Sample Questions 1 (ECN 101) 1. Roy La Voiture owns and operates a taxicab. He anticipates that a 10% increase in his fares will cause a 20% increase in his total revenue. Does this statement suggest that Roy believes his taxicab business faces a price inelastic, unit price elastic or price elastic demand for taxicab rides? A. Price Inelastic B. Unit Price Elastic C. Price Elastic 2. Ruth Numbercrucher is a graduate of the MTU's accounting program. When Ruth was a student, she drank a lot of Old Milwaukee beer. Now that she is gainfully employed, she only drinks Heineken beer. For Ruth, is Old Milwaukee beer an inferior good, a normal good, a substitute good, or a complementary good? A. B. C. D. Normal good Substitute good Inferior good Complementary good 3. Is the value of Ruth's income elasticity of demand for Old Milwaukee beer greater than, equal to, or less than zero? A. Greater than zero B. Equal to zero C. Less than zero 4. Elvis plans to attend a concert at MTU during Homecoming weekend. The price of a ticket is $15. He estimates that the cost of driving to and from MTU from his home in Calumet is $5, In order to attend the concert, Elvis will have to take five hours off from his part-time job at the Calumet Holiday station (which pays $6 per hour). What is Elvis’ opportunity cost of attending the concert? A. $15 B. $20 C. $26 D. $50 5. Microeconomics is the branch of economics that concerns. A. B. C. D. Local governments only. An economy's total level of output. The behavior of individual households and firms. All of the above are concerns of microeconomics. 6. An economist who states that "there is evidence that high rates of inflation are associated with slow long-term economic growth." This statement is an example of A. B. C. D. Positive economics Normative economics Negative economics Microeconomics 7. In a centrally planned economy, A. B. C. D. The government plans how people spend their free-time. The market determines the distribution of resources. A government agency determines how resources will be allocated. Business firms determine the allocation of resources. 8. Suppose that Jim's Food Mart noticed that it sold the same amount of milk (500 gallons per week) when it increased the price of milk from $2.50 to $3.50. If everything else remained the same, we would say the price elasticity demand for milk at Jim's food Mart is A. Perfectly elastic B. Elastic C. Perfectly inelastic D. Unitary elastic. 9. Which statement best characterizes the movement from point A to point C in the graph below? Price of beer C A B Demand for beer Quantity of beer A. B. C. D. The movement from A to C is an increase in the demand for beer. The movement from A to C is an increase in the quantity of beer demanded. The movement from A to C is a decrease in the demand for beer. The movement from A to C is a decrease in the quantity of beer demanded. 10. Which statement best characterizes the movement from point A to point B in the graph above? A. B. C. D. The movement from A to B is an increase in the demand for beer The movement from A to B is an increase in the quantity of beer demanded. The movement from A to B is a decrease in the demand for beer The movement from A to B is a decrease in the quantity of beer demanded. 11. Which of the following might cause the movement from A to C on the graph above? A. B. C. D. A decrease in the price of bourbon, a substitute for beer. An increase in the price of a potato chips, a complement to beer. An increase in consumers' incomes if beer is a normal good. A decease in consumers' incomes if beer is a normal good. 12. A perfectly inelastic supply curve A. B. C. D. Cannot exist Is vertical Has an elasticity of 1 Is horizontal 13. Which of the following terms best characterizes resource ownership and resource allocation in the US economy? A. B. C. D. Market capitalism Market socialism Centrally planned socialism Centrally planned capitalism 14. Suppose that an economy produces two products – peanuts and beans. If there are constant opportunity costs of producing peanuts and beans, then: A. The opportunity cost of producing peanuts falls when there is an improvement in the technology used to produce beans. B. The production possibilities frontier is a straight line. C. The production possibilities curve bows out from the origin. D. The opportunity cost of producing beans rises when there is an improvement in the technology used to produce beans. 15. Suppose that US power companies can generate electricity with fuel oil or coal. Suppose further than fuel oil prices increase due to a decreased supply of fuel oil. What will happen to the price of coal and the quantity of coal consumed by power companies following the increase in fuel oil prices? A. B. C. D. The price of coal will rise and the quantity of coal consumed will fall. The price of coal will rise and the quantity of coal consumed will rise. The price of coal will fall and the quantity of coal consumed will fall The price of coal will fall and the quantity of coal consumed will rise. 16. Which statement below best describes changes in the supply and/or demand curve(s) for coal when the price of fuel oil increased in the last question? A. The demand for fuel oil fell and the demand for coal rose. B. The quantity of fuel oil demanded fell and the quantity of coal demanded rose. C. There was a movement along the demand curve for fuel oil and a movement along the demand curve for coal. D. There was a movement along the demand curve for fuel oil and a shift in the demand curve for coal. 17. The cross-price elasticity of demand between butter and margarine is most likely A. B. C. D. Positive since the goods are substitutes. Positive since the goods are complements Negative since the goods are complements Zero since both butter and margarine are normal goods. 18. Suppose that a $1.00 increase in the price of a restaurant meal results in a drop in quantity demanded of 5 meals. Which of the following statements is correct? A. The slope of the demand curve is -1/5 and there is insufficient information to determine the price elasticity of demand. B. The price elasticity of demand is -1/5 and there is insufficient information to determine the slope of the demand curve C. The slope of the demand curve and the price elasticity of demand are both equal to -1/5. D. The slope of the demand curve is -1/5 and the price elasticity of demand is 5. Assume that U.S. agricultural land is used either to raise cattle for beef or to grow wheat. The next figure represents the production possibility frontier for beef and wheat. Pounds of beef 100 A C B 60 Bushels of wheat 50 80 120 19. What is the opportunity cost of one bushel of wheat between points B and A? A. B. C. D. 40 pounds of beef 30 bushels of wheat 4/3 pounds of beef 4/3 bushels of wheat 20. In the graph above, production at point C is: A. B. C. D. attainable if all available resources are used to produce wheat unattainable given currently available technology and resources attainable by more fully employing already available resources attainable if beef production drops to zero Use this demand schedule for hockey pucks to answer the next two questions. Price $1 $2 $3 $4 $5 Quantity Demanded 100 80 60 40 20 21. At what price is the price elasticity of demand equal to one? A. $1 B. $2 C. $3 D. $4 22. At which price is the demand for hockey pucks least price elastic? A. $1 B. $2 C. $3 D. $4 23. Suppose that the market for Diet Pepsi is in equilibrium. Suppose further than most people believe that Diet Pepsi and Diet Coke are perfect substitutes. What will happen to the equilibrium price and quantity of Diet Pepsi following an increase in the price of Diet Coke if the supply of Diet Pepsi is perfectly inelastic? A. B. C. D. The equilibrium price will increase and the equilibrium quantity will decrease. The equilibrium price will decrease and the equilibrium quantity will increase. The equilibrium price will decrease and the equilibrium quantity will not change. There will be a decrease in the equilibrium price and an ambiguous (unknown) effect o the equilibrium quantity. 24. Steak is a normal good. If the price of steak increases, A. B. C. D. The income effect on the demand for steak will reinforce the substitution effect The income effect on the demand for steak will offset the substitution effect Consumers' purchasing power will increase. Consumers will buy more steak. 25. During the last two weeks, the price of crude oil has fallen from more than $74.per barrel to less than $62 per barrel. Which statement below offers the best explanation for this price decrease? A. B. C. D. The supply of oil decreased. The demand for oil decreased. The supply of oil increased and the demand for oil increased. The demand for oil decreased and the supply of oil decreased. 26. Steve buys Pepsi at $0.60 per can and orange juice at $1.20 per can. If he is maximizing his utility, then A. He will consume twice as much Pepsi as orange juice B. His total utility from orange juice is twice that from Pepsi C. His total utility from his last can of orange juice is twice his total utility of his last can of Pepsi. D. His marginal utility from his last can of orange juice is twice the marginal utility received from his last can of Pepsi. 27. 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. 80 utils B. 20 utils C. $4 D. $1 28. If a consumer's budget line between meat and potatoes has a vertical axis intercept at 100 pounds of meat and a horizontal axis intercept at 100 pounds of potatoes A. B. C. D. Demand must be inelastic The consumer's budget must equal $100 Both meat and potatoes must have a price of $1 per pound. The price of a pound of meat must equal the price of a pound of potatoes. Use the graph below to answer the next set of questions. Price ($) ) Supply 18 16 14 12 10 8 6 4 2 Demand Quantity 5 10 15 20 25 30 35 40 29. Suppose that the government establishes a price floor of $14 per unit for the product in the above graph. How many units will be sold? A. 30 B. 20 C. 10 D. 0 30. How large is the excess demand or excess supply at a price of $14? A. Excess supply of 20 units. B. Excess demand of 20 units C. Excess supply of 15 units D. Excess demand of 15 units 31. Suppose that the government removes the price floor. What will be the equilibrium price in this market? A. $2 B. $18 C. $20 D. $10 32. Now suppose that levies a tax of $4 per unit for all units that producers sell. By how much will the equilibrium price you determined above increase? A. $0 B. $2 C. $4 D. $6 33. How much total tax revenue will the government collect with this tax. A. $0 B. $80 C. $60 D. $40 34. The graph above illustrates the effects of an increase in income for a consumer who only consumes corned beer and pastrami. For this consumer, which of the following is true? A. B. C. D. Corned beef is an inferior good Pastrami is a normal good Corned beef and pastrami are both normal goods Pastrami is an inferior good. 35. Which indifference curve (A or B or C) in the graph below best represents the preferences for someone who strongly prefers Diet Coke over Diet Pepsi? B