Chapter 2 Thinking Like an Economists
TRUE OR FALSE
1. Economists devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. (T)
2. While the scientific method is applicable to studying natural sciences, it is not applicable to studying a nation’s economy. (F)
3. It is difficult for economists to make observations and develop theories, but it is easy for economists to run experiments to generate data to test their theories. (F)
4. Good assumptions simplify a problem without substantially affecting the answer. (T) 5. Assumptions can simplify the complex world and make it easier to understand. (T) 6. Economic models omit many details to allow us to see what is truly important. (T)
7. The circular-flow diagram explains, in general terms, how the economy is organized and how participants in the economy interact with one another. (T)
8. In the circular-flow diagram, households and firms are the decision makers. (T)
9. In the circular-flow diagram, factors of production are the goods and services produced by firms. (F)
10. In the circular-flow diagram, firms own the factors of production and use them to produce goods and services. (F)
11. In the circular-flow diagram, one loop represents the flow of goods and services, and the other loop represents the flow of factors of production. (F)
12. The production possibilities frontier is a graph that shows the various combinations of outputs that the economy can possibly produce given the available factors of production and the available production technology. (T)
13. Refer to Figure 2-1, if this economy uses all its resources in the dishwasher industry, it produces 35 dishwashers and no doghouses. (T) Figure 2-1
14. Refer to Figure 2-1, it is possible for this economy to produce 75 doghouses. (F) 15. Refer to Figure 2-1, it is possible for this economy to produce 30 doghouses and 20 dishwashers. (T)
16. Refer to Figure 2-1, it is possible for this economy to produce 45 doghouses and 30 dishwashers. (F)
17. Refer to Figure 2-1, unemployment could cause this economy to produce at point B. (T)
18. Refer to Figure 2-1, the opportunity cost of moving from point A to point D is 10 dishwashers. (T)
19. Refer to Figure 2-1, the opportunity cost of moving from point B to point D is 15 doghouses. (F)
20. Refer to Figure 2-1, the opportunity cost of an additional doghouse increases as more doghouses are produced. (T)
21. If an economy can produce more of one good without giving up any of another good, then the economy’s current production point is inefficient. (T)
22. When a production possibilities frontier is bowed outward, the opportunity cost of the first good in terms of the second good increases as more of the second good is produced. (F)
23. A production possibilities frontier will be bowed outward if some of the economy’s resources are better suited to producing one good than another. (T)
24. While the production possibilities frontier is a useful model, it cannot be used to illustrate economic growth. (F)
25. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. (T)
26. Macroeconomics is the study of economy-wide phenomena. (T)
27. Economists acting as scientists make positive statements, while economists acting as policy advisers make normative statements. (T)
28. Normative statements describe how the world is, while positive statements prescribe how the world should be. (F)
29. \statement, not a positive statement. (F)
30. There is only one explanation for why economists give conflicting advice on policy issues, and it is that they have different values about what policy should try to accomplish. (F)
31. The slope of a line is equal to the change in the x-variable divided by the change in the y-variable. (F)
Chapter 3 Interdependence And The Gains From Trade
TRUE OR FALSE
1. Interdependence among individuals and interdependence among nations are both based on the gains from trade. (T)
2. If a person chooses self-sufficiency, then she can only consume what she produces. (T)
3. If Wrex can produce more math problems per hour and more book reports per hour than Maxine can, then Wrex cannot gain from trading math problems and book reports with Maxine. (F) 4. Trade allows a country to consume outside its production possibilities frontier. (T) 5. Opportunity cost refers to how many inputs a producer requires to produce a good. (F) 6. Opportunity cost measures the trade-off between two goods that each producer faces. (T)
7. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good. (T)
8. If one producer has the absolute advantage in the production of all goods, then that same producer will have the comparative advantage in the production of all goods as well. (F)
9. If a country has the comparative advantage in producing a product, then that country must also have the absolute advantage in producing that product. (F)
10. If one producer is able to produce a good at a lower opportunity cost than some other producer, then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good. (F)
11. Unless two people who are producing two goods have exactly the same opportunity costs, then
one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good. (T)
12. The principle of comparative advantage states that, regardless of the price at which trade takes place, everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage. (F)
13. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage. (T)
14. Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods. (T)
15. As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than his or her opportunity cost. (T) 16. When each person specializes in producing the good in which he or she has a comparative advantage, each person can gain from trade but total production in the economy is unchanged. (F) 17. For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the two opportunity costs. (F)
18. David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation. (T) 19. International trade may make some individuals in a nation better off, while other individuals are made worse off. (T)
20. Trade can make some individuals worse off, even as it makes the country as a whole better off. (T) SHORT ANSWER
1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?
Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else.
2. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
Alpha’s Production Possibilities Frontier Omega’s Production Possibilities Frontier
a. b. c. d.
Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.
If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now?
If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.
Alpha’s Production Possibilities Frontier
Omega’s Production Possibilities Frontier
a. Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its
production possibilities frontier) and Omega would be producing 50 units of peanuts and 150 units of popcorn (point A on its production possibilities frontier).
b. The total world production of peanuts would be 175 units and the total world production
of popcorn would be 225 units.
c. The total world production of peanuts would now be 250 units and the total world
production of popcorn would now be 300 units.
d. Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega,
leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn from Omega. Omega would be producing 300 units of popcorn and would trade 100 of them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100 units of peanuts from Alpha.
Choice
1. People who provide you with goods and services (b)
a. are acting out of generosity.
b. do so because they get something in return. c. have chosen not to become interdependent. d. are required to do so by the government.
2. When an economist points out that you and millions of other people are interdependent, he or she is referring to the fact that we all (b)
a. rely upon the government to provide us with the basic necessities of life. b. rely upon one another for the goods and services we consume. c. have similar tastes and abilities.
d. are concerned about one another’s well-being. 3. When can two countries gain from trading two goods? (d)
a. when the first country can only produce the first good and the second country can only
produce the second good
b. when the first country can produce both goods, but can only produce the second good at
great cost, and the second country can produce both goods, but can only produce the first good at great cost
c. when the first country is better at producing both goods and the second country is worse
at producing both goods
d. Two countries could gain from trading two goods under all of the above conditions.
4. Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it impossible for both Shannon and Justin to benefit from trade? (a)
a. Shannon does not like vegetables and Justin does not like cookies.
b. Shannon is better than Justin at baking cookies and Justin is better than Shannon at
growing vegetables.
c. Justin is better than Shannon at baking cookies and at growing vegetables. d. Both Shannon and Justin can benefit from trade in all of the above cases. 5. A production possibilities frontier is bowed outward when (d)
a. the more resources the economy uses to produce one good, the fewer resources it has
available to produce the other good.
b. an economy is self-sufficient instead of interdependent and engaged in trade. c. the rate of tradeoff between the two goods being produced is constant.
d. the rate of tradeoff between the two goods being produced depends on how much of
each good is being produced.
6. The following table contains some production possibilities for an economy for a given month. (d) Sweaters Gloves 4 300 6 ? 8 100 If the production possibilities frontier is bowed outward, then “?” could be
a. 100. b. 150. c. 200. d. 250.
7. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of these pairs of points could be on the United States' production possibilities frontier? (c)
a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars) b. (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars) c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars) d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars) 8. What must be given up to obtain an item is called (c)
a. out-of-pocket cost. b. comparative worth. c. opportunity cost. d. absolute value.
9. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton (c)
a. is equal to 0.
b. is between 0 and 1. c. is equal to 1. d. is greater than 1.
10. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then (d)
a. Korea should specialize in the product in which it has an absolute advantage.
b. it would be impossible for Korea to have an absolute advantage over another country in
both products.
c. it would be difficult for Korea to benefit from trade with another country if Korea is
efficient in the production of both goods.
d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls.
11. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is (a)
a. 1/5 table for Mike and 1/3 table for Sandy. b. 1/5 table for Mike and 3 tables for Sandy. c. 5 tables for Mike and 1/3 table for Sandy. d. 5 tables for Mike and 3 tables for Sandy.
12. If Shawn can produce more donuts in one day than Sue can produce in one day, then (c)
a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn has an absolute advantage in the production of donuts. d. Sue has an absolute advantage in the production of donuts.
13. Kelly and David are both capable of repairing cars and cooking meals. Which of the following scenarios is not possible? (c)
a. Kelly has a comparative advantage in repairing cars and David has a comparative
advantage in cooking meals.
b. Kelly has an absolute advantage in repairing cars and David has an absolute advantage
in cooking meals.
c. Kelly has a comparative advantage in repairing cars and in cooking meals. d. David has an absolute advantage in repairing cars and in cooking meals. 14. Comparative advantage is related most closely to which of the following? (b)
a. output per hour b. opportunity cost
c. efficiency
d. bargaining strength in international trade
15. Two individuals engage in the same two productive activities. In which of the following circumstances would neither individual have a comparative advantage in either activity? (c)
a. One individual’s production possibilities frontier is steeper than the other individual’s
production possibilities frontier.
b. One individual is faster at both activities than the other individual.
c. One individual’s opportunity costs are the same as the other individual’s opportunity
costs.
d. None of the above is correct; one of the two individuals always will have a comparative
advantage in at least one of the two activities.
16. Total output in an economy increases when each person specializes because
a. there is less competition for the same resources.
b. each person spends more time producing that product in which he or she has a
comparative advantage.
c. a wider variety of products will be produced within each country due to specialization. d. government necessarily plays a larger role in the economy due to specialization. 17. Which of the following statements is not correct? (d)
a. Trade allows for specialization.
b. Trade has the potential to benefit all nations.
c. Trade allows nations to consume outside of their production possibilities curves. d. Absolute advantage is the driving force of specialization. 18. By definition, imports are (d)
a. people who work in foreign countries.
b. goods in which a country has an absolute advantage. c. limits placed on the quantity of goods leaving a country. d. goods produced abroad and sold domestically. 19. By definition, exports are (d)
a. limits placed on the quantity of goods brought into a country. b. goods in which a country has an absolute advantage. c. people who work in foreign countries.
d. goods produced domestically and sold abroad.
20. Which of the following would not result from all countries specializing according to the principle of comparative advantage? (d)
a. The size of the economic pie would increase.
b. Worldwide production of goods and services would increase. c. The well-being of citizens in each country would be enhanced.
d. Each country’s production possibilities frontier would shift outward.
Chapter 4 The Market Forces of Supply and Demand
TRUE OR FALSE
1. In a market economy, supply and demand determine both the quantity of each good produced and 2. the price at which it is sold. (T)
3. Prices allocate a market economy’s scarce resources. (T)
4. Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product. (F)
5. In a competitive market, the quantity of each good produced and the price at which it is sold are not determined by any single buyer or seller. (T)
6. In a perfectly competitive market, the goods offered for sale are all exactly the same. (T)
7. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good rises, and when the price falls, the quantity demanded falls. (F)
8. The market demand curve shows how the total quantity demanded of a good varies as the income of
buyers varies, while all the other factors that affect how much consumers want to buy are held constant. (F)
9. If something happens to alter the quantity demanded at any given price, then the demand curve shifts. (T)
10. If the demand for a good falls when income falls, then the good is called an inferior good. (F) 11. A decrease in income will shift the demand curve for an inferior good to the right. (T)
12. An increase in the price of a substitute good will shift the demand curve for a good to the right. (T) 13. A decrease in the price of a complement will shift the demand curve for a good to the left. (F)
14. If a person expects the price of socks to increase next month, then that person’s current demand for socks will increase. (T)
15. A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way. (F)
16. Whenever a determinant of demand other than price changes, the demand curve shifts. (T)
17. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price. (T)
18. When the price of a good is high, selling the good is profitable, and so the quantity supplied is large. (T)
19. If something happens to alter the quantity supplied at any given price, then we move along the fixed supply curve to a new quantity supplied. (F)
20. A decrease in supply shifts the supply curve to the left. (T)
21. A reduction in an input price will cause a change in quantity supplied, but not a change in supply. (F)
22. If there is an improvement in the technology used to produce a good, then the supply curve for that good will shift to the left. (F)
23. When a seller expects the price of its product to decrease in the future, the seller's supply curve shifts left now. (F)
24. When the market price is above the equilibrium price, the quantity of the good demanded exceeds the quantity supplied. (F)
25. Price will rise to eliminate a surplus. (F)
26. Sellers respond to a shortage by cutting their prices. (F)
27. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium price. (T)
28. In a market, the price of any good adjusts until quantity demanded equals quantity supplied. (T) 29. A decrease in demand will cause a decrease in price, which will cause a decrease in supply. (F)
SHORT ANSWER 1.
a. What is the difference between a \ Graph your answer.
b. For each of the following changes, determine whether there will be a change in quantity demanded or a change in demand. i. a change in the price of a related good ii. a change in tastes iii. a change in the number of buyers iv. a change in price v. a change in consumer expectations vi. a change in income a. A change in demand refers to a shift of the demand curve. A change in quantity
demanded refers to a movement along a fixed demand curve. b. A change in price causes a change in quantity demanded. All of the other changes listed
shift the demand curve.
A
change in quantity supplied A change in supply
2.
Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change.
a. Winter starts and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. h. Consumer income falls because of a recession, and hot chocolate is considered a normal
good.
i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium. (a) (b)
(c) (e)
(d)
(f)
(g) (h)
(i)
(j)
In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift.3.
Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down, stay the same, or change ambiguously.
No Change in Demand An Increase in Demand A Decrease in Demand No Change in Supply P same Q same P up Q up P down Q down An Increase in Supply P down Q up P ambiguous Q up P down Q ambiguous A Decrease in Supply P up Q down P up Q ambiguous P ambiguous Q down CHOICE
1. Which of the following is an example of a market? (d)
a. a gas station b. a garage sale c. a barber shop
d. All of the above are examples of markets. (d) 2. In a competitive market, the price of a product
a. is determined by buyers and the quantity of the product produced is determined by
sellers.
b. is determined by sellers and the quantity of the product produced is determined by
buyers.
c. and the quantity of the product produced are both determined by sellers. d. None of the above is correct.
3. A downward-sloping demand curve illustrates (d)
a. that demand decreases over time. b. that prices fall over time.
c. the relationship between income and quantity demanded. d. the law of demand. Table 4-1 Price Aaron’s Angela’s Austin’s Alyssa’s Quantity Quantity Quantity Quantity Demanded Demanded Demanded Demanded $0.00 20 16 4 8 $0.50 18 12 6 6 $1.00 14 10 2 5 $1.50 12 8 0 4 $2.00 6 6 0 2 $2.50 0 4 0 0 4. Refer to Table 4-1. Whose demand does not obey the law of demand? (c) a. Aaron’s b. Angela’s c. Austin’s d. Alyssa’s
5. Refer to Table 4-1. If these are the only four buyers in the market, then the market quantity demanded at a price of $1 is (d)
a. 4 units. b. 7.75 units. c. 14 units. d. 31 units.
6. When we move along a given demand curve, (c)
a. only price is held constant.
b. income and price are held constant.
c. all nonprice determinants of demand are held constant. d. all determinants of quantity demanded are held constant. 7. Which of the following is not held constant in a supply schedule? (c)
a. technology
b. the price of the good c. the prices of inputs d. expectations
8. A market supply curve is determined by (b)
a. vertically summing individual supply curves. b. horizontally summing individual supply curves.
c. finding the average quantity supplied by sellers at each possible price.
d. finding the average price at which sellers are willing and able to sell a particular quantity
of the good.
9. A decrease in quantity supplied (a)
a. results in a movement downward and to the left along a fixed supply curve. b. results in a movement upward and to the right along a fixed supply curve. c. shifts the supply curve to the left. d. shifts the supply curve to the right. 10. Another term for equilibrium price is (b)
a. dynamic price.
b. market-clearing price. c. quantity-defining price. d. balance price.
11. If, at the current price, there is a surplus of a good, then (a)
a. sellers are producing more than buyers wish to buy. b. the market must be in equilibrium.
c. the price is below the equilibrium price. d. quantity demanded equals quantity supplied.
12. If a shortage exists in a market, then we know that the actual price is (c)
a. above the equilibrium price and quantity supplied is greater than quantity demanded. b. above the equilibrium price and quantity demanded is greater than quantity supplied. c. below the equilibrium price and quantity demanded is greater than quantity supplied. d. below the equilibrium price and quantity supplied is greater than quantity demanded. 13. If the demand for a product increases, then we would expect (c)
a. equilibrium price to increase and equilibrium quantity to decrease. b. equilibrium price to decrease and equilibrium quantity to increase. c. equilibrium price and equilibrium quantity both to increase. d. equilibrium price and equilibrium quantity both to decrease. 14. If the supply of a product decreases, then we would expect (a)
a. equilibrium price to increase and equilibrium quantity to decrease. b. equilibrium price to decrease and equilibrium quantity to increase. c. equilibrium price and equilibrium quantity both to increase. d. equilibrium price and equilibrium quantity both to decrease. 15. When supply and demand both increase, equilibrium (d)
a. price will increase. b. price will decrease.
c. quantity may increase, decrease, or remain unchanged. d. price may increase, decrease, or remain unchanged.
16. What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell? (a)
a. Price would fall and the effect on quantity would be ambiguous. b. Price would rise and the effect on quantity would be ambiguous. c. Quantity would fall and the effect on price would be ambiguous. d. Quantity would rise and the effect on price would be ambiguous. 17. Which of these statements does not apply to market economies? (c)
a. Prices prevent decentralized decision making from degenerating into chaos.
b. Prices coordinate the actions of millions of people with varying abilities and desires. c. Prices ensure that anyone who wants a product can get it.
d. Prices ensure that what needs to get done does in fact get done.
Chapter 5 Elasticity and its Its Application
TRUE OR FALSE
1. The demand for bread is likely to be more elastic than the demand for solid-gold bread plates. (F) 2. In general, demand curves for luxuries tend to be price elastic. (T)
3. Goods with close substitutes tend to have more elastic demands than do goods without close substitutes. (T)
4. The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years. (F)
5. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. (T)
6. Demand is inelastic if the price elasticity of demand is greater than 1. (F)
7. Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls. (F)
8. If the price elasticity of demand is equal to 1, then demand is unit elastic. (T) 9. When demand is inelastic, a decrease in price increases total revenue. (F)
10. The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income. (T)
11. Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand. (F)
12. If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes. (T)
13. If the cross-price elasticity of demand for two goods is negative, then the two goods are complements. (T)
14. Price elasticity of supply measures how much the quantity supplied responds to changes in the price. (T)
15. Supply and demand both tend to be more elastic in the long run and more inelastic in the short run. (T)
16. If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must have decreased by 3%. (T)
17. If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of supply approaches infinity. (T)
18. A government program that reduces land under cultivation hurts farmers but helps consumers. (F) 19. OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run. (T)
20. Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic. (F) Short Answer
1. Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?
In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 2.5 percent.
In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 0.75 percent.
CHOICE
1. In general, elasticity is a measure of (d)
a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive.
c. how firms’ profits respond to changes in market prices.
d. how much buyers and sellers respond to changes in market conditions.
2. When studying how some event or policy affects a market, elasticity provides information on the (b)
a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy. 3. Which of the following statements about the price elasticity of demand is correct? (d)
a. The price elasticity of demand for a good measures the willingness of buyers of the good
to buy less of the good as its price increases.
b. Price elasticity of demand reflects the many economic, psychological, and social forces
that shape consumer tastes.
c. Other things equal, if good x has close substitutes and good y does not have close
substitutes, then the demand for good x will be more elastic than the demand for good y. d. All of the above are correct. 4. For a good that is a necessity, (b)
a. quantity demanded tends to respond substantially to a change in price. b. demand tends to be inelastic.
c. the law of demand does not apply. d. All of the above are correct.
5. Goods with many close substitutes tend to have (a)
a. more elastic demands. b. less elastic demands.
c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative. 6. For a good that is a luxury, demand (b)
a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way. 7. The demand for Neapolitan ice cream is likely quite elastic because (d)
a. ice cream must be eaten quickly.
b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers. c. the market is broadly defined.
d. other flavors of ice cream are good substitutes for this particular flavor.
8. Which of the following is not a determinant of the price elasticity of demand for a good? (b)
a. the time horizon
b. the steepness or flatness of the supply curve for the good c. the definition of the market for the good d. the availability of substitutes for the good
13. When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand (b)
a. first becomes smaller, then larger. b. always becomes larger. c. always becomes smaller.
d. first becomes larger, then smaller.
14. The difference between slope and elasticity is that (a)
a. slope is a ratio of two changes, and elasticity is a ratio of two percentage changes. b. slope is a ratio of two percentage changes, and elasticity is a ratio of two changes. c. slope measures changes in quantity demanded more accurately than elasticity. d. none of the above; there is no difference between slope and elasticity.
Figure 5-1
15. Refer to Figure 5-1. The demand curve representing the demand for a luxury good with several close substitutes is (c)
a. A. b. B. c. C. d. D.
16. Refer to Figure 5-1. Atog says he would buy one cup of coffee per day regardless of the price. If this is true, then Atog's demand for coffee is represented by demand curve (a)
a. A. b. B. c. C. d. D.
17. Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, (b)
a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers’ total expenditure on the good is unchanged.
18. The case of perfectly elastic demand is illustrated by a demand curve that is (b)
a. vertical. b. horizontal.
c. downward-sloping but relatively steep. d. downward-sloping but relatively flat. 19. For a vertical demand curve, (a)
a. slope is undefined, and price elasticity of demand is equal to 0. b. slope is equal to 0, and price elasticity of demand is undefined. c. slope and price elasticity of demand both are undefined. d. slope and price elasticity of demand both are equal to 0.
20. Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method, (A)
a. the price elasticity of demand is about 1.43, and an increase in the airfare will cause
airlines' total revenue to decrease.
b. the price elasticity of demand is about 1.43, and an increase in the airfare will cause
airlines' total revenue to increase.
c. the price elasticity of demand is about 0.70, and an increase in the airfare will cause
airlines' total revenue to decrease.
d. the price elasticity of demand is about 0.70, and an increase in the airfare will cause
airlines' total revenue to increase.
21. Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is (b)
a. 0.567. b. 0.700. c. 1.429. d. 2.200.
22. 156. When demand is inelastic, a decrease in price will cause (b)
a. an increase in total revenue. b. a decrease in total revenue.
c. no change in total revenue, but an increase in quantity demanded. d. no change in total revenue, but a decrease in quantity demanded.
23. Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue? (a)
a. 0.2 b. 1 c. 1.5
d. All of the above could be correct.
24. Necessities such as food and clothing tend to have (d)
a. high price elasticities of demand and high income elasticities of demand. b. high price elasticities of demand and low income elasticities of demand. c. low price elasticities of demand and high income elasticities of demand. d. low price elasticities of demand and low income elasticities of demand.
25. For Susie, a 7 percent increase in income results in a 12 percent increase in the quantity demanded of pizza. For Susie, the income elasticity of demand for pizza is (d)
a. negative, and pizza is an normal good. b. negative, and pizza is a inferior good. c. positive, and pizza is an inferior good. d. positive, and pizza is a normal good.
26. Suppose good X has a negative income elasticity of demand. This implies that good X is (c)
a. a normal good. b. a necessity. c. an inferior good. d. a luxury.
27. Food and clothing tend to have (a)
a. small income elasticities because consumers, regardless of their incomes, choose to buy
relatively constant quantities of these goods.
b. small income elasticities because consumers buy proportionately more of both goods at
higher income levels than they buy at low income levels. c. large income elasticities because they are necessities.
d. large income elasticities because they are relatively inexpensive.
28. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be (a)
a. positive. b. negative.
c. either positive or negative. It depends whether A and B are normal goods or inferior
goods.
d. either positive or negative. It depends whether the current price level is on the elastic
or inelastic portion of the demand curve.
29. Which of the following could be the cross-price elasticity of demand for two goods that are complements? (a)
a. -1.3 b. 0 c. 0.2 d. 1.4
30. Determinants of the price elasticity of supply is the (d)
a. number of close substitutes for the good in question.
b. the ability of sellers to change the amount of the good they produce. c. length of the time period. d. Both b and c
31. In the long run, the quantity supplied of most goods (d)
a. will increase in almost all cases, regardless of what happens to price. b. cannot respond at all to a change in price.
c. can respond to a change in price, but the change is almost always inconsequential. d. can respond substantially to a change in price. 32. When a supply curve is relatively flat, (c)
a. sellers are not at all responsive to a change in price.
b. the equilibrium price changes substantially when the demand for the good changes. c. the supply is relatively elastic. d. the supply is relatively inelastic.
33. A linear, upward-sloping supply curve has (a)
a. a constant slope and a changing elasticity of supply. b. a changing slope and a constant elasticity of supply. c. both a constant slope and a constant elasticity of supply. d. both a changing slope and a changing elasticity of supply.
34. If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity supplied, then the price increase amounted to (c)
a. 0.67%. b. 0.83%. c. 1.20%. d. 2.70%.
35. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about (d)
a. 0.22. b. 0.53. c. 1.00.
d. 1.89.
36. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production from 40 to 50 boxes when price increases by 20 percent, then supply is (d)
a. inelastic, since the price elasticity of supply is equal to .91. b. inelastic, since the price elasticity of supply is equal to 1.1. c. elastic, since the price elasticity of supply is equal to 0.91. d. elastic, since the price elasticity of supply is equal to 1.1. 37. If the price elasticity of supply for a good is equal to infinity, then (b)
a. the supply curve is vertical. b. the supply curve is horizontal.
c. the supply curve also has a slope equal to infinity.
d. the quantity supplied is constant regardless of the price.
38. Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to (b)
a. increase the total revenue of wheat farmers. b. decrease the total revenue of wheat farmers. c. decrease the demand for wheat. d. decrease the supply of wheat.
39. Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then (c)
a. consumers of wheat would buy more wheat.
b. wheat farmers would suffer a reduction in their total revenue. c. wheat farmers would experience an increase in their total revenue. d. the demand for wheat would decrease. 40. n the market for oil in the short run, demand (b)
a. and supply are both elastic. b. and supply are both inelastic. c. is elastic and supply is inelastic. d. is inelastic and supply is elastic.
41. Which of the following statements helps to explain why government drug interdiction increases drug-related crime? (c)
a. The direct impact is on buyers, not sellers.
b. Successful drug interdiction policies reduce the demand for illegal drugs.
c. Drug addicts will have an even greater need for quick cash to support their habits.
d. In the short run, both equilibrium quantities and prices will fall in the markets for illegal
drugs.
Chapter 6 Supply, Demand, and Government policies
TRUE OR FALSE
1. Economic policies often have effects that their architects did not intend or anticipate. (T) 2. Rent-control laws dictate a minimum rent that landlords may charge tenants. (F) 3. Minimum-wage laws dictate the lowest wage that firms may pay workers. (T) 4. Price controls can generate inequities. (T)
5. If a good or service is sold in a competitive market free of government regulation, then the price of the good or service adjusts to balance supply and demand. (T)
6. A price ceiling is a legal minimum on the price at which a good or service can be sold. (F) 7. A price ceiling set above the equilibrium price is not binding. (T)
8. A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied. (T)
9. Long lines and discrimination are examples of rationing methods that may naturally develop in response to a binding price ceiling. (T)
10. Price ceilings are typically imposed to benefit buyers. (T)
11. When the government imposes a binding price ceiling on a competitive market, a surplus of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. (F) 12. When free markets ration goods with prices, it is both efficient and impersonal. (T)
13. The effects of rent control in the long run include lower rents and lower-quality housing. (T) 14. A price floor is a legal minimum on the price at which a good or service can be sold. (T) 15. A price floor set above the equilibrium price is not binding. (F)
16. A price floor set above the equilibrium price causes a surplus in the market. (T) 17. Price floors are typically imposed to benefit buyers. (F) 18. Not all sellers benefit from a binding price floor. (T)
19. If the equilibrium price of an airline ticket is $500 and the government imposes a price floor of $400 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. (F) 20. The goal of the minimum wage is to ensure workers a minimally adequate standard of living. (T) 21. In an unregulated labor market, the wage adjusts to balance labor supply and labor demand. (T) 22. A binding minimum wage causes the quantity of labor demanded to exceed the quantity of labor supplied. (F)
23. Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them. (F)
24. A tax on sellers shifts the supply curve to the left, but not the demand curve. (T)
25. The term tax incidence refers to how the burden of a tax is distributed among the various people who make up the economy. (T)
26. If a tax is imposed on the sellers of a product, then the tax burden will fall entirely on the sellers. (F)
27. A tax on buyers shifts the demand curve to the right. (F)
28. A tax of $1 on buyers shifts the demand curve downward by exactly $1. (T)
29. A tax on buyers usually causes buyers to pay more the good and sellers to receive less for the good than they did before the tax was levied. (T)
30. Whether a tax is levied on sellers or buyers, taxes discourage market activity. (T)
31. Whether a tax is levied on sellers or buyers, buyers and sellers usually share the equivalent burden of taxes. (T)
32. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. (T)
33. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot legislate the true burden of a tax. (T)
34. If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. (T)
35. A tax burden falls more heavily on the side of the market that is less elastic. (T) Short Answer
1. Using a supply and demand diagram, show a labor market with a binding minimum wage. Use the diagram to show those who are helped by the minimum wage and those who are hurt by the minimum wage.
Those who are helped by the minimum wage are the workers who are still employed and now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage, q0. The minimum wage creates unemployment equal to the difference between the quantity of labor supplied and the quantity demanded at the minimum wage, q2-q0. The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor and, hence, hire a smaller quantity. 2.
a. Using the graph shown, analyze the effect a $300 price ceiling would have on the market
for ten-speed bicycles. Would this be a binding price ceiling?
b. Using the graph shown, analyze the effect a $700 price floor would have on this market for
ten-speed bicycles. Would this be a binding price floor?
c. Why would policymakers choose to impose a price ceiling or price floor?
a. A $300 price ceiling would cause a shortage of 4,000 bicycles. A price ceiling is binding if
it is set at any price below equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price ceiling.
b. A $700 price floor would cause a surplus of 4,000 bicycles. A price floor is binding if it is
set at any price above equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price floor.
c. More than one reason may exist for policymakers to impose a price ceiling or price floor in a
market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers.
3. Using the graph shown, in which the vertical distance between points A and B represents the tax in the market, answer the following questions.
a. b. c. d. e. f. g. What was the equilibrium price and quantity in this market before the tax? What is the amount of the tax?
How much of the tax will the buyers pay? How much of the tax will the sellers pay?
How much will the buyer pay for the product after the tax is imposed? How much will the seller receive after the tax is imposed?
As a result of the tax, what has happened to the level of market activity?
a. b. c. d. e. f. g. Equilibrium price was $8 and equilibrium quantity was 8,000 units. The tax is $5.
Buyers will pay $3. Sellers will pay $2. $11. $6.
Instead of 8,000 units bought and sold, only 6,000 will be bought and sold.
4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.
CHOICE
1. Price controls (c)
a. always produce a fair outcome.
b. always produce an efficient outcome. c. can generate inequities of their own. d. Both (a) and (b) are correct. 2. Policymakers use taxes (b)
a. to raise revenue for public purposes, but not to influence market outcomes. b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities. d. only in those markets in which the burden of the tax falls clearly on the sellers. 3. A price ceiling is binding when it is set (c)
a. above the equilibrium price, causing a shortage. b. above the equilibrium price, causing a surplus. c. below the equilibrium price, causing a shortage. d. below the equilibrium price, causing a surplus.
4. The imposition of a binding price ceiling on a market causes quantity demanded to be (a)
a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Both (a) and (b) are possible.
5. Suppose the government has imposed a price ceiling on televisions. Which of the following
events could transform the price ceiling from one that is not binding into one that is binding? (B)
a. Firms expect the price of televisions to fall in the future. b. The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good. d. The number of consumers buying televisions decreases.
6. Suppose the government has imposed a price ceiling on cellular phones. Which of the following events could transform the price ceiling from one that is binding to one that is not binding? (D)
a. Cellular phones become more popular.
b. Traditional land line phones become more expensive.
c. The components used to produce cellular phones become more expensive. d. A technological advance makes cellular phone production less expensive.
7. If the government removes a binding price ceiling from a market, then the price paid by buyers will (a)
a. increase and the quantity sold in the market will increase. b. increase and the quantity sold in the market will decrease. c. decrease and the quantity sold in the market will increase. d. decrease and the quantity sold in the market will decrease. 8. When OPEC raised the price of crude oil in the 1970s, it caused the (c)
a. United States’ nonbinding price floor on gasoline to become binding. b. United States’ binding price floor on gasoline to become nonbinding. c. United States’ nonbinding price ceiling on gasoline to become binding. d. United States’ binding price ceiling on gasoline to become nonbinding.
9. One economist has argued that rent control is \best way to destroy a city, other than bombing.\
a. He fears that low rents will cause low-income people to move into the city, reducing
the quality of life for other people.
b. He fears that rent control will benefit landlords at the expense of tenants, increasing
inequality in the city.
c. He fears that rent controls will cause a construction boom, which will make the city
crowded and more polluted.
d. He fears that rent control will eliminate the incentive to maintain buildings, leading to a
deterioration of the city.
10. Which of the following is not a short-run effect of rent control on the housing market? (b)
a. reduced rents b. a large shortage
c. a small increase in quantity demanded d. a small decrease in quantity supplied
11. Over time, housing shortages caused by rent control (b)
a. increase, because the demand for and supply of housing are less elastic in the long run. b. increase, because the demand for and supply of housing are more elastic in the long
run.
c. decrease, because the demand for and supply of housing are less elastic in the long
run.
d. decrease, because the demand for and supply of housing are more elastic in the long
run.
12. A price floor is (d)
a. a legal minimum on the price at which a good can be sold.
b. often imposed when sellers of a good are successful in their attempts to convince the
government that the market outcome is unfair without a price floor. c. a source of inefficiency in a market.
d. All of the above are correct. 13. If a price floor is not binding, then (c)
a. there will be a surplus in the market. b. there will be a shortage in the market.
c. there will be no effect on the market price or quantity sold.
d. the market will be less efficient than it would be without the price floor. 14. A price floor is binding when it is set (b)
a. above the equilibrium price, causing a shortage. b. above the equilibrium price, causing a surplus. c. below the equilibrium price, causing a shortage. d. below the equilibrium price, causing a surplus.
15. A minimum wage that is set above a market's equilibrium wage will result in (c)
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers. c. an excess supply of labor, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers. 16. Price ceilings and price floors that are binding (b)
a. are desirable because they make markets more efficient and more fair.
b. cause surpluses and shortages to persist since price cannot adjust to the market
equilibrium price.
c. can have the effect of restoring a market to equilibrium.
d. are imposed because they can make the poor in the economy better off without
causing adverse effects.
17. When government imposes a price ceiling or a price floor on a market, (a)
a. price no longer serves as a rationing device. b. efficiency in the market is enhanced. c. shortages and surpluses are eliminated. d. buyers and sellers both become better off. 18. A tax on sellers will (c)
a. shift the demand curve upwards by the amount of the tax. b. shift the demand curve downwards by the amount of the tax. c. shift the supply curve upwards by the amount of the tax. d. shift the supply curve downwards by the amount of the tax. 19. A $0.10 tax levied on the sellers of chocolate bars will cause the (b)
a. supply curve for chocolate bars to shift down by $0.10. b. supply curve for chocolate bars to shift up by $0.10. c. demand curve for chocolate bars to shift down by $0.10. d. demand curve for chocolate bars to shift up by $0.10.
20. When a tax is placed on the sellers of a product, (b)
a. buyers pay more and sellers receive more than they did before the tax. b. buyers pay more and sellers receive less than they did before the tax. c. buyers pay less and sellers receive more than they did before the tax. d. buyers pay less and sellers receive less than they did before the tax. 21. When a tax is placed on the sellers of cell phones, (c)
a. the size of the cell phone market and the price paid by buyers both increase.
b. the size of the cell phone market increases, but the price paid by buyers decreases. c. the size of the cell phone market decreases, but the price paid by buyers increases. d. the size of the cell phone market and the price paid by buyers both decrease. 22. If a tax is levied on the buyers of a product, then the demand curve (b)
a. will not shift. b. will shift down. c. will shift up.
d. will become flatter.
23. A tax imposed on the buyers of a good will (a)
a. raise the price paid by buyers and lower the equilibrium quantity. b. raise the price paid by buyers and raise the equilibrium quantity.
c. raise the effective price received by sellers and lower the equilibrium quantity. d. raise the effective price received by sellers and raise the equilibrium quantity. 24. A tax imposed on the buyers of a good will (c)
a. lower the price paid by buyers and lower the equilibrium quantity. b. lower the price paid by buyers and raise the equilibrium quantity.
c. lower the effective price received by sellers and lower the equilibrium quantity. d. lower the effective price received by sellers and raise the equilibrium quantity.
25. If the government removes a tax on sellers of a good and imposes the same tax on buyers of the good,
then the price paid by buyers will (d)
a. increase and the price received by sellers will increase. b. increase and the price received by sellers will not change. c. not change and the price received by sellers will increase. d. not change and the price received by sellers will not change. 26. In the final analysis, tax incidence (c)
a. depends on the legislated burden. b. is entirely random.
c. depends on the forces of supply and demand. d. falls entirely on buyers or entirely on sellers.