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ECO222 Test - 2 Fall 2014 Exam Solution..........................




Question;True/False 30%Indicate whether the statement is true or false.____1. Total utility can be objectively measured in numbers that indicate usefulness or benefit to the consumer.____2. As a rule, the more of a commodity a consumer acquires, the smaller will be her total utility from that good.____3. An optimal purchase is one that maximizes total utility.____4. If the marginal net utility of beer is a positive number, the consumer should buy more beer in order tomaximize utility.____5. Consumer surplus is the difference between the worth of a commodity to the consumer and the price theconsumer pays for the commodity.____6. The resolution of Adam Smith's diamond-water puzzle is based on the distinction between marginal and totalutility.____7. Scarcity raises both price and marginal utility but generally reduces total utility.____8. Quantity demanded is not only affected by price but by variables such as income and the prices of othergoods.____9. The market demand curve is the horizontal summation of all individual demand curves.____ 10. A change in the price of one good results in a rotation of the budget line, so that it is steeper or flatter.____ 11. A decrease in the price of one good results in a parallel shift in the budget line.____ 12. The budget line and the indifference curve are geometric devices used to provide a closer look at consumerchoice.____ 13. An increase in income shifts indifference curves outward.____ 14. A consumer will consume the combination of goods at the point of tangency between the budget line and theindifference curve.____ 15. A consumer will consume the combination of goods at the crossing point of a budget line and indifferencecurve.____ 16. A vertical demand curve has an elasticity of demand equal to zero.2____ 17. A horizontal demand curve is perfectly elastic because a change in price will not induce a change in quantitydemanded.____ 18. A horizontal demand curve is perfectly elastic because a change in price will induce an infinite change inquantity demanded.____ 19. A straight-line demand schedule has the same elasticity throughout its length.____ 20. The unit-elastic demand curve is a rectangular hyperbola.____ 21. If price goes up 20 percent and quantity demanded declines by 10 percent, total revenue will rise.____ 22. If a demand curve is unit elastic, then P times Q will remain constant when P changes.____ 23. A demand curve with unit elasticity can never touch either the vertical or horizontal axes.____ 24. A price increase will always cause a firm's revenue to fall, because they will sell less of the good.____ 25. Necessities such as food and shelter have inelastic demand.____ 26. If there are many close substitutes available for a good, its elasticity of demand will be higher.____ 27. Since an individual spends a small share of her income on salt, the elasticity of demand is likely to be low.____ 28. Cross-elasticity of demand could be used to measure the responsiveness of the quantity demanded ofswimming pools to a change in the price of picnic tables.____ 29. Demand curves often do not remain stationary, they shift because of changes in other variables.____ 30. A decrease in the price of a good will cause a movement along the demand schedule to a higher quantitydemanded.Multiple Choice 30%Identify the choice that best completes the statement or answers the question.____ 31. Lana spent $5 to see a movie. We knowa. the movie was worth 500 utils.3b. Lana's total utility from movies was $5.c. the movie was worth at least $5 worth of other goods.d. the movie increased marginal utility.____ 32. High price and low total utility indicatea. low marginal utility.b. large quantities are sold.c. high marginal utility.d. a high price/marginal utility ratio.____ 33. For most goods and most people, marginal utility probablya. continues to increase as larger quantities are purchased.b. plummets after the first few units but soon begins to rise.c. declines as consumption increases.d. is negative after the first unit of a good is purchased.e. is positive and rising for most goods.____ 34. Elaine values the utility of her first cup of coffee at $1, a second cup, $.75, and a third cup, $.50. If Elainedrinks three cups of coffee for breakfast, her total utility is equal toa. $.50, the value of her last cup of coffee.b. $1.00, the value of her first cup of coffee.c. marginal utility.d. $2.25.e. $1.50.____ 35. As a general rule, consumers havea. limited income.b. unlimited desires for goods.c. many choices of goods facing them.d. All of the above are correct.e. None of the above are correct.____ 36. Marginal utility has a negative slope. This is because of thea. optimal purchase rule.b. law of increasing costs.c. law of diminishing marginal utility.d. marginal rate of substitution.____ 37. Which of the following scenarios could be an example of increasing marginal utility?a. A father buying three game CDs for his son.b. A shopkeeper selling the tenth unit of hamburger.c. A philatelist buying an additional stamp for collection.d. A consumer buying an additional unit of apple.____ 38. Gwen's decision to buy a new television instead of a bicycle for the same pricea. means that opportunity cost is zero since both cost the same amount.4b. would not have involved trade-off and opportunity cost if Gwen had decided to put themoney in a bank CD instead.c. would not imply a trade-off because of scarcity if Gwen were a multimillionaire.d. means that the opportunity cost to Gwen is the bicycle that she has given up.____ 39. Suppose that Joan, the only consumer of pork, has a downward-sloping demand curve for pork and faces anupward-sloping supply curve. If her demand curve shifts out because she develops a craving for pork, then atthe new equilibrium (everything else equal),a. the price of pork relative to other goods will be higher than before.b. Joan's marginal utility from every unit of pork she eats will be higher than before.c. Joan's real income will be lower than before.d. All of the above are correct.____ 40. For a(n) ____, if incomes rise and prices do not change, quantity demanded will increase.a. normal goodb. inferior goodc. Giffen goodd. substitute good____ 41. The Wall Street Journal reports that "hard times aid poultry companies as people eat cheaper fowl." In thelanguage of economists, this meansa. chicken is an inferior good.b. chicken has a negative substitution effect.c. chicken has a positive substitution effect.d. people's tastes change during recessions.e. chicken has a positive income effect.Figure 5-6____ 42. In Figure 5-6, a shift in the budget line from AC to AB indicatesa. the price of wine coolers has risen.b. income has increased.c. the price of beer has fallen.d. the price of wine coolers has fallen.5e. All of the above are correct.____ 43. Which of the following observations is not true of a budget line?a. It indicates what choices are available to the consumer.b. It is a curve of constant expenditure.c. Its slope reports the market terms on which the consumer can trade one good for another.d. It helps examine the consumer?s preferences.____ 44. Which of the following is characteristic of indifference curves?a. They are negatively sloped.b. They never intersect.c. They are convex toward the origin.d. All of the above are correct.Figure 5-11____ 45. In Figure 5-11, a consumer is initially at point A. There is a price change and she moves to B. It follows thata. the demand for beer follows the law of demand.b. the demand for beer does not follow the law of demand.c. wine is an inferior good.d. the consumer is confused.____ 46. For a consumer to maximize utility, he will choose thea. point where the slope of the budget line equals the slope of the indifference curve.b. any point where the budget line and indifference curve intersect.c. point where he gets the most of the good he prefers most.d. point where the marginal rate of substitution is greatest.e. the point where marginal utility is zero for both goods6Figure 5-17____ 47. Which of the following statements about Figure 5-17 must be correct?a. The consumer pays a higher dollar price per unit for good Y at A than at D.b. The consumer pays the same dollar price per unit for good Y at A and at B.c. The consumer pays a higher dollar price per unit for good X at D than at A.d. The consumer pays a higher dollar price per unit for good X at A than at C.Figure 5-19____ 48. In Figure 5-19, the consumer experiences at point C7a.b.c.d.greater total utility than at point D.greater total utility than at point E.less total utility than at point utility equal to that experienced at point D.____ 49. The price elasticity of a vertical demand curve is alwaysa. infinitely large.b. zero.c. one.d. increasing as price increases.____ 50. Total expenditure by a buyer is equal to thea. slope at any point along the demand curve.b. price times quantity demanded at any point along the demand curve.c. elasticity times price at any point along the demand curve.d. elasticity times quantity demanded at any point along the demand curve.____ 51. To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax,which presumably would be passed on to tourists. The hotel industry argued that the tax would hurt hotelbusiness. They are really arguing thata. tourist and convention demand is inelastic, so hotel bookings will decline.b. tourist and convention demand is very elastic, so hotel bookings will decline.c. they would prefer a property tax increase instead.d. it is unfair to tax people who do not live in the area.____ 52. Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic. Then thereal burden of an excise tax on insulin will bea. split equally between buyers and sellers.b. borne entirely by sellers.c. borne entirely by buyers.d. borne by sellers on units sold up to the initial equilibrium quantity and by buyers on alladditional units.____ 53. Would a profit-maximizing firm sell where demand is inelastic?a. No, this would not follow the rule of MC = MR.b. No, the firm could not profitably raise price.c. Yes, the firm could profitably lower price to attract sales.d. Yes, in this case there are few substitutes for the good.____ 54. The price elasticity of demand for widgets at any particular price is determined bya. whether widgets are luxuries or necessities.b. how much of their budgets consumers spend on widgets.c. whether there are any good substitutes for widgets.d. All of the above are correct.____ 55. A 10 percent increase in the cost of restaurant meals, which are a luxury, will most likely8a.b.c.d.increase the purchase of meals by 10 percent.increase the purchase of meals by less than 10 percent.decrease the purchase of meals by more than 10 percent.decrease the purchase of meals by less than 10 percent.____ 56. The price elasticity of new automobile purchases is about 1.2. This implies that an increase of $1,000 on a$10,000 automobile willa. reduce the number of autos sold by 1.2 percent.b. increase the consumer expenditures on autos by 1.2 percent.c. reduce the number of autos sold by 12 percent.d. increase consumer expenditures on autos by 12 percent.____ 57. A study of New York City (NYC) tax rates concluded that taxes on the nonmanufacturing sector should behigher since that sector has fewer alternatives. Manufacturers are more mobile and may move to avoid highertaxes. This means thata. nonmanufacturing firms have a more elastic demand for NYC locations.b. manufacturing firms have an inelastic demand for the NYC locations.c. nonmanufacturing firms have relatively inelastic demand for the NYC locations.d. nonmanufacturing demand for NYC locations is perfectly elastic.____ 58. The elasticity measure which has been employed by the courts to assess the degree of market competition isa. price elasticity of demand.b. income elasticity of demand.c. cross elasticity of demand.d. inverse elasticity of demand.____ 59. The definition of cross elasticity of demand for two products X and Y isa. percentage change in quantity of X demanded/percentage change in quantity of Ydemanded.b. percentage change in price of Y/percentage change in quantity of X demanded.c. percentage change in price of Y/percentage change in price of X.d. percentage change in quantity of X demanded/percentage change in price of Y.____ 60. If the demand for gasoline becomes more elastic over time,a. the demand curve will shift out.b. the demand curve will become flatter.c. other things being equal, the equilibrium price of gasoline must fall.d. other things being equal, the equilibrium quantity of gasoline must fall.


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