Practice Questions: Micro Test #1

1. Since necessities are generally characterized by inelastic demands…

a. there will be a small decrease in quantity demanded when the price rises

b. there will be a large decrease in the quantity demanded when the price rises

c. there will be a small increase in quantity demanded when price rises

d. there will be a large increase in quantity demanded when price rises

e. there will be a shift to the left of the demand curve when price rises

2. If a small rise in the price of opera tickets caused a decrease in total revenue, it would be concluded that…

a. demand was inelastic.

b. demand was perfectly inelastic.

c. demand was elastic.

d. the price rise caused a shift in the demand for tickets, so it is impossible to say.

e. demand was unit price elastic.

3. According to the laws of supply and demand, an increase in demand causes…

a. equilibrium price to fall, equilibrium quantity to rise

b. equilibrium price to rise, equilibrium quantity to fall

c. both equilibrium price and quantity to fall

d. both equilibrium price and quantity to rise

e. no change in either price or quantity.

4. Minimum wage laws usually cause…

a. prices to fall.

b. labor surpluses.

c. labor shortages.

d. people to quit their jobs.

e. an increase in the demand (by employers) for unskilled workers.

5. The short run is the time in which…

a. quantity supplied can not be changed in response to a change in price or demand.

b. demand is highly price elastic.

c. quantity supplied can be changed by employing more workers and building new factories.

d. a business can alter neither its number of workers nor its plant capacity.

e. quantity supplied can be adjusted using existing plant capacity more or less intensively.

6. If the income elasticity of demand for lard is -3.00, this means that:

a. lard is a substitute for butter.

b. lard is a normal good.

c. lard is an inferior good.

d. lard is a superior good.

e. more lard will be purchased when its price falls.

7. Which of the following is not an illustration of the notion of opportunity cost?

a. A growing economy can produce more consumer goods and more capital goods at the same time.

b. If I buy a pizza, I will not be able to afford a movie.

c. Resources devoted to consumer goods production are not available for capital goods production.

d. The land a Kansas farmer plants in wheat is not available for corn production.

e. The production of more military goods means fewer resources are available for civilian goods.

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Refer to previous graph for the next two questions.

8. Other things being equal, this economy will achieve the most rapid rate of growth if…

a. it chooses point E.

b. it chooses point D.

c. it chooses point C.

d. it chooses point B.

e. it chooses point A.

9. According to the graph above…

a. the available resources are equally suited to the production of both consumer and capital goods.

b. point C reflects an inefficient use of resources.

c. the nation could reach point E by operating with a 10% rate of unemployment.

d. the invention of a highly productive machine that can be used to make consumer goods but has no impact on the ability to make capital goods would move the economy from point A to point C.

e. the level of technology and the supply of resources are held constant when the economy moves from point C to point B.

10. An increase in the price of gasoline shifts the demand for tires in what direction?

a. to the left, because gas and tires are substitutes.

b. to the right, because gas and tires are substitutes.

c. to the left, because gas and tires are complements.

d. to the right, because gas and tires are complements.

e. it doesn't affect it because they are unrelated.

11. Which of the following would cause an outward shift of a production possibilities curve?

a. an increase in unemployment

b. an increase in inflation

c. an increase in capital equipment

d. a decrease in natural resources

e. an increase in consumer demand

12. Suppose a city eliminates rent controls at a time when the vacancy rate for housing is extremely low. Which of the following is most likely to occur?

a. No change in rents, since price controls are usually set where supply and demand curves intersect

b. A decrease in rents, followed by a decrease in the number of housing units supplied.

c. An increase in rents, followed by an increase in the number of housing units supplied.

d. An increase in the demand for housing, followed by a decrease in the number of housing units supplied.

13. The law of diminishing marginal utility assumes that

a. human wants for a particular good can be satisfied.

b. human wants, in general, can be satisfied.

c. costs for all goods increase.

d. resources are scarce.

e. added satisfaction increases as you consume more units of a good.

14. The Loud & Lucky campus entertainment committee sponsored a concert which featured a second rate rock group. It found that if it charged $4 per seat, 200 people would buy tickets. If it charged $2 per ticket, 400 people would buy tickets. This showed that over the stated range of the demand curve

a. the demand for tickets is elastic.

b. the demand for tickets is unitary elastic.

c. the demand for the tickets is inelastic.

d. total revenue increased.

e. total revenue decreased.

15. A lawyer who earns $500/hr is considering hiring a student to type up her cases for $10/hr. The lawyer types faster (2 hrs per case) than the student she can hire (40 hrs per case). What should the lawyer do?

a. Hire the student because the opportunity cost of an hour's typing is losing an hour of practicing law.

b. Do her own typing to minimize her opportunity costs.

c. Do her own typing to increase overall economic efficiency.

d. Do her own typing to increase her overall allocative efficiency.

16. What is the difference between income elasticity of demand and price elasticity of demand?

17. When studying production possibilities curves important assumptions are made about all the points along the curve. What are these assumptions?

18. What is the difference between a price floor and a price ceiling, what is the similarity?

19. What is the difference between a change in quantity demand and a change in demand?

20. What forces cause demand to change?

21. What forces cause supply to change?

22. What is the midpoint formula and how do you use it to determine price elasticity of demand? Use this formula to determine whether the following information indicates elastic, inelastic, or unit elastic demand. {Price goes from $15 to $10 and as a result quantity goes from 200 units to 400 units}

23. What is the relationship between price elasticity of supply and time? Why does this relationship exist?

Sample Long Written Response Question:

Assume that the market supply and demand curves for wheat are price inelastic, but not perfectly inelastic, at the equilibrium. For ALL parts of the question, assume that price remains in the relatively inelastic portion of the supply and demand curves.

a) As a result of newly invented farm equipment, the number of bushels of wheat produced increases. Illustrate the situation with a graph then explain how these inventions affect each of the following.

i) Market price of wheat.

ii) Industry output for wheat.

iii) Revenue of wheat farmers.

b) Use the same graph to show what happens in the wheat market if the government announces that the consumption of wheat products greatly reduces the risk of having a heart attack. Explain the impact this event will have on each of the following.

i) Market price of wheat.

ii) Industry output of wheat.

c) Assume that the government establishes an effective price floor for wheat. Use a new graph to indicate where an effective price floor will be set. Explain the effects of such a program on each of the following.

i) The market price of wheat.

ii) Consumer surplus in the wheat market.

iii) Industry output of wheat.

Sample Supply and Demand Question:

What will happen in the market for personal computers if the following events take place?

* Stock markets in the USA crash, losing more than 50% of their value.

* The price of the special glass used to make computer monitors decreases.

a) Draw a graph that illustrates the impact of the events described on the market for personal computers above.

b) Explain why these changes have taken place (make sure to use specific terms and to explain fully your logic).

c) After these changes have taken place, what happens to price and quantity in the market?