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ISU ECON 101 - Econ101Exam2-Blue-S17-Key

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1 Econ 101, Section 5, S17, Schroeter Exam #2, Blue Choose the single best answer for each question. Do all of your scratch-work on the exam. 1. If the cross price elasticity of demand for good X with respect to the price of good Y is positive, it means that goods X and Y are *. substitutes. b. complements. c. both normal goods. d. both inferior goods. 2. Which of the following statements about elasticity is true? a. An elasticity is a ratio of percentage changes. b. The elasticity of variable X with respect to changes in variable Y is independent of the units used to measure X and Y. c. Along a linear (downward sloping) demand curve, slope is constant but elasticity is not. *. All of the above are true. 3. When Lester the barber charged $15 for men’s regular haircuts, he did 17 haircuts per day on average. Now that he has raised his price to $18 for men’s regular haircuts, his business volume has dropped off to 12 haircuts in an average day. Over this range of prices, the elasticity of demand (calculated by the midpoint method) for Lester’s haircuts is *. -1.90. b. -1.47. c. -0.68. d. -0.53. 4. In the competitive market for a particular good, when supply increases we observe that equilibrium quantity increases by 20% and total revenue of the good’s sellers increases by some percentage less than 20%. Based on this information, we can conclude that a. the demand for the good is inelastic. *. the demand for the good is elastic. c. the demand for the good is unit elastic. d. None of the above. (We cannot reach a conclusion without knowing the exact percentage change in total revenue.) 5. In the competitive market for widgets, when demand increases, we observe that equilibrium price increases by 10% while equilibrium quantity increases by 20%. Based on this information, we can conclude that a. the demand for widgets is elastic. b. the demand for widgets is inelastic. *. the supply of widgets is elastic. d. the supply of widgets is inelastic.2 6. A good will tend to have less elastic demand, a. the greater the availability of close substitutes. *. the more it is regarded to be a necessity. c. the more narrowly the good is defined. d. in the long-run than in the short-run. 7. “The world’s production of crude oil is responsive to changes in the price of oil. If the price goes up, oil companies can respond immediately by simply increasing production from existing oil wells. But there are limits on how much production can be increased using existing wells only. Increasing production beyond these limits requires that oil companies engage in time-consuming exploration for new reserves of crude oil.” The implication of this statement is that a. the demand for crude oil is more elastic in the short-run than in the long-run. b. the demand for crude oil is more elastic in the long-run than in the short-run. c. the supply of crude oil is more elastic in the short-run than in the long-run. *. the supply of crude oil is more elastic in the long-run than in the short-run. 8. Iowa State University is searching for ways to increase revenue. University officials claim that by reducing the tuition charged to out-of-state students, total tuition revenue from out-of-state students will actually increase. In making this claim, university officials are a. ignoring the law of demand. b. assuming that the demand for an ISU education by out-of-state students is inelastic. *. assuming that the demand for an ISU education by out-of-state students is elastic. d. assuming that the demand for an ISU education by out-of-state students is unit elastic. 9. A legal maximum on the price at which a good can be sold is called a price a. floor. *. ceiling. c. support. d. deflator. 10. A price floor is binding when it is set a. below the equilibrium price causing a shortage. b. below the equilibrium price causing a surplus. c. above the equilibrium price causing a shortage. *. above the equilibrium price causing a surplus. 11. Which of the following would we expect to observe in a rental housing market subject to rent control? a. Substantial investment in the construction of new rental housing. *. Landlords who are unresponsive to their tenants’ complaints about housing quality. c. High rates of vacancy in rental housing. d. All of the above.3 12. The current federal minimum wage is a. $8.00/hour. *. $7.25/hour. c. $6.75/hour. d. $6.25/hour. 13. Which of the following would we expect to observe in a low-skill labor market subject to a minimum wage set at a level above the equilibrium wage? a. Excess demand for low-skill labor. b. Employers offering to pay wages above the minimum in order to compete more effectively for the limited supply of workers. c. Greater employment than if the market were in equilibrium with no minimum wage. *. None of the above. 14. Initially, there is a binding price floor in the competitive market for a good. Which of the following could convert the price floor from one that is binding to one that is not binding? a. an increase in the level of the price floor. *. an increase in demand. c. a decrease in demand. d. either a or b. 15. Equilibrium price in a competitive market for a particular good is $1.00/unit and equilibrium quantity is 5000 units/day. If the government were to impose an excise tax of $0.25/unit, under which of the following circumstances would the impact on the quantity traded be the greatest? a. The elasticity of demand is -0.5 and the elasticity of supply is 0.5. *. The elasticity of demand is -2.0 and the elasticity of supply is 2.0. c. The elasticity of demand is -2.0 and the elasticity of supply is 0.5. d. None of the above, because the tax’s impact on quantity would be the same in all three cases. 16. Equilibrium price in a competitive market for a particular good is $1.00/unit and equilibrium quantity is 5000 units/day. If the government were to impose an excise tax of $0.25/unit, under which of the following circumstances would the impact on the buyers’ price be the greatest? *. The elasticity of demand is -0.5 and the elasticity of supply is 2.0. b. The elasticity of demand is -2.0 and the elasticity of supply is 0.5. c. Neither a nor b, because buyers’ price would remain at $1.00/unit in both cases. d. Neither a nor b, because buyers’ price would increase to $1.25/unit in both cases. 17. Studies of labor markets have shown that the demand for labor is more elastic than the supply of labor. As a result, the


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