Name ______________________________

Economics 2306

Principles of Microeconomics

Professor James Henderson

Spring 1996 Test No. 1

I. Multiple Choice Answer the following on your Scan Tron.

1. Scarcity can best be defined as
a. unlimited wants.
b. a shortage--when buyers cannot obtain the goods they want.
c. a surplus--when sellers cannot sell the goods they produce.
d. insufficient resources to satisfy unlimited wants.
e. the private ownership of society's resources.

2. Economics is the social science that examines how society attempts to
a. fight unemployment and inflation while achieving economic growth.
b. organize business and earn profits for firms subject to governmental control.
c. allocate resources among the governmental, industrial, and international sectors of the economy.
d. produce and distribute goods and services in a world of scarce resources.
e. form social groups in order to coerce individuals into doing what's best for the group.

3. The expression "There's no such thing as a free lunch" means
a. even if the lunch is free, we pay for it in extra calories.
b. resources used up in the lunch are not available to satisfy other wants.
c. the same thing as "The best things in life are free."
d. you can eat only if you work first.
e. neither seawater nor air is free.

4. Which of the following is an example of a normative statement?
a. If the money supply falls, interest rates will rise.
b. Teenage unemployment would be lower if there were no minimum wage.
c. The quantity of mittens sold increases as the price of mittens decreases.
d. The federal government's budget deficit should be reduced.
e. If interest rates go up, then construction activity will fall.

5. The expression "Time is money" reflects which economic concept?
a. Opportunity cost
b. Specialization
c. Market exchange
d. Comparative advantage
e. Efficiency

6. The law of comparative advantage states that
a. the individual with the lowest opportunity cost for producing a particular good should specialize in producing it.
b. comparative advantage exists only when one person has an absolute advantage in the production of two goods.
c. whoever has a comparative advantage in producing a good also has an absolute advantage in producing that good.
d. whoever has an absolute advantage in producing a good also has a comparative advantage in producing that good.
e. gains from trade are possible only when one person has the comparative advantage in producing both goods.

7. The law of demand suggests that as the price of a good increases,
a. persons recognize that its price may be even higher in the future, so they buy now rather than later.
b. consumers tend to shift their purchases to relatively cheaper substitutes.
c. people will buy less in the hope that the commodity will be cheaper in the future.
d. the money income of the consumer increases, and he or she is less able to buy all goods, including the good whose price has increased.
e. the money income of the consumer decreases, and if the product is a normal good, more will be purchased.

8. Which of the following would not cause the demand curve for peaches to shift?
a. An increase in the price of apricots
b. A decrease in the price of nectarines
c. An increase in the price of peaches
d. A change in preference for peaches
e. A decrease in the income of peach buyers

9. Which of the following is the best example of complements?
a. Milk and cheese
b. Coffee and tea
c. CDs and tapes
d. Hiking boots and athletic shoes
e. Tortilla chips and salsa

10. Which of the following best represents this concept of market equilibrium?
a. All consumers and suppliers will be satisfied with the price and quantity traded.
b. The price and quantity actually sold equals the actual price and quantity bought.
c. The equilibrium price and quantity will never change.
d. The amount willingly supplied equals the amount willingly demanded.
e. Only suppliers will be satisfied with the equilibrium price and quantity.

11. Price distributes goods to those
a. with the greatest need.
b. with the greatest desire.
c. with the most money.
d. who are willing and able to pay the most for the goods.
e. who are most favored by government officials.

12. Tickets to the Michigan-Notre Dame football game are usually sold out in advance of game day. This suggests
a. the price of the tickets must be very high or else people would not consider them valuable.
b. the price is set below the equilibrium level.
c. the Michigan football stadium is relatively small.
d. everyone who attends will enjoy it.
e. the price is determined primarily by the fixed supply of tickets.

13. If one looks at historical evidence, it can be noted that gasoline consumption was lower when the price was 25 cents per gallon than when it went over $1 per gallon. This suggests the
a. demand curve for gasoline is upward sloping.
b. gasoline market has never been in equilibrium.
c. demand for gasoline must have increased relative to supply.
d. supply of gasoline is not sensitive to the price.
e. demand for gasoline has no effect on price.

14. If an increase in the price of a product from $1 to $2 per unit leads to a decrease in the quantity demanded from 100 to 80 units, the according to the simple formula, the value of price elasticity of demand in absolute terms is
a. 0.2
b. 5
c. 5 percent
d. 20 percent
e. 500 percent

15. If Baylor University increases tuition in order to increase its revenue,
a. it will not be successful if the demand curve slopes downward.
b. it will be successful if demand is elastic.
c. it will be successful if demand is inelastic.
d. it will be successful if supply is elastic.
e. it will be successful if supply is inelastic.

16. Which of the following describes a situation in which demand must be inelastic?
a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50.
b. The price of pens rises by 10 cents, and total revenue rises.
c. A 20 percent increase in the price of pens leads to a 20 percent decrease in the quantity of pens demanded.
d. Total revenue does not change when the price of pens rises.
e. Total revenue decreases when the price of pens rises.

17. In the real world, demand is not likely to be perfectly inelastic at every price because
a. no substitutes exist for some goods.
b. some consumers will be unable to afford very high prices with given incomes.
c. at low prices, consumers always want a lot.
d. consumers are willing to pay any price for certain goods.
e. the prices of certain goods don't change.

18. If "I'm a Pepper, you're a pepper, we're a Pepper, too," describes our demand for Dr. Pepper, it is likely to be
a. relatively price elastic.
b. relatively income elastic.
c. relatively price inelastic.
d. unit elastic.
e. infinitely elastic.

19. The supply of paintings by Van Gogh is most likely to be
a. of infinite elasticity, because supply is limited.
b. of zero elasticity, because supply is limited.
c. elastic, because the paintings are luxury goods.
d. inelastic, because supply is limited.
e. of unitary elasticity.

20. As the economy recovers from a recession, we should expect that
a. demand for inferior goods will fall and demand for normal goods will rise.
b. demand for both inferior and normal goods will rise.
c. demand for inferior goods will rise and demand for normal goods will fall.
d. demand for both inferior and normal goods will fall.
e. demand for complements will fall.

21. Which of the following sayings describes the concept of diminishing marginal utility?
a. Time is money.
b. Penny wise and pound foolish.
c. Absence makes the heart grow fonder.
d. A penny saved is a penny earned.
e. A fool and his money are soon parted.

22. The marginal utility of a second copy of today's New York Times is
a. infinite.
b. practically 0.
c. positive and greater than the MU of the first copy.
d. equal to the MU of the first copy.
e. 50 cents.

23. Suppose you go to an all-you-can-eat pizza buffet. What is likely to be the marginal utility of the last slice of pizza you eat?
a. Infinite
b. 0
c. 1
d. Less than 0
e. Greater than 1

24. Joe the Economist tells his wife, Jane, that he wants to spend a weekend fishing with his friends. She replies, "You don't love me anymore." Just before she hits Joe with a croquet mallet, Joe explains to her that she has confused the concepts of
a. marginal utility and price.
b. income and price.
c. marginal utility and total utility.
d. love and death.
e. consumer surplus and utility.

25. People who use drive-through windows at restaurants tend to
a. have a low opportunity cost of time.
b. have a high opportunity cost of time.
c. not maximize their utility.
d. act irrationally.
e. value their money more than their time.

II. True-False-Uncertain Answer the following the spaces provided. Explain.

1. A decrease in the price of a good will cause a leftward shift in the demand curve for that good if it is a normal good.

2. A price ceiling set below the equilibrium price will result in a shortage.

3. If a $1 increase in price leads to a 3-unit decrease in quantity demanded, then demand must be elastic.

4. The demand for a particular brand of skis is likely to be more inelastic than the demand for skis in general.

5. The fact that the washroom usually has paper towels left (free to the consumer) suggests that the marginal utility of paper towels quickly diminishes to 0 for each consumer.

III. Short Answer. Use spaces provided.

1. A competitive market is currently experiencing a shortage. How do the buyers and sellers know there is a shortage? Explain how the equilibrium price and quantity will eventually prevail (i.e., explain how the shortage changes the behavior of buyers and sellers).

2. What are the likely consequences of the following events on the U.S. market for coffee? Explain which curve shift(s), what happens to price and quantity, and show the changes on the graph.



a. Medical evidence that more than two cups of coffee a day greatly increases the risk of stomach cancer











b. An unexpected, heavy frost in Brazil













c. A dramatic rise in after-tax income for consumers












d. Juan Valdez discovers a cheaper way to pick coffee beans

e. Events a and b occur simultaneously.

Extra Credit

Explain the relationship between marriage, demand elasticity, and the phrase "You always hurt the one you love."