SAMPLE EX2-1

1.
Suppose that the price of a shirt is $30, and the marginal utility of a shirt is 60 utils; the
price of a sweater is $50, and the marginal utility is 100 utils; the price of socks is $10,
and the marginal utility is 25. Which good would a rational consumer purchase next?
a.
b.
c.
d.
e.
2.

Assume that a consumer is in equilibrium relative to three goods, X, Y, Z. Which of the

following would cause an increase in consumption of X?
a.
b.
c.
d.
e.

3.

the greater the availability of close substitutes.

the narrower the definition of the market.
the longer the period of time.
All of the above are correct.
None of the above are correct.

Suppose the price of product X is reduced from $1.65 to $1.35, and as a result the
quantity demanded increases from 1400 to 1600. Using the midpoint method, the price
elasticity of demand for X in the given price range is
a.
b.
c.
d.
e.

5.

decrease in price of Y
decrease in marginal utility of Y
increase in marginal utility of Z
all of the above
none of the above

Consumption of a good tends to be more price sensitive

a.
b.
c.
d.
e.

4.

shirt
sweater
socks
either a shirt or sweater, but cannot tell which
depends on which she wants more--shirt, sweater, or socks

2/3.
5/6.
1.
6/5.
3/2.

If the price elasticity of demand for basketballs is 1.20, a 15 percent increase in the price
will result in
a.
b.
c.
d.

an 18 percent decrease in the quantity of basketballs demanded.

a 15 percent decrease in the quantity of basketballs demanded.
an 8 percent reduction in the number of basketballs demanded.
a 12.5 percent reduction in the number of basketballs demanded.

6.

It has been suggested that IU reduce ticket prices to its football games to increase
attendance and increase revenue. Economic theory predicts that this price reduction
would
a.
b.
c.
d.
e.

7.

Last year Doug bought 10 bottles of Oliver Blueberry Wine when his income was
$40,000. This year his income is $50,000, and he purchased 15 bottles of Oliver
Blueberry. Other things constant, it is apparent that Doug
a.
b.
c.
d.
e.

8.

considers Oliver Blueberry to be a normal good.

considers Oliver Blueberry to be an inferior good.
considers Oliver Blueberry to be superior to Butler Blueberry.
has a price elastic demand for Oliver Blueberry.
has a price inelastic demand for Oliver Blueberry.

A local bar has a Ahappy hour@ price for beer that is lower than the price it charges for
the same beer at other times. The bar owner believes that, during happy hour, demand for
beer is
a.
b.
c.
d.
e.

9.

have no effect on attendance and increase revenue if demand is inelastic.

decrease attendance and increase revenue.
decrease attendance and increase revenue if demand is elastic.
increase attendance and increase revenue if demand is elastic.
decrease attendance and increase revenue if demand is inelastic.

price elastic.
price inelastic.
income elastic.
income inelastic.
unit elastic.

If the tax on bottled water is raised by $1 per bottle, the price consumers pay for water
can be expected to
a.
b.
c.
d.

remain unchanged.
rise by more than $1.
rise by less than $1.
rise by $1.

10.

Refer to the graph above showing a $2 per pack tax on cigarettes. The percentage of the
burden of this tax paid by tobacco consumers is
a.
b.
c.
d.
e.

11.

Refer to the graph above. The after-tax price paid and the after-tax price received are,
respectively,
a.
b.
c.
d.
e.

12.

zero.
25 percent.
50 percent.
75 percent.
100 percent.

$5 and $5.
$5 and $6.
$4 and $6.
$6 and $5.
$6 and $4.

It is known that the demand curve for liquor is inelastic compared to the supply curve.
The fact that many states impose high taxes on liquor suggests that legislators believe that
a.
b.
c.
d.
e.

such taxes will be effective in cutting alcohol abuse.

such taxes will raise substantial revenue for the states.
liquor dealers are an insignificant part of the electorate , so why not burden them
with a high tax.
consumers will not bear much of the burden of the tax.
suppliers will avoid the tax by passing the entire burden on to the consumers.

13.

The effect of rent controls in areas such as Berkeley, California and New York City has
been
a.
b.
c.
d.
e.

14.

Which of the following is not an example of a price floor?

a.
b.
c.
d.
e.

15.

a quantity of child care demanded greater than quantity supplied

a decrease in quality of care
a decrease in the number of hours of child care provided
an increase in the demand for child care
All of the above would occur as a result of a price ceiling.

Social Security (including Medicare) is funded by a 15.3 percent payroll tax. By law,
7.65 percent is paid by the employer, and 7.65 percent is paid by the employee. The
economic burden of the Social Security tax is borne
a.
b.
c.
d.
e.

17.

a minimum wage law

dairy price supports
price controls on gasoline in the 1970s
a legal price intended to maintain prices above the equilibrium price
federal regulations that set minimum allowable air fares in the 1970s

Which of the following would not be a result of a binding price ceiling on child care?
a.
b.
c.
d.
e.

16.

to increase the supply of housing.

to reduce the quantity of housing supplied.
to increase the vacancy rate.
to encourage construction of apartment buildings.
to improve the quality of apartment buildings.

equally be employers and employees.

more by employers than by employees.
more by employees than by employers.
almost totally by employers.
almost totally by employees.

Producer surplus is the

a.
b.
c.
d.

difference between total value of consumers and total profit of sellers.

difference between the consumers= offer prices and the actual price paid.
difference between price and opportunity cost.
difference between price and the value of unsold inventories.

e.

18.

difference between consumers= willingness to buy and producers= willingness

to sell.

Producing less than the market equilibrium quantity of steel means that
a.
b.
c.
d.
e.

resources must have had a higher-valued use in the production of another good.
consumer surplus will be higher than at any other quantity.
producer surplus will be higher than at any other quantity.
an additional unit of steel would add more to society=s benefit than to its cost.
All of the above are correct.

19.

Refer to the graph above. Which of the following is a correct statement?

a.
b.
c.
d.
e.

20.

Education is important to an economy. From a social welfare perspective, spending on

education should be increased as long as
a.
b.
c.
d.
e.

21.

At P1, consumer surplus is (A + B + C) - (D + E + F).

At P2, producer surplus is (D + E + F) - (A + B + C).
At P3, consumer surplus is greater than at P2, and producer surplus is smaller than
at P2, but total surplus is at maximum.
All of the above are true statements.
None of the above is true.

any citizen is illiterate.

society can afford it.
total benefits increase when spending increases.
total cost is less than total benefit.
an extra dollar spent on education provides at least a dollar in added benefits.

According to Adam Smith=s Ainvisible hand,@

a.
b.
c.
d.
e.

government plays a behind-the-scenes role in making markets in the economy

work efficiently.
individuals who are concerned about the public good will almost invisibly
promote increased social welfare.
free markets require only a little intervention to operate efficiently.
many buyers and sellers acting independently out of self-interest can promote
general economic well-being.
All of the above are examples of Smith=s invisible hand metaphor.

Use the following information to answer questions 22-24.

Suppose that you own a classic Triumph TR3 sports car. You have lost interest in sports cars, so
it is worth only $1000 to you. Steven is a real Triumph enthusiast and would be willing to pay as
much as $5000.
22.

If you sell the TR3 to your friend Steven

a.
b.
c.
d.

23.

If you sell the TR3 for $2000, then social welfare

a.
b.
c.
d.
e.

24.

rises by $1000.
rises by $3000.
rises by $4000.
decreases by $4000.
decreases by $2000.

Suppose you discover that Steven is not the only person who is interested in the TR3.
Enrique also likes it and would pay $2500; Dana would pay $6000, and Jackie would pay
$8500. To maximize economic welfare in this five-person society, you should
a.
b.
c.
d.
e.

25.

for more than $1000, you have gained at his expense.

for less than $5000, he has gained at your expense.
for $3000, splitting the difference, you both gain; at any other price, somebody
loses and social welfare is decreased.
for more than $1000 but less than $5000, you both gain and
social welfare is increased.

sell theTR3 to Steven, because his was the first offer you received.
sell the TR3 to Steven, but only if you can coerce him to match Jackie=s offer.
sell the TR3 to Jackie, but only if she pays $8500.
sell the TR3 to Jackie, even if she pays only slightly more than the next best offer.
take the car off the market and wait for it to appreciate in value.

The cross-elasticity of demand coefficient between tennis balls and tennis racquets is
a.
b.
c.
d.
e.

equal to one.
greater than zero but less than one.
greater than one.
zero.
negative.

ANSWERS
1c
2b
3d
4a
5a
6d
7a
8a
9c
10c
11e
12b
13b
14c
15d
16e
17c
18d
19e
20e
21d
22d
23c
24d
25e

SAMPLE EX2-2
1.
Other things constant, if the price of Mercedes cars were to decrease by ten percent, we
would expect
a.
b.
c.
d.
2.

Suppose that the price of Lik-M-Aid candy at Cecilia=s Corner Store is raised from
$.95 to $1.05, and as a result, the quantity of Lik-M-Aid demanded increases from
792 to 808. The price elasticity of demand (midpoint method ) is
a.
b.
c.
d.
e.

3.

an 18 percent decrease in the quantity demand.

an 18 percent increase in the quantity demanded.
an 8 percent decrease in the quantity demanded.
an 8 percent increase in the quantity demanded.
a 0.18 percent decrease in the quantity demanded.

The income elasticity of demand for quinces is estimated to be +0.4. This estimate
suggests that quinces are
a.
b.
c.
d.

5.

0.2%
5.0%
5.0
0.5
0.2

If the price elasticity of demand for basketballs is 1.20, then a 15 percent increase in price
would be expected to result in a
a.
b.
c.
d.
e.

4.

a greater than ten percent increase in the number of Mercedes purchased.

a less than ten percent increase in the number of Mercedes purchased.
no change in the number of Mercedes purchased.
a small percentage decrease in the number of Mercedes purchased.

a substitute good.
a complementary good.
a normal good.
an inferior good.

During recent economic downturns it was noticed that there was an increase in used
baby clothing stores. The most likely explanation for this occurrence is
a.
b.
c.
d.
e.

changing preferences for baby clothes.

a negative income elasticity of demand for used baby clothes.
a very low price elasticity of demand for used baby clothes.
a very high price elasticity of demand for used baby clothes.
a very high income elasticity of demand for used baby clothes.

6.

The value of cross-price elasticity of demand between orange soda and grape soda is
a.
b.
c.
d.
e.

7.

Which of the following goods will have the highest price elasticity of demand?
a.
b.
c.
d.
e.

8.

.16
1.6
6.1
6.1%
16%

In the economy of Fantasia, people always spend one-fourth of their income on ambrosia.
The income elasticity of demand for ambrosia is
a.
b.
c.
d.
e.

10.

Breyer=s chocolate-chip ice cream

Breyer=s ice cream
Ice cream
They are all ice cream, so they will all have the same elasticity.
There is no way to tell the relative elasticities of these goods.

AGateway reported 887,000 PCS shipped in Quarter III of 1998, a stunning rise of 43%
over Quarter III, 1997, while dropping prices 7%.@ What is price elasticity of demand
for Gateway computers, as represented by these data?
a.
b.
c.
d.
e.

9.

negative
positive.
0.
between -1 and 0.
less than -1.

0.25
2.50
25.0
1.00
not determinate from the information given.

The supply of gold is quite inelastic, whereas the demand is elastic. Therefore, buyers of
gold jewelry will
a.
b.
c.
d.
e.

pay more of any sales tax levied on jewelry than sellers will.
pay less of any sales tax levied on jewelry than sellers will.
pay all of any sales tax levied on jewelry.
pay none of any sales tax levied on jewelry.
pay more of the tax when prices are higher than when prices are lower.

11.

The graph above shows a tax of ____ imposed on the ____.

a.
b.
c.
d.
e.

12.

In the graph above, the after-tax price paid by buyers and price received by sellers are,
respectively,
a.
b.
c.
d.
e.

13.

$1; buyer
$1; seller
$2; buyer
$2; seller
$4; buyer

Price paid by buyers

$6.00
$5.00
$7.50
$4.00
$6.00

Price received by sellers

$5.00
$6.00
$2.50
$6.00
$4.00

The per-unit burden of the tax borne by buyer and seller is, respectively,
a.
b.
c.
d.
e.

Buyer
$2.00
$1.00
$1.50
$ .50
$4.00

Seller
$0
$1.00
$ .50
$ .50
$2.00

14.

Suppose the above tax is repealed and a price ceiling of $4.00 is enacted. The effects of
this policy include a (shortage/surplus) of ____ units.
a.
b.
c.
d.
e.

15.

Which of the following is not a result of an increase in the minimum wage?

a.
b.
c.
d.

16.

an increase in the number of teens who choose to look for jobs

and increase in the dropout rate from high school
an increase in the number of teens who are unemployed
an increase in teenage employment

Which of the following is likely to result from rent controls that establish a belowequilibrium price for rental housing?
a.
b.
c.
d.
e.

17.

shortage; 3
surplus; 3
shortage; 4
surplus; 4
surplus; 7

Shortages and black markets will develop.

The quality of existing housing will deteriorate.
People will change housing less often.
Non-price rationing schemes will emerge.
All of the above.

An accurate way to distinguish a shortage from scarcity is to note that

a.
b.
c.
d.
e.

a shortage can be eliminated by raising price, whereas scarcity cannot be

eliminated.
a shortage is a result of price controls, but scarcity is the result of producers
withholding output from the market.
shortage means we cannot have all we want at zero price; scarcity means we
cannot have all we want at any price.
at a high enough price, there is no scarcity, but shortages continue to exist even at
high prices.
none of the above: scarcity and shortage mean essentially the same thing.

18.

The principle of diminishing marginal utility states that, as you consume more and more
of a good, other things constant,
a.
b.
c.
d.
e.

total utility eventually rises.

the additional satisfaction from consuming an additional unit approaches, but
never becomes, 0.
the demand for an inferior good falls as income rises.
the marginal unit consumed adds negative utility to a consumer=s total
satisfaction.
the additional satisfaction from consuming an additional unit eventually declines.

19.

A tax imposed on sellers is

a.
b.
c.
d.
e.

20.

The marginal utility of the next salad is 150; the marginal utility of the next T-shirt is 200.
The price of a salad is $6, and the price of a T-shirt is $10. According to utility theory, a
rational consumer with sufficient income will
a.
b.
c.
d.
e.

21.

less than zero.

zero (or very close to it).
$2000 (or very close to it).
equal to consumer surplus.

Mike, owner of The Write Shop, was willing to sell a Pentel Quicker-Clicker pencil for
$4.49 but actually received a price of $4.99. In this exchange, Mike gained
a.
b.
c.
d.
e.

23.

buy a salad.
buy a T-shirt.
buy neither item and wait until their prices fall.
buy a salad if and only if the total utility from salads is greater than the total
utility from T-shirts.
buy a T-shirt if and only if the total utility from T-shirts is greater than the total
utility from salads.

If the price of a new computer is $2000, producers in the market will continue to supply
additional computers until the producer surplus from the last computer produced is
a.
b.
c.
d.

22.

likely to be more of a burden on low-income sellers than on consumers.

harder to avoid than a tax on buyers.
easier to avoid than a tax on buyers.
equivalent to a tax on imposed on buyers.
none of the above.

excess supply of $50.

consumer surplus of $.50.
producer surplus of $.50.
excess marginal revenue of $.50.
excess marginal revenue of $4.99.

Scalping of tickets for IU basketball games tends to

a.
b.
c.
d.

decrease social well-being.

benefit sellers of the tickets but not the buyers.
maximize the difference between consumer and producer surplus.
increase the likelihood that tickets will be used by those who value them most
highly.

24.

The economic value created in equilibrium in the market shown below is ____.
[The area of a rectangle = (length x width); the area of a triangle = 2 (base x height).]

a.
b.
c.
d.
e.
25.

$160
$120
$80
$40
$4

It is reported that electronic methods of billing and paying reduce processing costs for a
firm by $.50 per bill (down from $1.50 to $2.00 for current methods). Use supply-anddemand analysis to predict the effect of this new technology on the market price of
residential electricity and total revenue of electric companies. Price elasticity of
residential demand for electricity is 0.13.
a.
b.
c.
d.

increase P; increase TR
increase P; decrease TR
decrease P; increase TR
decrease P; decrease TR

ANSWERS
1a
2e
3a
4c
5b
6b
7a
8c
9d
10b
11d
12e
13b
14c
15d
16e
17a
18e
19d
20a
21b
22c
23d
24a
25d

1.

SAMPLE EX2-3
Generally, if the price of yachts were to decrease by a large percentage, we would expect
a.
b.
c.
d.

2.

Demand for a good would tend to be more price sensitive

a.
b.
c.
d.
e.

3.

0.5
2.0
0.2
2.0%
0.5%

If the price elasticity of demand for a good is 1.22, then a 10 percent increase in price
would be expected to result in a
a.
b.
c.
d.
e.

5.

the greater the availability of complements.

the longer the period of time there is at hand.
the broader the definition of the product category.
the fewer the substitutes there are.
Both (b) and (c) are correct.

Suppose that the price of good X is reduced from $1.65 to $1.35, and as a result, the
quantity of X demanded increases from 1900 to 2100. The price elasticity of demand
(midpoint method ) is
a.
b.
c.
d.
e.

4.

a substantial increase in the number of yachts purchased.

only a slight increase in the number of yachts purchased.
no change in the number of yachts purchased.
a slight decrease in the number of yachts purchased.

1.22 percent decrease in the quantity demand.

1.22 percent increase in the quantity demanded.
12.2 percent decrease in the quantity demanded.
12.2 percent increase in the quantity demanded.
122 percent decrease in the quantity demanded.

Get Smart University is contemplating a tuition increase to enhance revenue. If GSU

believes that raising tuition would raise revenue, they are assuming that the
a.
b.
c.
d.
e.

law of demand does not apply to education at GSU.

demand for education at GSU is elastic.
demand for education at GSU is inelastic.
demand for education at GSU is unit elastic.
supply of education at GSU is elastic.

6.

Suppose the value of income elasticity of demand for a private college education is equal
to 1.5. This means that
a.
b.
c.
d.
e.

7.

The value of cross-price elasticity of demand between golf balls and golf clubs is
a.
b.
c.
d.
e.

8.

pay more of any sales tax levied on bonsai trees than buyers will.
pay less of any sales tax levied on bonsai trees than buyers will.
pay all of any sales tax levied on bonsai trees.
pay none of any sales tax levied on bonsai trees.
pay more of the tax when prices are higher than when prices are lower.

A strict drug interdiction policy that reduces the supply of illegal drugs is most likely to
a.
b.
c.
d.

10.

negative.
positive.
0.
greater than 1.
less than 1.

The supply of Japanese bonsai trees is quite inelastic, whereas the demand is elastic.
Therefore, sellers of the trees will
a.
b.
c.
d.
e.

9.

every $1 increase in income provides an incentive for a $1.50 increase in

expenditures on private college education.
every $1.50 increase in income provides an incentive for a $1 increase in
expenditures on private college education.
a 10 percent increase in income causes a 15 percent increase in the quantity of
private college education purchased.
a 15 percent increase in income causes a 10 percent increase in the quantity of
private college education purchased.
a 10 percent decrease in private college tuition will have a large enough income
effect to increase spending on private college education by 15 percent.

reduce drug consumption but increase drug related crime.

reduce both drug consumption and drug related crime.
increase both drug consumption and drug-related crime.
reduce drug consumption but leave drug-related crime unchanged.

Which of the following is the most accurate statement about a binding minimum wage?
a.
b.
c.

A minimum wage raises the incomes of all low-wage workers.

A minimum wage lowers the incomes of all low-wage workers.
A minimum wage raises the incomes of some workers but at the expense of other
workers who lose their jobs.

d.
e.

11.

The graph above shows a tax of ____ imposed on the ____.

a.
b.
c.
d.
e.

12.

$4.00; 40
$3.50; 50
$3.00; 40
$3.00; 120
$2.50; 50

The per-unit burden of the tax borne by buyer and seller is, respectively,
a.
b.
c.
d.
e.

14.

$1; buyer
$1; seller
$4; buyer
$4; seller
$3; buyer

The after-tax market price and quantity sold are

a.
b.
c.
d.
e.

13.

A minimum wage raises the incentive for firms to engage in on-the-job training.
A minimum wage has no effect on the wages of workers.

Buyer
$1.00
$ .50
$ .75
$ .25
$3.00

Seller
$0
$ .50
$ .25
$ .75
$1.00

The total tax revenue collected by the government is

a.
b.
c.

$20
$25
$40

d.
e.
15.

Suppose the tax in the graph on the previous page is repealed and a price floor of $4.00 is
enacted. The effects of this policy include a (shortage/surplus) of ____ units.
a.
b.
c.
d.
e.

16.

wants are unlimited and resources are limited.

wants are limited and resources are unlimited.
price is held above equilibrium.
price is held below equilibrium.
quantity supplied exceeds quantity demanded.

Diminishing marginal utility means that, other things constant, as you

a.
b.
c.
d.
e.

19.

wedges money away from buyers.

wedges money away from sellers.
drives a wedge between the old and new equilibrium prices.
drives a wedge between the price paid by the buyer and that received by the seller.
both c and d.

Shortages result whenever

a.
b.
c.
d.
e.

18.

shortage; 40
surplus; 40
shortage; 20
surplus; 20
surplus; 60

When we say that a tax introduces a wedge in a market, we mean that the tax
a.
b.
c.
d.
e.

17.

$120
$160

consume more of a good, total satisfaction from consuming this good tends to fall.
consume more of a good, additional satisfaction from consuming each additional
unit tends to fall.
consume more of a good, the extra satisfaction you obtain from each extra unit of
the good is negative.
hire more labor, the total amount produced begins to fall.
hire more labor, the marginal product begins to fall.

If the marginal utility of a third waffle is 10 and the marginal utility of a second piece of
ham is 30 and you eat the third waffle, which of the following must be true?
a.
b.
c.
d.
e.

You are irrational.

You prefer waffles to ham at any price.
The price of a waffle is less than one-third the price of a piece of ham.
The price of a waffle is three times the price of a piece of ham.
The price of a waffle is more than three times the price of a piece of ham.

20.

Refer to the graph above. What area represents consumer surplus?

a.
b.
c.
d.
e.

21.

Katie visits a sporting goods store to buy new set of golf clubs. She is willing to pay
$750 for the clubs, but the seller=s opportunity cost is $400. If she buys them on sale for
$525, Katie=s consumer surplus from the purchase is
a.
b.
c.
d.
e.

22.

A
B
C
A+B
A+B+C

$225
$300
$525
$750
$1275

Suppose the cost of producing chocolate decreases. As a result, the equilibrium price of
chocolate _____, the equilibrium quantity of chocolate purchased _____, and consumer
surplus _____.
a.
b.
c.
d.
e.

decreases; decreases; decreases

decreases; increases; decreases
decreases; increases; increases
increases; increases; increases
decreases; decreases; increases

23.

The equilibrium in free markets

a.
b.
c.
d.
e.

maximizes the sum of consumer and producer surplus.

allocates demand for goods to the sellers who produce them at least cost.
allocates the supply of goods to buyers who value them most highly, as measured
by willingness to pay.
All of the above are correct.
None of the above is correct.

24.

Scalping of tickets for admission to the Museum of Modern Art tends to

a.
b.
c.
d.

25.

decrease social well-being.

benefit sellers of the tickets but not the buyers.
maximize the difference between consumer and producer surplus.
increase the likelihood that tickets will be used by those who value them most
highly.

Consumer surplus exists only if

a.
b.
c.
d.
e.

producer surplus exists.

the market is in equilibrium.
demand curves are downward sloping.
consumers buy goods at sale prices or below cost.
all of the above.

ANSWERS
1a
2b
3a
4c
5c
6c
7a
8a

9a
10c
11a
12a
13b
14c
15d
16d
17d
18b
19c
20a
21a
22c
23d
24d
25c