Econ 101-008 Midterm Two Practice Questions Professor Salemi has not marked the right answers for the practice questions so that students determine what the right answers are and why they are correct. If you are confused by a question, please raise the issue in recitation. Please assume that all demand and supply schedules have normal shapes unless otherwise instructed. Please assume that there are no third party effects unless otherwise instructed. 1. Price elasticity of demand is defined as the percentage change in _________ that occurs as the result of a one percent change in __________. A. Consumer expenditure, price. B. Quantity demanded, supply. C. Quantity demanded, price. D. Consumer expenditure, supply. 2. The demand for a Ford Focus (a brand of compact car) is likely to be _____ elastic than the demand for a compact automobile because ________. A. Less, there are good substitutes for a Focus. B. Less, an auto accounts for a small part of a consumer’s budget. C. More, there are many different compact cars on the market. D. More, many drivers are loyal to the Ford brand. 3. An economically rational individual is the sole supplier of a special type of varnish that is used for finishing fine furniture. Which of the following would the supplier never do? A. Lower the price of the varnish. B. Sell varnish to different customers at different prices. C. Choose a price for the varnish that implied that demand was elastic. D. Choose a price for the varnish that implied that demand was inelastic. 4. Which of the following would cause the supply of tea kettles to become less price elastic? A. The tea kettle industry shifts to a production technique that uses specially trained labor. B. Transportation services improve in the city where most industry firms are located. C. The invention of a new pump lowers the cost of producing coffee makers. D. The tea kettle industry replaces a specialized heating element with one that can work in a variety of consumer machines. 5. An allocation of goods and services is not efficient if A. Trades are possible that make both parties better off. B. Consumer surplus is below its maximum possible level. C. The distribution of goods is highly unequal. D. The demand for an important consumer product is highly inelastic. 6. Which of the following is an example of a strategy that efficiently reallocates airline seats when a flight is overbooked? A. Deciding by roll of the dice who will forego their seats. B. Offering ticket vouchers to individuals who volunteer to give up their seats. C. Granting seats in the order that ticket holders arrive at the gate. D. Denying seats to those who paid the least amount for their tickets. 7. In Asheville, there are two sources of electric power. A hydroelectric plant produces power at a cost of $0.04 per KWH. A coal fired generator produces power at a cost of $0.07 per KWH. Which of the following describes an efficient policy for pricing electricity? The electricity price paid by Ashville customers should… A. Equal the average of the costs at the two production facilities. B. Equal the marginal cost of electricity at the plant that supplies them. C. Equal the lower price provided the hydroelectric plant can meet total customer demand. D. Equal the higher coal-fired plant price for all levels of customer demand.8. Suppose that the price of a can of chicken soup is greater than the marginal cost of the can of soup. Which of the following must be true given that the soup industry is not perfectly competitive? A. The producer of the soup will raise her profits by increasing production. B. The producer of the soup will lower her profits by increasing production. C. Welfare improving trades between consumers and the soup producer are possible. D. Welfare improving trades between consumers and the soup producer are not possible. 9. Harris Teeter can buy orange juice from three growers. The following table shows the cost and capacity of each source including the cost to Harris Teeter of storing and selling the juice. Source Capacity (thousands of gallons per day) Cost per gallon Florida Farms 2 $2.50 Citrus Grove 3 $2.75 Sunny Days 2 $3.00 Each day, Harris Teeter sells 4 thousand gallons of juice at a price of 3.00. The allocation of orange juice that results is ________ because _________. A. Inefficient, quantity supplied does not equal the quantity demanded. B. Inefficient, because price is greater than marginal cost. C. Efficient, quantity supplied equals the quantity demanded. D. Efficient, price equals marginal cost. 10. Suppose there are no third party effects associated with production or consumption of good A. Which of the following reasons explains why levying a tax on good A creates an inefficient allocation of goods? A. A tax levied on a good leads to under-consumption by consumers. B. A tax levied on a good leads to over-consumption by consumers. C. The tax causes the market price of the good to equal the marginal cost of the good. D. The tax increases producer surplus. 11. Imagine the state of North Carolina decides to increase the gasoline tax. Who will pay for this tax increase in the short run? A. Consumers, because demand for gasoline is elastic. B. Suppliers, because consumers do not have good substitutes for gasoline. C. Consumers, because demand for gasoline is inelastic. D. Suppliers, because it is easy to obtain gasoline supplies from other states. 12. John runs a business washing cars. Every week he spends $100 on supplies for his business and earns $400 washing cars. John’s economic profit is _________ A. $300 provided he has no other explicit costs to bear. B. $300 which is the difference between his revenue and the cost of his supplies. C. Unknown, because we do not know how many hours he spends washing cars. D. Unknown, because we do not know what John could earn if he did not wash cars. 13. ABC Corp makes computer products. In 2006, it introduces a computer monitor that is a big improvement on the previous technology. The public likes the monitor and ABC Corp earns large economic profits in 2006. Which of the following statements correctly explains what is likely to happen to ABC’s profits in the coming years? Profits are likely to _________