Ag Econ 1041
Second Exam, 140 points
October 13, 2011
Name ______KEY____________________
8 a.m. Section
True/False – one point each
T
F
1.
Voluntary exchange makes both buyers and sellers worse off.
T
F
2.
Consumer surplus increases in a market that is increasing exports.
T
F
3.
The basic assumption made by economists about human behavior is that people try
to make themselves as well off as possible.
T
F
4.
The fallacy of composition is the false assumption that what is true for some is true
for most.
T
F
5.
In the case of positive relationships, two variables move in the same direction, both
increase or both decrease.
T
F
6.
A good decision maker would choose the action with the lowest opportunity cost.
T
F
7.
Scarcity forces individuals to make choices.
T
F
8.
Rising coffee prices due to frost in Colombia suggests demand is elastic.
T
F
9.
Food has more inelastic demand than Toyota pickup trucks.
T
F
10.
The quantity demanded of a good refers to one point on the demand curve.
T
F
11.
Market equilibrium exists when the quantity supplied = quantity demanded.
T
F
12.
If demand for sweaters increases and the supply of sweaters decreases, the
equilibrium price definitely falls.
T
F
13.
The price elasticity of demand is a measure of buyers’ responsiveness to a change
in the price of a product.
T
F
14.
When the % change in quantity demanded exceeds % change in price, then the
demand is inelastic.
T
F
15.
The demand for a good is more elastic if it is a necessary good.
T
F
16.
If a good is elastic, then the good likely has good substitutes.
1
T
F
17.
If an increase in the price of peanut butter increases the demand for jelly, then the
cross-price elasticity of demand for these goods is positive.
T
F
18.
Decisions allocate resources.
T
F
19.
Prices are signals that help resources be allocated efficiently in a market economy.
T
F
20.
Excise taxes tend to lower market price.
T
F
21.
A deadweight loss is a measure of gain by market participants caused by
government intervention.
T
F
22.
Choosing an alternative with the highest opportunity cost will lead to maximizing
utility.
T
F
23.
Government interference with market outcomes causes deadweight loss, which is a
reduction in the net value created for buyers and sellers through markets.
T
F
24.
The opportunity cost of an action is the lowest valued alternative foregone.
T
F
25.
Utility and consumer surplus are the same thing.
T
F
26.
People respond to incentives.
T
F
27.
Improvements in productivity tend to benefit only producers and sellers.
T
F
28.
Scarcity is an issue for the poor only. It does not affect the wealthy.
T
F
29.
Jason consumes only normal goods. If prices remain unchanged and Jason’s
income increases, his marginal utility from each good will decline or remain
unchanged and his total utility will increase.
T
F
30.
Exports will lower the producer surplus.
Multiple choice – two points each
___d__ 31. The assumption that means other things remain unchanged is
a) Technology
b) Market equilibrium
c) Quid pro quo
d) Ceteris paribus
e) E pluribus unum
2
___b__ 32. An increase in the price of a consumption complement will cause a(n)
a) Increase in demand
b) Decrease in demand
c) Increase in supply
d) Decrease in supply
e) No change in demand or supply
___d__ 33. An increase in the price of a production substitute will cause a(n)
a) Increase in demand
b) Decrease in demand
c) Increase in supply
d) Decrease in supply
e) No change in demand or supply
___d__ 34. A decrease in demand, with no change in supply, will lead to _______________ in
equilibrium price and ______________ in equilibrium quantity.
a) An increase, an increase
b) An increase, a decrease
c) A decrease, an increase
d) A decrease, a decrease
e) No change, no change
___c__ 35. An increase in technology, with no change in demand, will lead to ______________
in equilibrium price and ______________ in equilibrium quantity.
a) An increase, an increase
b) An increase, a decrease
c) A decrease, an increase
d) A decrease, a decrease
e) No change, no change
___a__ 36. Income elasticity identifies __________ and ___________ goods, while cross price
elasticity shows ____________ and ____________ goods.
a) Normal and inferior; substitutes and complements
b) Substitute and complement; normal and inferior
c) Demand and supply; buyers and sellers
d) Normal and complements; inferior and substitutes
e) None of the above
___e__ 37. “Utility” is most closely related to the term
a) Useful
b) Useless
c) Require
d) Necessary
e) Satisfaction
3
___c__ 38. The law of diminishing marginal utility indicates that the slope of the marginal
utility curve is eventually
a) Horizontal
b) Vertical
c) Negative
d) Positive
e) Negative, then positive
___e__ 39. According to the utility model of consumer demand, the law of diminishing
marginal utility indicates that the demand curve is
a) Flat
b) Vertical
c) U-shaped
d) Upward sloping
e) Downward sloping
___b__ 40. The consumer’s surplus for a good is equal to
a) The demand price
b) The demand price minus the price paid
c) The demand price plus the price paid
d) The price paid minus the demand price
e) The price paid plus the demand price
Short answers are valued at 5 points each
41. What happens to the demand for restaurant meals when income increases? What kind of
goods are restaurant meals?
D ↑; normal goods
42. In the case of an excise tax, what happens to the price and quantity exchanged?
P ↑; Q ↓
43. We know a graduate who just got a high paying job. What is happening to her demand for
goods she feels are inferior?
Demand for inferior goods decrease or D ↓
4
44. Diagram the market for gasoline in Missouri. Now show on the same graph the impact of
decreased income.
$/Q
S
P0
P1
D1
0
Q1 Q0
D
Q
45. Why do consumers benefit from imports?
Lower prices or increased consumer surplus
46. Diagram a price floor being implemented. Show the producer surplus after the floor is
implemented.
$/Q
S
Pf
PS
D
0
Qd
Qs
Q
47. Costco reduced prices and the value of sales (revenue) increased. This tells us what we
know about demand.
Demand is elastic
48. What determines the equilibrium or market clearing price for backpacks?
Qs = Qd (for backpacks)
5
49. Show with a diagram the final amount of consumer and producer surplus and the deadweight
loss from an excise tax on electricity.
S1
$/Q
Pt
S
CS
PS
DWL
D
0
Q
50. Considering the market for personal computers, diagram the changes that have resulted from
improved production techniques caused by advances in technology, increased consumer
income and the increase in available software. Remember, prices have fallen over time for
personal computers.
S
P=$/Q
S1
P0
P1
D1
D
0
Q0
Q1
Q
51. What is the primary motivation for consumers? For sellers?
Maximize utility or consumer surplus. Maximize profit or producer surplus
52. The quantity demanded rises as a result of what?
Price decrease
6
The following questions are valued at 10 points each
53. Identify what happens to demand or supply under the following situations (increase,
decrease or no change; i.e. utility increases so D ↑).
a) Wealth and income declines
D↓
b) Price of a complement increases
D↓ or S ↑
c) Input costs decline
S↓
d) Population decreases
D↓
e) Production technology improves
S↑
54. Show the impacts of the government installing a price ceiling. Be sure to show the change
in producer and consumer surplus as well as the deadweight loss.
$/Q or P
S
DWL
P0
CS+ PSPc
Pc
D
0
Qs Q0
Qd
Q
7
55. Layout the trade market and exporter’s situation. Show the change in producer and
consumer surplus in the export market. How much does the exporter sell outside this
market? Exports = Qs - Qd
Exporter
P
Pw
P0
Trade
S
CS- PS+
ES
Pw
PS+ PS+
ED
D
Qd Q0
Qs
Qt
8