Microeconomics Midterm

Question 1

True or False:

Price elasticity is higher when close substitutes are available.

Answer 1

True

Breakfast cereal vs sunscreen

Question 2

True or False:

Price Elasticity is lower for narrowly defined goods than for broadly defined ones.

Answer 2

False

Blue jeans vs clothing

Question 3

True or False:

Price elasticity is higher for necessities than it is for luxuries.

Answer 3

False

Insulin vs Mediterranean cruises

Question 4

True or False:

Price elasticity is higher in the long
run than in the short run.

Answer 4

True

There’s not much people can do in the
short run, but the long run presents options

Question 5

The Determinants of Supply Elasticity

Answer 5

1. The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.

Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars.

2. Availability of Inputs
   Can only supply more if you can get the inputs needed to make more.
3. For many goods, price elasticity of supply is greater in the long run than in the short run.

Firms can build new factories, or new firms may be able to enter the market.

Question 6

True or False:

The flatter the curve, the bigger the elasticity.

The steeper the curve, the smaller the elasticity.

Answer 6

True

Question 7

Suppose that when the price of ginger ale is $2 per bottle, firms can sell 4 million bottles. When the price of ginger ale is $3 per bottle, firms can sell 2
million bottles.

Is the demand for ginger ale elastic or inelastic?

Answer 7

Elastic

Question 8

True or False:

If demand is inelastic, the result of cost-saving technological
improvements will be substantially lower prices.

Answer 8

True

Question 9

True or False:

Where demand is inelastic, the cost increase can largely be passed
along to consumers in the form of higher prices, without much of a decline in equilibrium quantity.

Answer 9

True

Question 10

True or False:

Elastic demand – price and revenue move in opposite directions (price UP and rev DOWN)

Answer 10

True

Question 11

True or False:

If demand is more inelastic than supply, consumers bear most of the tax burden.

Answer 11

True

Question 12

True or False:

If supply is more inelastic than demand, sellers bear most of the tax burden.

Answer 12

True

Question 13

True or False:

An increase in income causes a decrease in demand for a normal good.

Answer 13

False

Question 14

When it is impossible to produce more of
one good (or service) without decreasing the quantity produced of another good (or service)

Answer 14

Productive efficiency

Question 15

When the mix of goods produced
represents the mix that society most desires

Answer 15

Allocative efficiency

Question 16

True or False:

A price change for a good shows a movement along the demand curve
for that good.

Answer 16

True

Question 17

True or False:

Increase in # of buyers increases quantity demanded at each price, shifts D curve to the left.

Answer 17

False

Question 18

True or False:

Suppose the number of buyers increases. Then, at each P, Qd will increase

Answer 18

True

Question 19

True or False:

Demand for a normal good is positively related to income.

Answer 19

True

INCREASE Income for a group causes an INCREASE in QD for certain goods at each price, shifts D curve to the right.

▪Examples of normal goods? Pizza, jeans, movies

Question 20

True or False:

Demand for an inferior good is negatively related to income.

Answer 20

True

INCREASE Income causes a DECREASE QD for certain goods at each price, shifts D curves for inferior goods to the left.

▪ Examples of inferior goods? Bus rides, ramen noodles

Question 21

True or False:

Two goods are substitutes if an increase in the price of one causes a decrease in demand for the other.

Answer 21

False

Example: pizza and hamburgers.
An INCREASE in the price of pizza causes an INCREASE demand for hamburgers, shifting hamburger demand curve to the right.

Question 22

True or False:

Two goods are complements if
an increase in the price of one
causes a fall in demand for the other.

Answer 22

True

Example: computers and software.
If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.

Question 23

Goods that fill the same need

Answer 23

Substitutes

INCREASE in the P of a substitute
(milkshake) causes INCREASE in D
for Frosties. At every price point, more people will buy the cheaper good.

Question 24

Goods that are used together

Answer 24

Complements

INCREASE in the P of chips causes DECREASE in D for salsa. The higher P
will cause less D for good #1 so people will demand less of good #2.

Question 25

True or False:

Expectations can cause a shift of the demand curve.

Answer 25

True

Question 26

True or False:

Anything that causes a shift in tastes toward a good will decrease demand for that good and shift its D curve to the right.

Answer 26

False

Shifts in taste are positively related

Question 27

What curve shifts in response to a change in the # of buyers?

Answer 27

Market Demand Curve

Question 28

Does price shift the Demand curve or cause a movement along the Demand curve.

Answer 28

Causes movement along the Demand curve

Question 29

True or False:

An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right.

Answer 29

True

Example: With many restaurants closed from the
pandemic, the S in the market for restaurant meals
fell and the S curve shifted left.

Question 30

True or False:

When both curves shift to the right, Q rises, but the effect on P is ambiguous.

Answer 30

True

But if supply increases more
than demand, P falls.

Question 31

True or False:

If both curves shift in opposite directions, P rises, but effect on Q is ambiguous.

Answer 31

True

If demand increases more than supply, Q rises.

Question 32

True or False:

A price ceiling below the eq’m price is a
binding constraint on the price and
causes a shortage.

Answer 32

True

Question 33

Tax Revenue =

Answer 33

Tax x Quantity