Name ______________________________

Economics 2306 - 10 & H1

Principles of Microeconomics

Professor James Henderson

Fall 1996 Test No. 1

I. Answer the following multiple choice questions on your Scantron.

1. Which of the following statements regarding the basic economic problem of scarcity is correct?
a. The problem only exists in countries that are not highly industrialized.
b. The problem will quite likely disappear as production increases.
c. The problem will be sure to disappear with the growth of technology.
d. The problem will exist as long as resources are available in limited amounts.
e. The problem will disappear as a person's income falls.

2. Which of the following represents the best definition of economics?
a. An investigation of the quantities and prices of the various goods produced by the nations of the world.
b. A study of why inflation and unemployment periodically strike the U.S. economy.
c. An analysis of how individuals and societies deal with the problem of scarcity.
d. An examination of the role that money plays in the economy.
e. A study of how goods and services are distributed throughout the world.

3. Microeconomics can best be defined as the study of
a. the behavior of small firms in the marketplace
b. the economic behavior of individual decision makers
c. the behavior of the economy as a whole
d. how to use the fewest natural resources to produce goods and services
e. government's role as a produce in the economy

4. Economists believe that people respond in a predictable way to changes in costs and benefits. the term that best describes this phenomenon is
a. opportunity cost
b. scarcity
c. innovation
d. rational behavior
e. ceteris paribus

5. Which of the following should not enter into your decision whether to drive your car to pick up a pizza or have it delivered?
a. amount of gas it will take for you to pick it up
b. wear on the tires of your car as a result of the trip
c. cost of insurance for your car
d. expected cost or inconvenience should you have an accident along the way
e. opportunity cost of driving

6. Opportunity cost is defined
a. only in terms of the money spent
b. as the value of all alternatives not chosen
c. as the value of the best alternative not chosen
d. as the difference between the benefits from your choice and the benefits from the next best alternative
e. as the difference between the benefits from your choice and the costs of that choice

7. Adam Smith's term, "the invisible hand," refers to
a. the hidden role of government in setting regulations that govern trading on markets
b. the most capable entrepreneurs in the economy
c. market forces working through the price mechanism
d. the unseen work of the financial markets that facilitates trade
e. the role of technological change and random events in the economy

8. In what way is consumer demand different from consumer wants?
a. Demand is only for necessities
b. Demand is only for luxuries
c. Demand takes into account the ability to pay
d. Consumer wants are only for luxuries
e. Consumer wants are only for necessities

9. Suppose you drink more tea because the price of coffee has increased. Which of the following best explains your action?
a. the law of supply
b. the income effect
c. the substitution effect
d. tea and coffee are complements
e. your nominal income has increased

10. If we say that demand has increased, we mean that there has been
a. a leftward movement along the demand curve.
b. a rightward movement along the demand curve.
c. a leftward shift in the demand curve
d. a rightward shift in the demand curve
e. an increase in the slope of the demand curve

11. Which of the following is most likely to be a normal good?
a. major league baseball games
b. macaroni-and-cheese dinners
c. trips to the laundromat
d. bus rides
e. used paperback books

12. The difference between normal and inferior goods is that
a. normal goods are of better quality than inferior goods
b. an increase in price will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward
c. if the price of a normal good increases, individuals who buy it are poorer; with inferior goods, the opposite is true
d. an inferior good is something that will not be demanded until quantities of the normal good have been exhausted
e. an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward

13. Which of the following might cause the demand for ice cream, a normal good, to increase?
a. a rise in the price of ice cream
b. a rise in the price of sherbet
c. cooler weather
d. a decrease in the number of consumes
e. a drop in consumer income

14. The basic reason that supply curves slope upward is because
a. demand curves slope downward
b. production is characterized by increasing costs
c. profits decline as product prices rise
d. greater output can only result from improved technology
e. price and quantity supplied are inversely related

15. When quantity demanded of a good is less than the quantity supplied at the prevailing market price,
a. the market is in equilibrium.
b. the price of the good tends to rise.
c. the price of the good tends to fall.
d. the demand curve shifts rightward until the surplus is eliminated.
e. the supply curve shifts leftward until the shortage is eliminated.

16. A shortage of textbooks will cause
a. a decrease in the supply of textbooks
b. a decrease in the demand for textbooks
c. both an increase in the supply of textbooks and a decrease in the demand for textbooks
d. an increase in the price of textbooks, caused by a shift in either the supply curve or the demand curve
e. an increase in the price of textbooks

17. Price allocates 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.

18. If the tea harvest is bad in a particular year, the supply of tea will be
a. lower, its price will be lower, and demand for coffee will go up
b. lower, its price will be higher, and demand for coffee will go up
c. lower, is price will be higher, and demand for coffee will go down
d. lower, its price will be lower, and demand for coffee will go down
e. higher, its price will be higher, and demand for coffee will go up

19. If demand decreases and supply increases, price will
a. always decrease
b. always increase
c. increase only if supply increases more than demand decreases
d. increase only if supply increases less than demand decreases
e. decrease only if supply increases more than demand decreases

20. If the market for beef cattle was initially in equilibrium, an increase in the price of the feed grains used to fatten cattle would cause
a. the demand for beef cattle to increase, driving prices upward
b. the supply of beef cattle to decline, driving beef prices upward in the long run
c. the supply of beef to increase, placing downward pressure on beef prices in the long run
d. both supply and demand to fall, leaving price virtually unchanged
e. the supply of beef to increase, driving the price down and increasing demand

21. A good synonym for elasticity would be
a. stability
b. volatility
c. stickiness
d. demand
e. responsiveness

22. If the price of Pepsi-Cola increases from 50 cents to 60 cents per can and the quantity demanded decreases from 100 cans to 50 cans, then the demand for Pepsi-Cola is
a. unit elastic
b. perfectly elastic
c. perfectly inelastic
d. relatively elastic
e. relatively inelastic

23. 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, what is the value of price elasticity of demand at $1.50?
a. -1/3
b. -2 1/3
c. -1/4
d. -3
e. -2/3

24. If the demand for airline tickets to Fort Lauderdale is price elastic,
a. airline revenue will increase if supply increases.
b. airline revenue will increase if supply decreases
c. a small change in price will cause a large shift in the demand curve
d. a large change in price will cause a small shift in the demand curve
e. a large change in price will cause a large shit in the demand curve

25. Along a downward-sloping linear demand curve, total revenue is greatest where demand is
a. inelastic
b. elastic
c. inelastic when prices are high
d. elastic when prices are high
e. unit elastic

II. Answer the following True/False or Uncertain and explain.

1. The opportunity cost of college is the same for all students who are receiving full-tuition scholarships.

2. The slope of the demand curve for a normal good must be positive.

3. If income rises and the demand for toothbrushes stays the same, income elasticity of toothbrushes is said to be unit elastic.

4. The law of diminishing marginal utility explains why an individual's demand curve is elastic.

5. If a good is inferior, an increase in a consumer's income will not affect her demand for that good.

III. Short Answers

1. A leading state university is considering eliminating its high-profile football program because it is a financial drain on the university's budget. A committee has been charged with examining the pros and cons of the issue. What costs should be considered when making a decision? What benefits would the university gain? Should the payments on the bond issue that financed the stadium's construction be considered in the decision? Why?

2. Using the concepts of total utility and marginal utility, explain why you eat more pizza at Ci Ci's all-you-can-eat buffet than you do at Giovanni's pizza-by-the-slice.

IV. Supply and Demand

What are the likely consequences of the following events on the U.S. market for tobacco products? State whether price and quantity increase (+), decrease (-), or stay the same (0). Show the change in the diagram.

1. The Food and Drug Administration classifies
tobacco an "addictive substance."
P _______
Q _______

2. The Congress votes to raise the excise
tax on all tobacco products.
P _______
Q _______

3. Hurricane Fran dumps 15" of rain on
North Carolina and destroys 80% of
that state's tobacco crop.
P _______
Q _______

4. Hollywood glamorizes cigarette smoking by
showing all major actors and actresses
lighting up.
P _______
Q _______

5. Sixteen states sue the major tobacco
companies for billions of dollars because
of tobacco-related costs in their Medicaid programs.

P _______
Q _______

EXTRA CREDIT

Using the concept of elasticity, show that a drug enforcement policy aimed at getting rid of suppliers of heroin may not be very effective in reducing heroin consumption.