Econ - Macro and Micro

Question 1

When demand for a good is inelastic, a higher price will:

A) have no impact on the demand for the good.
B) lead to an increase in total expenditures for the good.
C) fail to reduce the quantity demanded for the good.

Answer 1

B
When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. “Fail to reduce the quantity demanded for the good” is inaccurate because that would only be true if demand was perfectly inelastic.

Question 2

own price elasticity = ?

Answer 2

% change in quantity demanded / % change in own price

Question 3

cross price elasticity = ?

Answer 3

% change in quantity demanded / % change in price of other goods

Question 4

income elasticity = ?

Answer 4

% change in quantity demanded / % change in income

Question 5

|own price elasticity| > 1: demand is _____

Answer 5

elastic

Question 6

what is the formula for?

% change in quantity demanded / % change in own price

Answer 6

own price elasticity

Question 7

when demand is elastic, |own price elasticity|____

Answer 7

> 1

Question 8

when demand is inelastic, |own price elasticity|____

Answer 8

<1

Question 9

cross price elasticity > 0: related good is _______

Answer 9

a substitute

Question 10

cross price elasticity _____: related good is a substitute

Answer 10

> 0

Question 11

cross price elasticity ____ related good is a complement income

Answer 11

<0

Question 12

cross price elasticity < 0: related good is _____

Answer 12

a complement

Question 13

_____: good is an inferior good

Answer 13

elasticity < 0

Question 14

elasticity < 0: good is an____ good

Answer 14

inferior

Question 15

income elasticity > 0: good is a ____ good

Answer 15

normal

Question 16

income elasticity ____: good is a normal good

Answer 16

> 0

Question 17

income elasticity > ___: good is a normal good

Answer 17

0

Question 18

For an _____, the income effect of a price decrease is negative-income elasticity of demand is negative.
An increase in income ____ demand for an inferior good.

Answer 18

inferior good

reduces

Question 19

For an inferior good, the income effect of a price decrease is ____, income elasticity of demand is ____.

Answer 19

negative; negative

Question 20

A good for which consumers exhibit a negative income effect that is smaller than the substitution effect is most accurately described as a(n):

A) Giffen good.
B) inferior good.
C) Veblen good.

Answer 20

B
For an inferior good the income effect is negative. A Giffen good is an inferior good for which the negative income effect is larger than the positive substitution effect, resulting in a decrease in consumption in response to a decrease in price.
C - A Veblen good is not an inferior good, but rather a good that provides more utility to a consumer at a higher price than it provides at a lower price because the status benefits of ownership are greater at higher prices

Question 21

A good for which consumers exhibit a negative income effect that is smaller than the substitution effect is most accurately described as a(n):

A) Giffen good.
B) inferior good.
C) Veblen good.

Answer 21

B
For an inferior good the income effect is negative.

B- A Giffen good is an inferior good for which the negative income effect is larger than the positive substitution effect, resulting in a decrease in consumption in response to a decrease in price.

C - A Veblen good is not an inferior good, but rather a good that provides more utility to a consumer at a higher price than it provides at a lower price because the status benefits of ownership are greater at higher prices

Question 22

Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand. He makes the following assertions:

Statement 1: For most goods, demand is more elastic in the long run than the short run.

Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market.

With respect to Bawerk’s statements:

A) only statement 2 is correct.
B) only statement 1 is correct.
C) both are correct.

Answer 22

C
Both of these statements are accurate. Price elasticity for most goods is greater in the long run because individuals can make long-term decisions that require different quantities of the good, such as buying more fuel efficient vehicles to use less gasoline. Price elasticity is greater the better the available substitutes because an increase in price will lead more buyers to switch to the substitute products.

Question 23

According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely result in:

A)
decreasing the total sales of the firm as a result of competition amongst salespeople.
B)
doubling the total sales of the firm.
C)
increasing the total sales of the firm and reducing the average sales per salesperson.

Answer 23

C
The law of diminishing returns states that as more of a resource is added to a production process, holding other resource use constant, increases in output will eventually decrease. Therefore, as more salespeople are added they will generate more sales at a decreasing rate. Total sales will increase and the average sales per salesperson will decrease.

Question 24

The percent change in demand for a good divided by the percent change in the price of another good is known as the:
A) income elasticity of demand.
B) cross price elasticity of demand.
C) price elasticity of demand.

Answer 24

B

Question 25

The cross price elasticity of demand for a substitute good and the income elasticity for an inferior good are:

      Cross elasticity	Income elasticity A)               < 0	              > 0 B)               < 0	              < 0 C)               > 0	              < 0

Answer 25

C

Question 26

If quantity demanded increases 15% when the price drops 1%, demand for this good:

A) elastic, but not perfectly elastic.
B) inelastic, but not perfectly inelastic.
C) perfectly elastic.

Answer 26

A
Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of demand will be greater than 1.0 and demand for the product is considered to be elastic.

Question 27

The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800 five years ago and is 1.6300 today. The percent change in the Australian dollar relative to the British pound is closest to:

A) depreciation of 9.2%.
B) depreciation of 10.1%.
C) appreciation of 10.1%.

Answer 27

A
To correctly calculate the percentage change in AUD relative to GBP, convert the exchange rates so that AUD is the base currency: 1 / 1.4800 = 0.6757 GBP/AUD five years ago and 1 / 1.6300 = 0.6135 GBP/AUD today. The percentage change in the Australian dollar against the British pound is 0.6135 / 0.6757 − 1 = −9.2%.

Note that the GBP has appreciated against the AUD by 1.6300 / 1.4800 − 1 = 10.1% over the same period.

*first time picked C, which is the answer ffor GDP)

Question 28

The difference between Country D’s nominal and real exchange rates with Country F is most closely related to:

A) the risk-free interest rates of the two countries.
B) the ratio of the two countries’ price levels.
C) Country D’s inflation rate.

Answer 28

B
The difference between real exchange rates and nominal exchange rates is the relative inflation rates over time between the two countries. Real exchange rate (D/F) = nominal exchange rate (D/F) × (CPIf/CPId).