Principles

of Economics
Midterm Exam 2

02/24/2015

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SID: ____________________________________________________.



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Do not start the exam until instructed to do so.

Please select only one answer.

1. Using the midpoint method, the price elasticity of demand for a good is computed
to be approximately 0.75. Which of the following events is consistent with a 10
percent decrease in the quantity of the good demanded?
a. A 7.5 increase in the price of the good
b. A 13.33 percent increase in the price of the good
c. An increase in the price of the good from $7.50 to $10
d. An increase in the price of the good from $10 to $17.50




2. Refer to the figure below.

Suppose a price ceiling of $5 is imposed on this market. As a result,
a. the quantity of the good supplied decreases by 20 units.
b. the demand curve shifts to the left; quantity sold is now 30 units and the
price is $5.
c. buyers total expenditure on the good decreases by $80.
d. the price of the good continues to serve as the rationing mechanism.




3. Motor oil and gasoline are complements. If the price of motor oil increases,
consumer surplus in the gasoline market
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.

4. Suppose a tax is imposed on bananas. In which of the following cases will the tax
cause the equilibrium quantity of bananas to shrink by the largest amount?
a. The response of buyers to a change in the price of bananas is strong, and the
response of sellers to a change in the price of bananas is weak.
b. The response of sellers to a change in the price of bananas is strong, and the
response of buyers to a change in the price of bananas is weak.
c. The response of buyers and sellers to a change in the price of bananas is
strong.
d. The response of buyers and sellers to a change in the price of bananas is
weak.



5. Refer to the figure below.

Area C represents the
a. decrease in consumer surplus that results from a downward-sloping demand
curve.
b. consumer surplus to new consumers who enter the market when the price
falls from P2 to P1.
c. increase in producer surplus when quantity sold increases from Q2 to Q1.
d. decrease in consumer surplus to each consumer in the market when the
price increases from P1 to P2.



6. For a particular good, a 12 percent increase in price causes a 3 percent decrease
in quantity demanded. Which of the following statements is most likely applicable to
this good?
a. There are many substitutes for this good.
b. The good is a necessity.
c. The market for the good is narrowly defined.
d. The relevant time horizon is long.

7. Which of the following ideas is the most plausible?

a. Reducing a high tax rate is less likely to increase tax revenue than is reducing
a low tax rate.
b. Reducing a high tax rate is more likely to increase tax revenue than is
reducing a low tax rate.
c. Reducing a high tax rate will have the same effect on tax revenue as reducing
a low tax rate.
d. Reducing a tax rate can never increase tax revenue.



8. An increase in the price of cheese crackers from $2.25 to $2.45 per box causes
suppliers of cheese crackers to increase their quantity supplied from 125 boxes per
minute to 145 boxes per minute. Using the midpoint method, supply is
a. elastic, and the price elasticity of supply is 1.74.
b. elastic, and the price elasticity of supply is 0.57.
c. inelastic, and the price elasticity of supply is 1.74.
d. inelastic, and the price elasticity of supply is 0.57.



9. For each of three potential buyers of oranges, the table displays the willingness to
pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the
only three buyers of oranges, and only three oranges can be supplied per day.


First Orange
Second Orange
Third Orange
Allison
$2.00
$1.50
$0.75
Bob
$1.50
$1.00
$0.60
Charisse
$0.75
$0.25
$0

The market quantity of oranges demanded per day is exactly 7 if the price of an
orange, P, satisfies
a. $0.60 < P < $0.75.
b. $0.60 < P < $2.00.
c. $0.25 < P < $0.75.
d. $0.25 < P < $0.60.



10. Consumer surplus is equal to the
a. Value to buyers - Amount paid by buyers.
b. Amount paid by buyers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Willingness to pay of buyers.

11. The following table shows the demand schedule for a particular good.

Price
Quantity
$20
0
$16
3
$12
6
$8
9
$4
12
$0
15

Using the midpoint method, what is the price elasticity of demand when price rises
from $12 to $16?
a. 0.43
b. 0.67
c. 2.33
d. 4




12. Refer to the figure below.

In the after-tax equilibrium, government collects
a. $1,440 in tax revenue; of this amount, $960 represents a burden on buyers
and $480 represents a burden on sellers.
b. $1,440 in tax revenue; of this amount, $720 represents a burden on buyers
and $720 represents a burden on sellers.
c. $1,680 in tax revenue; of this amount, $1,260 represents a burden on buyers
and $420 represents a burden on sellers.
d. $1,680 in tax revenue; of this amount, $840 represents a burden on buyers
and $840 represents a burden on sellers.

13. The numbers reveal the opportunity costs of providing 10 piano lessons of equal
quality.

Seller
Cost
Marcia
$200
Jan
$250
Cindy
$350
Greg
$400
Peter
$700
Bobby
$800

You wish to purchase two sets of 10 piano lessons, one for yourself and one for your
brother, so you take bids from each of the sellers. You will take lessons at the same
time, so one teacher cannot provide lessons to both of you. You must pay the same
price for both sets of lessons, and you will not accept a bid below a sellers cost
because you are concerned that the seller will not provide all 10 lessons. What bid
will you accept?
a. $351
b. $349
c. $201
d. $199



14. How does total revenue change as one moves downward and to the right along a
linear demand curve?
a. It always increases.
b. It always decreases.
c. It first increases, then decreases.
d. It is unaffected by a movement along the demand curve.




15. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of
airline tickets are required to pay the tax to the government. If the tax is reduced
from $50 per ticket to $30 per ticket, then the
a. demand curve will shift upward by $20, and the price paid by buyers will
decrease by less than $20.
b. demand curve will shift upward by $20, and the price paid by buyers will
decrease by $20.
c. supply curve will shift downward by $20, and the effective price received by
sellers will increase by less than $20.
d. supply curve will shift downward by $20, and the effective price received by
sellers will increase by $20.

16. Hot dogs and hot dog buns are complements. An increase in the price of flour
used to make hot dogs buns will
a. increase consumer surplus in the market for hot dog buns and decrease
producer surplus in the market for hot dogs.
b. increase consumer surplus in the market for hot dogs and increase producer
surplus in the market for hot dog buns.
c. decrease consumer surplus in the market for hot dog buns and increase
producer surplus in the market for hot dogs.
d. decrease consumer surplus in the market for hot dog buns and decrease
producer surplus in the market for hot dogs.



17. The figure represents the relationship between the size of a tax and the tax
revenue raised by that tax.

For an economy that is currently at point D on the curve, a decrease in the tax rate
would
a. decrease consumer surplus.
b. decrease producer surplus.
c. increase tax revenue.
d. increase the deadweight loss of the tax.




18. If the government removes a binding price floor from a market, then the price
paid by buyers will
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.

19. Refer to the figure below.

If total surplus is $240 and consumer surplus is
a. $100, then the price of the good is $130.
b. $130, then the price of the good is $120.
c. $160, then the price of the good is $100.
d. $120, then the price of the good is $90.


20. If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease
in the price of aluminum foil will increase the quantity demanded of aluminum foil
by
a. 1.66%, and aluminum foil sellers' total revenue will increase as a result.
b. 1.66%, and aluminum foil sellers' total revenue will decrease as a result.
c. 3.48%, and aluminum foil sellers' total revenue will increase as a result.
d. 3.48%, and aluminum foil sellers' total revenue will decrease as a result.



21. Under rent control, landlords cease to be responsive to tenants' concerns about
the quality of the housing because
a. with rent control, the government guarantees landlords a minimum level of
profit.
b. they become resigned to the fact that many of their apartments are going to
be vacant at any given time.
c. with shortages and waiting lists, they have no incentive to maintain and
improve their property.
d. with rent control, it becomes the government's responsibility to maintain
rental housing.

22. The vertical distance between points A and B represents a tax in the market.

The tax results in a loss of consumer surplus that amounts to
a. $105.
b. $140.
c. $170.
d. $210.




23. Suppose that the market for large, 64-ounce soft drinks in the town of Pudgyville
is characterized by a typical, downward-sloping, linear demand curve and a typical,
upward-sloping, linear supply curve. The market is initially in equilibrium with
1,000 soft drinks sold per day. The newly-elected Mayor of Pudgyville wants to tax
64-ounce soft drinks. She is considering either a $0.10 tax or a $0.30 tax. Her chief
economic advisor estimates that the number of soft drinks sold after a $0.10 tax will
be 900 and after a $0.30 tax will be 500. Which tax is better?
a. The $0.10 tax is better because it raises more revenue and creates a lower
deadweight loss than the $0.30 tax.
b. The $0.30 tax is better because it raises more revenue and creates a lower
deadweight loss than the $0.10 tax.
c. It is not clear which tax is better because although the $0.30 tax raises more
tax revenues, it creates a larger deadweight loss than the $0.10 tax.
d. It is not clear which tax is better because although the $0.10 tax raises more
tax revenues, it creates a larger deadweight loss than the $0.30 tax.

24. Refer to the figure below.

Assume, for the good in question, two specific points on the demand curve are (Q =
1,000, P= $40) and (Q = 1,500, P = $30). Then which of the following scenarios is
possible?
a. Both of these points lie on the section of the demand curve from B to C.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d. Any of these scenarios is possible.






25. Assume the supply curve for diapers is a typical, upward-sloping straight line,
and the demand curve for diapers is a typical, downward-sloping straight line.
Suppose the equilibrium quantity in the market for diapers is 1,000 per month
when there is no tax. Then a tax of $0.50 per diaper is imposed. The effective price
paid by buyers increases from
$1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.
The governments tax revenue amounts to $475 per month. Which of the following
statements is correct?
a. After the tax is imposed, the equilibrium quantity of diapers is 900 per
month.
b. The demand for diapers is more elastic than the supply of diapers.
c. The deadweight loss of the tax is $12.50.
d. The tax causes a decrease in consumer surplus of $380.