Sample ECON 5 Questions Exam #2 1. Which of the following events would cause a rightward shift in the market-supply curve for large automobiles? a) A technological improvement which reduces the cost of production. b) An increase in the wages of auto workers. c) An excise tax on automobiles. d) A decrease in the number of sellers. 2. Tire producers offer to sell tires to U.S. auto producers at a lower price than in the past. As a result one would expect: a) no change in the supply of automobiles. b) an increase in the demand for automobiles. c) an increase in the supply of automobiles. d) a decrease in the supply of automobiles. 3. A decrease in the equilibrium price of a good could be the result of a) an increase in the price of a substitute good. b) an increase in income if it is a normal good. c) an increase in worker productivity in that market, which lowers production costs. d) a growing population. 4. If there is a shortage in a free market, then: a) consumers competing for a limited quantity supplied will force up the price of a good above equilibrium. b) consumers competing for a limited quantity supplied will drive up the price of the good to equilibrium. c) suppliers will decrease their output to match demand. d) suppliers will accept any price below equilibrium. 5. As a result of an increase in a product's price: a) product supply increases. b) product supply decreases. c) product supply does not change, but quantity supplied increases. d) the impact on product supply is uncertain. Economic theory has no answer to this question. 6. All of the following factors will affect the supply of shoes except one. Which will not affect the supply of shoes? a) higher wages for shoe factory workers b) higher prices for leather c) a technological improvement that reduces waste of leather and other raw materials in shoe production d) an increase in consumer income.

7. Which of the following would cause the quantity of wheat bread demanded to increase, but not the demand for wheat? a) a reduction in the price of rye, used to produce rye bread b) a new scientific study demonstrating that wheat bread reduces the risk of colon cancer c) a decrease in the price of rye bread d) an increase in the number of farmers growing wheat e) an increase in the price of wheat flour 8. a) b) c) d) e)

When there is an excess quantity supplied of a product at the current price, then: the market price must be below equilibrium price. the market price will tend to rise. the market price must be above equilibrium price. the market price will tend to fall. both c) and d) will occur.

9. A decrease in supply, ceteris paribus: a) causes both equilibrium price and quantity to increase. b) causes both equilibrium price and quantity to decrease. c) causes equilibrium price to increase and equilibrium quantity to decrease. d) causes equilibrium price to decrease and equilibrium quantity to increase. 10. True (A) or False (B) If the market for peaches is in equilibrium at $2.99 per pound, a decrease in the supply of peaches will cause a surplus of peaches at that price. 11. True (A) or False (B) A technological advance which reduces the cost of producing computers will shift the supply curve of computers to the left. 12. True (A) or False (B) Price elasticity is a measure of the relative responsiveness of the change in price to a change in quantity demanded. 13. Demand is said to be ____________when the quantity demanded is not very responsive to changes in price. a) independent b) inelastic c) unit elastic d) elastic e) flexible 14. A steel mill raises the price of steel by seven percent which results in a twenty percent reduction in the quantity of steel demanded. The demand curve facing this firm is: a) elastic. b) inelastic. c) unit elastic. d) unit inelastic.

15. Fantastic Cuts Hair Salon knows that a fifteen percent increase in the price of their haircuts will result in a five percent decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? a) 0.05 b) 0.10 c) 0.15 d) 0.33 e) 3.0 16. The elasticity in the vicinity of five different points along a demand curve varies as follows: Point Elasticity

! !

A ! 1.25 !

B 0.3

! !

C !! 1.0 !

D 0.2

! !

E 2.1

In the vicinity of which of these points would a price decrease be accompanied by an increase in total revenue? a) B and D b) A and E c) A and D d) B, C and D 17. The price of stadium seats at a baseball game increase from $20 to $30 and ticket sales fall from 45,000 per game to 35,000 per game. If other things remained constant, then it appears that the price elasticity of demand is: a) elastic. b) inelastic. c) unit elastic. d) unit inelastic. e) equal to zero. 18. A 25% decrease in the price of breakfast cereal leads to a 20% increase in the quantity of cereal demanded. As a result: a) total revenue will decrease. b) total revenue will increase. c) total revenue will remain constant. d) the elasticity of demand will increase. 19. Among the following pairs, which is likely to have the greatest price elasticity of demand? Why? a) cars or Toyotas b) electricity usage during a month or during a year c) cable television or an apartment rental 20. You have been hired by the city to determine whether or not an increase in the price of tickets for the mass transit system would raise system revenues. The debate has been heated and the city council seems to be divided. One side argues that in order to increase revenues from the transit system, prices must be increased. The opposing side argues that a price increase at this time will lower revenues. What assumptions is

each side making about the price elasticity of demand, and how might you determine the best course of action? 21. If the price of a certain brand of sneakers falls from $27.50 to $22.50, and the quantity demanded by consumers increases from 15 to 25 pairs per week, then using the arc elasticity formula, the price elasticity of demand is: a) -0.25 b) -1.00 c) -2.75 d) -1.50 e) -2.50 22. A local store noticed that when it increased the price of milk from $2.50 per gallon to $3.50 per gallon, it sold the same amount of milk per week (165 gallons). Since everything else remained the same, we would say the a) demand for milk is perfectly elastic b) demand for milk is elastic c) demand for milk is perfectly inelastic d) demand for milk is unitary elastic e) law of supply does not apply in this situation 23. The amount of money a firm receives from the sale of its output is called: a) total net profit b) net revenue c) total revenue d) total gross profit 24. At a price of $5.00 per doll, most stores cannot keep Beanie Baby dolls in stock because consumers buy them all as soon as shipments arrive. This implies that there a) is an excess supply of Beanie Babies, and the price must fall for equilibrium to be reached b) will be a downward shift in the demand curve for Beanie Babies c) will be an upward shift in the supply curve for Beanie Babies d) is an excess demand for Beanie Babies, and the price must rise for equilibrium to be reached e) is an excess demand for Beanie Babies, and the price must fall for equilibrium to be reached 25. An excess supply of rice in a competitive market would indicate that a) the problem of scarcity has been solved in that market b) buyers want to purchase more rice at the current price than the sellers want to sell c) the market will not be able to approach equilibrium d) the entire supply curve must shift to the left in order to attain equilibrium e) the current price exceeds the equilibrium price

26. If the demand for baseball cards rises and the supply curve does not shift, then the price: a) will rise and quantity will fall b) and quantity will rise c) will fall and quantity will rise d) and quantity will fall e) will rise, but quantity may rise or fall 27. If the price of ice cream increases substantially, ceteris paribus, the equilibrium quantity of hot fudge sauce is likely to: a) increase, and the equilibrium price is likely to decrease. b) increase, and the equilibrium price is likely to increase. c) decrease, and the equilibrium price is likely to decrease. d) decrease, and the equilibrium price is likely to increase. e) decrease, while the impact on equilibrium price is uncertain. 28. When the minimum wage is set above the equilibrium market wage: a) there will be an excess demand for labor at the minimum wage b) it will have no effect on the quantity of labor employed c) the unemployment rate will rise d) the quality of the labor force will rise e) the unemployment rate will fall 29. The price elasticity of demand measures the: a) responsiveness of a good's price to a change in quantity demanded b) adaptability of suppliers when a change in demand alters the price of a good c) responsiveness of quantity demanded to a change in a good's price d) adaptability of buyers when there is a change in demand e) responsiveness of quantity supplied to a change in quantity demanded 30. If the price elasticity of demand for Cheer detergent is -3.0, then a: a) 12 percent drop in price leads to a 36 percent rise in the quantity demanded b) 12 percent drop in price leads to a 4 percent rise in the quantity demanded c) $1,000 drop in price leads to a 3,000-unit rise in the quantity demanded d) $1,000 drop in price leads to a 333-unit rise in the quantity demanded e) 12 percent rise in price leads to a 36 percent rise in the quantity demanded 31. If demand is elastic and price increases, total revenue will: a) increase b) decrease if the elasticity is infinite c) increase if the elasticity of supply is not zero d) remain unchanged e) decrease 32. Price floors set above market equilibrium price cause: a) shortages b) surpluses c) a new market equilibrium

d) the increased use of illegal drugs e) all of the above 33. The elasticity in the vicinity of five different points along a demand curve varies as follows: Point! ! A! B! C! D! E Elasticity ! 1.25! 0.3! 1.0! 0.2! 2.1 At which of these points would a price increase be accompanied by an increase in total revenue? a) B and D b) A and E c) A, C and E d) A and D 34. True (A) or False (B) A perfectly elastic demand curve is horizontal. 35. True (A) or False (B) A price elasticity of demand of -2 for a specific cola means that if the price increases 1 percent, the quantity demanded of the cola will decrease by 2 percent. ANSWERS: 1A 2C 3C 4B 5C 6D 7D 8E 9C 10B 11B 12B 13B 14A 15D 16B 17B 18A 19 A Toyotas (more substitutes available) 19B electricity for a year (longer time period to adjust purchasing) 19C apartment rentals (comprises a larger proportion of one's income) 20 The side arguing for a price increase believes demand is inelastic. The opposition believes demand is elastic. One should perhaps gather data and estimate elasticity before deciding. (Or raise price and see what happens!) 21E 22C 23C 24D 25E 26B 27C 28C 29C 30A 31E 32B 33A 34A 35A