ÿWPC _

							Optional Questions for Exam 1 1. The demand has increased so much in response to our offering a $75 price rebate that our inventory of portable laptops is now running very low.” What is wrong with this statement? A graph may be useful in your answer. 2. In the space below draw a supply and demand graph for California raisins. The following series of events occurs. Explain the result of each occurrence using graphs to support your answers (you may use the space provided or draw separate graphs if you prefer.) a. An advertising campaign for California raisins is successful. b. A fungus wipes out half the grape crop (used to make raisins) in California. c. The price of bran flakes (a compliment) increases. d. The price of dried cranberries (a substitute) increases. e. The government declares a price ceiling of 75 cents below equilibrium price. f. A new technology is developed to more efficiently harvest grapes. 3. Suppose the New York City Council imposes a tax on privately owned taxicab companies operating in the city. a. Using the space below, show the effects of the tax on taxicab prices and quantity of cab rides per month. b. How much are consumers harmed by the tax? (Hint: Use the concept of consumer surplus.) c. Suppose that there are many available substitute forms of public transportation such as public buses and subways. How would these substitutes impact the elasticity of demand for tax cabs and, therefore, the size of the effects you described in part a? d. Explain how the tax on cabs impacts the market price and quantity for riding New York buses. How does the elasticity of demand for cabs impact your answer?

Multiple Choice Questions 1. Gabe Fried is stranded on a Pacific island and realizes that, to survive, he must pick berries. He discovers that he picks more berries in the first hour than he does in the second because it becomes increasingly difficult to find berries. Gabe has just discovered: a. b. c. d. the law of demand. the law of opportunity costs. the law of increasing costs. the law of scarcity.

2. Now Gabe (from question 1) can use his time to produce food by picking berries or fishing. Which of the following is likely to cause an inward shift in Gabe’s production possibilities frontier? a. Gabe invents a fishnet. b. a typhoon destroys resources on the island. c. Gabe discovers an additional forest of berry trees. d. Gabe finds a companion, named Friday, to help him fish and pick berries. 3. Dog food companies have developed a new technology that makes nutritious dog food out of garbage. We would expect, ceteris paribus, that the a. supply curve of dog food would shift left. b. supply curve of dog food would shift to the right. c. demand curve for dog food would shift to the left. d. demand curve for dog food would shift to the right. 4. As long as an excess demand for pizza exists in the market, there will be incentive a. for demanders to bid up the price. b. for demanders to buy fewer pizzas. c. for pizza makers to produce and sell fewer pizzas. d. for pizza makers to lower the price of pizza e. a shift in both demand and supply curves to achieve equilibrium. 5. The staff economist for Barnaby Boots estimates that if the firm increases the price of its boots by 10 percent, it would lead to a 6 percent reduction in the quantity of boots demanded. Which of the following best describes these findings: a. demand is elastic and a price increase will raise total revenues b. demand is elastic and a price increase will lower total revenues c. demand is inelastic and a price increase will raise total revenues. d. demand is inelastic and a price increase will lower total revenues. e. demand elasticity is uncertain but a price increase will raise total revenues

6. Price elasticity of demand reflects a. the degree to which firms are willing to supply quantities of goods to match any change in the demand for those goods. b. the degree to which consumers are willing to demand goods to match any change in the quantities of the goods supplied by the firms. c. the sensitivity of consumers demand to changes in the price of a good. d. the sensitivity of price to changes in quantity demanded of a good. e. the willingness of firms to change prices when they anticipate changes in demand. 7. If the state of Georgia, hoping to generate the highest tax revenues, can tax only one good from among many, it would choose the good with a. inelastic demand and elastic supply. b. inelastic demand and inelastic supply. c. elastic demand and inelastic supply. d. elastic demand and elastic supply. 8. When a price floor (above equilibrium price) is imposed on a market, a. the quantity of the good supplied will fall. b. the quantity of the good demanded will rise. c. the demand curve for the good will shift to the left. d. there will be a shortage of the good. e. there will an excess supply of the good 9. Suppose the government provides milk to everyone free of charge and everyone consumes it to the point at which s/he receives no additional satisfaction from another bottle of milk. Is this necessarily good? a. Yes, because everyone is satisfied. b. No, because there might be some cases where the resources used to produce milk could have been better used to produce more of other products. c. Yes, because the law of diminishing marginal utility indicates that in order to get the greatest amount of satisfaction from the use of resources, people should consume as much of every good as they can. d. Yes, because no one must pay for the milk. 10. Which of the following statements is false? a. There are always opportunity costs to making choices. b. Because of scarcity, choices must be made. c. Elementary education at public schools is usually free. d. When government builds a new highway, taxpayers end up with less of some of the things they would otherwise have.

11. All other things being equal, the _______ the percentage of an individual's budget spent on a good, the ________ the price elasticity of demand. a. greater, higher b. smaller, lower c. greater, lower d. smaller, higher e. a and b 12. If total utility rises by a constant amount as a person consumes additional units of a good, it follows that a. marginal utility is rising. b. marginal utility is falling. c. total utility and marginal utility are equal. d. marginal utility is constant. e. marginal utility is negative. 13. That portion of the change in the _________ of a good that is attributable to a change in its relative price is called the ____________. a. quantity supplied, "substitution effect" b. quantity demanded, "income effect" c. quantity supplied, "income effect" d. quantity demanded, "substitution effect" e. none of the above 14. Why do societies need rationing devices? a. Because people have too many needs and not enough wants. b. Because price exists. c. Because scarcity exists. d. Because competition exists. e. Because people have opportunity costs. 15. Which of the following statements represents a correct and sequentially accurate economic explanation? a. X and Y are substitutes. The price of X falls, the quantity demanded of X rises, and the demand for Y rises. b. X and Y are substitutes. The price of X rises, the demand for X falls, and the demand for Y rises. c. X and Y are substitutes. The price of X falls, the demand for X rises, and the quantity demanded of Y rises. d. X and Y are substitutes. The price of X falls, the quantity demanded of X rises, and the demand for Y falls. 16. Which of the following statements is true? a. In a given economy, only one combination of goods is efficient.

b. If good X is produced at increasing opportunity costs, then producing the 100th unit of good X will require forfeiting fewer units of, say, good Y than will be required to produce the 50th unit of good X. c. One of the three questions economists say every society must answer is "Who will determine the prices charged for the goods and services produced?" d. The efficiency criterion address the question of whether an alternative arrangement exists that can make at least one person better off without making anyone else worse off. 17. Which statement uses the term ceteris paribus correctly? a. If you exercise regularly, you will be healthier, ceteris paribus. b. Blue is to green, ceteris paribus, as red is to purple. c. Most people consider Sunday the first day of the week, ceteris paribus. d. Jill is taller than Jack, ceteris paribus. 18. "If you had not gone to dinner with your friends, you would have stayed home and surfed the Internet." It follows that a. surfing the Internet is the opportunity cost of having dinner with your friends. b. having dinner with your friends is the opportunity cost of surfing the Internet. c. the price of having dinner with your friends is more than the price you would have had to pay to surf the Internet. d. the opportunity cost of having dinner with your friends is lower than the opportunity cost of surfing the Internet. e. it is less costly to surf the Internet than to have dinner with your friends. 19. What does it mean if a person makes a "decision at the margin"? a. The person compares additional benefits and additional costs when deciding what to do. b. The person weighs the good against the bad and then decides what to do. c. The person is more likely to say yes than no. d. The person compares marginal benefits and total costs and then decides what to do. e. The person makes a decision based on a condition. 20. If supply is perfectly inelastic, a. a rise in price will not change quantity supplied. b. a fall in price will change quantity supplied. c. a rise in price will change quantity supplied by more than a fall in price. d. a fall in price will change quantity supplied by more than a rise in price. 21. What are the likely consequences of the following events on the U.S. market for tobacco products? Use graphs to support your answers, in each case showing whether demand and/or supply shifts and the effect on market equilibrium. Assume an upward-sloping supply curve and a downward-sloping demand curve. a. The Food and Drug Administration classifies tobacco an "addictive substance." b. Congress votes to increase the excise (per unit of output) subsidy to tobacco farmers. c. Hurricane Fran dumps 15 inches of rain on North Carolina and destroys 80% of that

state's tobacco crop. How does the degree of the elasticity of demand for tobacco products impact your answer? d. Sixteen states sue the major tobacco companies for billions of dollars because of tobaccorelated costs in their Medicaid programs. e. Medical evidence that more than two cups of coffee a day (considered a substitute for smoking) greatly increases the risk of stomach cancer. 22. Medical research suggests that people can significantly improve their health and lengthen their life expectancy by exercising more, eating a healthy diet, avoiding stress, and drinking and smoking less. Nevertheless, studies also show that most people fail to follow these healthy practices. Use the economic decision-making approach to explain why it may be rational for people to practice “unhealthy” behavior, even though it can diminish their health and life expectancy. 23. This question concerns the market for rental housing in the city of San Marcos. Using supply and demand graphs show and explain the market effects of each of the following. a. Owners of rental housing in San Marcos argue that the price of maintenance and landscaping services (inputs to provide rental housing) have increased. Assuming the statement is accurate, what are the likely effects on price and quantity of rental housing in San Marcos? b. Suppose that San Marcos city officials impose rent controls on rental housing (i.e., a price ceiling below the market equilibrium price shown in part a). Show and explain why the price ceiling would lead to a shortage (in your answer define what is meant by a shortage)? Briefly comment on some likely outcomes of this shortage. c. Meanwhile, officials in the city of Escondido decide to impose a tax on rental housing (to be paid by owners of rental housing) in their city. Assume that rental housing in San Marcos is a close substitute for rental housing in Escondido. Show how you expect the Escondido tax to impact the rental shortage in San Marcos? Explain. d. Suppose that the demand for rental housing in Escondido was perfectly inelastic. How would your answer in part (d) change? 24. Draw a graph with normal-looking demand and supply curves for physician services, where the equilibrium price is $100 per unit of service. How would the demand curve change if a public insurance program were to pay (on behalf of consumers) the entire price of physician services? How would this impact the equilibrium price of physician services? Would the new equilibrium price/quantity result in an efficient resource allocation? Explain. (Hint: The demand curve depicts the relationship between market price and the quantity of services demanded by consumers. Regardless of market price, what quantity will people demand if they pay nothing?)