2. If mangoes cost India Rupees (INR) 10 each, a consumer spends his budget on fruits that he values more highly than mangoes. However, at a price of INR 4 per mango the consumer buys 20 mangos. The total consumer surplus (in INR) is closest to: A. 26 B. 60 C. 120 | Ans: B; the price of first mango is IND 10, assuming the price and the quantity has a linear relationship, the consumer surplus is the area between demand curve and actual price, which is  |
3. Which of the following government interventions in market forces is most likely to cause overproduction? A. Price floors B. Price ceilings C. Imposing an additional per-unit tax $1 on sellers | Ans: A; lawmakers make it illegal to buy or sell a good or service below a certain price, which is above equilibrium, which is called price floor. When the price imposed, buyers would like to purchase less but sellers are willing to sell more, so it causes overproduction. B is incorrect; sometimes, lawmakers determine that the market price is “too high” for consumers to pay, so they use their power to impose a ceiling on price below the market equilibrium price, which is called price ceiling. When the price imposed, buyers would like to purchase more but sellers are willing to sell less, so there is a short in production. C is incorrect; tax on sellers will cause the supply because move to left, and then have a higher equilibrium price. But demand and supply are still the same. |
4. Demand for a good is most likely to be more elastic when: A. the good is a necessity B. a lesser proportion of income is spent on the good C. the adjustment to a price change takes a longer time | Ans: C; elasticity is defined as the ratio of percentage changes. It is a general measure of how sensitive one variable is to any other variable. For most goods, long-run elasticity of demand is greater than short-run elasticity, since the longer the adjustment time, the greater the degree to which a household could adjust to the change in price. A is incorrect; if the goods is a necessary, the demand is inelastic. The consumption will keep in a certain level no matter how much it costs, since it is necessary to living. B is incorrect; in general, if consumers tend to spend a very small portion of their budget on a good, their demand tends to be less elastic than if they spend a very large part of their income. |
5. Over a given period, the price of a commodity falls by 5.0% and the quantity demanded rises by 7.5%. the price elasticity of demand for the commodity is best described as: A. elastic B. inelastic C. perfectly elastic | Ans: A; elasticity is defined as the ratio of percentage changes. It is a general measure of how sensitive one variable is to any other variable. Here, elasticity is  The magnitude of the elasticity coefficient is greater than one, so we would say that demand is elastic at that price. |
6. The price of a good falls from $15 to $13. Given this decline in price, the quantity demanded of the good rises from 100 units to 120 units. The price elasticity of demand for the good is closest to: A. 1.3 B. 1.5 C. 10.0 | Ans: A; sometimes, we might not have the entire demand function or demand curve, we use something called arc elasticity In this problem,  |
7. If the quantity demanded of pears falls by 4% when the price of apples decreases by 3%, then apples and pears are best described as: A. substitutes B. complements C. inferior goods
| Ans: A; the price of another good might very well have an impact on the demand for a good or service, so we should be able to define an elasticity with respect to the other price. That elasticity is called the cross-price elasticity demand. In this problem,  The cross-price elasticity of demand is positive, so they are substitutes. |
8. Assume that at current production and consumption levels, a product exhibits price elasticity of demand equal to 1.20 and elasticity of supply equal to 1.45. the true economic consequences of taxes imposed on the seller of such a product are most likely borne: A. By the seller B. By the buyer C. Partly by the buyer and partly by the seller | Ans: C; tax on the seller will cause the supply curve shift to the left, which will also raise the new equilibrium price. So the taxes are partly by the buyer and partly by the seller. |
9. A consumer good demonstrates the following changes in price and quantity:
The elasticity of supply is closest to: A. 0.60 B. 0.64 C. 0.67 | Ans: B; we use arc elasticity here:  |
10. If a price cut of a product increases total revenue, demand is best described as: A. elastic B. inelastic C. unit elastic
| Ans: A; a price cut will increase total revenue only if the decrease of price will cause a much more increase in quantity. So the demand is elastic. |
11. A company determines that the quantity demanded of a product increases by 5% when price is reduced by 10%. The product’s price elasticity of demand is best described as: A. elastic B. inelastic C. perfectly elastic | Ans: B; Here, elasticity is  The magnitude of the elasticity coefficient is less than one, so we would say that demand is inelastic at that price. |
12. Demand for guest rooms in a resort hotel increases from 100 to 150 rooms per night when the nightly room rate increases from $150 to $200. The elasticity of supply of guest rooms in the resort hotel is closest to: A. 0.72 B. 1.40 C. 1.50 | Ans: B; we use arc elasticity here:  |
13. The cross elasticity of demand for a complementary product would most likely be: A. zero B. positive C. negative | Ans: C; two goods whose cross-price elasticity of demand is negative are defined to be complements. Alternatively, substitutes have positive cross-price elasticity of demand. |
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