Econ 101 Section 3– Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 6 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. Under what circumstances does the burden of an excise tax fall mainly on producers?
(a) When consumers do not have many substitutes for the good
(b) When it is easy for suppliers to expand production of the good
(c) When the supply is relatively elastic and demand is fairly inelastic
(d) When the supply is relatively inelastic and demand is fairly elastic
2. Regardless of the price of ice cream, Charlie spends $5 a week on ice cream. What can we conclude about Charlie's demand for ice cream?
(a) His price elasticity of demand for ice cream is equal to one.
(b) His income elasticity of demand for ice cream is equal to zero.
(c) His price elasticity of demand for ice cream is equal to zero.
(d) His income elasticity of demand for ice cream is equal to one.
3. What situation would make the demand for new cars relatively more price elastic?
(a) Auto manufacturers find it easy to hire skilled workers.
(b) Car buyers are prosperous, and they are seeking luxury cars.
(c) There is a plentiful supply of used cars.
(d) Auto manufacturers have a difficult time hiring skilled workers.
4. If the price elasticity of demand for an annual magazine subscription is 1.6 in the range between $26 and $30, what happens in the market for this subscription when the price rises over this range?
(a) Magazines will become an inferior good.
(b) There will be an increase in the total revenue the magazine collects on its subscriptions.
(c) Magazines will become a normal good.
(d) There will be a decrease in the total revenue the magazine collects on its subscriptions.
5. Which of the following statements is correct?
(a) The cross-price elasticity of demand measures the extent to which the sales effect outweighs the price effect.
(b) When the price of a good increases, total revenue tends to increase due to the price effect and tends to decrease due to the sales effect.
(c) A price increase always increases total revenue, because the seller collects a higher price on each unit sold.
(d) When the price of a good increases, total revenue tends to decrease due to the price effect and tends to increase due to the sales effect.
6. Assume the cross-price elasticity of demand for Coke and Pepsi is equal to 3. If Pepsi raises its price by 10%, then:
(a) the quantity of Coke demanded will decrease by 30%.
(b) the quantity of Coke demanded will increase by 30%.
(c) the quantity of Pepsi demanded will decrease by 30%.
(d) the quantity of Pepsi demanded will increase by 30%.
Question 7 [8 pts.] For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit elastic demand:
I. Total revenue decreases when price increases: _Elastic___________________
II. The additional revenue generated by an increase in quantity sold is exactly offset by revenue lost from the fall in price received per unit: ____Unit Elastic________________
III. Total revenue falls when output increases: ___Inelastic_________________
IV. Producers in an industry find they can increase their total revenues by working together to reduce industry output: ____Inelastic________________
Question 8 [4 pts.] Suppose the cross-price elasticity of demand for large SUVs and gasoline is –0.28. How would a 10% decrease in the price of gasoline affect the quantity of large SUVs demanded? I.e., by what percentage and in what direction would the quantity demanded change?
Increase of 2.8%
Question 9 [8 pts.] In the space to the right, draw a diagram to illustrate the burden of an excise tax in the market for textbooks, where demand is very inelastic, but supply is somewhat elastic. For full credit, label and clearly indicate the following graphically:
Ø The price paid by consumer (label as PC)
Ø The price received by producer (label as PP)
Ø The portion of the tax borne by consumer (label as TC)
Ø The portion of the tax borne by the producer (label as TP)
Ø The total tax revenue collected by the government (label as REV or shade in).
Question 10 [8 pts.] Using the demand schedule in the figure below, complete the total revenue column.
|
|
Quantity |
Total |
|
Price |
demanded |
revenue |
|
$0 |
10 |
0 |
|
1 |
9 |
9 |
|
2 |
8 |
16 |
|
3 |
7 |
21 |
|
4 |
6 |
24 |
|
5 |
5 |
25 |
|
6 |
4 |
24 |
|
7 |
3 |
21 |
|
8 |
2 |
16 |
|
9 |
1 |
9 |
|
10 |
0 |
0 |
Then answer the following questions:
At what price is demand unit elastic?
$5
Over what price range is demand inelastic?
$0-$4 or $0-$5
Over what price range is demand elastic?
$6-$10 or $5-$10