Exam #1

Question 1

The problem of scarcity is that people face trade-offs. Which of the following trade-offs is the concern of economics?
a. Trade-offs faced by consumers in the purchase of goods
b. Trade-offs faced by workers between work and leisure
c. Trade-offs faced by firms in what goods to produce
d. all of the above

Answer 1

d. all of the above

Question 2

Boeing Corporation and Airbus Industries are the only two producers of long-range commercial aircraft. This market is not perfectly competitive because
a. each company has annual sales of over $10 billion
b. each company can significantly affect prices
c. Airbus receives subsidies from the European Union
d. Airbus cannot sell aircraft to the United States government

Answer 2

b. each company can significantly affect prices

Question 3

Describe a perfectly competitive market.

Answer 3

Goods offered for sale are all exactly the same
Buyers and sellers are so numerous
No single buyer or seller has any influence over the market price
Price takers: no buyers or sellers can influence the price

Question 4

Suppose you are in charge of product pricing and marketing strategy for a pharmaceutical company. You will have greater ability to independently set prices for your product if:
a. there are no close substitutes for your product
b. there are lots of other firms selling closely related products in your market
c. your market is perfectly competitive
d. none of the above

Answer 4

a. there are no close substitutes for your product

Question 5

Describe how the supply curve moves with lower and higher quantities.

Answer 5

Lower quantity = supply curve left
Higher quantity = supply curve right

Question 6

Describe how the demand curve moves with lower and higher quantities.

Answer 6

Lower quantity = demand curve left
Higher quantity = demand curve right

Question 7

When an industry’s raw material costs increase, other things remain the same,
a. the supply curve shifts to the left
b. the supply curve shift to the right
c. output increases regardless of the market price and the supply curve shifts upward
d. output decreases and the market price also decreases

Answer 7

a. the supply curve shifts to the left

Question 8

Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect:
a. the price of steel to fall
b. the demand curve for steel to shift to the right
c. the demand curve for plastic to shift to the left
d. nothing to happen to steel because it is only a substitute for plastic

Answer 8

b. the demand curve for steel to shift to the right

Question 9

Assume that steak and potatoes are complements. When the price of steak goes up, the demand curve for potatoes:
a. shifts to the left
b. shifts to the right
c. remains constant
d. shifts to the right initially and then returns to its original position

Answer 9

a. shifts to the left

Question 10

Two goods are complements if..?

Answer 10

an increase in the price of one leads to a decrease in the demand for the other

Question 11

If the actual price were below the equilibrium price in the market for bread, a:
a. surplus would develop that cannot be eliminated over time
b. shortage would develop, which market forces would eliminate over time
c. surplus would develop, which market forces would eliminate over time
d. shortage would develop, which market forces would tend to exacerbate

Answer 11

b. shortage would develop, which market forces would eliminate over time

Question 12

The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
What is the equilibrium price of books sold?
a. 5
b. 10
c. 15
d. 20

Answer 12

d. 20

Set demand function equal to supply function and solve

Question 13

The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
What is the equilibrium quantity of books sold if the equilibrium price is 20?
a. 25
b. 50
c. 75
d. 100

Answer 13

d. 100

Plug 20 into function and solve

Question 14

The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
If P = $25, which of the following is true?
a. There is a surplus equal to 30
b. There is a shortage equal to 30
c. There is a shortage, but it is impossible to determine how large
d. There is a surplus, but it is impossible to determine how large

Answer 14

a. There is a surplus equal to 30

Plug 25 into both equations then compare answers
Qs > Qd by 30

Question 15

If the price of $1.50 is a binding price imposed by the government, we can call it:
a. a price floor
b. a price ceiling
c. a socially optimal equilibrium price
d. a fiscal price

Answer 15

b. a price ceiling

Question 16

If the price of $1.50 is NOT a binding price imposed by the government, we can call it:
a. a price floor
b. a price ceiling
c. a socially optimal equilibrium price
d. a fiscal price

Answer 16

a. a price floor

Question 17

Which of the following best describes a horizontal demand curve?
a. Demand is infinitely elastic
b. Demand is completely inelastic
c. Demand becomes more inelastic the lower the price
d. Demand becomes more elastic the lower the price

Answer 17

a. Demand is infinitely elastic

Question 18

What is the Elasticity of Demand for the following:
Infinitely elastic
Completely elastic
Elastic
Inelastic
Unit elastic

Answer 18

Ed = infinity = perfectly/infinitely elastic
Ed = 0 = completely inelastic = vertical line
Ed > 1 = elastic
Ed < 1 = inelastic
Ed = 1 = unit elastic

Question 19

The income elasticity of demand refers to:
a. a change in income following a change in quantity demanded
b. the substitution of one good for another as income changes
c. the percentage change in quantity demanded resulting from a 1-percent increase in income
d. the change in income required for quantity demand to change by 1%

Answer 19

c. the percentage change in quantity demanded resulting from a 1-percent increase in income

Question 20

If two goods are substitutes, the cross-price elasticity of demand must be:
a. negative
b. positive
c. zero
d. infinite

Answer 20

b. positive

Question 21

If two goods are complements, the cross-price elasticity of demand must be:
a. negative
b. positive
c. zero
d. infinite

Answer 21

a. negative

Question 22

What is the cross-price elasticity of demand?

Answer 22

How much the Qd of one good responds to a change in the price of another good

Percentage change in Qd of the first good divided by the percentage change in price of the second good

Question 23

For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?
a. -2.75%
b. +2.75%
c. -27.5%
d. +27.5%

Answer 23

a. -2.75%

Ei = % change quantity / % change income
1.1 = % change quantity / -0.025

Question 24

Describe normal and inferior goods

What is the income elasticity for each?

Answer 24

Normal good
An increase in income leads to an increase in demand (shift right)

Inferior good
An increase in income leads to a decrease in demand (shift left)

Normal goods: income elasticity > 0
Inferior goods: income elasticity < 0

Question 25

Suppose the U.S. demand curve for gasoline shifts rightward, and the U.S. supply curve for gasoline remains unchanged. As a result, the price of gasoline increases by 9 percent, and the equilibrium quantity increases by 3 percent. Which of the following statements is true based on this information?
a. The price elasticity of supply for gasoline is roughly 0.33
b. The price elasticity of supply for gasoline is roughly 3
c. The price elasticity of demand for gasoline is roughly 0.33
d. The price elasticity of demand for gasoline is roughly -3

Answer 25

a. The price elasticity of supply for gasoline is roughly 0.33

Es = % change Q / % change P
= 0.03 / 0.09
= 0.33

Question 26

The demand for packs of Pokémon cards is given by the equation Qd = 500 – 45P. At a price of $2.50 per pack, what is the quantity demanded?
a. 387.5
b. 264.7
c. 168.9
d. 347.8

Answer 26

a. 387.5

Plug in and solve

Question 27

The demand for packs of Pokémon cards is given by the equation Qd = 500 – 45P. At a price of $2.50 per pack, the quantity demanded is 387.5. What is the price elasticity of demand at $5.00 per pack?
a. 0.507
b. 0.672
c. 0.238
d. 0.765

Answer 27

a. 0.507

Ed = % change in Q / % change in P
Midpoint method = { (Q2 – Q1 ) / [ (Q2 + Q1) / 2] } / { (P2 – P1) / [(P2 + P1) / 2] }
Q1 = 387.5
Q2 = 500 – 45P = 500 – 45(5) = 275
P1 = 2.5
P2 = 5

= { 275 – 387.5) / [ (275 + 387.5) / 2] } / { (5 – 2.5) / [(5 + 2.5) / 2] }
= 0.341 / 0.67
= 0.507

Question 28

What is the most important factor that explains differences in living standards across countries?
a. the quantity of money
b. the level of unemployment
c. productivity
d. equality

Answer 28

c. productivity

Question 29

Which of the following would shift the demand for Chiefs football jerseys to the right?
a. The Chiefs play in the Super Bowl
b. The price of the jerseys decreases by $15
c. The technology of sewing machines used to make the jerseys improved
d. The price of Purdue football jerseys decreases

Answer 29

a. The Chiefs play in the Super Bowl