MICRO ECONOMICS -MIDTERM

(TEST CODE 174)

PART 1: MCQs ( 7.5 marks)

Q.11 : If, at the current price, there is a shortage of a good, then

A. the price is below the equilibrium price.

B. sellers are producing more than buyers wish to buy.

C. the market must be in equilibrium.

D. quantity demanded equals quantity supplied.

Q.12 : Two goods are complements when a decrease in the price of one good

A. increases the demand for the other good.

B. decreases the demand for the other good.

C. decreases the quantity demanded of the other good.

D. increases the quantity demanded of the other good.

Q.13 : Which of the following events would definitely result in a higher price in the market for Snickers?

A. Demand for Snickers increases and supply of Snickers decreases.

B. Demand for Snickers and supply of Snickers both decrease.

C. Demand for Snickers decreases and supply of Snickers increases.

D. Demand for Snickers and supply of Snickers both increase

Q.14 : Which of these statements best represents the law of supply?

A. When sellers’ supplies of a good increase, the price of the good increases.

B. When production technology improves, sellers produce less of the good.

C. When input prices increase, sellers produce less of the good.

D. When the price of a good decreases, sellers produce less of the good.

Q.15 : If, for two goods, the cross-price elasticity of demand is 1.25, then

A. the two goods are luxuries.

B. the demand for one of the goods conforms to the law of demand, but the demand for the other good
violates the law of demand.

C. one of the goods is normal and the other good is inferior.

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 D. the two goods are substitutes.

Q.16 : If the price of milk rises, when is the price elasticity of demand likely to be the lowest?

A. three months after the price increase B. one year after the price increase

C. one month after the price increase D. immediately after the price increase

Q.17 : Which of the following should be held constant when calculating an income elasticity of demand?

A. the price of the good

B. prices of related goods

C. tastes

D. All of the above should be held constant.

Q.18 : For a particular good, a 10 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. The market for the good is narrowly defined.

B. There are many close substitutes for this good.

C. The relevant time horizon is short.

D. The good is a luxury.

Q.19 : If the demand for textbooks is inelastic, then a decrease in the price of textbooks will

A. decrease total revenue of textbook sellers.

B. not change total revenue of textbook sellers.

C. increase total revenue of textbook sellers.

D. There is not enough information to answer this question.

Q.20 : Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10
percent of their land, then

A. the demand for wheat would decrease.

B. consumers of wheat would buy more wheat.

C. wheat farmers would experience an increase in their total revenue.

D. wheat farmers would suffer a reduction in their total revenue.

Q.21 : If corn farmers know that the demand for corn is inelastic, and they want to increase their total
revenue, they should all

A. plant more corn so that they would be able to sell more each year.

B. reduce the number of acres they plant in corn.

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 C. increase spending on fertilizer in an attempt to produce more corn on the acres they farm.

D. contribute to a fund that promotes technological advances in corn production.

Q.22 : For a good that is a necessity, demand

A. has unit elasticity.

B. tends to be inelastic.

C. cannot be represented by a demand curve in the usual way.

D. tends to be elastic.

Q.23 : Holding all other forces constant, if increasing the price of a good leads to a decrease in total revenue,
then the demand for the good must be

A. unit elastic.

B. inelastic.

C. elastic.

D. None of the above is correct, since a price increase always leads to an increase in total revenue.

Q.24 : There are very few, if any, good substitutes for motor oil. Therefore

A. the demand for motor oil would tend to be inelastic.

B. the supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars
relative to their tastes for small cars.

C. the demand for motor oil would tend to be elastic.

D. the demand for motor oil would tend to respond strongly to changes in prices of other goods.

Q.25 : If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price results in a

A. 0.4 percent decrease in the quantity demanded.

B. 40 percent decrease in the quantity demanded.

C. 4 percent decrease in the quantity demanded.

D. 2.5 percent decrease in the quantity demanded.

Q.26 : In which of the following situations will total revenue increase?

A. Price elasticity of demand is 1.2, and the price of the good decreases.

B. Price elasticity of demand is 0.5, and the price of the good increases.

C. Price elasticity of demand is 3.0, and the price of the good decreases.

D. All of the above are correct.

Q.27 : Goods with many close substitutes tend to have

B. more elastic demands.

C. less elastic demands.

D. income elasticities of demand that are negative.

Q.28 : 20
Price

18

16

14

12

10

2
D

2 4 6 8 10 12 14 16 Quantity

The following graph shows the linear demand curve for a particular
good. For prices above $8, demand is price

A. inelastic, and total revenue will rise as price rises.

B. elastic, and total revenue will rise as price rises.

C. elastic, and total revenue will fall as price rises.

D. inelastic, and total revenue will fall as price rises.

Q.29 : Which one could be the cross-price elasticity of demand for two goods that are complements?

A. 1.4 B. 0 C. 0.2 D. -1.3

Q.30 : If the demand for donuts is elastic, then a decrease in the price of donuts will

A. There is not enough information to answer this question.

B. not change total revenue of donut sellers.

C. increase total revenue of donut sellers.

D. decrease total revenue of donut sellers.

Q.31 : Using the midpoint method, the price elasticity of demand for a good is computed to be 0.75. Which of
the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

A. an increase in the price of the good from $10 to $17.50

B. an increase in the price of the good from $7.50 to $10

C. a 7.5 increase in the price of the good

D. a 13.33 percent increase in the price of the good

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Q.32 : If the demand for donuts is elastic, then an increase in the price of donuts will

A. increase total revenue of donut sellers.

B. decrease total revenue of donut sellers.

C. not change total revenue of donut sellers.

D. There is not enough information to answer this question.

Q.33 : If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price
elasticity of demand is

A. 0.50. B. 1. C. 1.5. D. 2.

Q.34 : You have just been hired as a business consultant to determine what pricing policy would be
appropriate in order to increase the total revenue of a store. The first step you would take would be to

A. increase the price of every shoe in the store.

B. look for ways to cut costs and increase profit for the store.

C. determine the price elasticity of demand for the store's products.

D. determine the price elasticity of supply for the store’s products.

Q.35 : A legal maximum on the price at which a good can be sold is called a price

A. support. B. ceiling. C. floor. D. subsidy.

Q.36 : If a price ceiling is not binding, then

A. the equilibrium price is above the price ceiling.

B. the equilibrium price is below the price ceiling.

C. it has no legal enforcement mechanism.

D. More than one of the above is correct.

Q.37 : Which one is the most likely explanation for the imposition of a price ceiling on the market for milk?

A. Sellers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into
imposing the price ceiling.

B. Policymakers have studied the effects of the price ceiling carefully, and they recognize that the price
ceiling is advantageous for society as a whole.

C. Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into
imposing the price ceiling.

D. Buyers and sellers of milk have agreed that the price ceiling is good for both of them and have
therefore pressured policymakers into imposing the price ceiling.

Q.38 : Refer to Figure. Which of the following statements is correct?

5
 price
12

11

10
S
9

1
D

3 6 9 12 15 18 21 24 27 30 quantity

A. A price floor set at $7 will be binding and will result in a surplus of 12 units.

B. A price floor set at $4 will be binding and will result in a shortage of 3 units.

C. A price floor set at $7 will be binding and will result in a surplus of 6 units.

D. A price floor set at $4 will be binding and will result in a shortage of 6 units.

Q.39 : Refer to Figure. Which of the following statements is correct?

11

10
S
9

1
D

3 6 9 12 15 18 21 24 27 30 quantity

A. A price ceiling set at $4 will be binding and will result in a shortage of 3 units.

B. A price ceiling set at $4 will be binding and will result in a shortage of 6 units.

C. A price ceiling set at $7 will be binding and will result in a surplus of 6 units.

D. A price ceiling set at $7 will be binding and will result in a surplus of 12 units.

Q.40 : The term tax incidence refers to

A. whether buyers or sellers of a good are required to send tax payments to the government.

B. whether the demand curve or the supply curve shifts when the tax is imposed.

C. the distribution of the tax burden between buyers and sellers.

D. widespread view that taxes always will be a fact of life.

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 price
Figure 2 S after tax
7
S
6.5

5.5

4.5

4
D
3.5

2.5

1.5

0.5

5 10 15 20 25 30 35 40 45 50 55 60 65 70 quantity

41. Refer to Figure 2. The equilibrium price in the market before the tax is imposed is

a. $3.50. b.$5 c.$6 d.7$

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42. Refer to Figure 2. As the figure is drawn, who sends the tax payment to the government?

a. the buyers

b. the sellers

c. A portion of the tax payment is sent by the buyers and the remaining portion is sent by the sellers.

d. The question of who sends the tax payment cannot be determined from the figure.

43. Refer to Figure 2. The price paid by buyers after the tax is imposed is

a. $2.50. b.$3.5 c.$5 d.$6

44. Refer to Figure 2. The effective price sellers receive after the tax is imposed is

a. $2.50. b.$3.5 c.$5 d.$6

45. Refer to Figure 2. The amount of the tax per unit is

a. $1. b. 1.5$ c.$2.5 d.$3.5

46. Refer to Figure 2. Buyers pay how much of the tax per unit?

a. $1. b. 1.5$ c.$2.5 d.$3.5

47. Refer to Figure 2. Sellers pay how much of the tax per unit?

a. $1. b. 1.5$ c.$2.5 d.$3.5

48. Refer to Figure 2. Suppose the same supply and demand curves apply and a tax of the same amount
per unit as shown here is imposed. Now, however, the buyers of the good, rather than the sellers, are
required to pay the tax to the government. Now, relative to the case depicted in the figure,

a. the burden on buyers will be larger and the burden on sellers will be smaller.

b. the burden on buyers will be smaller and the burden on sellers will be larger.

c. the burden on buyers will be the same and the burden on sellers will be the same.

d. The relative burdens in the two cases cannot be determined without further information.

49. Refer to Figure 2. How much tax revenue does this tax generate for the government?

a. $75 B.$125 C.$175 D.$300

50. Economics is the study of how evenly goods and services are distributed within society.?

A. TRUE B. FALSE

PART 2: DISCUSSION (2.5 marks) The table below gives the demand and supply schedules for cat food.

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 Quantity of Quantiy
Price
demanded supplied Income Price of fish
($ per pound of cat
(tons of cat food (tons of cat food ($/month) ($ per fish)
food)
per year) per year)

52 1 16 7,000 1

45 1.5 21 6,000 2

38 2 26 5,000 3

31 2.5 31 4,000 4

24 3 36 3,000 5

a. What is the equilibrium price and quantity? How can you tell? (0.25)

b. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus? Explain why. If there is a
shortage, how much is the shortage? If there is a surplus, how much is the surplus? Explain how the
market forces adjust to maintain equilibrium in the cat food market.(0.5)

c. The number of suppliers for cat food industry increase. It leads to the supply change by 24 tons at
every price, what is the new equilibrium price and quantity? Show your calculation (0.5)

d. If now, the market price is $2 per pound of cat food. And the price will increase to $2.3 per pound.
Calculation the price elasticity of demand for cat food and does the total revenue increase, decrease, or
remain unchanged? (0.5)

e. Does the cat food is a normal good or an inferior good ? How can you tell? (0.25)

f. Caculated the cross-price elasticity of demand for cat food. If the price of fish increase from $2 to 3$.
Does the fish and cat food is substitute or complement product (0.5)
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