1.

An improvement in production technology will:

a. increase equilibrium price.
b. shift the supply curve to the left.
c. shift the supply curve to the right.
d. shift the demand curve to the left.

2.

The National Airline is considering an increase in its fares by 20 percent. The airline
executives argue that the fare increase is necessary in order to raise more revenues.
Opponents of the rate increase contend that the airlines revenues will fall if the rate
increase occurs. It can be concluded that:
a) both groups feel that the demand is elastic, but for different reasons.
b) both groups feel that the demand is inelastic, but for different reasons.
c) the airline executives feels the demand for its service is inelastic, and opponents of
the rate increase feel it is elastic.
d) the airline executives feels that the demand for its service is elastic, and the opponents
of the rate increase feel it is inelastic.

3.

If demand is price inelastic:

a) An increase in price must raise profits

b) An increase in price decreases revenue

c) An increase in price increases revenue

d) A decrease in price reduces sales .

4.

Price increases from 10 to 12 pence and the price elasticity of demand is -0.5. The quantity demanded was
500 units. What will it be now?
a) 550 units

b) 500 units

c) 450 units

d) 490 units

5.

The demand for an inferior good will -------------- during ------------a) Decrease; periods of rising prices.
b) Increase; periods of falling prices.
c) Increase; periods of falling incomes
d) Increase; periods of rising incomes

7.
Movement from point a to point e might be achieved if:
(a) this society recovered from a recession characterized by productive inefficiency.
(b) diligent immigrants moved into the country, increasing the work force.
(c) more people went on diets and had to buy new clothes.
(d) technological advanced, increasing economic profits.

8.

The economic system of a country is usually classified according to:

(a) who makes decisions and who owns which resources.
(b) whether it is democratic or totalitarian.
(c) its per capita GDP and its currency's value in euros or U.S. dollars.
(d) its international indebtedness and balances of payments.

Any bread price less than P1 would create:

(a) minimization of transaction costs.
(b) shortages.
(c) surpluses.
(d) rising unemployment among bakers.

If equilibrium moves from point a to point b, the only market experiencing a decrease in
demand is shown in:
(a) Panel A.
(b) Panel B.
(c) Panel C.
(d) Panel D.

If equilibrium moves from point a to point b, the only market experiencing an increase in
quantity supplied is shown in:
(a) Panel A.
(b) Panel B.
(c) Panel C.
(d) Panel D.
If equilibrium moves from point a to point b, the only market experiencing an increase in
supply is shown in:
(a) Panel A.
(b) Panel B.
(c) Panel C.
(d) Panel D.
If equilibrium moves from point a to point b, the only market experiencing a decrease in
supply is shown in:
(a) Panel A.
(b) Panel B.
(c) Panel C.
(d) Panel D.
Wedges between demand curves and supply curves are created by:
(a) arbitragers and speculators.
(b) intermediaries and transaction costs.
(c) growth in the level of national income.
(d) politicians who enact laissez faire policies.
(e) taxes, subsidies, and government regulations.
Price floors create tendencies for:
(a) shortages because buyers demand more than firms produce.
(b) lobbying by sellers for their elimination.
(c) net increases in the satisfactions of consumers.
(d) surpluses because firms produce more while households buy less.
(e) economy-wide growth of output.
Along a negatively sloped, straight-line demand curve, one constant is:
(a) price.
(b) quantity demanded.
(c) slope.
(d) the price elasticity of demand.

The transfer of wealth from industrialized countries to oil exporting

countries (OPEC) that followed skyrocketing oil prices in the 1970s indicates
that the price elasticity of demand for oil was:
(a) relatively low.
(b) relatively high.
(c) unitary.
(d) perfectly elastic.

If the slope of the demand for wheat is -10, we can predict that a higher
price of wheat will:
(a) increase total expenditures on wheat.
(b) reduce total expenditures on wheat.
(c) not affect total expenditures on wheat.
(d) More information is needed to answer.

If a 2% increase in the price of Kibbles causes a 1% increase in the quantity

sold of Bits, their price cross elasticity of demand is roughly _____ and these
goods are _____.
(a) -2; complements
(b) 0.5; substitutes
(c) 2; substitutes
(d) -0.5; complements

1. price elasticity of demand

(a)

Change in relative quantity demanded due to relative price

change.

2. income elasticity

(b)

Measures relative changes in amounts sold when income

changes.

3. Substitute good

(c)

Cross elasticity coefficient is positive.

4. Complementary goods.

(d)

Cross elasticity coefficient is negative.

5. inferior good

(e)

Negative income elasticity coefficient.

6. price-cross elasticity

(f)

% change y / % change price X

7. normal good

(g)

Income elasticity coefficients between zero and one.

8. luxury good

(h)

Income elasticity greater than one.

9. price elasticity of supply

(i)

Measures how relative amounts available vary when

relative prices change.

(j)

Who writes the check to the government?.

10. Legal incidence of tax

11. tax burden

(k)

Who loses purchasing power because of a tax?

12. tax burdens on buyers

(l)

Decrease as the ratio rises for (ep) / (es).

13. tax burdens on sellers

(m) Increase as the ratio rises for (ep) / (es).

Solve for the equilibrium price and quantity in the market for
asparagus if the supply curve can be described as Pa = 4 + 2Q and the
demand curve is written Pa = 20 3Q.
What would happen in the market for lawyers if all civil laws were carefully rewritten in plain
English so that contradictions and ambiguities were largely eliminated?
Answer: The demand for legal services would decrease resulting in a reduced quantity
supplied of legal services and lower prices. Incomes of lawyers would fall in the short run.
Eventually as fewer people entered the profession because of the lower incomes, the supply of
lawyers would decrease and their incomes would return to the original levels.

Figure 3-6(a)

Figure 3-6(b)

Draw a graph to illustrate the changes in supply or demand in the market for bananas if the Food
and Drug Administration announces research results that eating 5 pounds of bananas monthly raises
IQ scores by an average of 10 points. Now draw a graph to illustrate what would happen in the
markets for apples or other fruit.
Answer: The demand for bananas would grow, exerting upwards pressures on banana prices.
The quantity of bananas supplied would rise in response to increased demand and price.
Demands for other fruits would probably fall, depressing prices and the quantities supplied.

Figure 3-2(a)

Figure 3-2(b)

When a good is taxed,

a. both buyers and sellers of the good are made worse off.
b. only buyers are made worse off, because they ultimately bear the burden of the tax.
c. only sellers are made worse off, because the government holds them responsible for
sending
in the tax payments.
d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods
and
services that would otherwise not be provided in a market economy.
2. A tax levied on the sellers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right).
c. demand curve upward (or to the right).
d. demand curve downward (or to the left).

3. Buyers of a product will bear the larger part of the tax burden, and sellers will bear a
smaller part of
the tax burden, when
a. the tax is placed on the sellers of the product.
b. the tax is placed on the buyers of the product.
c. the supply of the product is more elastic than the demand for the product.
d. the demand for the product is more elastic than the supply of the product.
4. The decrease in total surplus that results from a market distortion, such as a tax, is called
a
a. wedge loss.
b. revenue loss.
c. deadweight loss.
d. shrinkage of consumer surplus.
5. A deadweight loss is a consequence of a tax on a good because the tax
a. induces the government to increase its expenditures.
b. induces buyers to consume less, and sellers to produce less, of the good.
c. causes a disequilibrium in the market.
d. imposes a loss on buyers that is greater than the loss to sellers.
Answers: AACCB
Which best describes consumer surplus?
a) The price consumers are willing to pay for a unit

b) The cost of providing a unit

c) The profits made by a firm

d) The difference the price a consumer pays for an item and the price he/she is willing to pay

Refer to the above diagram. Assuming the equilibrium price P0, consumer surplus is
represented by
areas:
*a. a + b
b. a + b + c + d
c. c + d
d. a + c
Refer to the above diagram. Assuming equilibrium price P0, producer surplus is
represented by areas:
a. a + b
b. a + b + c + d
*c. c + d
d. a + c

Refer to the above diagram. The area that identifies the maximum sum of consumer
surplus and
producer surplus is:
a. a + b + c + d + e + f
b. c + d + f
c. a + b + e
*d. a + b + c + d
Refer to the above diagram. If actual production and consumption occur at Q 1:
a. Efficiency is achieved
b. Consumer surplus is maximized.
*c. An efficiency loss (or deadweight loss) of b + d occurs.
d. An efficiency loss (or deadweight loss) of e + d occurs.
Referring to the question above, the dollar value of the deadweight loss triangle can
be calculated by
the following formula
a. Area = (base x height) plus 2
b. Area = (base x height) minus 2
c. Area = (base x height) /2
c. Area = (base / height) plus 2