Economic Analysis Test Questions

Topics: Supply and demand, Economics, Price elasticity of demand Pages: 5 (1280 words) Published: October 19, 2014
BFIN 515 Economic Analysis
Test 1
Fall 2006
NAME: Answer Key

Prof. Inbong Kang

5 points each
1. If a 5 percent decrease in price leads to a 10 percent increase in the quantity demanded, the price elasticity of demand is 2.
2. The opportunity cost of a choice refers to the highest valued activity sacrificed when the choice is made.
3. The curve that shows the maximum combination of any two products that can be produced with a fixed quantity of resources is called the
production possibilities curve.
4. The Laffer curve refers to the phenomenon that if the tax rate rises above a certain level, the tax revenue may fall, not rise, as people may get discouraged from working. 5. Demand curve slopes downward to the right for reasons related to the income effect and the substitution effect.

6. The area above the actual price paid (the market price) and below the demand curve is called the consumer surplus.
7. Inelastic demand can best be represented by a relatively {FLAT, STEEP} demand curve.
8. If a price {CEILING, FLOOR} is imposed, problems such as a shortage and quality deterioration develop.
9. If the price of gasoline goes up and Amy now buys fewer candy bars because she has to spend more on gas, this would best be explained by the {INCOME, SUBSTITUTION} effect.
10. Consider a pizza shop in a college town. As students go home during the summer, ceteris paribus the demand curve for pizzas shifts {OUT, IN}. As a result, the market equilibrium price of pizzas goes {UP, DOWN}, the equilibrium quantity demanded goes {UP, DOWN}, and the equilibrium quantity supplied goes {UP, DOWN}. 11. Consider the market for gourmet sandwiches. Ceteris paribus, an increase in the consumer’s income will shift the demand curve {OUT, IN}, resulting in a/an {INCREASE, DECREASE} in the market equilibrium price and a/an {INCREASE, DECREASE} in the


equilibrium quantity traded.
12. A 10% increase in price that leads to a 2% decrease in total expenditures indicates a price elasticity of {LESS, GREATER} than 1.
13. Consider the market for tomatoes. Ceteris paribus, a bad weather that hampers the growth and harvest of tomatoes in California will shift the supply curve {OUT, IN}, resulting in a/an {INCREASE, DECREASE} in the market equilibrium price and a/an {INCREASE, DECREASE} in the equilibrium quantity traded.

14. If suppliers fail to recognize external costs, the market equilibrium price is too {LOW, HIGH} and the equilibrium quantity traded is too {LOW, HIGH}, compared to the economically efficient equilibrium.

15. Consider the choices of women aged 30 to 50 years with (a) a college education and (b) less than a high school education. If one observes the share of women in the work force is higher among women with a college education, which of the following economic concepts can best explain the observation?

A. Opportunity cost
B. Marginal cost
C. Marginal benefit
D. Consumer surplus
16. Suppose a federal subsidy program is in place to assist high school graduates from low-income families with their college tuition; thanks to this program, more high school graduates go to college. Ceteris paribus, the supply of young, unskilled workers on the fast-food market will {INCREASE, DECREASE}, pushing the wage rates of workers hired by fast-food restaurants {UPWARD, DOWNWARD}. This will {INCREASE, DECREASE} the restaurant’s opportunity cost, causing a/an {INCREASE, DECREASE} in supply in the fast-food product market. As a result, the price of fast-food products will go {UP, DOWN}.

17. U.S. GDP is given by $11 trillion using the following figures: Personal consumption expenditures = $8 trillion
Gross private investment spending = $2 trillion
Government spending = $2 trillion
Exports = $1 trillion
Imports = $2 trillion
18. If the quantity demanded decreases by a larger percentage than the price increases, the demand is said to be {ELASTIC, INELASTIC}.
19. Suppose the price elasticity...
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