1. A decrease in the price of automobiles suped would be caused by which of the following:

                                               a. an increase in the demand for automobiles.

                                               b. a decrease in the demand for automobiles.

                                               c. higher prices for steel.

                    d. lower prices for gasoline.

 

2. A newspaper reports that in an urban area the average price of new homes had decreased, but the number of

new homes sold increased. This situation would be best explained by a(n):

 

a. increase in demand for new homes.

b. increase in supply of new homes.

c. decrease in demand for new homes.

d. decrease in supply of new homes

 

3. If demand is inelastic, the price burden of a $1 increase in the sales tax will:

 

a. fall primarily on the consumer rather than the producer.

b. fall primarily on the producer rather than the consumer.

c. be shared equally by the consumer and producer.

d. none of the above.

 4. Sony is considering a 10 percent price reduction on its color television sets. If the demand for sets in this range is inelastic:

                                                   a. revenues from color sets will remain constant.

                                                   b. revenues derived from color sets will decline.

                                                   c. revenues from color sets will increase.

                                                   d. the number of TV sets sold will decrease.

5. Given a consumer's utility schedule as shown below, marginal utility begins to diminish with the consumption of:

                             # of units consumed               Total Utility

                                 0                                                          0                   

                                 1                                                          4

                                 2                                                        10

                                 3                                                        15

                                 4                                                        18

                                 5                                                        20

a. 1 unit.

                          b. 2 units.

                          c. 3 units.

                          d. 4 units

6. Economic profit is:

a. total revenues minus fixed costs.

b. total revenues minus the cost of materials.

c. total revenues minus the opportunity cost of the inputs.

d. gross profit minus the selling and operating expenses.

7. The price elasticity of demand for beef is calculated to be about 0.60. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to:

a. increase by approximately 12 percent.

b. decrease by approximately 12 percent.

c. decrease by approximately 32 percent.

d. Decrease by approximately 26 percent.

8. A point inside the production possibilities curve is:

a. attainable and the economy is efficient.

b. attainable, but the economy is inefficient.

c. unattainable, but the economy is efficient.

d. unattainable and the economy is efficient.

 

9. Which of the following would be an example of a price support?

a. limits on interest rates charged by credit card companies.

b. subsidies for apartment rent in major cities.

c. minimum-wage laws for unskilled workers.

d. tariffs on agricultural products.

10. In the graph above, a fall in the price of TV sets will lead consumers to:

a. increase her demand for lasagna.

b. decrease her demand for lasagna

c. maintain her demand for lasagna unchanged.

B. Short Answer (30 pts.): show all work.

1. Explain the difference between a change in demand and a change in quantity demanded.

2. Briefly explain why indifference curves are convex to the origin and downward-sloping.

                           3. Briefly explain the difference between implicit and explicit economic costs. Why is it important?

C. Analytical and Numerical Problems. (40 pts.)

1. (10 pts) Using a set of indifference curves and budget constraint lines, derive an individual's demand curve for a product when the price of that product increases. Is the consumer in equilibrium at the higher price? How do you know? Be sure to label your axes and curves.

2. (10 pts) Why will a member of a state tax commission be more likely to levy sales taxes on goods whose price elasticity of demand is relatively low? Provide at least two examples of goods which are likely candidates for an excise or sales tax.

3. (10 pts) Using an appropriate set of diagrams, explain the economic impact of rent controls on tenants and landlords. Does your answer depend on the price- elasticity of demand (and supply) for wheat? Explain fully.

4. (10 pts) Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity.

a. Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.

b. Computers. Parts for making computers fall in price because of improvements in technology.

c. Lettuce. El Nino produces heavy rains that destroy a significant part of the lettuce crop.

d. Chicken. Beef prices rise because severe winter weather reduces cattle herds.