**12.

The local video store's business increased by 12% after the movie theater raised
its prices from $6.50 to $7.00. Thus, relative to movie theater admissions, videos are

a. Substitute goods.
b. Superior goods.
c. Complementary goods.
d. Public goods.
A
*13. An individual receives an income of $3,000 per month,
and spends $2,500. An increase in income of $500 per month occurs, and the individual
spends $2,800. The individual's marginal propensity to save is

a. 0.2
b. 0.4
c. 0.6
d. 0.8
B
**14. In any competitive market, an equal increase in both demand and supply can be
expected to always

a. Increase both price and market-clearing quantity.

b. Decrease both price and market-clearing quantity.
c. Increase market-clearing quantity.
d. Increase price.
The requirement is to describe market conditions in
a competitive market when both demand and supply increase. In a competitive market,
the market will always clear at the
equilibrium price. If there is an equal increase in both demand and supply, the
equilibrium price may increase, decrease, or remain the same. However, there will be
more units sold and, therefore, answer (c) is correct
**15. Given the following data, what is the marginal propensity to consume?

Level of
Disposable income Consumption
$40,000 $38,000
48,000 44,000
a. 1.33
b. 1.16
c. 0.95
d. 0.75
D
*16. Which of the following will cause a shift in the supply
curve of a product?

a. Changes in the price of the product.

b. Changes in production taxes.
c. Changes in consumer tastes.
d. Changes in the number of buyers in the market.
B
**17. When the federal government imposes health and safety regulations on certain
products, one of the most likely results is

a. Greater consumption of the product.

b. Lower prices for the product.
c. Greater tax revenues for the federal government.
d. Higher prices for the product.
D
18. In which of the following situations would there be inelastic demand?

a. A 5% price increase results in 3% decrease in the

quantity demanded.
b. A 4% price increase results in a 6% decrease in the
quantity demanded.
c. A 4% price increase results in a 4% decrease in the
quantity demanded.
d. A 3% price decrease results in a 5% increase in the
quantity demanded.
A
**19. In a competitive market for labor in which demand is
stable, if workers try to increase their wage

a. Employment must fall.

b. Government must set a maximum wage below the
equilibrium wage.
c. Firms in the industry must become smaller.
d. Product supply must decrease.
(a) The requirement is to describe the effect of an
increase in wages on demand for labor. Answer (a) is correct
because, like any other good or service, if price is increased
for labor, the demand will fall and employment will fall
**21. If the federal government regulates a product or service
in a competitive market by setting a maximum price below the equilibrium price, what is
the long-run effect?

a. A surplus.
b. A shortage.
c. A decrease in demand.
d. No effect on the market.
B
**22. A valid reason for the government to intervene in the wholesale electrical power
market would include which one of the following?
a. A price increase that is more than expected.
b. Electricity is an essential resource and the wholesale
market is not competitive.
c. The electricity distribution companies are losing
money.
d. Foreign power generators have contracts with the local
government at very high prices.
B
If the income elasticity of demand coefficient for a
particular product is 3.00, the good is likely

a. A luxury good.
b. A complementary good.
c. An inferior good.
d. A necessity.
A
**25. Which one of the following would cause the demand curve for a commodity to shift
to the left?

a. A rise in the price of a substitute product.

b. A rise in average household income.
c. A rise in the price of a complementary commodity.
d. A rise in the population.
C
**26. Price ceilings

a. Are illustrated by government price support programsin agriculture.

b. Create prices greater than equilibrium prices.
c. Create prices below equilibrium prices.
d. Result in persistent surpluses.
(c) The requirement is to describe the effect of price
ceilings. Price ceilings cause the price of a product to be
artificially low resulting in decreased supply. The price is
below the equilibrium price as indicated by answer (c).
*27. X and Y are substitute products. If the price of product Y increases, the immediate
impact on product X is

a. Price will increase.

b. Quantity demanded will increase.
c. Quantity supplied will increase.
d. Price, quantity demanded, and supply will increase.
B
28. Wilson Corporation has a major competitor that produces a product that is a close
substitute for Wilson's good. If the coefficient of cross-elasticity of demand for Wilson's
product with respect to the competitor's product is 2.00 and the competitor decreases its
price by 5%, what is the expected effect on demand for Wilson's product?
a. A 5% increase in demand.
b. A 5% decrease in demand.
c. A 10% increase in demand.
d. A 10% decrease in demand.
D