Ag Econ 1041
First Exam, 140 points
September 22, 2011
Name __________
11 a.m. Section
KEY __________________________
True/False – one point each
T F 1. The law of demand explains why, ceteris paribus, as the quantity demanded of a good increases, its marginal benefit increases.
T F 2. The quantity demanded of a good refers to one point on the demand curve.
T F 3. A decrease in the price of a complement of good A results in a decrease in demand for good A.
T F 4. Decreasing cost of an input increases the supply of the product.
T F 5. Market equilibrium exists when the quantity supplied = quantity demanded.
T F 6. If the demand for cars increases and the supply of cars decreases, the equilibrium price definitely falls.
T F 7. The price elasticity of demand is a measure of buyers’ responsiveness to a change in the price of a product.
T F 8. When the % change in quantity demanded exceeds % change in price, then the demand is inelastic.
T F 9. The demand for a good is more elastic if it is a necessary good.
T F 10. If a good is elastic, then the good likely has good substitutes.
T F 11. 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 12. The marginal utility curve generally has a negative slope.
T F 13. Decisions allocate resources.
T F 14. A market must be a physical location.
T F 15. Prices are signals that help resources be allocated efficiently in a market economy.
T F 16. Individuals will choose the option they believe offers the lowest opportunity cost.
1

T F 17. A good decision is one that helps a person, group or business realize its goals.
T F 18. Incentives affect our decision making.
T F 19. Utility is the benefit or satisfaction a person gets from consuming a good.
T F 20. A change in demand is illustrated by a new demand curve.
T F 21. A change in price that occurs with no change in demand will lead to a change in the quantity demanded by a consumer.
T F 22. Ceteris paribus roughly translates as other things being equal.
T F 23. The supply of popcorn is the amount actually purchased during a given time at a given price.
T F 24. The quantity of t-shirts people plan to buy this month depends on the quantity produced.
T F 25. If rising tomato prices reduce onion prices, onions and tomatoes are complements.
T F 26. The supply of books will decrease because there is a decrease in the price of books.
T F 27. If the supply of bottled water increases, the equilibrium price will decrease.
T F 28. If the demand and supply of apples both increase by the same amount, the price for apples should rise and the quantity sold will remain the same.
T F 29. Capital refers to goods that can be used to produce other goods.
T F 30. Scarcity is defined as a situation in which people are poor.
Multiple choice – two points each
___ a ___ 31. If, when price falls, total revenue increases, demand is a) Elastic b) Inelastic c) Unit elastic d) Perfectly elastic e) None of the above because TR decreases when price of the good falls
2

___ a ___ 32. 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
___ c ___ 33. If the price of cupcakes decreases a) Demand for cupcakes increase b) Supply of cupcakes increases c) Quantity demanded of cupcakes increases d) The demand curve for cupcakes shifts right e) Both A and B
___ b ___ 34. If the cross price elasticity of demand between Coke and Pepsi is 2.02, then Coke
and Pepsi are a) Complements b) Substitutes c) Normal goods d) Inferior goods e) None of the above
_ a or b __ 35. The income elasticity of demand is a) Positive for normal goods b) Negative for inferior goods c) Zero for normal goods d) Positive for inferior goods e) Both B and C
___ d ___ 36. The amount of satisfaction obtained from consuming an additional sandwich is a) Never negative b) Total utility c) A function of supply d) Marginal utility e) All of the above
___ d ___ 37. Utility refers to a) How useful a product is b) The satisfaction obtained from the product c) The durability of the product d) All of the above e) None of the above
3

___ a ___ 38. Which of the following is not a determinant of demand for gasoline? a) The price of gasoline b) The price of diesel c) The price of automobiles d)
Consumers’ incomes e) All of the above
___ c ___ 39. The demand for necessities generally is ___________ the demand for luxury
goods. a) As elastic as b) More elastic than c) Less elastic than d) Flatter than e) Not comparable to
___ b ___ 40. If demand is inelastic and the price falls, the total revenue a) Rises b) Falls c) Remains constant d) Might rise, fall or remain constant e) Becomes negative
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
42. If the price of Coca Cola declines what will happen to the demand for Pepsi Cola? What
happens to the price of Pepsi Cola?
Dp ↓; Pp ↓
43. We know a graduate who just got a high paying job. What is happening to her demand for
goods she feels are inferior?
D ↓
4

44. If a business faces rising electricity costs, what is the effect in the market where the firms
sells its goods?
P ↑, Q ↓ (due to S ↓)
45. Give one reason why demand is downward sloping.
Diminishing marginal utility, substitution effect, income effect
46. The supply of pain relievers is increasing yet prices are rising. Diagram this situation
completely showing the market outcomes.
$/Q
P
1
P
0
S
S
1
D
1
D
0 Q
0
Q
1
Q
47. Show the impact of higher train ticket prices on the market for bus travel.
$/Q
P
1
P
0
S
D D
1
0 Q
0
Q
1
Q
48. Use the decision rule to show why a person would chose to buy shoes rather than a potted
plant.
MU s > MU p
MC MC
5

49. Diagram the situation in the beef industry where demand increases and price still decreases.
$/Q
S
0
S
1
P
0
P
1
D
0
D
1
0 Q
0
Q
1
Q
50. What happens to the total revenue for oil producers if oil prices rise?
TR ↑
51. What happens to the total revenue for Toyota Camry if Honda Accord prices rise?
TR ↑
52. Diagram what happens to the hauling and trucking market when the price of diesel fuel
increases.
$/Q
S
1
S
P
P
1
0
D
0 Q
1
Q
0
Q
53. Using cross-price elasticity, how do you determine if the goods are complements?
Eij < 0
6

54. Show on a diagram the relationship that exist among demand, marginal revenue and
own-price elasticity.
$/Q
Ep > 1
Ep < 1
D
0
MR
Q
55. If a good has only a few substitutes and it accounts for a very small portion of a consumer’s
budget, is the good elastic or inelastic? Is the own-price elasticity of the good greater than
or less than 1?
Inelastic; < 1
56. Diagram the impact on the vegetable market of more people deciding to add vegetables to
their diet.
$/Q
P
1
P
0
S
0 Q
0
Q
1
D D
Q
1
7

The following question is valued at 10 points
57. Diagram the results of an increase in income for consumers and lower cost technology for
producers for the same product. What would have to happen for price to remain the same?
Do you believe this is likely? Shifts in demand & supply would have to be the same
S
$/Q
P
S
1
D
0 Q
0
Q
1
Q
D
1
8