Economics 101

Section 5-Alley

Spring 2002

Practice Exam 2

1. The price elasticity of demand measures the

a. / responsiveness of a good's price to a change in quantity demanded
b. / adaptability of suppliers when a change in demand alters the price of a good
c. / responsiveness of quantity demanded to a change in a good's price
d. / adaptability of buyers when there is a change in demand
e. / responsiveness of quantity supplied to a change in quantity demanded

2. If a 20 percent decrease in the price of chicken results in a 10 percent increase in the quantity demanded, the price elasticity of demand has a value of

a. / -0.5
b. / -2
c. / -1
d. / -0.1
e. / none of these

3. Suppose that when the price of aspirin rises from $2 to $3 per bottle, the quantity demanded falls from 800 bottles per day to 700 bottles per day. Over this range, the demand for aspirin is

a. / Elastic
b. / unitary elastic
c. / perfectly elastic
d. / Inelastic
e. / perfectly inelastic
  1. When demand is price elastic, a decrease in total expenditure on a good would result from a(n)

a. / decrease in price
b. / increase in quantity demanded
c. / increase in price
d. / decrease in income for an inferior good
e. / increase in total revenue to the seller
  1. For which of the following medical services is the income elasticity of demand likely to be the smallest?

a. / face-lifts
b. / plastic surgery
c. / Manicures
d. / emergency services after a car accident
e. / hair transplants
  1. The percentage change in demand divided by the percentage change in income is referred to as the

a. / price elasticity of demand
b. / income elasticity of demand
c. / cross-price elasticity of demand
d. / slope of the demand curve
e. / demand curve
  1. If the income elasticity of demand is negative, this means that the good is

a. / an inferior good
b. / at a lower than equilibrium price
c. / provided by a monopoly producer
d. / provided by competitive producers
e. / a normal good
  1. When there is a positive cross-price elasticity of demand between two goods,

a. / they are independent goods
b. / they are complementary goods
c. / they are substitute goods
d. / they are luxury goods
e. / the income elasticity of demand is positive
  1. If food is measured on the horizontal axis of a budget line diagram, and clothing is measured on the vertical axis, the slope of the budget line

a. / may be positive if the price of clothing is high enough
b. / may be positive if the price of food is high enough
c. / may be positive if income is large enough
d. / equals minus the maximum consumption of food divided by the maximum consumption of clothing
e. / equals minus the maximum consumption of clothing divided by the maximum consumption of food
  1. If income and the prices of both goods all double, the budget line will

a. / become flatter
b. / become steeper
c. / remain unchanged
d. / experience a parallel outward shift
e. / experience a parallel inward shift
  1. The law of diminishing marginal utility

a. / is valid only after basic necessities (e.g., food, shelter) have been obtained
b. / says that marginal utility decreases as more of a good is consumed
c. / implies that spending on a good will decrease as more of that good is consumed
d. / says that marginal utility decreases as income increases
e. / implies that spending on a good will decrease as income increases
  1. If bread costs $1 per pound and meat costs $4 per pound, a consumer whose marginal utility of meat equals 80 utils per pound is maximizing utility only if the marginal utility per pound of bread equals

a. / 4 utils
b. / 5 utils
c. / 10 utils
d. / 20 utils
e. / 80 utils
  1. The Jones family is going to Disney World and has set a budget of $1000 for food and souvenirs. If Mr. Jones finds a $50 bill on the ground during their trip and uses it to purchase additional souvenirs, then

a. / souvenirs are a normal good
b. / food is an inferior good
c. / the budget line has shifted to the left
d. / the slope of the budget line has changed
e. / souvenirs are a luxury good
  1. For an inferior good, a rise in price causes

a. / negative income and substitution effects
b. / positive income and substitution effects
c. / a negative income effect and a positive substitution effect
d. / a positive income effect and a negative substitution effect
e. / a positive income effect, but no substitution effect

Use the following table to answer questions 15 and 16 where the data in the table gives the cost per unit for each item.

Per kilogram tea / Per kilogram rice
Sri Lanka / 225 rupees / 25 rupees
Thailand / 150 bhat / 12.50 bhat

15. What is the opportunity cost of producing one more kilo of tea in Sri Lanka?

a.9 kilos tea

b. 12 kilos rice

c. 9 kilos rice

d. 1/9 kilo rice

e. 25 rupees

16. Which of the following is true?

  1. Thailand has a comparative advantage in producing tea
  2. Sri Lanka has a comparative advantage in producing tea
  3. The opportunity cost of tea in Thailand is 10 kilograms of rice
  4. Thailand has an absolute advantage in producing rice
  5. Sri Lanka has an absolute and a comparative advantage in producing tea

17.Consider the following data on consumption of q1 and q2. The price of q1 is $8.00. The price of q2 is $4.00. Income is $64. Which of the following combinations of goods maximizes utility?

q1 / q2 / MU1 / MU2
8 / 0 / 0.592178 / 0.6662
7.5 / 1 / 0.6496 / 0.460133
7 / 2 / 0.6965 / 0.34825
6.5 / 3 / 0.737707 / 0.27664
6 / 4 / 0.775771 / 0.226267
5.5 / 5 / 0.812062 / 0.188514
5 / 6 / 0.847467 / 0.1589
4.5 / 7 / 0.882909 / 0.134889

a. q2 = 0, q1 = 8

b. q2 = 1, q1 = 7.5

c. q2 = 2, q1 = 7

d. q2 = 3, q1 = 6.5

e. q2 = 5, q1 = 5.5

  1. If MUx/Px exceeds MUy/Py, then the consumer should

a. / consume more of good X and less of good Y
b. / consume less of good X and more of good Y
c. / consume less of both goods X and Y
d. / not change the consumption levels of X and Y
e. / consume more of good Z

19. The marginal rate of substitution measures

a. The additional utility from consuming one more unit of a product

b. The additional product produced from one more unit of an input

c. The amount of one good that must be given up to acquire more of another good while holding total utility constant

d. The percentage change in the quantity demanded of a product when the price of a substitute product changes

e. The rate at which weak hitting infielders may be traded for slow outfielders

20. For this problem p1 = 8, p2 = 1 and I = 40. Below is a table of alternative consumption choices q1 and q2, their cost and the marginal utility (MU) they provide. Which is the optimal choice?

q1 / q2 / cost / MU1 / MU2
5.0000 / 0.0000 / 40.0000 / 0.6423 / 0.4817
4.5000 / 4.0000 / 40.0000 / 0.8141 / 0.1866
4.0000 / 8.0000 / 40.0000 / 0.9190 / 0.1149
3.5000 / 12.0000 / 40.0000 / 1.0039 / 0.0807
3.0000 / 16.0000 / 40.0000 / 1.0808 / 0.0600
2.5000 / 20.0000 / 40.0000 / 1.1557 / 0.0460
1.2500 / 30.0000 / 40.0000 / 1.3607 / 0.0239
0.0000 / 40.0000 / 40.0000 / 1.6896 / 0.0101

a. q1 = 4.5q2 = 4

b. q1 = 4q2 = 8

c. q1 = 3.5q2 = 12

d. q1 = 3q2 = 16

e.q1 = 1.25q2 = 30

21. What is the elasticity of demand (mid-point formula) for a demand curve given by as price goes from $90 to $100?

a. -11/9

b.-19/21

c. -21/19

d. .85

e. -9/13

22. One the graph on the attached page, there is a decrease in the price of good 1. The initial situation is = 12, p2 = 4, and income = 64. The equilibrium is at point A. Then the price of p1 falls to 2. The consumer buys more of good one as its price falls. The new equilibrium is at point B. Substitution and income effects are evaluated at the new utility level. Which of the following statements is true.

a.The income effect is the movement from point A to point B

b.The substitution effect of the price change is from point C to point B.

c.The income effect of the price change is from point B to point D.

d.The substitution effect of the price change is from point D to point A

e.Both c and d are correct.

23. The law of demand tells us that

a. / price and quantity demanded are inversely related
b. / price and quantity go up together
c. / price and quantity demanded are directly related
d. / price and demand are inversely related
e. / an increase in supply produces an increase in demand
  1. Daniel's consumption of pizzas drops from 6 per week to 4 per week when the price rises from $9 to $11. His price elasticity of demand for pizza equals

a. / -0.5
b. / -1
c. / -2
d. / -0.08
e. / -1.7
  1. For which of the following categories of goods is demand likely to be the most elastic?

a. / pepper
b. / BMW automobiles
c. / laundry detergent
d. / shoes
e. / shampoo

Practice Exam 2 Key

1 / C / 14 / D
2 / A / 15 / C
3 / D / 16 / B
4 / C / 17 / C
5 / D / 18 / A
6 / B / 19 / C
7 / A / 20 / B
8 / C / 21 / B
9 / E / 22 / B
10 / C / 23 / A
11 / B / 24 / C
12 / D / 25 / B
13 / A