Unit 2 test prep. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Class: Date: Unit 2 test prep Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Rapidly increasing health costs have been a major political concern for several decades. Suppose that to control rising health costs the government sets the maximum price for a normal doctor's visit at $20, but the current market price is $40. Then: a. more people will try to visit the doctor, but the doctor will see fewer patients. b. the same number of people will try to visit the doctor, and the doctor will see the same number of patients. c. more people will be able to see the doctor, since the price is lower. d. fewer people will try to see the doctor, and the doctors will see fewer patients. e. fewer people will try to see the doctor, and the doctor will see the same number of patients. 2. The price elasticity of demand can be found by: a. examining only the slope of the demand curve. b. measuring absolute changes in price and quantity demanded. c. multiplying the percentage change in quantity demanded by the percentage change in price. d. knowing that when price changes, the quantity demanded goes in the opposite direction. e. dividing the percentage change in quantity demanded by the percentage change in price. 3. Jeanette is willing to pay $100 for the first pair of shoes, $80 for the second pair, $50 for the third, and $30 for the fourth. If shoes cost $50, Jeanette will buy pairs of shoes and her total consumer surplus equals. a. 4; $110 b. 3; $230 c. 3; $80 d. 4; $80 e. 2; $80 1

2 Figure 4-1: Bicycles and Radishes I 4. (Figure 4-1: Bicycles and Radishes I) The figure shows production possibility curve for two countries that produce only radishes and bicycles. The axes of both graphs are measured in equivalent units. Country A is now operating at point M, and Country B is now operating at point N. The opportunity cost of producing an additional ton of radishes would be: a. greater in Country A than in Country B. b. greater in Country B than in Country A. c. the same in both countries. d. greater at point M than at point N. e. zero for either country if the country was operating on the production possibility curve. 5. (Figure 4-1: Bicycles and Radishes I) The figure shows production possibility curve for two countries that produce only radishes and bicycles. The axes of both graphs are measured in equivalent units. Country A is now operating at point M, and Country B is now operating at point N. Suppose Country A discovered a new technology that greatly increased its ability to produce bicycles. This would: a. lower the opportunity cost of producing radishes in Country A. b. decrease the opportunity cost of producing radishes in Country B. c. have no effect on the opportunity cost of producing radishes in Country A. d. increase the opportunity cost of producing radishes in Country B. e. increase the opportunity cost of producing radishes in Country A. 6. Which of the following statements is true? a. The concept of equilibrium requires that all individuals have an equal amount of income. b. If equilibrium in a market exists, then the price in that market will not fluctuate by more than 5%. c. If equilibrium in a market exists, then there will be no remaining opportunities for individuals to make themselves better off. d. Equilibrium in a market will exist when the number of buyers is equal to the number of sellers. e. If equilibrium in a market exists, it is both an efficient and an equitable outcome. 2

3 7. A price ceiling will create a persistent and a price floor will create a persistent. a. surplus; surplus b. shortage; surplus c. shortage; shortage d. surplus; shortage e. quota; inefficiency Market for Fried Twinkies Price (unit) Quantity Demanded (units) Quantity Supplied (units) $1.10 9,000 3, ,000 5, ,000 7, ,000 9, ,000 11,000 Table 50-1: Market for Fried Twinkies 8. (Table 50-1: Market for Fried Twinkies) The government decides to tax fried Twinkies at a rate of $0.30 per Twinkie and collect that tax from the producers. Using the table, the producers will receive per Twinkie and sell Twinkies after the tax. a. $1.10; 3,000 b. $1.20; 5,000 c. $1.30; 7,000 d. $1.50; 5,000 e. $1.40; 9, (Table 50-1: Market for Fried Twinkies) From the table, as a result of the $0.30 tax per fried Twinkie, the government will receive total tax revenue of: a. $500. b. $1,000. c. $1,500. d. $1,200 e. $1, (Table 50-1: Market for Fried Twinkies) The government decides to tax fried Twinkies at a rate of $0.30 per Twinkie and collect that tax from the producers. Using the table, the consumers will pay per Twinkie and buy Twinkies after the tax. a. $1.20; 8,000 b. $1.30; 7,000 c. $1.40; 6,000 d. $1.50; 5,000 e. $1.10; 9,000 3

4 11. Total surplus is: a. the sum of consumer and producer surplus. b. measured as the area between the supply and demand curves from their beginnings to their ends. c. the total net gain to consumers from trading in the market. d. the total net gain to producers from trading in the market. e. the difference between quantity supplied and quantity demanded at a price above the equilibrium price. 12. If the government imposes a price ceiling in the market for grapefruit, total surplus: a. will increase. b. will decrease. c. will not change. d. may change, but we cannot determine the change without more information. e. will be maximized. 13. If the estimated price elasticity of demand for foreign travel is 4, then: a. a 20% decrease in the price of foreign travel will increase quantity demanded by 80%. b. demand for foreign travel is inelastic. c. a 10% increase in the price of foreign travel will increase quantity demanded by 40% d. a 20% increase in the price of foreign travel will increase quantity demanded by 80%. e. a 20% decrease in the price of foreign travel will increase quantity demanded by 5%. 14. Which of the following is a key factor in the effectiveness of well-functioning markets? a. Outcomes which are equitable for consumers and producers. b. The role of government to deliver economic signals to consumers and producers. c. A significant degree of government intervention to maximize efficiency. d. Your right to use and dispose of your private property as you see fit. e. Producers dictate prices and quantities to consumers. 15. If the quantity supplied responds substantially to a relatively small change in price, supply would be: a. price-elastic. b. price-inelastic. c. negatively sloped. d. insensitive to changes in price. e. perfectly inelastic 4

5 Figure 47-2: Demand for Notebook Computers 16. (Figure 47-2: Demand for Notebook Computers) The seller's total revenue at point S equals the: a. distance 0P. b. distance MS. c. area 0TUM. d. area 0PSM. e. area PSUT. 17. (Figure 47-2: Demand for Notebook Computers) The seller's total revenue at point V equals the: a. area 0TVN. b. area 0PSVN. c. distance 0T. d. distance NV. e. area SUV. 18. (Figure 47-2: Demand for Notebook Computers) The change in the firm's total revenue resulting from a change in price from P to T suggests that demand is: a. perfectly price-inelastic. b. perfectly price-elastic c. price-inelastic. d. price unit-elastic. e. price-elastic. 19. Which of the following goods is likely to have the largest price elasticity of demand? a. a bicycle b. a mountain bike c. a Cannondale mountain bike d. a green Cannondale mountain bike e. salt 5

6 20. Supply curves tend to be more the greater the time period facing the producer. a. price-inelastic b. price-elastic c. steeply sloped d. inflexible e. downward sloping. 21. Each month Jacquelyn spends exactly $50 on ice cream regardless of the price of each container. Jacquelyn's price elasticity of demand for ice cream is: a. 0. b. 1. c. greater than 1, but less than 5. d. less than 1, but greater than 0. e. greater than Economists use the term equilibrium to describe: a. when individuals are equal. b. when no individual would be better off taking a different action. c. when no individual has an incentive to change his or her behavior. d. when no individual would be better off taking a different action and when no individual has an incentive to change his or her behavior. e. when individuals earn the same income. 23. If a frost destroys much of the grapefruit crop, total surplus: a. will increase. b. will decrease. c. will not change. d. may change, but we cannot determine the change without more information. e. will rise to infinite levels. 24. A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, Due to the increase in tuition, how many of you will transfer to another university? One student out of about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is: a. unitary elastic. b. highly elastic. c. highly inelastic. d. perfectly inelastic. e. perfectly elastic. 25. You manage a popular malt shop and lately revenues have been disappointing. Your friend suggests that raising soda prices will increase revenues, but your waitress suggests that decreasing soda prices will increase revenues. You aren't sure who is right, but you do know that: a. your friend thinks the demand for sodas is elastic, while your waitress thinks the demand for sodas is inelastic. b. your friend thinks the demand for sodas is inelastic, while your waitress thinks the demand for sodas is elastic. c. both the friend and waitress think the demand for sodas is elastic. d. both the friend and waitress think the demand for sodas is inelastic. e. your friend thinks the demand curve for sodas is nearly horizontal, while your waitress thinks the demand curve is nearly vertical. 6

7 26. One of the consequences of increasing the minimum wage has been: a. decreased unemployment for low-skill workers. b. workers offering to work off the books for less than the minimum wage. c. lower production costs for small businesses. d. increased employment for high-skill workers. e. lower prices for goods produced with minimum wage workers. Figure 47-4: Linear Demand Curve II 27. (Figure 47-4: Linear Demand Curve II) At prices greater than $8, demand is, while prices below $8 are, and demand at $8 will be. a. elastic; inelastic; unit-elastic b. inelastic; elastic; unit-elastic c. unit-elastic; inelastic; elastic d. equal to 0; elastic; inelastic e. elastic; inelastic; equal to zero 28. (Figure 47-4: Linear Demand Curve II) If price was initially set at $8 and then increased to $10, one would find that total revenue: a. decreases, as the price effect is dominated by the quantity effect. b. increases, as the price effect dominates the quantity effect. c. stays the same, as both the price and quantity effects remain unchanged. d. stays the same, but the price effect is dominated by the quantity effect. e. decreases, as the quantity effect is dominated by the price effect. 7

8 29. Dr. Colgate is a dentist who employs an assistant, Ms. Crest. If Dr. Colgate worked all day at the front desk, she could answer 40 phone calls. If she worked all day with patients, she could clean the teeth of 40 patients. If Ms. Crest worked all day at the front desk, she could answer 60 phone calls. If she worked all day with patients, she could clean the teeth of 20 patients. Which of the following is true? a. Dr. Colgate has an absolute advantage in answering phones. b. Ms. Crest has a comparative advantage in answering phones. c. Ms. Crest has an absolute advantage in cleaning patients' teeth. d. Dr. Colgate has a comparative advantage in answering phones. e. Dr. Colgate has an absolute advantage in answering phones and an absolute advantage in cleaning patients teeth. 30. The price elasticity of supply for a good is 3 if: a. a 1% increase in price leads to a 3% decrease in quantity supplied. b. a 1% decrease in price leads to a 3% decrease in quantity supplied. c. a 9% decrease in price leads to a 3% decrease in quantity supplied. d. a 9% increase in price leads to an 3% decrease in quantity supplied. e. a 3% increase in price leads to a 1% increase in quantity supplied. 31. Consider the market for ipods. What happens if a fantastic new alternative MP3 player is developed and, at the same time, a boat carrying a large shipment of ipods is attacked by sea monsters and sunk? a. Price decreases and quantity increases. b. Price increases and quantity increases. c. The change in price is uncertain and quantity decreases. d. Price increases and the change in quantity is uncertain. e. Price decreases and the change in quantity is uncertain. 32. A decrease in the price of eggs will result in a(n): a. increase in the demand for eggs. b. increase in the supply of eggs. c. decrease in the supply of eggs. d. downward movement along the supply curve of eggs. e. decrease in the demand for eggs. 33. The quota rent refers to: a. the difference between the demand price and the supply price at the quota limit. b. the rent received by landlords who own rent-controlled apartments. c. the opportunity cost of using a quota-controlled service, or of buying a good that is subject to an import quota. d. the minimum rent that the owner of a building must receive before he or she is willing to rent out the building. e. the difference between the demand price at the quota limit and the market equilibrium price. 34. If the purpose of a tax is to decrease the amount of a harmful activity, such as underage drinking, the government should impose it when the supply is and the demand is. a. elastic; elastic b. inelastic; inelastic c. elastic; inelastic d. inelastic; elastic e. inelastic; perfectly inelastic 8

9 35. We predict the -run price elasticity of demand of gasoline would be the -run price elasticity of demand of gasoline. a. long; less than; short b. long; greater than; short c. long; equal to; short d. short; greater; long e. short; not comparable to; long 36. Lena and Jess are roommates. Lena hates to clean the bathroom. Jess will only agree to clean the bathroom if Lena vacuums the living room. This statement best represents the economic concept of: a. the real cost of something is what you must give up to get it. b. how much? is a decision at the margin. c. people usually exploit opportunities to make themselves better off. d. there are gains from trade. e. when markets don t achieve efficiency, government intervention can improve society s welfare. 37. Market failure refers to a situation in which: a. markets fail to reach a fair outcome. b. markets establish a high price for necessities. c. market-determined wages are not high enough to raise all workers above the poverty line. d. markets fail to reach an efficient outcome. e. markets fail to reach the price that maximizes economic profits. 38. The incidence of a tax: a. is a measure of the revenue the government receives from the tax. b. refers to who writes the check to the government. c. refers to the share of the tax paid by consumers and the share paid by sellers. d. is a measure of the deadweight loss from the tax. e. is the price elasticity of demand after the tax is paid. 39. Which of the following is an example of a black market? a. a tenant in a rent-controlled apartment subletting at a higher rent b. the purchase of an inferior radio at a department store c. waiting in line during the gasoline shortages of the 1970s d. the oil market e. negotiating a lower price when buying a sofa at a garage sale. 40. An efficient way to finance the provision of city services (such as street cleaning) would be to charge all city residents, no matter the level of income, a monthly lump-sum tax. Such a tax would be: a. progressive. b. regressive. c. proportional. d. a property tax. e. an excise tax. 9

10 41. Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area, the income elasticity of demand for peanut butter is 0.5. Due to local factory closings, you expect local incomes to decrease by 20%, on average, in the next month. As a result, you should stock: a. 20% more peanut butter on the shelves. b. 5% less peanut butter on the shelves. c. 10% more peanut butter on the shelves. d. 10% less peanut butter on the shelves. e. 20% less peanut butter on the shelves. 42. Which of the following would be most likely to have a vertical supply curve? a. salt b. oil c. insulin d. paintings by Van Gogh e. gasoline. 43. Suppose the price of cereal rose by 25% and the quantity of milk sold decreased by 50%. Then we know that the: a. cross-price elasticity between cereal and milk is 2. b. cross-price elasticity between cereal and milk is 0.5. c. price elasticity of demand for milk is 2. d. cross-price elasticity of demand for milk is 2. e. price elasticity of demand for cereal is If you know the cross-price elasticity between two goods is positive, then you know the two goods are: a. substitutes. b. complements. c. normal goods. d. inferior goods. e. necessities. 45. Suppose an income tax taxes 0% of the first $1,000, 10% of the next $10,000, and 20% of the remainder of earnings. This type of tax can be described as: a. progressive. b. proportional. c. regressive. d. equitable. e. an excise tax. 10

11 Unit 2 test prep Answer Section MULTIPLE CHOICE 1. ANS: A DIF: M REF: Module 8 2. ANS: E DIF: M REF: Module 46/10 3. ANS: C DIF: M REF: Module 49/13 4. ANS: B DIF: D REF: Module 4 5. ANS: E DIF: D REF: Module 4 6. ANS: C DIF: D REF: Module 6 7. ANS: B DIF: M REF: Module 8 8. ANS: B DIF: D REF: Module 50/14 9. ANS: C DIF: D REF: Module 50/ ANS: D DIF: D REF: Module 50/ ANS: A DIF: E REF: Module 50/ ANS: B DIF: D REF: Module 50/ ANS: A DIF: M REF: Module 46/ ANS: D DIF: M REF: Module 50/ ANS: A DIF: E REF: Module 48/ ANS: D DIF: M REF: Module 47/ ANS: A DIF: M REF: Module 47/ ANS: E DIF: D REF: Module 47/ ANS: D DIF: M REF: Module 47/ ANS: B DIF: E REF: Module 48/ ANS: B DIF: D REF: Module 47/ ANS: D DIF: M REF: Module ANS: B DIF: M REF: Module 50/ ANS: C DIF: M REF: Module 47/ ANS: B DIF: M REF: Module 47/ ANS: B DIF: M REF: Module ANS: A DIF: M REF: Module 47/ ANS: A DIF: M REF: Module 47/ ANS: B DIF: M REF: Module ANS: B DIF: M REF: Module 48/ ANS: C DIF: D REF: Module ANS: D DIF: M REF: Module ANS: A DIF: M REF: Module ANS: A DIF: D REF: Module 50/ ANS: B DIF: M REF: Module 47/ ANS: D DIF: M REF: Module ANS: D DIF: E REF: Module 50/ ANS: C DIF: E REF: Module 50/ ANS: A DIF: E REF: Module ANS: B DIF: M REF: Module 50/14 1

12 41. ANS: C DIF: D REF: Module 48/ ANS: D DIF: E REF: Module 48/ ANS: A DIF: M REF: Module 48/ ANS: A DIF: M REF: Module 48/ ANS: A DIF: M REF: Module 50/14 2