Test 2 practice MCQ (Answers are at the end)

1.

If the demand for product X is inelastic, a 4 percent increase in the price of X will: A. decrease the quantity of X demanded by more than 4 percent. B. decrease the quantity of X demanded by less than 4 percent. C. increase the quantity of X demanded by more than 4 percent. D. increase the quantity of X demanded by less than 4 percent.

2.

Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week: A. demand will become more price elastic. B. price elasticity of demand will not change as price is lowered. C. demand will become less price elastic. D. the elasticity of supply will increase.

3.

Refer to the above diagram and assume a single good. If the price of the good increased from $5.70 to $6.30 along D1, the price elasticity of demand along this portion of the demand curve would be: A. 0. 8. B. 1. 0. C. 1. 2. D. 2. 0.

4.

The elasticity of supply of product X is unitary if the price of X rises by: A. 5 percent and quantity supplied rises by 7 percent. B. 8 percent and quantity supplied rises by 8 percent. C. 10 percent and quantity supplied stays the same. D. 7 percent and quantity supplied rises by 5 percent.

5.

It takes a considerable amount of time to increase the production of pork. This implies that: A. a change in the demand for pork will not affect its price in the short run. B. the short-run supply curve for pork is less elastic than the long-run supply curve for pork. C. an increase in the demand for pork will elicit a larger supply response in the short run than in the long run. D. the long-run supply curve for pork is less elastic than the short-run supply curve for pork.

6.

The supply curve of a one-of-a-kind original painting is: A. relatively elastic. B. relatively inelastic. C. perfectly inelastic. D. perfectly elastic.

7.

We would expect the cross elasticity of demand between dress shirts and ties to be: A. positive, indicating normal goods. B. positive, indicating complementary goods. C. negative, indicating substitute goods. D. negative, indicating complementary goods.

8.

Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is: A. negative and therefore these goods are substitutes. B. negative and therefore these goods are complements. C. positive and therefore these goods are substitutes. D. positive and therefore these goods are complements.

9.

Which of the following goods will least likely suffer a decline in demand during a recession? A. Dinner at a nice restaurant B. iPod s C. Toothpa ste D. Plasma screen and LCD TVs

10. Generally speaking, the demand for luxury goods is more price elastic than is the demand for necessities. True False

11. When the percentage change in price is greater than the resulting percentage change in quantity demanded: A. a decrease in price will increase total revenue. B. demand may be either elastic or inelastic. C. an increase in price will increase total revenue. D. demand is elastic. 12. If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then: A. the demand for the product is elastic in the $6$5 price range. B. the demand for the product must have increased. C. elasticity of demand is 0.74. D. the demand for the product is inelastic in the $6$5 price range.

13. Which of the following generalizations is not correct? A. The larger an item is in one's budget, the greater the price elasticity of demand. B. The price elasticity of demand is greater for necessities than it is for luxuries. C. The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product. D. The price elasticity of demand is greater the longer the time period under consideration. 14. Marginal utility can be: A. positive, but not negative. B. positive or negative, but not zero. C. positive, negative, or zero. D. decreasing, but not negative. 15. Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy: A. less of X only if its price rises. B. more of Y only if its price rises. C. more of Y and less of X. D. more of X and less of Y. 16. When a consumer shifts purchases from product X to product Y the marginal utility of: A. X falls and the marginal utility of Y rises. B. X rises and the marginal utility of Y falls. C. both X and Y rises. D. both X and Y falls.

17. Diminishing marginal utility explains why: A. the income effect exceeds the substitution effect. B. the substitution effect exceeds the income effect. C. supply curves are upsloping. D. demand curves are downsloping. 18. According to prospect theory, firms are more likely to shrink packages than raise prices because: A. consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money. B. they don't understand that consumers recognize price increases easily, regardless of what form they take. C. consumers associate smaller packages with higher quality luxury goods. D. consumers are generally trying to downsize their purchases and lead simpler lives. 19. Prospect theory and the work of behavioral economists confirm that consumers are economically rational. True False

20. If the price of A is $12 and the price of B is $3, the budget line tells us that a consumer in effect can trade: A. 12 units of A for 3 of B. B. 1 unit of A for 4 of B. C. 1 unit of A for 3 of B. D. 1 unit of B for 4 of A.

21. AA is Al's indifference curve and BB is Betty's. Al and Betty have the same budget line, LL. This information implies that: A. Al's demand for X is greater than Betty's. B. Al's demand for Y is greater than Betty's. C. Al and Betty have the same demand for both products. D. Al will buy some of X, but Betty will not.

22. In the above diagram:

A. the consumer is indifferent between points A and B, but neither point maximizes his utility. B. the consumer is indifferent between points A and B and either point will maximize his utility. C. any combination of X and Y entailing more of Y and less of X than shown at B would be preferred. D. any combination of X and Y entailing more of X and less of Y than shown at A would be preferred. 23. "Essential" water is cheaper than "nonessential" diamonds because:

A. new industrial uses for diamonds have been discovered. B. the supply of water is great relative to demand and the supply of diamonds is small relative to demand. C. although the total utility of diamonds is greater, their marginal utility is small. D. the supply of diamonds is great relative to demand and the supply of water is small relative to demand.

24. Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?

A. Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero. B. MU/P is greater at all-you-can-eat restaurants. C. People who eat at all-you-can-eat restaurants do not experience diminishing marginal utility. D. Food at all-you-can-eat restaurants tends to have fewer calories, so consumers feel the need to consume a greater volume of food.

25. Refer to the above diagram. The budget line shift that moves the consumer's equilibrium from point A to point B suggests:

A. an increase in the demand for product X. B. a decrease in the demand for product X. C. no change in the demand for product X. D. that X is an inferior good.

test 2 practice Key

1. B 2. C 3. C 4. B 5. B 6. C 7. D 8. C 9. C 10. TRUE 11. C 12. A 13. B 14. C 15. D 16. B 17. D 18. A 19. FALSE 20. B 21. B 22. A 23. B 24. A 25. B