# Econ Orazem

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```					Econ 101: Orazem
Exam 2 Review

1. Assume the cross price elasticity between oranges and apples is 3. A 10% in increase in the price of apples
will cause a:
a. 20% increase in the price of apples
b. 30% increase in the demand of apples
c. 30% increase in the demand for oranges
d. 20% increase in the price of oranges

2. Price elasticity of demand measures the responsiveness of:
a. Quantity demanded to changes in product quality
b. Quantity demanded to changes in income
c. Quantity demanded to changes in price
d. Supply to changes in demand

3. The sign (negative or positive) on the cross-price elasticity of demand for wine and chocolate tells us
a. How the burdern of an excise tax on either good would be split between consumers and producers
b. Whether chocolate is a normal good
c. Whether wine and chocolate are substitutes or complements
d. Whether wine is a normal good

4. When demand is perfectly elastic,
a. Consumers do not respond to price changes
b. The demand curve is vertical
c. The demand curve is horizontal
d. Supplier do not respond to price changes

5. During a drought, the price elasticity of demand for water is less than one. During a flood the price elasticity
of demand for water is greater than one. This means that:
a. the quantity of water people choose to consume is independent of the price
b. the demand curve for water cannot have a constant slope
c. the demand for water is inelastic during a drought and elastic during flood
d. the demand for water is elastic during a drought and inelastic during a flood

6. Which piece of information is not needed in order to calculate the present value of a sum of money to be
received in the future?
a. The amount of money to be received
b. The interest rate
c. The amount of time until the money is received
d. The means through which the money will be paid (ex. Cash)

7. What is the present value of \$6,000 to be received three years from now?
a. The present value is the amount of interest that could be earned on that sum over the three years.
b. It depends on the likelihood that the money will actually be received.
c. It depends on the interest rate.
d. The present value is over \$6,000.

8. Jared has \$12,000 to lend at an annual interest rate of 6 percent. Suppose at the end of one year, he reinvests
the original \$12,000 plus his interest earnings for a second year at the same rate of interest. How much money
will he have at the end of two years?
a. \$12,982.00
b. \$13,483.20
c. \$12,720.00
d. \$13, 400.20
9. Javier and Pierre each want to buy an ice cream cone. Javier is willing to pay \$2.50 and Pierre is willing to pay
\$4.00. If the ice cream cone costs \$2.25, what is the total consumer surplus after Javier and Pierre make their
purchases?
a. \$4.50
b. \$6.50
c. \$2.00
d. \$0.25

10. Mario is willing to mow one lawn for \$18; he will mow a second for \$22, and a third for \$28. Assume that the
market rate for lawn mowing is \$24. How many lawns will Mario mow? What will be his total revenue? What
will be his producer surplus?
a. Mario will mow two lawns for a total revenue of \$48, and his producer surplus will be \$8
b. Mario will mow two lawns for a total revenue of \$48, and his producer surplus will be \$2.
c. Mario will mow three lawns for a total revenue of \$72, and his producer surplus will be \$2.
d. Mario will mow three lawns for a total revenue of \$72, and his producer surplus will be \$4.

11. Suppose the price of a hotel room in San Diego averages \$200 per night. At that price suppose 30,000 people
stay in hotel rooms on an average night in San Diego. If the average level of consumer surplus for each hotel
guest equals \$24, what is the total consumer surplus per night?
a. \$600,000
b. \$720,000
c. \$528,000
d. \$480,000

12. An excise tax imposed on chocolate would create a deadweight loss because
a. it will prevent some mutually beneficial trades from occurring.
b. it will discourage new firms from entering the chocolate-making business
c. it will reduce the demand for chocolate
d. it will dampen the profits of chocolate producers.

13. Which area on a graph represents producer surplus?
a. The area between the supply and demand curves to right of equilibrium point
b. The area between the supply and demand curves to the left of the equilibrium point
c. The area under the demand curve down to a line indicating price
d. The area above the supply curve up to a line indicating price

14. Consumer surplus is the...
a. difference between the quantity of a good demanded and the quantity supplied.
b. quantity of a good that remains on the market in instances of market failure.
c. amount of revenue collected from an excise tax.
d. difference between the price that consumers are willing to pay for a good and the amount they
actually pay

Use the graph on the board to answer the following questions (15-18)

15. Where is the consumer surplus?
a. A
b. B
c. C
d. D
16. Where is the producer surplus?
a. A
b. B
c. C
d. D
17. What is the numerical value of the consumer surplus?

18. What is the numerical value of the producer surplus?

19. Adam has a monthly income of \$840. He spends all of his money on two goods - leasing an apartment and
eating at restaurants. If his apartment rent is \$560 per month, how many restaurant meals can he buy each
month if the cost of each meal is \$14?
a. 12
b. 18
c. 20
d. 17

20. The collection of all the goods and services you consume is your
a. Consumption bundle.
b. Utility.
c. Total utility.
d. Marginal utility.

21. Which of the following would make the budget line steeper?
a. The price of the good measured on the horizontal axis increases.
b. The consumer's income increases.
c. The consumer's income decreases.
d. The price of the good measured on the horizontal axis decreases.

22. You are graphing the budget line for an individual who consumes coffee and bread. How is the budget line
affected when the consumer's income increases?
a. Only the vertical intercept increases
b. Both the horizontal and vertical intercepts decrease
c. Both the horizontal and vertical intercepts increase
d. Only the horizontal intercept decreases.

23. The downward slope of the budget line reflects the fact that
a. As you buy more of one good, you become worse off.
b. All goods are characterized by diminishing marginal utility.
c. As you buy more of one good, you can afford less of the other
d. As you buy more of one good, its price decreases

24. Evan spends all of his income on cheese and wine. A bottle of wine costs \$20, and a pound of cheese costs
\$12. At his current consumption level, the marginal utility of a pound of cheese is 30 utils, and the marginal
utility of a bottle of wine is 60 utils. In order to maximize his utility, Evan should
a. Buy wine and more cheese.
b. Spend the same amount on cheese as he does on wine.
c. Buy more wine and less cheese.
d. Buy less of both wine and cheese.
25. Samia reports that her marginal rate of substitution between caramels and jelly beans is constant. Therefore, it
is the case that
a. She views jelly beans and caramels as perfect substitutes.
b. Her indifference curves for these two goods will be upward-sloping.
c. She does not exhibit rational preferences.
d. Her decision of how much of each good to buy will be independent of their prices
26. What two variables are needed in order to calculate Gunther's marginal rate of substitution between DVDs and
theater tickets?
a. The amount of marginal utility Gunther derives from DVDs, and their price.
b. The amount of marginal utility Gunther derives from theater tickets, and their price.
c. The amount of marginal utility Gunther derives from one of these goods, and his income.
d. The amount of marginal utility Gunther derives from each of these goods.

27. The flattening of the indifference curve at points further to the right reflects
a. The concept of diminishing marginal utility.
b. The income effect.
c. The difficulty of finding large amounts of any one good.
d. The law of demand

28. What happens when there is an increase in the price of the good measured on the horizontal axis?
a. The budget line becomes steeper, and the consumer chooses a new consumption bundle at which is
total utility is less than it was before.
b. The budget line becomes flatter, and the consumer chooses a new consumption bundle at which is
total utility is less than it was before.
c. The budget line becomes flatter, and the consumer chooses a new consumption bundle at which is
total utility is more than it was before.
d. The budget line becomes steeper, and the consumer chooses a new consumption bundle at which is
total utility is more than it was before.

29. The slope of your indifference curves between food and entertainment reflects
a. The level of your income.
b. The number of entertainment options available to you.
c. The relative prices of these two goods.
d. Your willingness to substitute between these two goods.

30. With ordinary goods, the effect of an increase in the consumer's income is to
a. Expand her set of consumption choices and improve her well-being.
b. Make it more difficult to achieve the tangency condition.
c. Make it more difficult to determine the optimal consumption bundle.
d. Eliminate the effects of diminishing marginal utility

31. Max consumes only yogurt and almonds, and is currently on his highest possible indifference curve. Two
bundles on this indifference curve are:
Bundle I: 4 yogurts and 2 almonds
Bundle II: 3 yogurts and 3 almonds Which bundle below is definitely not on this indifference curve?
a. 1 yogurt and 6 almonds
b. 2 yogurts and 4 almonds
c. 4 yogurts and 3 almonds
d. 5 yogurts and 1.5 almonds

32. What is constant at all points along one indifference curve?
a. The consumer's total utility
b. The consumer's income
c. The marginal utility of each good
d. The total amount spent on each good
Important things to know for the test:

   There will be NO equations!!
   The following table would be very useful to memorize

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