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WARM-UP QUESTIONS FOR SECTION IV

Note: Unless otherwise indicated, you can assume that demand and supply curves are neither flat nor vertical and that all goods are normal.

A. An increase in demand: (a) increases both price and quandty (b) increases price and decreases quantity (c) decreases price and increases quantity (d) decreases both price and quantit).

B. Re-answer the above question for a demand decrease.

C. Re-answer for a supply increase.

D. Re-answer for a supply decrease.

E. An excise tax of SI per unit would be expected to: (a) increase price by $1 per unit (b) decrease price by less than $1 per unit (c) increase price by $1 per unit if the demand curve were verdcal (d) normally increase price by less than $1 per unit (e) both answers (c) and (d).

F. Re-answer Question E assuming a subsidy of $1 per uniL

G. If the elasticit) of demand is greater than one but less than infinity, it would be described as: (a) completely inelasdc (b) perfectly elastic (c) unit elastic (d) elastic (e) inelastic.

H. Total revenue will increase as price decreases if: (a) demand is of constant elasticit) (b) demand is elastic (c) demand is unit elastic (d) quantit) increases.

I. If both supply and demand cur\es shift in the same direction: (a) the direction of the quantity change can be predicted (b) the direcdon of both the price change and the quantit) change can be predicted (c) the direction of neitiier the price nor the quantity change can be predicted (d) the direcdon of the price change can be predicted (e) none of the above.

J. W ich of the following statements is incorrect (a) the income elasticit of demand for a normal good is positive (b) the income elasticirv of demand for an inferior good is negative (c) the cross elasticity of demand between substitute goods is positive (d) the

cross elasticit) of demand bervveen complemeiuarJ goods is negati\e (e) the cross elasdcity of unrelatcjl goods is 1.0.

K. Elasticit) of demand is: (a) the change jh price divided by the change in quantit) (b) pricej divided by quaiuity (c) quamity divided by pricej (d) the percentage change in price divided by the per-] centage change in quantity (e) the percentage] change in quantity divided by the percentage change] in price.

L. If elasticity is greater than one, we knt (a) die percentage change in quamit) exceeds the perl centage change in price (b) the percentage change ir price is zero (c) the demand curve is flat (d) the [ centage change in quantit\ is one (e) none of the above.

M. The elasticity of demand is equal to l.Oj

(a) ever)where on a flat demand curve and at th price axis of a linear curve (b) ever)where along] vertical demand curve and at the quantit) axis of a lir ear curve (c) everywhere along a straight line curv (d) ever)avhere along a flat demand curve and only I the midpoint of a straight line demand curve (e) the midpoint of a straight line curve.

N. 1 of the following is false? (a) fli demand and supply curves are perfectly elastic at a quantities (b) vertical demand and supply curves afl perfecdy inelastic at all prices (c) straight liij demand curves are unit elastic ever)where (d) fl ne.ss is different from elasdcit) (e) both demand ; supply become more elasdc with time.

0. If the ela.sticit) of demand is infinite, a di] decrease in price will cause quantit) to: (a) fall nothing (b) imdergo an explosive percenta increase (c) change by an equal amount (d) renia unchanged (e) undergo an explosive percenta decrease.

P. The demand curve faced b) the price-iakiii firm, the supply curve faced b\ the price-taking hou hold, die labor demand curve faced b\ the price- ing worker, and the labor supplv curve faced by price-taking firm all have an elasticit) equal to: (a)

(b) 1.0 (c) infinit) (d) 10 (e) anv of the a depending on the household of firm.

iarkel Forces

Q We acquire information about elasticity of demand by tracing the effect of: (a) demand curve shifts (b) supply curve shifts (c) simultaneous demand and supply shifts (d) increases in income , (e) all of the above.

The term appearing in the numerator in all j.elasdcity formulas is: (a) price (b) quandty (c) per-,.ccntage change in price (d) percentage change in

quanuty (e) none ofthe above.

S. The effect of a demand increase is to: (a) increase price, increase quantity, and decrease total revenue (b) increase price, decrease quantity and decrease total revenue (c) increase price, decrease quandty, and increase total re\enue (d) decrease ail three (e) increase all three.

QUESTIONS FOR SECTION IV

1. The effect of an increase in market demand ceteris paribus is to; (a) increase price with no change in quantity (b) increase quandt) with no change in price (c) decrease price and increase quantity (d) increase both price and quantit)- (e) decrease both price and quamir\.

2. The effect of a decrease in market supply ceteris paribus is usually: (a) an increase in price with no change in quantity (b) an increase in quantit) with no change in price (c) an increase in price and quantity (d) a decrease in price and quandt) (e) an increase in price and a decrease in quandt).

3. If economics texts and firewood are good sub-sdtutes for each-other, then: (a) when die piice of firewood rises we would expect to see an increase in the equilibrium price and quandty of economics texts (b) when the price of economics books rises, the. demand for firewood would shift left\vard (c) the equilibrium price of firewood and the equilibrium quantity of economics books tend to move in opposite direcdons (d) when the price of firewood rises, we would expect a movement along the demand curve for economics books (e) when the price of economics books is constant, the quandt) of firewood declines.

4. If new cars are a normal good, then in a recession we would expect to see: (a) an increase in both dieir price and quantity (b) an increase in their price and a decrease in quandt) sold (c) a decrease in their equilibrium price and quandt) sold (d) a decrease in their equilibrium price and an increase in quantit) sold (e) none of these.

5. Which of the following is inconsistent with an increase in the market demand for mories ceteris paribus? (a) a reducdon in the equilibrium quandty of movies seen by the Samuelson household (b) a decrease in the price the Friedman household must pay to see movies (c) an increased quandty of movies av-ailable to the Hayek household (d) a shift by the Alchian household into book reading (e) an increased demand for movies by the Becker household.

6. An increase in the price of denim ceteris paribus will: (a) increase the price of blue jeans with no predictable effect upon quandty (b) increase both

the price and equilibrium quandty of blue jeans (c) increase the price and the total expenditures on blue jeans (d) decrease the quantit)- sold and increase the price (e) decrease the quandty sold only.

7. V\Tiich of the following would be expected to decrease both the price and quandty sold of American autos? (a) an increase in the price of steel (b) the repeal of an expensive Detroit plant safety reguladon (c) higher wages for auto workers (d) a protracted autoworkers strike in Japan (e) a reducdon in the price of all forms of public transportation.

8. \Vhicli of the follo-wing would not be expected to increase both the price and number of handguns purchased for self protecdon? (a) a decrease in the! price of bullets (b) a protracted police strike (c) a j new and cheaper method of making handguns (d) an j outbreak of criminal lawlessness (e) all ofthe above.]

9. If the price of oranges falls at the same dme al new improved grapefruit pollination technique isf introduced, we would expect in equilibriumij

(a) the price and quandty of grapefruits to risel

(b) the price of grapefruit to rise (c) the quandt)of grapefruit to rbe (d) the price of grapefruit to fall and] die quantity to rise (e) the price of grapefruit to fall.

10. If the price of denim falls just as blue jeanS independently become more fashionable, we would expect: (a) the quandty sold of blue jeans to ris (b) the price of jeans to rise (c) both the price the quandt) of jeans to rise (d) both the price and quandt) of jeans to fall (e) none ofthe above.

11. Reanswer the quesdon above assuming th price of denim rises (a) (b) (c) (d) (e).

12. Assume now that a decrease in the price of cof ton pants occurs at the same dme as an increase in thj price of denim, then we wovild expect blue jeans to (a) increase in price (b) decrease in quandty (c) increas in price and decrease in quandt) (d) decrease uJ price and increase in quanun- (e) decrease in pric and decrease in quaiuit).

13. Suppose an outbreak of Mediterranean fn" flies comes to an end just as the wages of cheinici plant workers independently ri.se, then we woul expect malathion to: (a) a decrease in bodi price aii quandt) sold (b) decrease in price and increase