Practice Questions 2

Question 1

If demand is downward sloping, supply is upward sloping and the good in question is
a normal good, an increase in income would result in
(a) an increase in equilibrium price; an increase in equilibrium quantity.
(b) an increase in equilibrium price; a decrease in equilibrium quantity.
(c) a decrease in equilibrium price; a decrease in equilibrium quantity.
(d) a decrease in equilibrium price; an increase in equilibrium quantity.
(e) None of the above.

Answer 1

(a) an increase in equilibrium price; an increase in equilibrium quantity.

Question 2

Consumers’ total expenditures (or a firm’s total revenue) is maximized where
(a) the price is relatively high and the quantity is relatively low.
(b) price-elasticity of demand is equal to -1.
(c) price-elasticity of demand is more-negative than -1 (e.g., -1.4, -2.7)
(d) None of the above.

Answer 2

(b) price-elasticity of demand is equal to -1.

Question 3

The market demand curve will always
(a) be flatter than the individual demand curves that contribute to it.
(b) be steeper than the individual demand curves that contribute to it.
(c) have the same slope as the individual demand curves that contribute to it.

Answer 3

(a) be flatter than the individual demand curves that contribute to it.

Question 4

One can confidently conclude that if both demand and supply decrease there will be
(a) an increase in the equilibrium quantity exchanged.
(b) a decrease in the equilibrium quantity exchanged.
(c) a decrease in the equilibrium price.
(d) an increase in both price and quantity.
(e) a decrease in both price and quantity.

Answer 4

(b) a decrease in the equilibrium quantity exchanged.

This is because a decrease in demand and a decrease in supply both work to reduce the quantity of the good or service that is bought and sold in the market.

Question 5

If consumers’ marginal values for a particular good increase, then we would expect
(a) the market price of the good to increase.
(b) the market price of all other goods to increase.
(c) None of the above.

Answer 5

(a) the market price of the good to increase.

Question 6

You’re considering entry into a new market. You’ve been watching prices there for
some time, and feel like you understand things pretty well. Should you expect prices
to behave similarly when you enter?
(a) Yes.
(b) No.

Question 7

Lead pencils and ink pens are substitutes. When the government bans the use of lead
in pencils, which of the following would you expect to happen in the market for pens?
(a) The equilibrium price of pens will go up.
(b) People will buy fewer pens.
(c) The supply curve for pens will shift left.
(d) The demand curve for pens will shift left.
(e) None of the above.

Answer 7

(a) The equilibrium price of pens will go up.

Question 8

Someone is currently selling an item she owns for $1,650. If her true marginal value is
less than $1,650
(a) she would be willing to sell it for any offer lower than $1,650.
(b) she would be willing to sell it for any offer strictly between her marginal value
and $1,650.
(c) she would be willing to sell it for any offer equal to or higher than her marginal
value.
(d) none of the above.

Question 9

An increase in the price of a complementary good leads to
(a) an increase in equilibrium price; an increase in equilibrium quantity.
(b) an increase in equilibrium price; a decrease in equilibrium quantity.
(c) a decrease in equilibrium price; a decrease in equilibrium quantity.
(d) a decrease in equilibrium price; an increase in equilibrium quantity.
(e) None of the above.

Question 10

Scarcity could be reduced if
(a) individuals worked less and wanted more consumption goods.
(b) individuals worked more and wanted fewer consumption goods.
(c) the world population grew and world production remained the same.
(d) innovation came to a halt.

Question 11

How is it that sports stars are paid more than teachers but society values teachers
more than it values sport stars?
(a) People are greedy.
(b) Prices are determined by marginal values and the marginal value of another
teacher is lower.
(c) The total value of stars exceeds that of teachers so people are willing to pay more
for stars.
(d) None of the above.

Question 12

As the product of one firm becomes increasingly different from those of other firms we
expect that
(a) the demand curve facing the firm will be more elastic.
(b) the demand curve facing the firm will be less elastic.

Answer 12

(b) the demand curve facing the firm will be less elastic.

Question 13

What will happen to the market equilibrium of Shell’s gasoline when the price of
Texaco’s gasoline increases?
(a) The price will go up and the quantity will fall.
(b) The price will go up and the quantity will rise.
(c) The price will go down and the quantity will fall.
(d) The price will go down and the quantity will rise.

Question 14

The area under the demand curve and above the equilibrium price is known as
(a) Efficiency.
(b) Producer surplus.
(c) Consumer surplus.
(d) Profit.

Question 15

If the cost of producing automobiles increases,
(a) the quantity demanded of automobiles will eventually increase.
(b) the quantity demanded of automobiles will eventually decrease.
(c) the quantity demanded of automobiles will not change.

Answer 15

(b) the quantity demanded of automobiles will eventually decrease.

Question 16

What is likely to be the effect on tuition rates if the federal government increases the
amount of financial aid it provides to college students?
(a) There is likely to be downward pressure on tuition, as the cost of going to college
is now lower.
(b) There is likely to be upward pressure on tuition, as the demand for a college
education will have increased.
(c) There is likely to be downward pressure on tuition, as the demand for a college
education will have decreased.
(d) There is likely to be upward pressure on tuition, as the supply of positions at
colleges will increase as new colleges are built and existing colleges expand.

Question 17

⋆ An increase in a binding minimum wage will
(a) increase the number of people looking for work and decreases unemployment.
(b) increase the number of people looking for work and decreases the number of jobs
available.
(c) increase the number of jobs available for highly skilled workers and decrease labor
market surpluses.

Question 18

⋆ If demand for cigarettes among women is more “price inelastic” than is it is among
men,
(a) if cigarette taxes were increased cigarette smoking would decrease more (in percentage
terms) among women than men.
(b) if cigarette taxes were increased cigarette smoking would decrease less (in percentage
terms) among women than men.
(c) if income falls, a woman would be more likely to quit smoking than a man.
(d) if income falls, a women would be less likely to quit smoking than a man.

Question 19

⋆ If a $5 per-unit tax on tires were removed, one would expect the price of any substitute
for tires
(a) to increase by $5
(b) to decrease by $5
(c) to increase by less than $5
(d) to decrease by less than $5

Question 20

⋆ Imposing a binding price ceiling
(a) establishes a price above the equilibrium level.
(b) results in a decrease in the quantity supplied to the market.
(c) increases efficiency by increasing the difference between the marginal benefit and
the marginal cost of an additional unit.
(d) results in a surplus in the market.
(e) None of the above.

Question 21

⋆ If demand is relatively inelastic then the burden of a per-unit tax on the good will
tend to be
(a) borne mostly by producers.
(b) borne mostly by consumers.
(c) borne mostly by the government.
(d) borne mostly by the poor.
(e) shared equally by producers and consumers.

Question 22

⋆ Rent-control legislation that sets the rents on apartments below the equilibrium rental
rates tends to create
(a) rising incomes for landlords.
(b) a housing surplus.
(c) a black market for rental housing.
(d) an increase in the construction of new rental units.
(e) no effect, since a price ceiling below equilibrium price is not binding.