Dr



Dr. Westerhold

Econ 330

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

1. If P1 = $5, Q1 = 10,000, P2 = $6 and Q2 = 5,000, then at point P2 the point price elasticity Ed equals:

|a. |-6. |

|b. |-2.5. |

|c. |-4.25. |

|d. |-0.12. |

2. Elasticity is the:

|a. |percentage change in a dependent variable, Y, resulting from a one-percent change in the value of an independent |

| |variable, X. |

|b. |change in a dependent variable, Y, resulting from a change in the value of an independent variable, X. |

|c. |change in an independent variable, X, resulting from a change in the value of a dependent variable, Y. |

|d. |percentage change in an independent variable, X, resulting from a one-percent change in the value of a dependent |

| |variable, Y. |

3. Two products are complements if the:

|a. |cross-price elasticity of demand is less than zero. |

|b. |cross-price elasticity of demand equals zero. |

|c. |cross-price elasticity of demand is greater than zero. |

|d. |price elasticity of demand for each good is greater than zero. |

4. Demand and Supply Curves. The following relations describe demand and supply conditions in the lumber/forest products industry:

|QD = 75,000 - 10,000P |(Demand) |

|QS = -15,000 + 50,000P |(Supply) |

where Q is quantity measured in thousands of board feet (one square foot of lumber, one inch thick) and P is price in dollars.

A. Complete the following table:

| |Quantity |Quantity |Surplus (+) or |

|Price |Supplied |Demanded |Shortage (-) |

|(1) |(2) |(3) |(4) = (2) - (3) |

|$3.00  | | | |

|2.50 | | | |

|2.00 | | | |

|1.50 | | | |

|1.00 | | | |

5. Comparative Statics. Demand function for its coupon books:

Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A

where Q is quantity, P is price ($), Pop is population, I is disposable income per capita ($), and A is advertising expenditures ($).

|A. |Determine the demand curve in a typical market where P = $5, Pop = 1,000,000 persons, I = $35,000 and A = $10,000. Show the demand |

| |curve with quantity expressed as a function of price (inverse demand), and price expressed as a function of quantity (demand). |

|B. |Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units. |

6. Market Equilibrium. Various beverages are sold by roving vendors at Busch Stadium, home of the St. Louis Cardinals. Demand and supply of the product are both highly sensitive to changes in the weather. During hot summer months, demand for ice-cold beverages grows rapidly. On the other hand, hot dry weather has an adverse effect on supply in that it taxes the stamina of the vendor carrying his or her goods up and down many flights of stairs. The only competition to this service are the beverages that can be purchased at kiosks located throughout the stadium.

Demand and supply functions for ice-cold beverages per game are as follows:

|QD = 20,000 - 20,000P + 7,500PK + 0.8Y + 500T |(Demand) |

|QS = 1,000 + 12,000P - 900PL - 1,000PC - 200T |(Supply) |

where P is the average price of ice-cold beverage ($ per beverage), PK is the average price of beverages sold at the kiosks ($ per beverage), Y is disposable income per household for baseball fans, T is the average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and PC is the average cost of capital (in percent).

|A. |When quantity is expressed as a function of price (QD=), what are the ice-cold beverage demand and supply curves if P = $5, PK = $4,|

| |Y = $62,500, T = 80 degrees, PL = $10, and PC = 12% (plug in as “12”) |

|B. |Calculate the market equilibrium price-quantity combination. |

7. Demand Analysis. KRDY-FM is contemplating a T-shirt advertising promotion. Monthly sales data from T-shirt shops marketing the "Listen to KRDY-FM" design indicate that:

Q = 3,000 - 500P,

where Q is T-shirt sales and P is price.

|A. |How many T-shirts could KRDY-FM sell at $4 each? |

|B. |What price would KRDY-FM have to charge to sell 2,000 T-shirts? |

|C. |At what price would T-shirt sales equal zero? |

|D. |How many T-shirts could be given away? |

|E. |Calculate the point price elasticity of demand at a price of $4. |

8.Income Elasticity. Deluxe Carpeting, Inc., is a leading manufacturer of stain-resistant carpeting.

During the past year, Deluxe sold 28 million square yards (units) of carpeting at an average wholesale price of $16 per unit. This year, income is expected to fall from $19,000 to $17,000 as the nation enters a steep recession. Without any price change, Deluxe expects current-year sales to fall to 20 million units.

|A. |Calculate the implied arc income elasticity of demand. |

|B. |Given the projected fall in income, the sales manager believes that current volume of 28 million units could only be maintained with|

| |a price cut of $2 per unit. On this basis, calculate the implied arc price elasticity of demand. |

|C. |Holding all else equal, would a further increase in price result in higher or lower total revenue? |

9. Consider two goods X and Y. If the price of Y increases and as a consequence the demand curve for X shifts to the right, then,

A. x and y are substitutes.

B. x and y are complements

C. x and y are unrelated.

D. none of the above.

10. If you determine that the price elasticity of demand for your product is -0.23 then

A. you should reduce your price to increase total revenue.

B. you should reduce demand to increase total revenue.

C. you should increase supply to increase total revenue.

D. you should reduce supply to increase total revenue.

E. you should not alter your price.

11. OMIT

12. OMIT

13. If your product has an Ei=-2 then if US income decreases by 5% we would expect

A. demand to decrease by 5%

B. demand to increase by 5%

C. demand to decrease by 10%

D. demand to increase by 10%

14. Use the following supply and demand equations to answer all questions:

Qd=40-2P

Qs=-10 + 5P

A. Graph your equations including all x and y intercepts. Mathematically determine the equilibrium price and equilibrium quantity and show this on your graph:

B. Calculate the price elasticity of demand at the equilibrium value:

C. Is demand elastic, inelastic, or unit elastic? Why?

D. OMIT

E. Is the elasticity of supply price elastic, inelastic, or unit elastic? Why?

F. Suppose there is an increase in demand such that the new equilibrium price is now $8.00.

Determine the new equilibrium quantity.

G. OMIT

15. Midcontinent Plastics makes 80 fiberglass truck hoods per day for large truck manufacturers. Each hood sells for $500.00. If the ED=-.4 and then derive the demand curves for truck hoods:

16. If the demand function for tickets to a play is q = 7,500- 75p, at what price will total revenue be maximized?

a. $100

b. $200

c. $50

d. $25

e. none of the above.

17. The demand curve for a good is given by p = 60 -8q ,where p is the price and q is the quantity of the good. Suppose that the number of consumers in the economy doubles; a “clone” of each consumer, who has exactly the same demand curve as the original consumer,appears. The demand curve for the doubled economy is described by

a. p = 60 _ 16q.

b. p = 120 _ 8q.

c. p = 60 _ 4q.

d. p = 120 _ 16q.

18. The demand for voice mail is Q = 1,000 -150P + 20I. Assume that per capita disposable income I is $900. At a price P of $40, the income elasticity of demand is

a. 2.

b. 4.

c. 1.0.

d. 20.

e. 1.38.

19. The demand for cable television hookups is Q = 100 -10P0.5 + 2I2, where P is price and I is per capita

income. Cable TV is

a. a substitute good.

b. a normal good.

c. an inferior good.

d. a natural monopoly.

e. a complement good.

20. Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive but whose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichs is 200 -4PS -2PL and the demand function for Lamerdes is 200 -3PL-PS, where PS and PL are respectively the price of

Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 100 and the world supply of Lamerdes

is 70, then the equilibrium price of Schrecklichs is

a. $46.

b. $4.

c. $25.

d. $42.

e. $8.

21. The substitution effect of a price change

A. will always result in the consumer buying more of a good at a lower price.

B. will always result in the consumer buying less of a good at a higher price.

C. dominates the income effect in the inferior good case.

D. is all of the above.

22. The income effect of a price change

A. is always larger than the substitution effect in the inferior good case.

B. produces a backward bending income consumption curve.

C. reinforces the substitution effect in the normal good case.

D. is always positive.

23. When the income consumption curve is upward sloping, the good represented on the x axis must be

A. a substitute good

B. a normal good.

C. a Giffen good (a good that violates the law of demand so that increase in price leads to increase in Q)

D. an inferior good.

24. Given the following information show the consumer’s consumption possibilities and then derive the demand curve for X.

A. I=$5000; Px=2; Py=20. The consumer buys 2000 units of X. Draw in the Budget line showing the equilibrium and determine the amount of Y purchased.

B. If price decreases to $1 and Ed=-.75 then determine the new BL, new consumer equilibrium, and amount of X and Y consumed.

C. Graph the price consumption curve for this consumer.

D. Derive the demand curve for X.

25. Draw the case where Good X is considered normal up to an income of $100,000 and then considered inferior after that point. Use three BLs to show this. Show the ICC and derive the Engel curve.

26. Suppose that I=200; Px=10; Py=1 and Ei= -5.0. Draw BL 1 assuming that the consumer equilibrium occurs at 4 units of x. If Income increases by 10%, then draw BL2 and determine the new point of consumer equilibrium.

27. Show theoretically the income and substitution effects for a normal good when the price of X increases.

28. Suppose initially there is no tax on gasoline and the representative consumer, Bill, has an Income=2000, Py=1 and Pgas=2.00 The government then decides to implement an excise tax of 50 cents per gallon and provides a lump sum tax rebate in the amount of $140 to each consumer.

Assume Bill purchases 300 gallons of gasoline per month before the tax.

Assume after the tax Bill purchases 280 gallons of gasoline.

• Show the original BL and equilibrium position, point A (label intercepts and any relevant values in equilibrium);

• show the impact of the .50 tax by creating BL2 and showing the equilibrium position, point B

• calculate the amount of tax paid each consumer so you can see this area on the graph of total tax revenue and label the y values (create pt. C as a reference as we did in class)

• determine the new BL with the tax rebate showing the intercept values

• Is Bill better off, worse off, or does he achieve the same level of utility once the tax program is implemented

Answer Section: if you believe an answer is incorrect please let me know and I will announce it in class and post corrections to the website. Some of the answers were generated by me and some come from a testbank.

MULTIPLE CHOICE

1. ANS: A

2. ANS: A

3. ANS: A

PROBLEM

4. ANS:

A.

| |Quantity |Quantity |Surplus (+) or |

|Price |Supplied |Demanded |Shortage (-) |

|(1) |(2) |(3) |(4) = (2) - (3) |

|$3.00  |135,000  |45,000 |+90,000 |

|2.50 |110,000  |50,000 |+60,000 |

|2.00 |85,000 |55,000 |+30,000 |

|1.50 |60,000 |60,000 |      0 |

|1.00 |35,000 |65,000 |-30,000 |

5. ANS:

|A. |The value for each respective non-price variable must be substituted into the demand function in order to derive the |

| |relevant demand curve: |

| |Q |= 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A |

| | |= 10,000 - 5,000P + 0.02(1,000,000) + 0.4(35,000) + 0.6(10,000) |

| |Q |= 50,000 - 5,000P |

| | | |

| |Then, price as a function of quantity is: |

| |Q |= 50,000 - 5,000P |

| |5,000P |= 50,000 - Q |

| |P |= $10 - $0.0002Q |

|B. |At, | |

| |Q = 10,000: |P = $10 - $0.0002(10,000) = $8 |

| |Q = 25,000: |P = $10 - $0.0002(25,000) = $5 |

| |Q = 50,000: |P = $10 - $0.0002(50,000) = $0 |

6. ANS:

|A. |When quantity is expressed as a function of price, the demand curve for ice-cold beverages per game is: |

| | | |

| |QD |= 20,000 - 20,000P + 7,500PK + 0.8Y + 500T |

| | |= 20,000 - 20,000P + 7,500(4) + 0.8(62,500) + 500(80) |

| |QD |= 140,000 - 20,000P |

| | | |

| |When quantity is expressed as a function of price, the supply curve for ice-cold beverages per game is: |

| |QS |= 1,000 + 12,000P - 900PL - 1,000PC - 200T |

| | |= 1,000 + 12,000P - 900(10) - 1,000(12) - 200(80) |

| |QS |= -36,000 + 12,000P |

|B. |The equilibrium price is found by setting the quantity demanded equal to the quantity supplied and |

| |solving for P: |

| |QD |= QS |

| |140,000 - 20,000P |= -36,000 + 12,000P |

| |32,000P |= 176,000 |

| |P |= $5.50 |

| | | |

| |To solve for Q, set: | |

| | | |

| |Demand: QD |= 140,000 - 20,000(5.50) = 30,000 |

| |Supply: QS |= -36,000 + 12,000(5.50) = 30,000 |

| |In equilibrium, QD = QS = 30,000. |

7. ANS:

|A. |Q |= 3,000 - 500P |

| | |= 3,000 - 500(4) |

| | |= 1,000 |

| | | |

|B. |Q |= 3,000 - 500P |

| |2,000 |= 3,000 - 500P |

| |500P |= 1,000 |

| |P |= $2 |

| | | |

|C. |Q |= 3,000 - 500P |

| |0 |= 3,000 - 500P |

| |500P |= 3,000 |

| |P |= $6 |

| | | |

|D. |Q |= 3,000 - 500P |

| |Q |= 3,000 - 500(0) |

| |Q |= 3,000 |

| | | |

|E. |The point price elasticity of demand at a price of $4 is calculated as follows: |

| | |

| | |= [pic] |

| |εP | |

| | | |

| | |= -500 × [pic] |

| | | |

| | |= -2 (elastic) |

8. ANS:

|A. | |= [pic] |

| |EI | |

| | | |

| | |= [pic] |

| | | |

| | |= 3 |

|B. |Without a price decrease, sales this year would total 20 million units. Therefore, it is appropriate to estimate the arc |

| |price elasticity from a (before-price-decrease) base of 20 million units: |

| | |= [pic] |

| |EP | |

| | | |

| | |= [pic] |

| | | |

| | |= -2.5 (elastic) |

|C. |Lower. Because carpet demand is in the elastic range, EP = -2.5, an increase (decrease) in price will result in lower |

| |(higher) total revenues. |

9. A

10. D

11. C

12. E

13. D

14a. Demand (x=40, y=20)

Supply (x=-10, y=2)

Pe=$7.14

Qe=25.7

14b.Ed=-.56

14c. inelastic

14d. Es=1.39

14e. elastic

14f. Qnew=30

14g. Es=1.33

15. Qd=112-0.064P

16. C

17. C

18. E

19. B

20. B

21. D

22. C

23. B

24. BL1 (x intercept 2500; y intercept 250; x=2000; y=50). BL2 with Px falls to $1 then x intercept 5000; y intercept 250. With Ed=.75 a 50% decrease in Px leads to a 37.5% increase in Qx so that Qnew=2750 units and Qy=112.5 units. Demand curve should be downward sloping with pt A ($2, Q=2000) and pt B ($1, Q=2750).

25. BL1, create pt. A show Xa units purchased. Income increases to BL2 parallel shift, create pt. B. Xb > Xa since normal. Income increases to BL3 parallel shift, create pt. C. Xc < Xb since inferior. Xc may be higher or lower than Xa depending on how inferior the good is. Engel curve shows normal up to $100,000 then inferior after that.

26. BL1 x intercept 20, y intercept 200, pt. A X=4, Y=160. BL2 parallel shift outward (x intercept 22; y intercept 220). Ei=-5 so 10% increase in income leads to a -50% decrease in Q so new Qx=2, Qy=200). ICC shows good X is inferior and good Y is normal

27. BL1 and point A. Increase Px so BL2 rotates inward around y intercept. Pt. B should be such that Xb < Xa to preserve a negative substitution effect (px increases so qx decreases); for the good to be normal as income increases from C to B, point C should be placed such that Xc < XB (or in contrast, when Px increases it is as if Income falls so moving from B to C with a normal good the consumer should buy less so Xc < Xb). Point B should be between A and C.

28. Create BL1 with x intercept of 1000, y intercept of 2000. Show point A as 300 gasoline, $1400 other

a. With .50 tax show BL2 rotates inward with x intercept of 2000/2.50=800 and y intercept remains at 2000.

b. Show point B where Bill is consuming 280 units of gasoline and y would be 280*2.50=700 so 2000-700=1300 for Y.

c. Now, create point C on BL1 to show amount of tax revenue. Point C will show still at x=280 but on BL1 at the $2.00 price so leaves $2*280=560 spent on gasoline or 2000-560=1440 for Y.

d. Hence, the tax itself is the vertical distance between points B and C (or .50) and the rectangle between B and C up to 280 units is the tax revenue collected or 1440-1300=$140.00 (can confirm by knowing tax is .50 per unit and Bill buys 280 units generating $140 tax dollars).

e. Create BL3 with $140 rebate so new income is $2140 but price of gasoline is still 2.50. x intercept is 2140/2.50=856 and y intercept is 2140. BL3 should go through point C in this case since Bill pays $140 in tax and gets income rebate of $140. Point C would require 280*2.5=$700 out of his 2140 leaving him 1440 for other goods.

f. If you want to determine if Bill is better off, worse off, or equally as well off at his new equilibrium, say point D on BL3, compared to Bill’s utility originally at point A you will find that Bill is worse off than his original point A. Point A lies on a BL further to the right that is unattainable for Bill even though his rebate exactly offsets his tax expense.

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