Wendy01

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.

Wendy01

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.

Wendy01

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

Wendy01

1.Consumer surplus is best describe as:

A.Always less than or equal to zero
B.Always greater than or equal to zero
C.At times positive and at other times negative
  
Ans: B; consumer surplus is a measure of how much net benefit buyers enjoy from the ability to participate in a particular market. It is the difference between how much a buyer actually pays and how much he is willing to pay. It is always greater than or equal to zero.