Practice Test 4-5

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. A competitive market is one in which a. there is only one seller of the product. b. each seller of the product is free to set the price of his product. c. each seller attempts to compete with other sellers, causing fewer sellers in the market. d. there are so many buyers and many sellers that each has a negligible impact on price. 2. Buyers and sellers who have no influence on market price are referred to as a. price makers. b. market pawns. c. price takers. d. powerless. 3. Generally, the market for ice cream would be considered a. a monopolistic market. b. a competitive market. c. more organized than an auction. d. a market where individual sellers have significant pricing power. 4. A market with only a few sellers would be a. a monopoly. b. an oligopoly. c. a competitive market. d. a monopolistically competitive market. 5. Which of the following would NOT be a determinant of demand? a. the price of related goods b. income c. tastes d. the prices of the inputs used to produce the good 6. If the price of a substitute to good X increases, then the a. demand for good X will decrease. b. market price of good X will decrease. c. demand for good X will increase. d. quantity demanded for good X will increase. 7. Two goods are substitutes if a decrease in the price of one good a. increases the demand for the other good. b. reduces the demand for the other good. c. reduces the quantity demanded of the other good. d. increases the quantity demanded of the other good. 8. Suppose you like banana cream pie made with vanilla pudding. Assuming all other things are constant, you notice that the price of bananas is higher. How would your demand for vanilla pudding be affected by this? a. It would decrease. b. It would increase. c. It would be unaffected. d. There is insufficient information given to answer the question. 9. Which of the following is NOT a determinant of demand? a. the price of a resource

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b. the price of a complementary good c. the price of the good next month d. the price of a substitute good ____ 10. The downward-sloping line which relates prices and quantity demanded is called the a. demand schedule. b. demand curve. c. quantity demanded line. d. quantity demanded curve. ____ 11. A demand curve is a. the downward-sloping line relating the price of the good to the quantity demanded. b. the upward-sloping line relating price to quantity supplied. c. the curve that relates income to quantity demanded. d. showing the same relationship between two goods as a production possibilities frontier. ____ 12. Morgan tells you that the price of DVDs at the video store will be going up next week. You will probably respond by a. decreasing your current demand for DVDs. b. increasing your current demand for DVDs. c. not changing your current demand for DVDs. d. refusing to ever buy anymore DVDs at that store. Figure 4-2

____ 13. Refer to Figure 4-2. If the demand curve shifts from D1 to D, then a. firms would be willing to supply less than before. b. people are less willing to buy the product at any price than before. c. people are now more willing to buy the product at any price than before. d. the price of the product has decreased, causing consumers to buy more of the product. Figure 4-4

____ 14. Refer to Figure 4-4. Which graph could be used to show the result of 5 percent of the country's smokers deciding to stop smoking? a. A b. B c. C d. Each graph could be used to show the result. ____ 15. If the price of a good is low a. firms would increase profit by increasing output. b. quantity supplied could be zero. c. the supply curve for the good will shift to the left. d. firms should raise the price of the product. ____ 16. Which of the following determines a market supply curve but not an individual supply curve? a. number of sellers b. expectations c. input prices d. technology ____ 17. Lead is an important input in the production of crystal. If the price of lead decreases, all else equal, we would expect the supply of a. crystal to be unaffected. b. crystal to decrease. c. crystal to increase. d. lead to increase. ____ 18. Holding the nonprice determinants of supply constant, a change in price would a. result in a change in supply. b. have no effect on the quantity supplied. c. result in a shift of demand. d. result in a movement along a stable supply curve. ____ 19. All else constant, an increase in the number of cattle delivered to an auction to be marketed would a. represent an increase in the supply of cattle at the auction.

b. represent an increase in demand for cattle at the auction. c. represent a decrease in the number of sellers at the auction. d. have no effect on the demand or supply at the auction. Figure 4-6

____ 20. Refer to Figure 4-6. The movement from S to S1 is called a. a decrease in supply. b. a decrease in quantity supplied. c. an increase in supply. d. an increase in quantity supplied. ____ 21. The unique point at which the supply and demand curves intersect is called a. market unity. b. an agreement. c. cohesion. d. equilibrium. Figure 4-9

____ 22. Refer to Figure 4-9. In this market, equilibrium price and quantity would be a. $15,400. b. $20,600. c. $25,500. d. $25,800. ____ 23. Refer to Figure 4-9. At a price of $20, which would NOT be true?

a. b. c. d.

The market would be in equilibrium. Equilibrium price would be equal to equilibrium quantity. There would be no pressure for price to change. 600 units would be bought and sold.

Figure 4-10

____ 24. Refer to Figure 4-10. Graph A shows which of the following? a. an increase in demand b. an increase in quantity demanded c. an increase in quantity supplied d. All of the above are correct. e. Both a and c are correct. ____ 25. If the demand for a product decreases, we would expect equilibrium price a. to increase and equilibrium quantity to decrease. b. to decrease and equilibrium quantity to increase. c. and equilibrium quantity to both increase. d. and equilibrium quantity to both decrease. Table 4-3 An Increase in Demand A Decrease in Demand An Increase in Supply A C A Decrease in Supply B D

____ 26. Refer to Table 4-3. The space that would represent a decrease in equilibrium quantity and an indeterminate change in equilibrium price would be a. A. b. B. c. C.

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d. D. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous. What will happen to the equilibrium price of new textbooks if more students attend college, paper becomes cheaper, textbook authors accept lower royalties and fewer used textbooks are sold? a. Price will rise. b. Price will fall. c. Price will stay exactly the same. d. The price change will be ambiguous. Consider the market for new DVDs. If DVD players became cheaper, buyers expected DVD prices to fall next year, used DVDs became more expensive, and DVD production technology improved, then we could safely conclude that the equilibrium price of a new DVD would a. rise. b. fall. c. stay the same. d. We couldn't be sure what it might do. The price elasticity of demand measures a. a buyer's responsiveness to a change in the price of a good. b. the increase in demand as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the increase in demand that will occur from a change in one of the nonprice determinants of demand. The concept of elasticity is used to a. analyze how much the economy is capable of expanding. b. determine the level of government invention in the economy. c. analyze supply and demand with greater precision. d. calculate consumer credit purchases. A person who has high cholesterol and must exercise an hour every day has what type of demand for exercise equipment? a. elastic b. unit elastic c. inelastic d. weak Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because a. buyers tend to be much less sensitive to a change in price when given more time to react. b. buyers will have substantially more income over a ten-year period. c. buyers tend to be much more sensitive to a change in price when given more time to react. d. None of these answers are correct. Suppose the price of Twinkies is reduced from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is a. 2.00. b. 1.55.

c. 1.00. d. .64. Figure 5-1

____ 35. Refer to Figure 5-1. The section of the demand curve labeled A represents the a. elastic section of the demand curve. b. inelastic section of the demand curve. c. unit elastic section of the demand curve. d. perfectly elastic section of the demand curve. Figure 5-2

____ 36. Refer to Figure 5-2. The elasticity of demand from point B to point C, using the midpoint method would be a. 0.5. b. 0.75. c. 1.0. d. 1.3. ____ 37. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the demand curve will be a. steeper. b. further to the right. c. flatter. d. closer to the vertical axis. ____ 38. A perfectly inelastic demand curve will be a. negatively sloped, because buyers decrease their purchases when the price rises.

b. vertical, because buyers purchase the same amount whether the price rises or falls. c. positively sloped, because buyers respond by increasing their purchases when price rises. d. horizontal, because buyers increase their purchases by huge amounts with slight changes in price. ____ 39. Which of the following would have the most elastic demand? a. clothing b. blue jeans c. Levi jeans d. All three would have the same elasticity of demand since they are all related. Figure 5-6

____ 40. Refer to Figure 5-6. The price elasticity of this demand curve between $10 and $15 is a. unit elastic. b. elastic. c. inelastic. d. perfectly elastic. ____ 41. Moving up a linear demand curve, we know that total revenue a. increases, then decreases. b. decreases, then increases. c. increases. d. decreases. Figure 5-8

____ 42. Refer to Figure 5-8. Between point A and point B we know that a. the slope is equal to 1/4 and elasticity is equal to 2/3. b. the slope is equal to 1/4 and elasticity is equal to 3/2. c. the slope is equal to 3/2 and elasticity is equal to 1/4. d. the slope is equal to 2/3 and elasticity is equal to 1/4. ____ 43. Refer to Figure 5-8. Between point A and point B on the graph, the elasticity of demand is a. perfectly elastic. b. inelastic. c. unit elastic. d. elastic. ____ 44. If an increase in income results in a decrease in the quantity demanded of a good, then the good is a. an inferior good. b. a necessity. c. a normal good. d. a luxury. ____ 45. You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy other foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would a. be negative and your roommate's would be positive. b. be positive and your roommate's would be negative. c. be zero and your roommate's would approach infinity. d. approach infinity and your roommate's would be zero. Table 5-1 Income $30,000 $40,000 Quantity of Good X Purchased 2 5 Quantity of Good Y Purchased 20 10

____ 46. Refer to Table 5-1. Good X is a. very price elastic. b. an inferior good. c. underpriced. d. a normal good. ____ 47. In the long run which of the following would NOT be a reason why the elasticity of supply is elastic? a. Firms can build new factories. b. Firms can hire additional workers. c. New firms can enter the market. d. Firms can sell less at lower prices without losing profits. ____ 48. If sellers do not respond at all to a change in price, a. technological advancement must be great. b. supply must be perfectly elastic. c. a long period of time must have elapsed. d. supply must be perfectly inelastic. Figure 5-10

____ 49. Refer to Figure 5-10. Which of the following would be most elastic? a. from A to B b. from C to D c. from E to F d. from D to F Figure 5-12

____ 50. Refer to Figure 5-12. Which supply curve is perfectly inelastic? a. S1 b. S2 c. S3 d. It is impossible to tell without more information. Short Answer 51. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.

a. b. c. d. e. f.

What is your current total revenue for both groups? The elasticity of demand is more elastic in which market? Which market has the more inelastic demand? What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? What is the elasticity of demand between $5 and $3 in the children's market? Is this elastic or inelastic? Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?

52. Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of Ho-Ho's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?

Practice Test 4-5 Answer Section

MULTIPLE CHOICE 1. ANS: D there are so many buyers and many sellers so that each has a negligible impact on price. DIF: 2 2. ANS: C price takers. REF: SECTION: 1 OBJ: TYPE: M

DIF: 1 REF: SECTION: 1 3. ANS: B a competitive market. DIF: 1 4. ANS: B an oligopoly. REF: SECTION: 1

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DIF: 1 REF: SECTION: 1 5. ANS: D the prices of the inputs used to produce the good DIF: 1 REF: SECTION: 2 6. ANS: C demand for good X will increase. DIF: 2 REF: SECTION: 2 7. ANS: B reduces the demand for the other good. DIF: 3 8. ANS: A It would decrease. REF: SECTION: 2

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DIF: 2 REF: SECTION: 2 9. ANS: A the price of a resource DIF: 1 10. ANS: B demand curve. REF: SECTION: 2

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DIF: 1 REF: SECTION: 2 OBJ: TYPE: M 11. ANS: A the downward-sloping line relating the price of the good to the quantity demanded. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

12. ANS: B increasing your current demand for DVDs. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M 13. ANS: C people are now more willing to buy the product at any price than before. DIF: 2 14. ANS: C C REF: SECTION: 2 OBJ: TYPE: M

DIF: 3 REF: SECTION: 2 15. ANS: B quantity supplied could be zero. DIF: 2 16. ANS: A number of sellers DIF: 2 17. ANS: C crystal to increase. REF: SECTION: 3

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DIF: 3 REF: SECTION: 3 18. ANS: D result in a movement along a stable supply curve. DIF: 2 REF: SECTION: 3 19. ANS: A represent an increase in the supply of cattle at the auction. DIF: 2 REF: SECTION: 3 20. ANS: C an increase in supply. DIF: 2 21. ANS: D equilibrium. DIF: 1 22. ANS: B $20,600. REF: SECTION: 3

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DIF: 2 REF: SECTION: 4 23. ANS: B Equilibrium price would be equal to equilibrium quantity. DIF: 2 REF: SECTION: 4 24. ANS: E Both a and c are correct.

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DIF: 3 REF: SECTION: 4 25. ANS: D and equilibrium quantity to both decrease. DIF: 2 26. ANS: D D. REF: SECTION: 4

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DIF: 3 REF: SECTION: 5 27. ANS: C Quantity will fall and the effect on price is ambiguous. DIF: 3 REF: SECTION: 4 28. ANS: D The price change will be ambiguous. DIF: 3 REF: SECTION: 4 29. ANS: D We couldn't be sure what it might do. DIF: 3 REF: SECTION: 4 30. ANS: A a buyer's responsiveness to a change in the price of a good. REF: SECTION: 1 OBJ: TYPE: 1 31. ANS: C analyze supply and demand with greater precision. DIF: 2 32. ANS: C inelastic REF: SECTION: 1

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DIF: 2 REF: SECTION: 1 OBJ: TYPE: M 33. ANS: C buyers tend to be much more sensitive to a change in price when given more time to react. DIF: 2 34. ANS: D .64. REF: SECTION: 1 OBJ: TYPE: M

DIF: 3 REF: SECTION: 1 35. ANS: A elastic section of the demand curve. DIF: 2 36. ANS: B 0.75. DIF: 2 REF: SECTION: 1

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37. ANS: C flatter. DIF: 2 REF: SECTION: 1 OBJ: TYPE: M 38. ANS: B vertical, because buyers purchase the same amount whether the price rises or falls. DIF: 3 39. ANS: C Levi jeans DIF: 2 40. ANS: C inelastic. REF: SECTION: 1 OBJ: TYPE: M

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DIF: 3 REF: SECTION: 1 41. ANS: A increases, then decreases. DIF: 3 REF: SECTION: 1 42. ANS: B the slope is equal to 1/4 and elasticity is equal to 3/2. DIF: 3 43. ANS: D elastic. DIF: 2 44. ANS: A an inferior good. REF: SECTION: 1

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DIF: 1 REF: SECTION: 1 45. ANS: B be positive and your roommate's would be negative. DIF: 2 46. ANS: D a normal good. REF: SECTION: 1

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DIF: 1 REF: SECTION: 1 47. ANS: D Firms can sell less at lower prices without losing profits. DIF: 2 REF: SECTION: 2 48. ANS: D supply must be perfectly inelastic. DIF: 2 49. ANS: A REF: SECTION: 2

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from A to B DIF: 2 50. ANS: A S1 DIF: 1 SHORT ANSWER 51. ANS: a. b. c. d. e. f. Total revenue from children's tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350. the demand for children's tickets is more elastic. The adult ticket market has the more elastic demand. The elasticity of demand between $5 and $2 is 0.26 or inelastic. The elasticity of demand between $5 and $3 is 1.33 or elastic. If price is increased to $8 for adult tickets (maximum for the graph) and price decreased to $3 for child tickets (minimum for graph), total revenue would increase to $440 ($8 ( 40 + $3 ( 40) or $90 more than before. REF: SECTION: 2 OBJ: TYPE: M

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REF: SECTION: 1 OBJ: TYPE: S 52. ANS: The appropriate elasticity to compute would be cross-price elasticity. The cross-price elasticity for this example would be 1.36. The two goods are substitutes because the cross-price elasticity is positive. REF: SECTION: 1 OBJ: TYPE: S