Ag Econ 1041
First Exam, 140 Points
September 20, 2007
Name ________KEY__________________
3:30 p.m. Section
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One must have both utility and purchasing power to have demand for a good.
Increased scarcity of a product is signaled by a rise in the price of the product.
As the price falls for microcomputers, the demand for related software decreases.
The fallacy of composition is believing what is true for me is true for everyone.
If price increases, demand must have increased.
I will spend more on a good that provides negative utility.
The income and substitution effect explain why we buy more at lower prices.
Cross price elasticity is negative between cake and Pepsi.
Our goal as consumers is to minimize our utility.
Choosing an alternative with the lowest opportunity cost is equivalent to choosing the
alternative where marginal utility divided by marginal cost is greatest.
Demand will be upward sloping if marginal utility declines with additional consumption.
If demand decreases for houses we expect consumer surplus to decline from house
purchases.
If the price of oranges increases demand decreases.
If I own a hotel and learn demand for room rentals is inelastic, I should lower room rates
charged.
Demand for charcoal will increase if the price of charcoal using barbecue grills is
substantially reduced.
The quantity of apples people plan to buy this month depends on the quantity produced.
When a good is inelastic the quantity demand of that good is the same at all prices.
When the price elasticity of demand is greater than 1 (>1) then demand is inelastic.
A normal good, like cotton shirts, will have an income elasticity that is positive.
The more sensitive quantity demanded is to price the larger is the elasticity.
The value of a good minus the price of that good represents consumer surplus.
If a firm increases the price of the good and total revenue increases, the firm is operating
on the inelastic portion of the demand curve.
Scarcity is not a problem of the rich.
If the consumption of one good increases the utility of another good, the two goods are
complements.
Fallacy of composition states that what is true for the individual is not necessarily true
for the group.
Decisions are made based on marginal benefits and costs, not total benefits and costs.
If we get less utility from a good today than yesterday, demand has increased.
Increased scarcity would cause prices to fall.
Elasticity is the same as slope.
The relative change in quantity demanded is always the same if price changes by a
constant fixed amount.
Opportunity cost is the net value of the next best alternative to the one you chose.
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Economics is the study of resource allocation that results from individual decision
making.
A firm need not provide utility in excess of cost to a consumer after the firm becomes
large.
Marginal utility will eventually increase as we consume more of a good.
The increase in gasoline prices in Columbia has decreased the demand for gasoline.
Multiple choice – two points each
_____ 36. Explicit costs are usually:
a.) opportunity costs
b.) time spent
c.) cash outlays
d.) the key to all economics
_____ 37. If the marginal utility for pizza is decreasing but positive, then:
a.) the total utility for pizza is increasing
b.) the total utility for pizza is decreasing
c.) the total utility for pizza is negative
d.) additional pizza yields zero satisfaction
_____ 38. Following the decision rule will lead to:
a.) low costs
b.) higher demand
c.) utility maximization
d.) higher opportunity costs
_____ 39. Which of the following statements is true?
a.) total utility is the satisfaction from the entire consumption of a good
b.) utility measures the satisfaction obtained from a good
c.) marginal utility is the additional satisfaction from consuming the last
unit
d.) all of the above
_____ 40. All of the following are factors that will shift the demand curve, EXCEPT:
a.) the price of related goods
b.) income
c.) preferences
d.) the price of the good itself
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_____ 41. The market demand for a particular good:
a.) is the sum of individual demands for the good
b.) shows that sellers will produce more at lower prices, ceteris paribus
c.) shows that consumers will purchase more at higher prices, ceteris
paribus
d.) all of the above
_____ 42. Cross price elasticity measures the
a.) horizontal shift in demand caused by a change in the price of the good
b.) horizontal shift in demand caused by a change in the price of another
good
c.) vertical shift in demand caused by a change in the price of another
good
d.) vertical shift in demand caused by a change in expectations
_____ 43. Ceteris paribus, when demand is price inelastic, a rise in:
a.) price leads to lower total revenue
b.) total revenue due to a price change means quantity rises
c.) total revenue indicates a reduction in price
d.) price leads to greater total revenue
_____ 44. If the price elasticity of demand for Baja Fresh tacos is 3.5, then Baja Fresh
can:
a.) reduce the price of tacos by 35 percent and total revenue will remain
the same
b.) raise the price of tacos and total revenue will increase
c.) reduce the price of tacos by less than 35 percent and total sales will
remain the same
d.) reduce the price of tacos and total revenue will increase
_____ 45. Microeconomics is focused on:
a.) full employment, price stability, and economic growth
b.) the behavior of individuals, firms and government agencies
c.) money and U.S. policy
d.) centrally planned economies
_____ 46. According to the Latin phrase ceteris paribus:
a.) resources are limited
b.) things do not remain equal
c.) there is no government intervention
d.) nothing else changes
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_____ 47. In order to understand a particular graph, it is important to know:
a.) the total number of squares in the grid
b.) which variable is on the vertical axis and which in on the horizontal
axis
c.) where a point on the graph is
d.) where the maximum quantity is
_____ 48. When the relationship between two variables changes:
a.) there is movement from one point on the curve to another point on the
curve
b.) the curve is not affected
c.) the entire curve shifts
d.) the curve becomes linear
_____ 49. If an increase in one variable results in a decrease in the other variable, a
graph of the relationship between the variables is:
a.) a horizontal line
b.) a downward-sloping line
c.) an upward-sloping line
d.) a line with a slope equal to zero
_____ 50. Which of the following causes the market-demand curve for a good to shift?
a.) the cost of factors of production
b.) a change in the number of buyers in the market
c.) the expectations regarding future quantities
d.) a producer’s income
Short answers are valued at 5 points each
51. If your utility increases from using a good over time, what happens to consumer
surplus?
Increase
52. What are the four determinants or indicators of own-price elasticity?
Substitutes; time; necessity; portion of budget
53. What kind of good are restaurant meals? What happens to the demand for
restaurant meals when income increases?
Normal, D ↑
54. If the price of Coca Cola declines what will happen to the demand for Pepsi
Cola?
D Pepsi ↓
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55. We know a senior who just got a high paying job. What is happening to her
demand for goods she feels are inferior?
Decreasing
56. How does an individual’s consumer surplus change for a normal good if income
rises?
Increases
57. What happens to total revenue for oil producers if oil prices rise? Why?
Increases, inelastic demand
58. Show on a diagram the relationship that exists among demand, own-price
elasticity and marginal revenue.
P
elastic
inelastic
D
Q
MR
59. Given the cross price elasticity of Reebok to Nike basketball shoes is 0.25 (Ern =
0.25), diagram what happens to Nike demand when Reebok increases the price
for its shoes. Be complete.
P
DN1
DN0
Q
5
60. Use the decision rule to explain why someone would buy organic cucumbers
instead of non-organic cucumbers.
MU oc > MU noc
MC
MC
61. Diagram how a reduction in price changes the consumer surplus in a particular
market such as cell phones.
P
in CS
P0
P1
D
Q
q0
q1
20 points 62. Given the following information, complete the total revenue and marginal
revenue columns and if demand is elastic or inelastic.
Price
Quantity
TR
10
3
__30____
9
4
__36____
8
5
__40____
MR
Elastic demand?
___6___
___4___
___2___
7
6
__42____
___0___
6
7
__42____
___-2___
5
8
__40____
___-4___
4
9
__36____
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a.) Estimate the elasticity for a) a price change from $10 to $9 and b) a price
change from $5 to $6. (Show your work)
Ep = 1/3 = 33% = 3.3
1/10 10%
Ep = 1/8 = 12.5 = 0.63
1/5 20
b.) Because of a 10% increase in income, buyers are willing to buy two more units
at each price. a) what kind of a good is this? b) estimate the income elasticity
at a price of $8. (Show your work)
Normal
Ey = %Δ q = 2/5 = ≈ 40% = 4
%Δ y 10%
10%
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