Econ 101, Section 21, S10, Schroeter
Exam #2, Special code = 1
Choose the single best answer for each question. Do all of your scratch work in the
margins or in the blank space at the bottom of page 5.
1. Which of the following is likely to have the least elastic demand?
a. Coke.
b. Pepsi.
c. a Hy-Vee store-label brand of carbonated cola-flavored soft-drink.
*. carbonated soft-drinks.
2. For a good that is a necessity, demand
*. tends to be inelastic.
b. tends to be elastic.
c. is unit elastic.
d. is represented by a horizontal demand curve.
3. Which of the following is true?
a. The own-price elasticity of demand for a normal good must be in the elastic range.
*. If two goods are substitutes, their cross-price elasticity of demand is positive.
c. Demand is perfectly elastic if the own-price elasticity of demand is zero.
d. All of the above are true.
4. If the own-price elasticity of demand for a good is -1.4, then a price increase of 7%
will result, other things equal, in a quantity demanded decrease of
a. 5.0%.
b. 7.0%.
c. 8.4%.
*. 9.8%
5. The market for widgets is competitive and the demand for widgets is elastic. When the
supply of widgets decreases, the equilibrium price of widgets will
a. decrease, and the revenue of widget sellers will decrease.
b. increase, and the revenue of widget sellers will increase.
*. increase, and the revenue of widget sellers will decrease.
d. either b or c, depending on the elasticity of supply.
6. Harry the hot-dog vendor sells an average of 75 hot dogs per day at his regular price of
$4.00/hot dog. When he runs a special, charging a price of only $3.50/hot dog, his sales
increase to an average of 85 hot dogs per day. Over this range of prices, the elasticity of
demand (calculated by the midpoint method) for Harry's hot dogs is
a. -0.7350.
b. -0.8235.
*. -0.9375.
d. -1.0667.
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7. The demand for gasoline is more elastic in the long-run than in the short-run. The
supply of gasoline has roughly equal elasticities in the long-run and in the short-run.
What would be the effect in the competitive market for gasoline if supply increased and
remained at the new higher level permanently?
a. The equilibrium price of gasoline would decrease in the short-run, and decrease further
in the long-run.
b. The equilibrium quantity of gasoline would increase in the short-run, and increase
further in the long-run.
c. The equilibrium price of gasoline would decrease in the short-run, but then return part
of the way toward its original level in the long-run.
*. Both b and c.
8. The state of Iowa is facing a severe budget crisis that may require cutbacks to the drug
interdiction activities of state law enforcement officers. An economist working for the
state government argues that this will increase the supply of heroine, an illegal, addictive
drug, but will also reduce the amount of revenue going to the criminal organizations that
currently supply heroine. This economist thinks that
a. the supply of heroine is elastic.
b. the supply of heroine is inelastic.
c. the demand for heroine is elastic.
*. the demand for heroine is inelastic.
9. A price floor in a competitive market dictates
a. the exact price that sellers must charge.
b. the average price that sellers must charge.
*. the minimum price that sellers may charge.
d. the maximum price that sellers may charge.
10. Which of the following rental housing occupants is most likely to benefit from a
municipal rent control ordinance?
a. A family that needs an apartment bigger than their current one because they are
expecting another child.
b. A young adult who currently lives with his parents but would like to move out into a
place of his own.
*. A retired couple who currently have a suitable apartment and are quite happy to stay
where they are.
d. An apartment dweller who has been trying unsuccessfully for weeks to get the landlord
to fix an unreliable furnace.
11. Which of the following is likely to occur in a competitive market for a good that is
subject to a binding price ceiling?
a. Sellers will try to circumvent the price ceiling by secretly offering lower prices to
customers.
b. The government will be pressured by sellers into purchasing the market's surplus.
*. Long lines of frustrated customers will form outside of stores before they open.
d. All of the above.
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12. A surplus results when a
a. non-binding price ceiling is imposed on a market.
b. non-binding price floor is imposed on a market.
c. binding price ceiling is imposed on a market.
*. binding price floor is imposed on a market.
13. When the government imposes a minimum wage at a level that is above the
equilibrium wage in a labor market, the level of employment in the market will
a. increase and the wage that employed workers are paid will increase.
*. decrease and the wage that employed workers are paid will increase.
c. remain unchanged and the wage that employed workers are paid will increase.
d. remain unchanged and the wage that employed workers are paid will decrease.
14. Initially, there is a binding price ceiling on the market for gizmos. Assuming that the
ceiling price remains at the same level, which of the following events could convert the
price ceiling from one that is binding to one that is not binding?
a. The price of a substitute for gizmos increases.
b. A technological innovation results in a lower-cost method of producing gizmos.
c. Gizmos lose some of their popularity with consumers when it is discovered that their
use carries a health risk.
*. Either b or c.
15. Under which of these hypothetical circumstances would an excise tax on a
competitive market result in the price paid by buyers (inclusive of the tax) increasing by
the full amount of the tax?
a. The tax law requires that the buyer, not the seller, is the one responsible for sending the
tax payment to the government.
*. Supply is perfectly elastic.
c. Demand is unit elastic.
d. None of the above.
16. Suppose that a $1.00/unit excise tax is imposed on a competitive market in which the
elasticity of demand is -0.8 and the elasticity of supply is 1.5. As a result of the tax, the
price sellers receive (net of the tax) will
a. remain unchanged.
*. decrease by some amount less that $0.50/unit.
c. decrease by some amount between $0.50/unit and $1.00/unit.
d. decrease by $1.00/unit.
17. State cigarette excise taxes vary from state to state. The five states with the lowest
cigarette excise tax rates include all of the following except
a. South Carolina.
*. Iowa.
c. Virginia.
d. Missouri.
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18. When a tax is imposed on the competitive market for cell phones,
a. the number of cell phones purchased and the price that buyers pay (inclusive of the tax)
both decrease.
b. the number of cell phones purchased increases and the price seller receive (net of the
tax) decreases.
*. the number of cell phones purchased decreases and the price that buyers pay (inclusive
of the tax) increases.
d. None of the above.
19. Welfare economics is the study of
a. government programs to help the poor.
b. the effect of income redistribution on labor supply.
c. taxes and subsidies.
*. how the allocation of resources affects economic well-being.
20. Suppose that Sam is one of several bidders in an auction of a piece of antique
furniture. As the bidding proceeds, he has in mind a maximum amount that he will bid.
This maximum is called his
a. resistance price.
b. consumer surplus.
c. opportunity cost.
*. willingness to pay.
Questions 21 and 22 refer to the following information. The table lists willingness to pay
for the first, second, and third pizzas of the month for three hypothetical consumers. All
three have zero willingness to pay for pizzas after the third of the month.
Alison
Andrea
Andrew
First pizza
$12
$15
$18
Second pizza
$8
$12
$16
Third pizza
$2
$7
$11
21. If the price of pizzas were $14.00, the number of pizzas purchased each month by
each consumer would be:
a. Alison - 1; Andrea - 1; Andrew - 1.
b. Alison - 2; Andrea - 1; Andrew - 2.
c. Alison - 1; Andrea - 0; Andrew - 3.
*. Alison - 0; Andrea - 1; Andrew - 2.
22. If the price of pizzas decreased from $14.00 to $10.00, which of the three consumers
would experience the largest increase in consumer surplus?
a. Alison.
b. Andrea.
*. Andrew.
d. Andrea and Andrew would be tied for the largest increase in consumer surplus.
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23. When a competitive market is in equilibrium (with no taxes), the market's total
surplus is represented by the area
a. below the demand curve, above the equilibrium price, between the vertical axis and the
equilibrium quantity.
b. below the equilibrium price, above the horizontal axis, between the vertical axis and
the equilibrium quantity.
c. below the supply curve, above the horizontal axis, between the vertical axis and the
equilibrium quantity.
*. below the demand curve, above the supply curve, between the vertical axis and the
equilibrium quantity.
24. When the government doubles the size of an excise tax on a competitive market
a. consumer surplus and producer surplus will both increase.
*. consumer surplus and producer surplus will both decrease.
c. consumer surplus will increase and producer surplus will decrease.
d. consumer surplus will decrease and producer surplus will increase.
25. The imposition of an excise tax on a competitive market will
a. increase both quantity demanded and quantity supplied.
*. decrease both quantity demanded and quantity supplied.
c. increase quantity demanded and decrease quantity supplied.
d. decrease quantity demanded and increase quantity supplied.
26. When a $1.00/unit excise tax goes into effect on a competitive market, it increases the
price buyers pay (inclusive of the tax) by $0.70/unit and it decreases the price sellers
receive (net of the tax) by $0.30/unit. With the tax in effect, the volume of trade in the
market is 1000 units/day. Assuming that the demand and supply curves are straight lines,
the deadweight loss of this tax is
a. $300/day.
b. $700/day.
c. $1000/day.
*. Impossible to determine without more information.
(continued on back)
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27. If supply and demand of a good are straight lines, and the $/unit "size" of an excise
tax on the good doubles, the deadweight loss of the tax will
a. remain constant.
b. increase by 50%.
c. double.
*. quadruple.
The following graph depicts supply and demand in a hypothetical competitive market.
Use it to answer questions 28, 29, and 30.
($/unit)
10
7
Supply
5
4
2.5
Demand
30
50
(units/day)
28. When this market is in equilibrium (with no excise tax), consumer surplus is
a. $62.50/day.
*. $125/day.
c. $250/day.
d. None of the above.
29. What would be the impact on consumer surplus of the imposition of a $3.00/unit
excise tax on this market? Consumer surplus would
a. increase by $30/day.
b. decrease by $40/day.
c. decrease by $90/day.
*. None of the above.
30. What would be the impact on producer surplus of the imposition of a $3.00/unit
excise tax on this market? Producer surplus would
a. increase by $30/day.
*. decrease by $40/day.
c. decrease by $90/day.
d. None of the above.