1 Econ 101, Section 21, S10, Schroeter Exam #2, Special code = 2 Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of page For a good that is a necessity, demand *. tends to be inelastic. b. tends to be elastic. c. is unit elastic. d. is represented by a horizontal demand curve. 2. Which of the following is likely to have the least elastic demand? a. Coke. b. Pepsi. *. carbonated soft-drinks. d. a Hy-Vee store-label brand of carbonated cola-flavored soft-drink. 3. If the own-price elasticity of demand for a good is -1.4, then a price increase of 7% will result, other things equal, in a quantity demanded decrease of *. 9.8%. b. 8.4%. c. 7.0%. d. 5.0% 4. The market for widgets is competitive and the demand for widgets is elastic. When the supply of widgets decreases, the equilibrium price of widgets will a. decrease, and the revenue of widget sellers will decrease. b. increase, and the revenue of widget sellers will increase. *. increase, and the revenue of widget sellers will decrease. d. either b or c, depending on the elasticity of supply. 5. Which of the following is true? a. Demand is perfectly elastic if the own-price elasticity of demand is zero. b. The own-price elasticity of demand for a normal good must be in the elastic range. *. If two goods are substitutes, their cross-price elasticity of demand is positive. d. All of the above are true. 6. Harry the hot-dog vendor sells an average of 75 hot dogs per day at his regular price of $4.00/hot dog. When he runs a special, charging a price of only $3.50/hot dog, his sales increase to an average of 85 hot dogs per day. Over this range of prices, the elasticity of demand (calculated by the midpoint method) for Harry's hot dogs is a * c d
2 2 7. The state of Iowa is facing a severe budget crisis that may require cutbacks to the drug interdiction activities of state law enforcement officers. An economist working for the state government argues that this will increase the supply of heroine, an illegal, addictive drug, but will also reduce the amount of revenue going to the criminal organizations that currently supply heroine. This economist thinks that a. the demand for heroine is elastic. *. the demand for heroine is inelastic. c. the supply of heroine is elastic. d. the supply of heroine is inelastic. 8. The demand for gasoline is more elastic in the long-run than in the short-run. The supply of gasoline has roughly equal elasticities in the long-run and in the short-run. What would be the effect in the competitive market for gasoline if supply increased and remained at the new higher level permanently? a. The equilibrium price of gasoline would decrease in the short-run, and decrease further in the long-run. b. The equilibrium quantity of gasoline would increase in the short-run, and increase further in the long-run. c. The equilibrium price of gasoline would decrease in the short-run, but then return part of the way toward its original level in the long-run. *. Both b and c. 9. Which of the following rental housing occupants is most likely to benefit from a municipal rent control ordinance? a. A family that needs an apartment bigger than their current one because they are expecting another child. b. A young adult who currently lives with his parents but would like to move out into a place of his own. c. An apartment dweller who has been trying unsuccessfully for weeks to get the landlord to fix an unreliable furnace. *. A retired couple who currently have a suitable apartment and are quite happy to stay where they are. 10. Which of the following is likely to occur in a competitive market for a good that is subject to a binding price ceiling? *. Long lines of frustrated customers will form outside of stores before they open. b. Sellers will try to circumvent the price ceiling by secretly offering lower prices to customers. c. The government will be pressured by sellers into purchasing the market's surplus. d. All of the above. 11. A price floor in a competitive market dictates a. the exact price that sellers must charge. b. the average price that sellers must charge. *. the minimum price that sellers may charge. d. the maximum price that sellers may charge.
3 3 12. When the government imposes a minimum wage at a level that is above the equilibrium wage in a labor market, the level of employment in the market will a. remain unchanged and the wage that employed workers are paid will increase. b. remain unchanged and the wage that employed workers are paid will decrease. c. increase and the wage that employed workers are paid will increase. *. decrease and the wage that employed workers are paid will increase. 13. A surplus results when a a. binding price ceiling is imposed on a market. *. binding price floor is imposed on a market. c. non-binding price ceiling is imposed on a market. d. non-binding price floor is imposed on a market. 14. Initially, there is a binding price ceiling on the market for gizmos. Assuming that the ceiling price remains at the same level, which of the following events could convert the price ceiling from one that is binding to one that is not binding? a. A technological innovation results in a lower-cost method of producing gizmos. b. The price of a substitute for gizmos increases. c. Gizmos lose some of their popularity with consumers when it is discovered that their use carries a health risk. *. Either a or c. 15. State cigarette excise taxes vary from state to state. The five states with the lowest cigarette excise tax rates include all of the following except a. South Carolina. b. Virginia. *. Iowa. d. Missouri. 16. Under which of these hypothetical circumstances would an excise tax on a competitive market result in the price paid by buyers (inclusive of the tax) increasing by the full amount of the tax? a. Demand is unit elastic. b. The tax law requires that the buyer, not the seller, is the one responsible for sending the tax payment to the government. *. Supply is perfectly elastic. 17. Suppose that a $1.00/unit excise tax is imposed on a competitive market in which the elasticity of demand is -0.8 and the elasticity of supply is 1.5. As a result of the tax, the price sellers receive (net of the tax) will *. decrease by some amount less that $0.50/unit. b. decrease by some amount between $0.50/unit and $1.00/unit. c. decrease by $1.00/unit d. remain unchanged.
4 4 18. When a tax is imposed on the competitive market for cell phones, *. the number of cell phones purchased decreases and the price that buyers pay (inclusive of the tax) increases. b. the number of cell phones purchased and the price that buyers pay (inclusive of the tax) both decrease. c. the number of cell phones purchased increases and the price seller receive (net of the tax) decreases. 19. Suppose that Sam is one of several bidders in an auction of a piece of antique furniture. As the bidding proceeds, he has in mind a maximum amount that he will bid. This maximum is called his a. resistance price. b. consumer surplus. *. willingness to pay. d. opportunity cost. 20. Welfare economics is the study of a. taxes and subsidies. b. government programs to help the poor. c. the effect of income redistribution on labor supply. *. how the allocation of resources affects economic well-being. Questions 21 and 22 refer to the following information. The table lists willingness to pay for the first, second, and third pizzas of the month for three hypothetical consumers. All three have zero willingness to pay for pizzas after the third of the month. First pizza Second pizza Third pizza Alison $12 $8 $2 Andrea $15 $12 $7 Andrew $18 $16 $ If the price of pizzas were $14.00, the number of pizzas purchased each month by each consumer would be: a. Alison - 1; Andrea - 1; Andrew - 1. *. Alison - 0; Andrea - 1; Andrew - 2. c. Alison - 2; Andrea - 1; Andrew - 2. d. Alison - 1; Andrea - 0; Andrew If the price of pizzas decreased from $14.00 to $10.00, which of the three consumers would experience the largest increase in consumer surplus? a. Alison. b. Andrea. *. Andrew. d. Andrea and Andrew would be tied for the largest increase in consumer surplus.
5 5 23. When the government doubles the size of an excise tax on a competitive market a. consumer surplus will increase and producer surplus will decrease. b. consumer surplus will decrease and producer surplus will increase. c. consumer surplus and producer surplus will both increase. *. consumer surplus and producer surplus will both decrease. 24. When a competitive market is in equilibrium (with no taxes), the market's total surplus is represented by the area a. below the demand curve, above the equilibrium price, between the vertical axis and the equilibrium quantity. b. below the equilibrium price, above the horizontal axis, between the vertical axis and the equilibrium quantity. c. below the supply curve, above the horizontal axis, between the vertical axis and the equilibrium quantity. *. below the demand curve, above the supply curve, between the vertical axis and the equilibrium quantity. 25. The imposition of an excise tax on a competitive market will a. increase quantity demanded and decrease quantity supplied. b. decrease quantity demanded and increase quantity supplied. c. increase both quantity demanded and quantity supplied. *. decrease both quantity demanded and quantity supplied. 26. When a $1.00/unit excise tax goes into effect on a competitive market, it increases the price buyers pay (inclusive of the tax) by $0.70/unit and it decreases the price sellers receive (net of the tax) by $0.30/unit. With the tax in effect, the volume of trade in the market is 1000 units/day. Assuming that the demand and supply curves are straight lines, the deadweight loss of this tax is a. $1000/day. b. $700/day. c. $300/day. *. Impossible to determine without more information. (continued on back)
6 6 27. If supply and demand of a good are straight lines, and the $/unit "size" of an excise tax on the good doubles, the deadweight loss of the tax will a. increase by 50%. b. double. *. quadruple. d. remain constant. The following graph depicts supply and demand in a hypothetical competitive market. Use it to answer questions 28, 29, and 30. ($/unit) 10 7 Supply Demand (units/day) 28. When this market is in equilibrium (with no excise tax), consumer surplus is a. $250/day. *. $125/day. c. $62.50/day. 29. What would be the impact on producer surplus of the imposition of a $3.00/unit excise tax on this market? Producer surplus would a. decrease by $90/day. *. decrease by $40/day. c. increase by $30/day. 30. What would be the impact on consumer surplus of the imposition of a $3.00/unit excise tax on this market? Consumer surplus would a. decrease by $90/day. b. decrease by $40/day. c. increase by $30/day. *. None of the above.