Economics 212
Microeconomic
Principles
Exam #1
7 November 2011
Name: __________________________________________
The value of this exam is 100 points.
Instructor: Brian Young
Please show your work where appropriate!
Formulas and Definitions
5 points each
#1
When the price of beef increased by 25%, the quantity demanded of beef decreased by 20%.
Calculate the price elasticity of demand for beef. Is the demand for beef elastic or inelastic?
How has total revenue from the sale of beef changed?
#2
In Corndog County, the price elasticity of demand for bus tickets is 0.7, the income elasticity of
demand for bus tickets is - 0.5, and the cross elasticity of demand for bus tickets with respect to
gasoline is 0.3. If incomes in Corndog County decrease by 10%, what will happen to the
number of bus tickets demanded? Are bus tickets a normal good or an inferior good? Are bus
tickets and gasoline substitutes or complements?
#3
What is producer surplus?
#4
Explain the difference between a change in demand and a change in quantity demanded. What
leads to each of these changes?
#5
Economists often to refer to the equilibrium price as a “market clearing” price. Using your
understanding of surpluses and shortages, explain what is meant by a “market clearing”
price.
Page 1 of 8
Multiple Choice
3 points each
#1
One reason the demand for Dell laptop computers might increase is a
a. decrease in price of Dell laptop computers.
b. decrease in price of Hewlett-Packard computers.
c. very successful advertising campaign for Dell laptop computers.
d. poor quality performance record for Dell laptop computers.
#2
Suppose the price of a CD rose from $15 to $17 and the quantity demanded decreased from
1,000 per month to 900 per month. Using the midpoint formula, the ____ percent change in
price lead to a ____ percent change in the quantity demanded.
a. 12.5; 10.5
b. 13.3; 10.0
c. 11.8; 11.1
d. 8.0; 9.5
#3
When demand increases, there is a
a. movement down along the demand curve.
b. rightward shift of the entire demand curve.
c. leftward shift of the entire demand curve.
d. movement up along the demand curve.
Page 2 of 8
#4
The law of demand states that, other things remaining the same, if the price of a good rises, then
the
a. demand increases.
b. demand decreases.
c. quantity demanded decreases.
d. quantity demanded increases.
#5
The supply curve illustrates the law of supply because when the price increases, the
a. supply increases.
b. supply decreases.
c. quantity supplied decreases.
d. quantity supplied increases.
#6
Page 3 of 8
In the figure above, if the price of a slice of pizza is $3, then there is
a. a surplus.
b. a shortage.
c. an equilibrium.
d. None of the above answers is correct.
#7
If a substitute good is easy to find, then demand for a good is
a. elastic.
b. inelastic.
c. unit elastic.
d. Substitutes don’t have any effect on elasticity.
#8
The law of demand exists because
a. buyers have limited purchasing power and must make choices about what to buy.
b. as people’s incomes increase, they will buy more of most goods.
c. as price of a good rises, buyers judge it to be worth more.
d. as the price of a good rises, consumers increase the quantity they demand.
#9
Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then
a.
the demand for hot dogs will increase.
b.
the demand for hot dog buns will decrease.
c.
the quantity demanded of hotdogs will decrease.
d.
the demand for hot dog buns will increase.
#10
For many stocks on Wall Street, the closing price from one day to the next may be greatly
different. Evidently
a. there is no equilibrium price for these stocks.
b. stock buyers and sellers must be irrational.
c. demand or supply or both are constantly shifting minute by minute.
d. none of the above answers is correct.
Page 4 of 8
#11
A price ceiling set below the equilibrium price leads to
a.
a shortage.
b.
a surplus.
c.
an increase in the quantity bought and sold.
d.
the price rising above the equilibrium price.
#12
A price floor set above the equilibrium price results in
a.
a shortage.
b.
a surplus.
c.
an increase in the quantity bought and sold.
d.
the price falling below the equilibrium price.
#13
Peter’s production possibilities
Paul’s production possibilities
Production point Apples
Bread Production Apples
Bread
(pounds)
(loaves) point
(pounds)
(loaves)
A
0
and 20
A
0
and 30
B
1
and 16
B
1
and 24
C
2
and 12
C
2
and 18
D
3
and 8
D
3
and 12
E
4
and 4
E
4
and 6
F
5
and 0
F
5
and 0
Based on the table above, if Peter and Paul specialize according to their comparative advantages
and trade, how many pounds of apples and how many loaves of bread will they produce in
total?
a.
50 pounds of apples and 0 loaves of bread
b.
50 loaves bread and 0 pounds of apples
c.
30 loaves bread and 5 pounds of apples
d.
20 loaves bread and 5 pounds of apples
Page 5 of 8
#14
Over some price range, the demand for chemotherapy is perfectly inelastic with respect to price.
What will happen to the quantity demanded of chemotherapy if the price increases within that
range?
a. The quantity demand will increase.
b. The quantity demand will decrease.
c. The quantity demanded will remain unchanged.
d. More information is needed to make a definitive statement.
#15
Which of the following statements is correct?
a.
The term “inferior good” means the good is substandard.
b.
The quantity demanded of an inferior good increases as its price increases.
c.
Inferior goods are complements to higher priced goods.
d.
As buyers’ incomes decrease, the demand for inferior goods increases.
Short Answer
10 points each
#1:
When the supply and demand curves both shift to the right at the same time, is it always
possible to determine the direction of change in both the equilibrium price and quantity? Use
supply and demand curves to graphically explain your answer.
Page 6 of 8
#2
George has a $600 annual entertainment budget that he uses to buy trips to the movies and
dinners at local restaurants. The figure above shows indifference curves and budget lines for
these two goods. The price of a movie is $15.
a. Along budget line BL1, what is the price of a dinner?
b. What combination of dinners and movies will George select along budget line BL1?
c. Budget line BL2 represents a change in the price of dinners from that along BL1. What is
the new price of dinners along this budget line?
d. What combination of dinners and movies will George select along budget line BL2?
e. Use the information in this problem to give two points on George’s demand curve for
dinners.
Page 7 of 8
#3
The diagram above depicts the demand for, and market price of, buckets of raw oysters in New
Orleans.
a.
b.
c.
d.
What is the consumer surplus of the person who buys the 100th bucket of oysters?
What is the consumer surplus of the person who buys the 200th bucket of oysters?
What is the consumer surplus of the person who buys the 300th bucket of oysters?
What is the total consumer surplus in the market?
Page 8 of 8