Multiple-choice Questions: Chapter 5 1. The price elasticity of demand of a good is 1.25.

Pick the correct answer from the following: a. the demand for the good is elastic. b. the demand for the good is inelastic. c. the good is a necessity d. the good is a luxury 2. The demand for a good is highly inelastic if a. the price elasticity of the good is close to zero. b. the income elasticity of the good is close to one c. if it is a necessity d. both a and c. 3. The demand for a particular brand of tooth paste a. can be more elastic than the demand for tooth paste, because tooth paste is a necessity. b. can be less elastic than the demand for tooth paste, because tooth paste is a necessity. c. more elstic than the demand for tooth paste, because a particular brand always have close substitutes d. none of the above. 4. A perfectly inelastic demand curve a. is a vertical line parallel to Y-axis. b. is a vertical line parallel to X-axis. c. indicates a good with no close substitutes. d. a and c. e. b and c. 5. Pick the correct answer from the following: a. the price elasticity of supply is larger in the short-run than in the long-run. b. the price elasticity of demand is larger in the short-run than in the long-run. c. the price elasticity of supply is smaller in the short-run, larger in the long-run. C d. the price elasticity of demand is smaller in the short-run, but the price elasticity of supply is larger in the the short-run than in the long-run. 6. Choose the statement which you find wrong in the following; a. a mystery novel has more elastic demand than a required text book. b. Beethovens recording has less elastic demand than classical music recording in general. c. heating oil during the next six months has more elastic demand than heating oil during the next six years. d. root beer has more elastic demand than water.

7. Suppose the demand schedule for compact discs is as follows: Quantity Demanded (Income = $10000) 40 32 24 16 8 Quantity Demanded (Income = $12000) 50 45 30 20 12

Price $8 10 12 14 16

For a price increase from $8 to $10, the price elasticity of compact discs a. greater when income is $12000 than when income is $10000. b. is 0.6 when income is $12000, and 0.9 when income is $10000. c. is 0.4 when income is $12000, and 0.8 when income is $10000. d. remains the same no matter what the income is. 8. In question 7, for an income increase from $10000 to $12000, the income elasticity of compact discs a. is greater when price is $12 than when price is $16. b. is 1.25 when price is $12, and 2.00 when price is $16. c. is 1.25 when price is $12, and 2.50 when price is $16. d. remains the same no matter what the price is. 9. Mark always spends one-third of his income on clothing. Choose the wrong statement from below: a. Mark has constant income elasticity of clothing demand no matter what his income is. b. Mark price elasticity of clothing demand is the ratio of the original price to the new price. c. You cant calculate price elasticity based on the information given. d. Mark has income elasticity of clothing demand one-third. 10. Mark has recently changed his taste for clothing and has decided to spend only onefourth of his income on clothing. Choose the wrong answer from below: a. Marks income elasticity of clothing demand now differs from the original value obtained in question 9. b. Marks income elasticity is now greater than before. c. Marks demand curve for clothing shifts to the left. d. only a and b are true. e. all are true. 11. Two drivers-Tom and Jerry-each drive up a gas station. Before looking at the price, each places an order. Tom says, Id like 10 gallons of gas. Jerry says, Id like $10 of gas. Pick the correct answer from below: a. Tom has higher price elasticity of demand than Jerry.

b. Tom has higher income elasticity of demand than Jerry. c. Its hard to figure out from the information given. d. Toms price elasticity of demand is zero.

Multiple-choice questions: Chapter 6 1. When the govt. passes a legislation for a minimum support price for an agricultural farm product it is called a. price ceiling. b. minimum price. c. price floor. d. none of the above. 2. When the price ceiling is below the market clearing price level a. quantity demanded is much in excess of quantity supplied. b. market mechanism brings up the price level to the equilibrium when quantity demanded exacly equals quantity supplied. c. there is shortage of good in the market. d. both a and c. 3. Imposition of price ceiling is a. has to do more with equity and less with efficiency. b. has to do more with efficiency and less with equity. c. aimed to weigh both equity and efficiency equally. d. none of the above. 4. A recent study found that the demand and supply schedules for frisbees are as follows: Price per Frisbees 11 10 9 8 7 6 Quantity Demanded 1 million 2 4 6 8 10 Quantity Supplied 15 million 12 9 6 3 1

Choose the correct answer from below: a. equilibrium price and quantity of frisbees are $8.5 and 2 million respectively. b. when markets clear, buyers get 6million frisbees and the sellers sell 6 million frisbees. c. the free market price of frisbees is $8 d. both b and c are true. 5. The frisbee manufacturers lobby the govt. claiming that frisbee production improves scientists understanding of aerodynamics and thus is important to impose a price floor of $2 above the equilibrium price obtained in question 5 above. Pick the most appropriate answer from below: a. the new market price for frisbees is $10 which will cause a shortage of frisbees in the market.

b. the market price will not change since the price floor is not binding. c. the new market price is $10, and the number of frisbees sold at that price is 12 million. C d. non of the above. 6. Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon sold. Pick the correct statement from below: a. the govt. should tax the producers of gasoline bacause it will be a great burden for the consumers to pay the tax. b. the govt. should tax the consumers because it will force the consumers to do car pooling. c. it doesnt matter whether the producers or the consumers are taxed because both parties have to share the burden equally. d. the tax on gasoline will affect both the consumers and the producers. 7. In 6 above, if the demand for gasoline is highly inelastic than the supply, then a. a tax on gasoline will create excess gasoline in the market. b. the burden of tax will fall heavily on the producers. c. the burden of tax will fall heavily on the consumers. d. a tax on gasoline will create shortage of gasoline in the market. 8. In 6 above, if the demand for gasoline and the supply of gasoline are equally elastic, then, a tax of $0.50 on gasoline a. reduces the quantity sold, buyers pay $0.25 more, and the sellers receive $0.25 less than the original price. b. burden of tax is shared equally by the buyers and the sellers. c. the difference between the price buyers pay and the price sellers receive is $0.50. d. all are true.

Multiple-choice questions: Chapter 7 1. Willingness to pay a. is the minimum valuation of each buyer of a good. b. is the price that each buyer can afford given his current income. c. is the maximum valuation of each buyer of a good. d. must be greater than the price of a good. 2. Willingness to sell a. is the maximum valuation of each seller of a good. b. is the sellers cost of production of a good. c. is the price that each seller can charge to make a profit. d. must be less than the price of a good. 3. A marginal buyer is the one a. who, if the price is increased a little is the first to go out of the market. b. who, if the price is decreased a little is the first to enter the market. c. who is indifferent about buying and not buying. d. both a and c. 4. The total valuation of a product is a. the area under the demand curve and above the price line. b. the sum of the consumer surplus and the producer surplus. c. the area under the demand curve and above the x-axis. d. both b and c. 5. A market is said to be efficient a. if quantity demanded and the quantity supplied are the same. b. if both consumer surplus and the producer surplus are maximized. c. if the sum of the producer surplus and the consumer surplus is maximized. d. both a and c. 6. The assumptions used to conclude that the free market solution is efficient a. is that the market is competitive. b. the market doesnt produce any externality. c. no individual buyer and seller has any market power. d. all of the above. 7. An early freeze in California sours the lemon crop. This leads to a. increase in the consumer surplus and decrease in the producer surplus in the lemon market. b. decrease in the consumer surplus and increase in the producer surplus in the lemon market. c. decrease in the consumer surplus but nothing can be predicted about the producer surplus in the lemon market.

d. decrease in the producer surplus but nothing can be predicted about the consumer surplus. 8. Americans suddenly develops a lot of taste for Fench bread. This will lead to a. increase in the producer surplus and decrease in the consumer surplus in the French bread market. b. decrease in the consumer surplus and increase in the producer surplus in the French bread market. c. increase in the producer surplus but nothing can be predicted about the consumer surplus in the French bread market. d. decrease in the producer surplus but nothing can be predicted about the consumer surplus. 9. It is a hot day, and Bert is very thursty. Here is the value he places on a bottle of water: value of first bottle value of second bottle value of third bottle value of fourth bottle $7 5 3 1

Derive Berts demand schedule to answer the following question: If the price of a bottle of water is $4, the number of bottles Bert will buy is a. 3 bottles. b. 1 bottles. c. 2 bottles. d. none of the above. 10. In question 9 above, at price $4, a. the total benefit of Bert is $7, and the consumer surplus is $3. b. the total benefit of Bert is $5, and the consumer surplus is $1. c. the total benefit of Bert is $12, and the consumer surplus is $4. d. non of the above. 11. In 9, at price $4, if Bert buys the first bottle, a. the marginal benefit of buying one more bottle is $5, and the marginal cost is $4. A b. the marginal benefit of buying one more bottle is $5, and the marginal cost is also $5. c. the marginal benefit of buying one more bottle is $4, and the marginal cost is also $4. d. none of the above. 12. In 9, if the price goes down from $4 to $3, a. consumer surplus will go down. b. consumer surplus stays the same. c. the marginal benefit of an additional bottle is same as the marginal cost. d. both b and c.

13. Earnie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: cost of first bottle cost of second bottle cost of third bottle cost of fourth bottle $1 3 5 7.

Derive Earnies supply schedule to answer the following question: If the price of a bottle of water is $4, Earnie will produce a. 4 bottles. b. 3 bottles. c. 2 bottles. d. 1 bottle. 14. In 13, at price $4, a. the total cost of Earnie is $4, and the total producer surplus is also $4. b. the total cost of Earnie is $3, and the total producer surplus is $1. c. the total cost of Earnie is $1, and the total producer surplus is $3. d. none of the above. 15. In 13, at price $4, if Earnie has produced one bottle, a. the marginal benefit of producing an additional bottle is $4 and the marginal cost is $1. b. the marginal benefit of producing an additional bottle is $1 and the marginal cost is $4. c. the marginal benefit of producing an additional bottle is $4 and the marginal cost is $3. d. none of the above. 16.In 13, if the price rises from $4 to $5, a. the producer surplus will go down. b. producer surplus will stay the same. c. the marginal benefit of producing an additional bottle is same as the marginal cost. d. both b and c. 17. There are four consumers willing to pay the following amounts for haircuts: Phil: $7 Oprah: $2 Sally: $8 Geraldo: $5.

There are four haircutting businesses with the following costs: Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2.

Derive the demand and supply schedules for haircut to answer the following questions: Efficient number of haircut should be

a. 1. b. 2. c. 3. d. 4. 18. In 17, the businesses that should cut hair are a. A, C, and D. b. A, and C. c. A, B, C, and D. d. D. 19. In 17, the consumers who should have haircut are a. Oprah, and Geraldo. b. Sally and Phil. c. Oprah, Sally, and Geraldo. d. Phil, Sally, and Geraldo.

Multiple-choice questions: Chapter 8 1. When govt. imposes tax on a good, the revenue raised by the govt. a. is more than the welfare loss of the consumers. b. less than the welfare loss of the producers. c. more than the total welfare loss of consumers and produces. d. less than the total welfare loss of the consumers and producers. 2. Tax breeds inefficiency in the market in the sense that a. existing buyers have less incentive to buy, and thus the maximum surplus is not realized. b. existing sellers have less incentive to sell, and thus the maximum surplus is not realized. c. buyers and sellers at the margin go out of market and thus the maximum surplus is not realized. d. All of the above. 3. When there is no change in supply and demand, a tax increase a. increases the deadweight loss if the tax is small. b. decreases the deadweight loss if the tax is large. c. increases the deadweight loss. d. decrease the deadweight loss. 4. If govt. taxes land, a. wealthy landowners will pass the tax on to their poorer renter. b. since the supply of land is inelastic, the deadweight loss will not be great. c. since the demand for land is inelastic, burden of tax will fall on the landowners. d. none of the above. 5. If govt. taxes apartment buildings, a. wealthy landlords will pass on the tax to the poorer reenter. b. since the demand for appartments is inelastic, burden of tax will fall on the landlords. c. since the supply of appartment is elastic deadweight loss can be considerable. d. non of the above. 6. Taxing food would be a good way to raise revenue because a. everybody eats food and so lot of revenue could be raised. b. loss to the consumer surplus would be very small. c. major burden of tax will go to the sellers of food who are rich. d. demand for food is inelastic and so the deadweight loss would be small. 7. Taxing food would not be a good way to raise revenue because a. poor people will suffer. b. it is incapable of generating enough revenue to the govt. c. demand for food is inelastic and so the major burden of tax would go to the consumers. C

d. none of the above.