eco

final exam

The four types of economic goods

Private
Public
Club
Common Property Resources (Common Property)

A good would be considered non-excludable in consumption if:

Individuals who do not pay for the good can not be kept from enjoying its benefits

What best represents a common property resource (Common property good)?

An aquifer used by farmers and ranchers

It is reasonable to expect that

i. demand curves for a given good differ between consumers
iii. an individual has different demand curves for different goods

In moving up or down a demand curve for a particular good:

All non-price determinants of demand are held constant.

The law of demand states that as price decreases:

quantity demanded will increase, all else held constant.

If the demand curve for a good is vertical, then:

The law of demand fails to hold, and consumer purchases are completely insensitive to changes in price.

Which of the following is not a characteristic of a perfectly competitive market?

The ability of an individual firm or individual consumer to influence the market price.

A good's choke price is the dollar amount at which none of the good will be purchased and below which units will be purchased. If an individual's demand function for a good is given by the linear equation Q=200-4P, then the choke price is

$50

An individual's total expenditures on a good per-period (e.g., weekly) are equal to the price of the good times the number of units of the good purchased. If an individual's demand function for a good is given by the linear equation Q=200-4P, then as price is lowered from the choke price to zero his/her total expenditures:

increase initially and then decrease.

An increasing concern regards the affects of sustained summer droughts (water shortages) on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:

the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase.

In moving up or down an individual or market supply curve for a particular good:

All non-price determinants of supply are held constant.

The market demand for a good will decrease when there is

a decrease in income if the good is normal

Which of the following will result in an increase in the supply of a good or service?

An increase in government subsidies given to the producers of the good or providers of the service

Using the demand and supply framework developed in class and chapter 3 of the text, one can conclude that in order for a good to be exchanged between a seller and a buyer, it must be that:

Buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept.

The determinants of supply are:

i. factors other than price will affect the quantity of a good or service a firm is willing and able to produce
ii. factors that affect a producers minimum willingness-to-accept (WTA) to produce various quantities of a good

Surplus units of a good (or commodity) will arise in a market if its price is sustained:

above the equilibrium price, resulting in the quantity supplied exceeding the quantity demanded.

If the supply of a good decreases and the demand for the good simultaneously decreases, then the equilibrium:

quantity will fall, but equilibrium price may either rise, fall, or remain unchanged.

Consider a market for a good that is comprised of two identical producers whose supply functions are P=40+2Q. Given this information, the market supply function is:

P=40+Q

Consider a perfectly competitive market described by the supply function P=20+0.3Q and demand function P=80-0.1Q. The equilibrium price and quantity are:

P=$65 and Q=150

Which of the following examples best represents a public good:

a lighthouse protecting boats from a rocky coastline.

A good is considered to by non-rival in consumption if:

one individual's consumption of the good does not affect the amount available for others to consume.

In 2011, the company Netflix began streaming movies over the internet. The monthly fee for unlimited downloads is $7.99. Given this information, what type of economic good is a subscription to Netflix?

Club good

The distinction between club goods and common property goods is that:

club goods are excludable and non-rival, whereas common property goods are non-excludable and rival.

The distinction between public goods and private goods is that:

public goods are non-excludable and non-rival, whereas private goods are excludable and rival.

Which of the following examples best represents a common property good:

a stretch of beach allowing open-access recreational fishing

An individual who has an absolute advantage in accomplishing a particular task:

Can accomplish the task using fewer resources than others.

Suppose that for each surfboard Australia produces with its domestic resources (e.g. raw materials and labor), it must forego the production of 25 boomerangs, whereas for each surfboard New Zealand produces with its domestic resources, it must forego the production of 15 boomerangs. It follows that:

Australia has a comparative advantage in boomerangs.

If a country has a comparative advantage in the production of a good over another country, this means that it has the ability to produce the good:

at a lower opportunity cost than the other country.

From a production possibilities frontier (or curve) it may be concluded that:

If an economy's resources are fully employed, then production of some goods must be sacrificed if resources are allocated to the production of other goods.

Which of the following will not produce an outward shift of the production possibilities curve?

a reduction in unemployment

If a country has a comparative advantage in the production of a good over another country, then it can:

i. engage in mutually beneficial trade with other countries.
ii. increase the variety of products that it can consume without increasing its use of resources.
iii. consume a combination of goods that lies outside its production possibilities frontier.

Which of the following is not a characteristic of a perfectly competitive market?

the ability of an individual firm to influence the market price.

The market demand for a good will increase when there is:

a decrease in income if the good is inferior.

The determinants of demand are:

i. factors other than price that affect the quantity of a good or service a consumer is willing and able to purchase.
ii. factors that affect a consumers maximum willingness-to-pay for various quantities of a good or service.

A consumer's demand curve for a good can be used to identify:

i. how much of the good will be purchased (i.e., quantity demanded) at a given price.
ii. the amount by which purchases of the good (i.e., quantity demanded) will change as a result of a change in price.
iii. total expenditures on the good at a given price.

The income effect, substitution effect, and diminishing marginal utility are all explanations for:

why demand curves are downward sloping

If an individuals demand function for a good is given by the linear equation Q=100-0.5P, then as price is lowered from the choke price to zero his/her expenditures:

increase initially and then decrease

Consider a market for a good that is comprised of identical two consumers whose demand functions are P=20-2Q. Given this information, the market demand function is:

P=20-Q

The law of supply states that as price increases:

quantity supplied will increase, all else held constant.

If the supply curve for a good is vertical, then:

the law of supply fails to hold, and producer output is completely insensitive to changes in price.

If there is an improvement in the level of technology used in the production of a good then:

i. more output may be obtained with a given amount of inputs compared to before the technological improvement.
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement.

The market supply curve for a good that is produced and traded in a perfectly competitive market is derived by:

i. horizontally summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices.

Consider a perfectly competitive market described by the demand function P=60-0.3Q and supply function P=10+0.2Q. The equilibrium quantity and price are:

Q=100 and P=$30

Using the demand and supply framework developed in class and chapter 3 of the text, one can conclude that in order for a good to be exchanged between a seller and a buyer, it must be that:

buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept.

A shortage of a good will arise in a market if its price is sustained:

below the equilibrium price, resulting in the quantity demanded exceeding the quantity supplied.

If the demand for a good decreases and the supply of the good simultaneously decreases, then the equilibrium:

quantity will fall, but equilibrium price may either rise, fall, or remain unchanged.

If the demand for a good increases and the supply of the good simultaneously decreases, then the equilibrium:

price will rise, but equilibrium quantity may either rise, fall, or remain unchanged.

Suppose that both the demand for and supply of a good change simultaneously. You observe that the quantity of the good that is produced and traded increased, however, the equilibrium price remained the same. Given this information you may conclude that:

demand and supply increased by an equal amount.

Suppose the supply of oranges produced in Florida declines as a result of an unusually cold winter season. Noting that oranges are the key input used in the production of orange juice and that grape juice is a substitute for orange juice, then it is reasonable to expect:

the price of oranges to rise, the supply of orange juice to decrease, and the demand for grape juice to increase.

Which of the following examples best reflects the law of supply?

the price of a product falls and as a result the quantity supplied decreases

Maximum willingness-to-pay is to _________, as consumer surplus is to ___________.

total value (or total benefit), net value (or net benefit)

Graphically, consumer surplus is represented by:

the area below the demand curve and above the price of the good.

The producer surplus derived by a firm from producing and selling a good or providing a service:

is the difference between the minimum prices producers are willing to accept and the price they actually receive.

Suppose an individuals demand curve for a good is described by the demand function P=60-2Q. If the equilibrium price in the market is P0=$40, then consumer surplus is:

$100

Suppose an individuals demand for a good is described by the demand function P=80-4Q. If a change in market supply results in price decreasing from P0 = $60 to P1=$40, then the change in consumer surplus is:

$150

If a tax is imposed upon a good that is produced and traded in a perfectly competitive market, then:

both buyers and sellers are worse off.

Consider a perfectly competitive market described by the supply function P=10+0.3Q and demand function P=60-0.2Q. Suppose the market is initially in equilibrium. If the government intervenes in the market and imposes of a price restriction of P=$25, the result rounded to the nearest unit will be a:

shortage of 125 units.

An example of an ad valorem tax is:

iii. a residential property tax paid by a homeowner that depends upon the property's value as determined by a county tax appraiser.
iv. a sales tax charged by a local grocery store on products other than food.

Consider a perfectly competitive market described by the supply function P=20+0.3Q and demand function P=120-0.2Q. Suppose the market is initially in equilibrium. If a specific tax of t=$10 per unit of output sold is imposed upon sellers, then:

ii. the total economic surplus (consumer surplus + producer surplus) will fall by $1900.
iii. $1800 will be collected in tax revenues, and a deadweight loss of $100 will result.

If a binding price ceiling (i.e., a maximum price that may be charged) is imposed upon a good that is produced and traded in a perfectly competitive market, then relative to the initial (unregulated) market equilibrium:

the quantity of the good that consumers are willing to purchase will increase.

An elasticity:

i. is a measure of the sensitivity of a variable to a change in another variable.
ii. is defined as the ratio of the percentage change in the affected variable to the percentage change in the affecting variable.
iv. is invariant (or insensitive) to the units in which variables are measured.

The price elasticity of demand is defined as the:

percentage change in quantity demanded divided by the percentage change in price.

Which of the following is not characteristic of the demand for a commodity that is price elastic?

the price elasticity is less than one.

The more broadly a product is defined (for example, gasoline in general vs. a specific brand of gasoline):

The smaller number of substitutes that exist and the smaller the price elasticity of demand.

If a firm finds that it can generate $13,000 of revenue when the price of the good it sells is $5 per unit and $11,000 of revenue when the price of the good it sells is $6 per unit, then:

ii. the demand for the good is elastic in the $5-$6 price range.

The U.S. Department of Energy recently reported that it estimates that the average household can expect to spend about $750 less on gasoline in 2015 compared to 2014 as a result of the decline in the price of crude oil. Given this information, it may be concluded that for the average household:

ED

Consider a perfectly competitive market described by the demand function P=60-0.3Q and the supply function P=10+0.2Q. Using the standard formula (vs. the mid-point formula) for calculating elasticities, it may be concluded that at the equilibrium price and quantity:

ED = -1 and ES = 1.5

Suppose the market demand for a good is described by the demand function P=200-0.1Q. Given demand, the total revenue function relating the total revenues (TR) generated by the good to the quantity of output sold (Q) is:

TR=200Q-0.1Q2 (squared)

The primary determinant of the price elasticity of supply is the:

amount of time the producer has to adjust inputs in response to a price change.

Suppose that a 5% increase in the price of good X causes an 8% increase in the quantity demanded of good Y. The cross-price elasticity of demand is therefore:

positive and the goods are substitutes.

Utility refers to the:

iii. satisfaction that a consumer derives from a good or service.

The law of diminishing marginal utility states that:

As a person increases consumption of a product while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

If total utility increases as consumption of a good increases, then the marginal utility from each successive unit of the good consumed:

is positive, but it may be either increasing or decreasing.

Suppose that an individual's preferences are described by the Cobb-Douglass utility function U=X1/2Y1/2 and consider the following 3 combinations (or bundles) of X and Y: Bundle A (2,4); Bundle B (3,4); Bundle C (2,5). Given the individual's preferences, the bundles ranked from most-preferred to least preferred are:

Bundle B, Bundle C, Bundle A.

Suppose an individual's preferences are described by the utility function U=X1/2Y1/2. The combinations or bundles of X and Y that yield a common or constant level of utility =2 are described by which of the following indifference functions?

Y=4/X

Consider an individual whose utility function is U = X0.5Y0.5. If the individual consumes 2 units of X and 8 units of Y, then she will experience some level of utility. If the individual instead consumes 4 units of X, how much of good Y must she consume in order to attain the level of utility associated with 2 units of X and 8 units of Y?

Y=4.

Any bundle of goods that lies outside the budget line:

is unobtainable, given the consumer's income.

Which of the following does the budget constraint not identify?

i. how the prices of the goods and services and determined.
iii. the combination of goods and services the individual will choose to purchase.

In moving upward or downward along a consumer's budget constraint:

the prices of the goods and income are constant.

Consider an individual that exhausts her per-period (e.g. weekly) income on goods X and Y. If her income is $200, the price of good X is Px=$4, and the price of good Y is Py=$8, then the algebraic expression for her budget constraint is:

Y=25-0.5X

If a consumer is maximizing utility then income is allocated over goods such that:

Marginal utility per dollar (i.e., marginal utility divided by price) is equal over the goods.

Consider a consumer who as a fixed amount of income that is spent each period (e.g., weekly) on goods and services. If the price of a good decreases, say from P0 to P1, and total expenditures on other goods decreases as a result, then it may be concluded that within this price range the demand for the good whose price changed is:

elastic.

In order to evaluate the sensitivity of changes in quantity demanded (or purchases) to changes in price, a market researcher could evaluate the slope of the demand function or the price elasticity of demand. The price elasticity of demand is often favored because:

i. the price elasticity provides a better means for making cross-product comparisons (e.g., between goods X and Y) when the prices of the products differ sizably.
ii. the price elasticity is not sensitive to the units in which price and quantity demanded are measured.

Which of the following generalizations is not correct?

The price elasticity of demand is greater for necessities than it is for luxuries.

Which of the following is not characteristic of the demand for a commodity that is elastic?

the price elasticity is less than one.

if the price elasticity of demand for a good at the current price is ED = -0.25, then a:

1 percent increase in price will lead to a 0.25 percent decrease in quantity demanded.

Consider a linear demand curve. Demand is price elastic in the range of prices above the mid-point price and price inelastic in the range of prices below the mid-point price. This is because:

Above the mid-point price, the prices around which percentage changes are calculated are large relative to the associated quantities, whereas the opposite is the case below the mid-point price.

If a demand curve is linear, then as price increases from zero to the choke price the absolute value of the price elasticity of demand:

increases continuously

Suppose that at the current prices the price elasticity of demand is 0.27, 0.78, 1.42, and 1.77 for products A, B, C, and D respectively. A one percent decrease in price will decrease total revenue in which of the following?

A and B.

True / False: if the demand for a product is inelastic at a given price, a change in price will cause total revenue to change in the same direction.

True.

If a firm can sell 3,000 units of a good at $10 per unit and 5,000 at $8, it can be concluded that:

demand is elastic within this price range.

If a firm finds that it can generate $10,000 of revenue when the price of the good it sells is $6 per unit and $8,000 of revenue when the price of the good it sells is $5 per unit, then:

iii. the demand for the good is inelastic in the $5-$6 price range.

A firm or agency whose objective is to maximize revenue will set price:

at the unit elastic point of the demand curve.

T/F?
In the range of prices in which demand is elastic, total revenue will diminish as price decreases

True

T/F?
It is reasonable to expect that the demand for Wawa or Racetrack brand gasoline will be more elastic than the demand for gasoline in general.

True.

Suppose the market demand for a good is described by the demand function P=100-0.5Q. It follows that the total revenue function relating the total revenues (TR) to the quantity sold (Q) is:

TR=100Q-0.5Q2 (squared)

Suppose that a 4 percent increase in the price of good X causes a 12 percent increase in the quantity demanded of good Y. The cross-price elasticity of demand is therefore:

positive and the goods are substitutes.

Consider two goods (say X and Y) that each have prices (PX and PY) and which are known to be substitutes for each other and which are known to be normal goods. That is, the quantity of each good demanded (or purchased) is a function of its price (e.g, PX), the price of the substitute (e.g. PY ), and consumer income. Given this information, how many total demand elasticities can be calculated for goods X and Y?

6

The income elasticity of demand is a measure of:

the extent to which the quantity of a good demanded changes when income changes.