ECON 102.

1001 - Principles of Microeconomics Fall 2012

Mehmet S. Tosun

ECON 102 Homework 2 (Due by Thursday, November 1, 2012) (Answer All Questions on the Class Webcampus Page) 1. A local restaurant has estimated that the price elasticity of demand for meals is equal to 2. If the restaurant increases menu prices by 5%, they can expect the number of customers to decrease by ________and total revenue to ________. A) 10%; fall B) 10%; increase C) 2.5%; fall D) 5%; stay constant

2. On a linear demand curve: A) elasticity is the same at all points on the demand curve. B) demand is elastic at high prices. C) demand is elastic at low prices. D) demand is inelastic at high prices.

3. If the quantity demanded of agricultural output is very unresponsive to a fall in price, the demand for agricultural output is: A) horizontal. B) positively sloped. C) price-elastic. D) price-inelastic.

4. An important determinant of the price elasticity of demand is the: A) level of technology. B) availability of substitutes. C) quantity of the good supplied. D) price of related goods.

5. A newspaper typically consumes a smaller fraction of a consumer's budget than a home entertainment system. Therefore, you would expect the demand for: A) both to be equally price-elastic. B) newspapers to be more price-elastic. C) a home entertainment system to be more price-elastic. D) a home entertainment system to be more price-inelastic.

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

6. To say that two goods are complements, their cross-price elasticities of demand should be: A) greater than 0. B) positive, yet almost equal to 0. C) less than 0. D) equal to 0.

7. Suppose the cross-price elasticity between demand for Burger King burgers and the price of McDonald's burgers is 0.8. If McDonald's increases the price of its burgers by 10%, then: A) Burger King will sell 8% more burgers. B) We cannot tell what will happen to Burger King, but McDonald's will sell 8% fewer burgers. C) Burger King will sell 10% more burgers. D) Burger King will sell 8% fewer burgers.

8. If your income increases and your consumption of bagels increases, other things equal, bagels are considered a(n): A) positive good. B) normal good. C) negative good. D) inferior good.

9. The price elasticity of supply is computed as the percentage change in: A) price divided by the percentage change in quantity supplied. B) quantity supplied divided by the percentage change in quantity demanded. C) quantity supplied divided by the percentage change in consumer income. D) quantity supplied divided by the percentage change in price.

10. Which of the following is true? A) If the price elasticity of supply is greater than 1, then supply is price-inelastic. B) If the price elasticity of supply is zero, then supply is price unit-elastic. C) If the price elasticity of supply is greater than 1, then quantity supplied is relatively unresponsive to price changes. D) If the price elasticity of supply is greater than 1, then supply is price-elastic.

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11. The long-run price elasticity of supply of crude oil is ________ the short-run price elasticity of supply of crude oil. A) equal to B) not comparable to C) greater than D) less than

12. A price floor will cause a larger surplus when demand is ________ and supply is ________. A) elastic; elastic B) elastic; inelastic C) perfectly inelastic; elastic D) inelastic; inelastic

13. Assume the supply curve shifts to the right by a given amount at each price. Price in the market will decline the most if demand is more: A) price-elastic and supply is more price-inelastic. B) price-elastic and supply is more price-elastic. C) price-inelastic and supply is more price-inelastic. D) price-inelastic and supply is more price-elastic.

14. Which of the following is an example of an excise tax? A) a one-time local government tax of $50 B) a tax on the value of your property C) a tax of $0.41 per gallon of gas D) a tax of 12.4% of your wages

15. State governments place excise taxes on cigarettes because: A) they want to reduce deadweight loss. B) it is an easy way to raise tax revenue while discouraging smoking. C) they want to subsidize tobacco farming. D) they want to discourage cigarette smuggling.

16. The incidence of a tax: A) is a measure of the deadweight loss from the tax. B) is a measure of the revenue the government receives from the tax. C) refers to who writes the check to the government. D) refers to who in reality pays the tax to the government.

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

17. By law, FICA (the Federal Insurance Contributions Act), a payroll tax, is collected equally from the employers and the employees. In reality: A) it's impossible to determine who bears the burden of the tax. B) the law worksboth the employers and the employees bear half the burden of the tax. C) the employees bear almost all the burden of the tax. D) the employers bear almost all the burden of the tax.

Use the following to answer questions 18-19:

18. (Table: Market for Fried Twinkies) The government decides to tax fried Twinkies at a rate of $0.30 per Twinkie and collect that tax from the producers. Using the table, the consumers will pay ________ per Twinkie and buy ________ Twinkies after the tax. A) $1.30; 7,000 B) $1.40; 6,000 C) $1.50; 5,000 D) $1.20; 8,000

19. (Table: Market for Fried Twinkies) From the table, of the $0.30 tax per fried Twinkie, consumers actually pay ________, while producers actually pay ________. A) $0.20; $0.10 B) $0.00; $0.30 C) $0.15; $0.15 D) $0.30; $0.00

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20. Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals 0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax? A) It's impossible to tell without additional information. B) Yacht builders and buyers will pay equally. C) Yacht builders will pay more. D) Yacht buyers will pay more.

Use the following to answer question 21: Figure: Market for Lattes

21. (Figure: Market for Lattes) If, in the market for lattes shown in the figure, the government assesses a tax of $0.75 on each latte, the price the consumer pays for a latte after the tax will: A) change, but we cannot determine by how much. B) increase from $2 to $2.25. C) increase from $2 to $2.75. D) increase from $2 to $2.50.

22. If demand is perfectly inelastic and the supply curve is upward-sloping, then the burden of an excise tax is: A) shared by consumers and producers, with the burden falling mainly on consumers. B) shared by consumers and producers, with the burden falling mainly on producers. C) borne entirely by producers. D) borne entirely by consumers.

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23. The governor wants to impose a $1 excise tax on some goodhe doesn't care which but he does want to minimize the deadweight loss. The deadweight loss will be least when: A) the demand is inelastic and supply is elastic. B) both demand and supply curves are elastic. C) both demand and supply are inelastic. D) the demand is elastic and supply is inelastic.

Use the following to answer question 24: Figure: The Gas Market

24. (Figure: The Gas Market) The figure represents the market for gasoline. An excise tax has been levied on each gallon of gasoline supplied by producers. Based on the graph, the incidence of the tax on suppliers is: A) $1. B) $0.50. C) $15,000. D) $1.50.

25. Criteria that economists use in selecting a tax system include: A) low revenue yield. B) only ability to pay. C) ability to pay and benefits received. D) only benefits received.

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ECON 102.003 - Principles of Microeconomics

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26. A tax that takes a larger share of the income of high-income taxpayers than of lowincome taxpayers is called a: A) flat tax. B) sales tax. C) regressive tax. D) progressive tax.

27. Suppose Governor Meridias initiates a payroll tax of 10% on all income up to $50,000. Any income above $50,000 is not taxed. This payroll tax will be: A) regressive. B) structural. C) proportional. D) progressive.

28. Accounting profit differs from economic profit because: A) economic costs include depreciation, while accounting costs do not. B) accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs. C) economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only. D) of differences in the manner in which revenue is calculated.

29. For most firms, economic profit is: A) equal to accounting profit. B) greater than accounting profit. C) negative. D) less than accounting profit.

30. You own a small deli that sells sandwiches, salads, and soup to the community. Which of the following is an implicit cost of the business? A) the job offer you did not accept at a local catering service B) your monthly utility bill C) wages paid to part-time employees D) bread, meat, and vegetables used to produce the items on your menu

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31. Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is: A) $0. B) $230,000. C) $12,000. D) $30,000.

32. The implicit cost of capital is: A) the opportunity cost of the capital used by a business. B) the cost of human capital. C) depreciation. D) the explicit cost of capital that the firm might have used but didn't need to.

33. Suppose the Chicago Cubs could rent out Wrigley Field (the field the players play on) to local youth leagues for $11,000 per month. The $11,000 per month reflects the ________ of capital. A) total cost B) implicit cost C) explicit cost D) direct cost 34. In economics a marginal value refers to: A) a value entered as an explanatory item in the margin of a balance sheet or other accounts. B) the value associated with one more unit of an activity. C) a value that is most appropriately identified in a footnote. D) the value associated with an unimportant, or marginal, activity.

35. The amount by which an additional unit of an activity increases total benefit is: A) marginal benefit. B) utility. C) net benefit. D) marginal cost.

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Mehmet S. Tosun

36. Whenever MB > MC, the decision maker should do ________ of the activity. A) none B) more C) less D) the same amount

37. To maximize her grade in economics, Stacey should study until: A) her marginal benefit of studying begins to decrease. B) her marginal cost of studying reaches zero. C) her marginal cost of studying begins to increase. D) her marginal benefit of studying equals her marginal cost of studying.

38. William installs custom sound systems in cars. If he installs seven systems per day, his total costs are $300. If he installs eight systems per day, his total costs are $400. William will install only eight sound systems per day if the eighth customer is willing to pay at least: A) $50. B) $100. C) $300. D) $400.

39. According to the optimal output rule, if marginal benefit: A) is less than marginal cost, an activity should be reduced. B) is equal to marginal cost, an activity should be reduced. C) exceeds marginal cost, net benefit is maximized. D) exceeds marginal cost, an activity should be reduced.

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 40: Figure: Marginal Analysis of Good X

40. (Figure: Marginal Analysis of Good X) You are considering consuming units of Good X. The graph represents your marginal benefit and marginal cost curves. How many units of Good X will you consume? A) 2 B) 3 C) 4 D) 1

41. You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. You should choose: A) $10 million after 10 years, since that is a larger amount than the present value of $5 million paid after 10 years. B) $5 million today, since it would be worth more than $10 million after 10 years, if the $5 million earned interest at the rate of 10% per year. C) $10 million after 10 years, since it is the larger amount. D) $10 million after 10 years, since this is more than you would get if you invested $5 million for 10 years at an annual rate of interest of 10%.

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 42:

42. (Table: Present Value of Projects A, B, C, and D) Given the information in the accompanying table, if the interest rate were 2%, which project would you choose? A) B B) C C) D D) A

43. The marginal utility of coffee consumption for Steve is the change in ________ generated by consuming an additional unit of coffee. A) total demand B) total utility C) price D) total consumption

44. The principle of diminishing marginal utility states that as an individual consumes more of a good: A) the total utility obtained will eventually become negative. B) the addition to total utility obtained from the nth unit of the good will be less than that obtained from the (n 1) unit of the good. C) the marginal utility will eventually become negative. D) the total utility obtained will eventually fall.

Use the following to answer questions 45-46:

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

45. (Table: Utility) The marginal utility for the second unit is: A) 15. B) 10. C) 5. D) 35.

46. (Table: Utility) Total utility is maximized at the ________ unit. A) sixth B) fourth C) first D) second

47. When total utility is at a maximum, marginal utility is: A) zero. B) at a maximum. C) rising. D) at its average value.

48. Utility is the: A) satisfaction consumers derive from their consumption of goods and services. B) lowest price that buyers are willing to pay for a given quantity of a good. C) good not adequately provided by a free market and usually provided by the government. D) difference between a firm's total revenue and its total economic cost.

49. Chuck spends all his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. If Chuck purchases 10 milkshakes, he can purchase ________ tacos. A) 8 B) 10 C) 18 D) 50

50. For Darryl, the optimum consumption bundle is the one that ________ his ________, given his budget constraint. A) minimizes; opportunity cost B) maximizes; opportunity cost C) minimizes; utility D) maximizes; utility

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. A B D B C C A B D D C A C C B D C C A C B D C B C D A C D A C A B B A B D B A C B D B B

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ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

45. 46. 47. 48. 49. 50.

A B A A A D

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