Test 2—VERSION 1

Principles of Microeconomics

Fall 2002

Instructions:  Answer each of the following 40 multiple choice questions in the allotted time.  YOU MUST PUT YOUR VERSION NUMBER ON YOUR ANSWER SHEET!! Failure to do so will result in lost points.  You may write on your test, but you may not tear off any pages.  Failure to so do will result in lost points.  You must write your name on the test.  Failure to do so will result in lost points.  Finally, you must turn in your test.  Failure to do so will result in a zero.  You can not use a graphing calculator or your cell phone as a calculator.

1.  Consumer surplus is

a.  the area under the demand curve but above price

b.  the are under the demand curve but below price

c.  the area under the supply curve

d.  the area under price but above the supply curve

REFER TO FIGURE 1 FOR THE FOLLOWING 6 QUESTIONS

Figure 1 shows the market for home computer which is initially in equilibrium.  A tax is placed on computers making the new equilibrium point E`.

2.  What is the size of the tax placed on computers?

a.  \$ 0

b.  \$ 50

c.  \$100

d.  \$150

3.  How much tax revenue does the government collect?

a.  \$ 0

b.  \$3,750

c.  \$ 7,500

d.  \$ 11,250

4.  How much of the tax do consumers pay?

a.  \$ 0

b. \$3,750

c.  \$ 7,500

d.  \$ 11,250

5.  Which letter represents the deadweight loss?

a.  A

b.  B

c.  C

d.  D

6.  Which letter represents producer’s share of the tax?

a.  A

b.  B

c.  C

d.  D

7.  What is the size of the deadweight loss?

a.  1,250

b.  1,875

c.  3,750

d.  5,625

8.  Which of the following is NOT an example of either a positive or negative externality?

a.  you neighbor playing the radio so loud that it keeps you from studying

b.  pollution

d.  spraying for roaches in an apartment complex

9.  If the elasticity of demand (a.k.a. price elasticity) for gasoline is .7 then

a.  the demand for gasoline is inelastic

b.  the demand for gasoline is elastic

c.  the demand for gasoline is unitary elastic

d.  there is not information to determine the answer

10.  Todd’s CD shop sells 50 compact discs a day if the price is \$25.  If they lowers the price to \$15, then they will sell 65 compact discs a day.  What is the elasticity of demand?

a.  .35

b.  .75

c.  1.33

d.  2.88

11.  Using the elasticity of demand that you found in the above question, demand is

a.  inelastic

b.  unitary elastic

c.  elastic

d.  income elastic

12.  Using the price and quantity information from Todd’s CD shop, what is the arc elasticity?

a.  .35

b.  .522

c.  .75

d.  1.00

13.  I.  The elasticity of demand is negative.  II.  The income elasticity of demand is usually negative.

a.  I and II are true.

b.  I is true.  II is false

c.  I is false.  II is true.

d.  I and II are false.

14.  If demand is elastic, than the firm must _____ price to increase total revenue.

a.  increase

b.  decrease

c.  do nothing—total revenue is as large as it can be.

d.  there is not enough information to answer this question.

15.  The income elasticity of an inferior good is

a.  less than zero

b.  between zero and one

c.  greater than one

d.  equal to one

16.  Which of the following is more likely to make demand more inelastic?

a.  an increase in the amount of time

b.  a decrease in the amount of time

c.  the availability of substitute goods get larger

d.  the consumer spends a larger portion of their income on purchasing the good.

17.  If the supply of a good is relatively elastic and the demand is relatively inelastic, than imposing a tax on the good will

a.  decrease the equilibrium price and increase the equilibrium quantity

b.  decrease both the equilibrium price and quantity

c.  increase the equilibrium price and decrease the equilibrium quantity

d.  leave price unchanged and decrease the equilibrium quantity

18.  If demand is relatively elastic and supply is relatively inelastic, than imposing a tax on a good will be borne

a.  more by sellers than by buyers

b.  more by buyers than by sellers

c.  entirely by sellers

19.  Suppose that a good creates positive externalities.  In general we can say that

a.  when compared to the optimal amount of output it will be underproduced

b.  when compared to the optimal amount of output it will be overproduced

c.  it should be taxed to correct for the externality

d.  we should do nothing

20.  A supply curve that is perfectly vertical is

a.  elastic

b.  perfectly elastic

c.  inelastic

d.  perfectly inelastic

21.  For the perfectly vertical supply curve, the elasticity of supply is

a.  zero

b.  one

c.  some number greater than zero but less than one

d.  infinity

22.  According to the theory of utility, as more units of a good are acquired, the consumer’s marginal utility

a.  always continue to rise

b.  diminishes

c.  remains constant

d.  may diminish at first, but must eventually rise again.

23.  If your demand price for the 100th  unit of a book is \$10 and the market price is \$7, than your consumer surplus for the 100th unit is

a.  \$17

b.  \$10

c.  \$7

d.  \$3

24.  If the marginal cost of the 100th unit of a book is \$1 and the market price is \$7, than the producer surplus for the 100th unit is

a.  \$1

b.  \$6

c.  \$7

d.  \$8

25.  If the income elasticity for books is 2.7 then

a.  a 1% increase in income implies that the quantity demanded of books will rise

by 2.7

b.  a 1% increase in income implies that there will be a 2.7% decrease in the

quantity demanded of books

c.  a 1% increae in income implies that there will be a 2.7% increase in the

quantity demanded of books

d.  a one unit increase in income implies that the quantity demanded of books will

increase by 2.7 units

26.  If the elasticity of demand (a.k.a. price elasticity) for graphing calculators is .5 then

a.  the demand for calculators is inelastic

b.  the demand for calculators is elastic

c.  the demand for calculators is unitary elastic

d.  there is not information to determine the answer

27.  When a new book is released from a publisher, it is issued in hardback.  After a few weeks or months, it is released in paperback.  Note that hardback books cost more to produce than paperback books.  What is the most probably reason that publishers release hardbook copies first and paperback copies secondly?

a.  to decrease the profit per unit so that their tax liabiltiy will decrease.

b.  to differentiate between consumer groups.  Some will have inelastic demand curves while others have elastic demand curves.

c.  because firms are interesed in how the book “looks” and “feels” in the hands of consumers

d.  it decreases average costs

28.  If the income elasticity of a good is .8 than the good can be classified as a

a.  luxury good

b.  substitute

c.  inferior good

d.  necessity

29.  If the quantity demanded increases by 20% in response to a 10% decrease in price than demand is

a.  unstable

b.  relatively inelastic

c.  unitary elastic

d.  relatively elastic

30.  If there are a lot of close substitutes for a good than its price elasticity will tend to be

a. elastic

b. unitary elastic

c. inelastic

d. decreasing

31.  If the elasticity of supply is equal to 2.8, then a 5% increase in price will lead to a

a. 2.8% increase in quantity supplied

b. 14% increase in quantity supplied

c. 14% increase in supply

d. 28% increase in quantity supplied

32.  Which of the following is the best example of a public good?

a.  candy  bar

b.  a pay telephone at the mall

c.  health care

33.  Producer surplus will ____ as price increases

a.  decrease

b.  remain constant

c.  increase

d.  either increase or decrease depending upon the elasticity of supply

34.  The Total Revenue of a taco restaurant would be equal to

a.  income minus explicit costs

b.  the change in quantity sold divided by the change in price

c.  elasticity of demand divided by the elasticity of supply

d.  price of tacos times the quantity sold

35.    Suppose two neighborhoods (A and B) have identical housing, but neighborhood A has a strictly enforced deed restriction that prohibits homeowners from parking junk cars in the front yard.  If houses in neighborhood A sell for \$105,000 and houses in neighborhood B sell for \$100,000, how would an economist value the external cost (negative externality) of visible junk cars, per house?

a.  \$5,000

b.  \$100,000

c.  \$105,000

d.  \$205,000

36.  When production of a good results in a negative externality, the unregulated competitive market equilibrium is

a.  the efficient level of output

b.  greater than the efficient level of output

c.  less than the efficient level of output

d.  unattainable

37.  One important feature that distinguishes a public good from a private good is that for public goods,

a.  only the government can produce them

b.  anybody can be excluded from consuming the good

c.  if you pay for the good, you are guaranteed to be the sole consumer

d.  nobody can be excluded from consuming the good

38.  A free rider is a

a.  public good

b.  private good

c.  person who enjoys the benefits of a good or service without paying for them

d.  government policy designed to correct the public good problem

39.  The “invisible hand” refers to the notion that

a.  competitive markets send resources to their highest valued uses

b.  government intervention is necessary to ensure efficiency

c.  marginal utility decreases as more of a good is consumed

d.  marginal cost increases as more is produced

40.  Suppose you are willing to tutor another student for \$10, but they offer you \$15 and you accept.  What is your producer surplus?

a.  \$5

b.  \$10

c.  \$15

d.  \$25

1. A

2.

3.

4.

5.

6.

7.

8. C

9. A

10. B

11. A

12. B

13. B

14. B

15. A

16. B

17. C

18. A

19. A

20. D

21. A

22. B

23. D

24. B

25. C

26. A

27. B

28. D

29. D

30. A

31. B

32. D

33. C

34. D

35. A

36. B

37.D

38. C

39. A

40. A