent increase in the price of the good b. a percent increase in the price of the good c. a percent increase in the price of the good d. a percent increase in the price of the good 3. Demand is said to be unit elastic if a. quantity demanded changes by the same percent as the price. b. quantity demanded changes by a larger percent than the price. c. the demand curve shifts by the same percentage amount as the price. d. quantity demanded does not respond to a change in price. Figure Refer to Figure 5-4. As price falls from P A to P B, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity? a. D 1 b. D 2 c. D 3 d. All of the above are equally elastic.

2 Figure Refer to Figure 5-7. Total revenue when the price is P 1 is represented by the area(s) a. B + D. b. A + B. c. C + D. d. D. e. A+B+C+D 6. In which of these instances is demand said to be perfectly inelastic? a. An increase in price of 2% causes a decrease in quantity demanded of 2%. b. A decrease in price of 2% causes an increase in quantity demanded of 0%. c. A decrease in price of 2% causes a decrease in total revenue of 0%. d. The demand curve is horizontal. 7. Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase its total revenue and your job is on the line. If the demand for sandwiches is elastic, you a. should increase the price of sandwiches. b. should decrease the price of sandwiches. c. should not change the price of sandwiches. d. could not determine what to do with price until you determine whether supply is elastic or inelastic. 8. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 4 percent, the number of candy bars demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the a. demand for candy bars in this price range is elastic. b. demand for candy bars in this price range is inelastic. c. demand for candy bars in this price range is unit elastic. d. price elasticity of demand for candy bars in this price range is Income elasticity of demand measures how a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level.

3 10. Which supply curve represents perfectly inelastic supply? Price S 2 S 1 S 3 Quantity a. S 1 b. S 2 c. S 3 d. Cannot determine without more information. 11. To determine whether a good is considered normal or inferior, one could examine the value of the a. income elasticity of demand (E I ) for that good. b. price elasticity of demand (E p ) for that good. c. price elasticity of supply (E S ) for that good. d. cross-price elasticity of demand (E xy ) for that good. 12. If two goods are substitutes, their cross-price elasticity will be a. positive. b. negative. c. zero. d. equal to the difference between the income elasticities of demand for the two goods. 13. Suppose the income elasticity of demand for basketballs is A 3 percent increase in income will result in a. a 3.6 percent decrease in the quantity of basketballs demanded. b. a 3.6 percent increase in the quantity of basketballs demanded. c. a 4 percent decrease in the number of basketballs demanded. d. None of the above is correct. 14. A key determinant of the price elasticity of supply is a. the ability of sellers to change the price of the good they produce. b. the ability of sellers to change the amount of the good they produce. c. how responsive buyers are to changes in sellers' prices. d. the slope of the demand curve. 15. If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. supply is said to be inelastic. c. an increase in price will not shift the supply curve very much. d. even a large decrease in demand will change the equilibrium price only slightly.

4 Figure Refer to Figure 6-4. If the government imposes a price ceiling in this market at a price of $5.00, the result would be a a. shortage of 20 units. b. shortage of 10 units. c. surplus of 20 units. d. surplus of 10 units. e. equilibrium (neither shortage nor surplus) 17. Refer to Figure 6-4. For a price ceiling to be binding, it would have to be set at a. any price below $6.00. b. a price between $4.00 and $6.00. c. any price above $8.00. d. any price above $6.00. Figure 6-5

5 18. Refer to Figure 6-5. If the government imposes a price floor of $2.00 in this market, the result is a a. surplus of 30 units of the good. b. shortage of 20 units of the good. c. shortage of 30 units of the good. d. shortage of 50 units of the good. e. equilibrium (neither shortage nor surplus) 19. A tax on the buyers of popcorn a. increases the equilibrium quantity of popcorn. b. reduces the equilibrium quantity of popcorn. c. has no effect on the equilibrium quantity of popcorn. d. may increase, decrease, or have no effect on the equilibrium quantity of popcorn. 20. When a payroll tax is enacted, a. the wage received by workers falls and the wage paid by firms rises. b. the wage received by workers falls and the wage paid by firms falls. c. the wage received by workers rises and the wage paid by firms falls. d. the wage received by workers rises and the wage paid by firms rises. Figure Refer to Figure Before the tax is imposed, the equilibrium price is a. $24. b. $16. c. $10. d. $ Refer to Figure The price that buyers will pay after the tax is imposed is a. $24. b. $16. c. $10. d. $ Refer to Figure The price that sellers receive after the tax is imposed is a. $24. b. $14. c. $10. d. $ Refer to Figure The amount of the tax per unit is a. $16. b. $14. c. $8. d. $6.

6 25. Suppose that a tax is placed on DVDs. If the sellers end up bearing most of the tax burden, we know that the a. demand is more inelastic than supply. b. supply is more inelastic than demand. c. government has required that buyers remit the tax payments. d. government has required that sellers remit the tax payments. 26. The term tax incidence refers to a. the matter of whether buyers or sellers of a good are required to send tax payments to the government. b. the matter of whether the demand curve or the supply curve shifts when the tax is imposed. c. the distribution of the tax burden between buyers and sellers. d. All of the above are correct. Figure Refer to Figure At the equilibrium, total consumer surplus is represented by the area a. A. b. A + B + C. c. D + E + F. d. A + B + C + D + E + F. 28. Refer to Figure At the market-clearing equilibrium, total producer surplus is represented by the area a. F. b. F + G. c. D + E + F. d. D + E + F + G + H.

7 Figure Refer to Figure At the quantity Q 3, a. the market is in equilibrium. b. consumer surplus is maximized. c. the sum of consumer surplus and producer surplus is maximized. d. the value to buyers is less than the cost to sellers. 30. Efficiency is attained when a. total surplus is maximized. b. producer surplus is maximized. c. all resources are being used. d. consumer surplus is maximized and producer surplus is minimized. 31. Market power refers to the a. side effects that may occur in a market. b. government regulations imposed on the sellers in a market. c. ability of market participants to influence price. d. forces of supply and demand in determining equilibrium price.

8 Figure 8-7 The graph below represents a $10 per unit tax on a good. 32. Refer to Figure 8-7. After the tax goes into effect, producer surplus is the area a. D + F + G + H + J. b. D + F + G + H. c. D + F + J. d. J. e. G + H 33. Refer to Figure 8-7. The deadweight loss of the tax is represented by the area a. B + D. b. C + F. c. A + C + F + J. d. B + C + D + F. e. G + H 34. Assume that the equilibrium price of a Snicker s bar is $1. If the government taxes Snicker s bars by $0.25, what do you expect to happen to the price of Snicker s bars after the tax is imposed? a. Price will be less than $1. b. Price will remain at $1. c. Price will be more than $1 and less than $1.25. d. Price will be $1.25. e. Price will be more than $1.25. True/False Indicate whether the statement is true or false. 35. Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower. 36. If the equilibrium wage rate is $6 per hour, and the minimum wage is $7.25 per hour, a shortage of labor will exist. 37. According to the Laffer curve increasing the tax rate initially increases revenue, however, there becomes a point where further tax rate increases will reduce revenue. 38. Producer surplus is the price minus the cost of production.

9 39. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. 40. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Extra Credit Question: To be eligible to answer these extra credit questions, you must satisfy both criteria below: Your cell phone has not rung in class You are taking this test in class at the regularly scheduled time: (Tu, Mar 1 st ) 41. The price of oil hit $100 a barrel this past week. What has happened in the oil market to cause the recent increase in oil prices? a. Demand has shifted outward b. Demand has shifted inward c. Supply has shifted left or upward d. Supply has shifted right or downward 42. What has happened to the consumer surplus in the oil market following the recent increase in oil prices? a. Consumer surplus has increased b. Consumer surplus has decreased c. Consumer surplus has not changed

10 Rupp Econ 2113 SS A Answer Section MULTIPLE CHOICE 1. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand 2. ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand 3. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand MSC: Definitional 4. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand 5. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Demand curve Total revenue 6. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Perfectly inelastic demand 7. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Elastic demand Total revenue 8. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand 9. ANS: A PTS: 1 DIF: 1 REF: 5-1 TOP: Income elasticity of demand MSC: Definitional 10. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand 11. ANS: A PTS: 1 DIF: 1 REF: 5-1 TOP: Income elasticity of demand 12. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand 13. ANS:B PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand 14. ANS: B PTS: 1 DIF: 2 REF: 5-2 TOP: Price elasticity of supply 15. ANS: B PTS: 1 DIF: 2 REF: 5-2 TOP: Price elasticity of supply 16. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings Shortages 17. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings 18. ANS: E PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings Shortages 19. ANS: B PTS: 1 DIF: 2 REF: 6-2 TOP: Tax 20. ANS: A PTS: 1 DIF: 2 REF: 6-2 TOP: Payroll taxes Wages 21. ANS: B PTS: 1 DIF: 1 REF: 6-2 TOP: Equilibrium price

11 22. ANS: A PTS: 1 DIF: 2 REF: 6-2 TOP: Tax Equilibrium price 23. ANS: C PTS: 1 DIF: 2 REF: 6-2 TOP: Tax Equilibrium price 24. ANS: B PTS: 1 DIF: 2 REF: 6-2 TOP: Tax 25. ANS: B PTS: 1 DIF: 2 REF: 6-2 TOP: Tax Elasticity 26. ANS: C PTS: 1 DIF: 2 REF: 6-2 TOP: Tax incidence Tax burden MSC: Definitional 27. ANS: B PTS: 1 DIF: 2 REF: 7-3 TOP: Consumer surplus 28. ANS: C PTS: 1 DIF: 2 REF: 7-3 TOP: Producer surplus 29. ANS: D PTS: 1 DIF: 2 REF: 7-3 TOP: Inefficiency 30. ANS: A PTS: 1 DIF: 2 REF: 7-3 TOP: Efficiency MSC: Definitional 31. ANS: C PTS: 1 DIF: 1 REF: 7-4 TOP: Market power MSC: Definitional 32. ANS: D PTS: 1 DIF: 2 REF: 8-1 TOP: Tax Producer surplus 33. ANS: B PTS: 1 DIF: 2 REF: 8-1 TOP: Deadweight losses 34. ANS: C PTS: 1 DIF: 1 REF: 8-2 TOP: Perfectly inelastic supply TRUE/FALSE 35. ANS: T PTS: 1 DIF: 2 REF: ANS: F PTS: 1 DIF: 2 REF: ANS: T PTS: 1 DIF: 1 REF: ANS: T PTS: 1 DIF: 1 REF: ANS: T PTS: 1 DIF: 1 REF: ANS: T PTS: 1 DIF: 2 REF: ANS: C PTS: 1 DIF: 2 REF: ANS: B PTS: 1 DIF: 2 REF: 8-3

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