Practice Midterm #1

1. Which is a normative economic statement about the cigarette market?
a. Taxing cigarettes makes people buy fewer cigarettes
b. Taxing cigarettes will raise the price of cigarettes
c. A per unit tax on cigarettes will place a higher burden on consumers if their demand becomes more inelastic
d. A per unit tax on cigarettes is a good idea because the government should be involved in discouraging bad habits

2. When discussing Marginal Cost or Marginal Benefit, the word "marginal" means:
a. a small change
b. average
c. monetary
d. equal

3. On the production possibility curve (PPC) for 2 door and 4 door sedans, if we can produce more of both goods, then:
a. the price of one of the goods has decreased
b. productivity has decreased
c. we are now producing at an inefficient point
d. the inputs/factors are not homogeneous

4. A brain drain occurs when skilled workers migrate from less developed countries to more developed countries. How would the brain drain most likely affect the U.S. PPC?
a. an increase (shift right) in the production of all goods
b. a decrease (shift left) in the production of all goods
c. a decrease in the production of more technologically advanced goods, but little change in less advanced goods
d. an increase in the production of more technologically advanced goods, but little change in less advanced goods

5. The opportunity cost of any good or service is the
a. actual dollar cost of doing or making it
b. highest price that a merchant can get for the item
c. value of the next best alternative
d. cost associated with a value judgment

6. Falling Macintosh (computer) prices have what effect on the software market?
a. increase in demand
b. increase in supply
c. decrease in demand
d. decrease in supply

7. Which of the following is likely to decrease the supply of grapefruit among citrus growers:
a. a decrease in the price of oranges
b. an increase in the average household incomes
c. an increase in the price of grapefruit
d. an increase in citrus pickers' wages

8. If red beans and garbanzo beans are complements in soup-making, and the supply of red beans increases, the result is:
a. an increase in the demand for garbanzo beans
b. an increase in the demand for red beans
c. a decrease in the supply of garbanzo beans
d. a decrease in the supply of red beans

9. A laborsaving innovation in automobile assembly will cause:
a. an increase in supply
b. a decrease in supply
c. an increase in demand
d. a decrease in demand

10. If the cross price elasticity between two goods is greater than zero, they must be:
a. substitute goods
b. complementary goods
c. normal goods
d. inferior goods

11. (own) Price elasticity of demand measures
a. the responsiveness of quantity demanded to a change in quantity supplied
b. the responsiveness of quantity demanded to a change in factor costs (e.g. wages)
c. the relationship between a good's current market price and its equilibrium price
d. the responsiveness of quantity demanded to changes in price

12. Demand is said to be inelastic when:
a. % change in Quantity is greater than the % change in Price
b. % change in Quantity equals zero, whenever Price changes
c. % change in Quantity is less than the % change in Price
d. % change in Quantity is equal to the % change in Price

13. When a per unit tax is imposed on broccoli and candy bars, if the demand curve for candy bars is more elastic than the demand curve for broccoli, we would expect that:
a. consumers bear a greater burden of the per unit tax on candy bars than on broccoli
b. consumers bear a greater burden of the per unit tax on broccoli than on candy bars
c. consumers always bear all of the burden from any sales tax
d. the quantity demanded for candy bars will rise by more than that for broccoli

14. Which are possible outcomes of an effective rent control (where the ceiling is below the equilibrium):
a. landlords (suppliers) can discriminate in their decision to rent their unit(s)
b. the quality of many rental units will decrease over time
c. as incomes increase in an area, the shortage will worsen
d. all of the above

15. What is the effect of imposing a price floor below the equilibrium price?
a. quantity demanded is greater than quantity supplied
b. quantity demanded is equal to quantity supplied
c. quantity supplied is greater than quantity demanded
d. quantity supplied decreases as a result of the surplus

16. If the equilibrium price of natural gas is $2.50 per thousand cubic feet and a price ceiling is imposed at $2 per thousand cubic feet, the likely result is
a. a surplus
b. a shortage
c. accumulating inventories
d. none of the above

Questions #17-20 correspond with information from the following table.

The table tells us that, in one hour, Bill can bake 6 pies or make 4 loaves of bread. Ted can bake 8 pies or 4 loaves of bread in an hour.

17. For Bill, the opportunity cost of baking each pie is:
a. 3/2 a loaf of bread
b. 3/2 a pie
c. 4/3 a loaf of bread
d. 1 loaf of bread
e. none of the above

18. Which of the following statements is most accurate:
a. Ted has both a comparative and absolute advantage in baking pies
b. Ted has both a comparative and absolute advantage in baking bread
c. Ted has a comparative advantage in baking pies
d. Ted has a comparative advantage in baking bread

19. Which of the following statements is true:
a. Ted's opportunity cost of baking each loaf of bread is less than Bill's, giving Ted a comparative advantage in baking bread
b. Bill has an absolute advantage in baking bread
c. Bill has no comparative advantage since he is not better than Ted at either activity
d. Bill has a comparative advantage in baking bread, even though Ted and Bill can bake the same amount of bread in an hour.

20. Which of the following statements most accurately reflect the Law of Comparative Advantage:
a. Bill should specialize in baking bread and Ted in baking pies, because this is where their absolute advantage lies.
b. Bill should specialize in baking pies and Ted in baking bread, because this is where their comparative advantage lies.
c. Bill should specialize in baking bread and Ted in baking pies, because this is where their comparative advantage lies.
d. both a and c are correct

21. Which of the following goods probably has the greatest income elasticity:
a. jet ski
b. radio
c. cereal
d. rice

22. Which statement is the most correct about income elasticity:
a. an inferior good has an income elasticity less than 1
b. an inferior good has an income elasticity less than 0
c. a normal good has an income elasticity less than 1
d. a luxury has an income elasticity less than 1

23. Suppose the (own) price elasticity of demand for UofL's green permit parking was -1.2 If UofL was only interested in maximizing their sales of these green parking permits, they should:
a. raise the price of the green permits
b. lower the price of the green permits
c. don't change the price of the green permits
d. raise the elasticity of the green permits

24. Which of the following pairs of goods are the best examples of complements:
a. Pepsi and Coca Cola
b. Toyota trucks and Chevy trucks
c. Breakfast cereal and Pizza
d. Sugar and Instant Coffee
e. both c and d are correct