Question 1

Suppose good X is a substitute of good Y. Everything else remaining unchanged, an increase in price of good Y will lead to:
A)an increase in demand for good Y.
B)a decrease in demand for good X.
C)an increase in demand for good X.
D)a decrease in price of good X.

Accepted Answer

When the price of good Y increases, consumers will look for alternatives, leading to an increase in demand for good X, which is a substitute for good Y.

Question 2

Which of the following groups is most likely to be benefitted when a country engages in free trade?
A)All the domestic producers of the country
B)The manufacturers of exportable goods
C)The producers in the import-competing industries
D)The workers employed in the import-competing industries

Accepted Answer

Manufacturers of exportable goods are most likely to benefit from free trade as it provides them with access to larger markets and increased competitiveness. Domestic producers and import-competing industries may face increased competition and potentially negative consequences, while the workers employed in import-competing industries may lose their jobs due to increased imports.

Question 3

Which of the following events would lead to a decrease in demand for air travel?
A)A decrease in the number of people who are afraid to fly
B)A decrease in oil prices
C)A decrease in rail fares
D)An increase in income levels

Accepted Answer

A decrease in rail fares would lead to an increase in demand for rail travel, which would then lead to a decrease in demand for air travel.

Question 4

Which of the following is a "unit-free" measure?
A)Consumer surplus when the demand curve is horizontal
B)Producer surplus when the supply curve is vertical
C)Market supply
D)Price elasticity of demand

Accepted Answer

Price elasticity of demand is a unit-free measure because it is calculated as a percentage change in quantity demanded divided by a percentage change in price, making it independent of the units of measurement.

Question 5

An increase in the imports of clothing into the United States from India will benefit the _____ and hurt the _____.
A)U.S.clothing producers; Indian clothing producers
B)Indian consumers; Indian clothing producers
C)the U.S.consumers; Indian clothing producers
D)the U.S.consumers; the U.S.clothing producers

Accepted Answer

An increase in imports of clothing from India will likely result in lower prices for U.S. consumers, which benefits them. However, it will hurt U.S. clothing producers as they will face increased competition from cheaper imports. Indian clothing producers are not impacted by this scenario as they benefit from increased exports to the United States. Indian consumers are also not directly impacted by this scenario.

Question 6

Which of the following will cause a rightward shift of the market supply curve?
A)An increase in the product price
B)A decrease in input prices
C)Change in consumers' tastes
D)An increase in national income

Accepted Answer

A decrease in input prices for producers will lower their production costs, allowing them to supply more at every possible price level. This will cause a rightward shift of the market supply curve.

Question 7

Which of the following is an example of arbitrage?
A)A firm sells a box of cereal at $10 when the average cost of producing it is $6.
B)Thomas buys a new stock issued by a firm on the stock exchange.
C)A local salon charges 5 percent more for all its services than a competing salon in the same locality.
D)Romi buys a DVD from Walmart at $10 and sells it on eBay for $20.

Accepted Answer

The answer of Which of the following is an example...

Question 8

Which of the following factors can lead to an increase in demand for coffee at Starbucks?
A)An increase in household income
B)An increase in the price of sugar
C)An increase in the price of coffee beans
D)A 10 percent decline in local population

Accepted Answer

An increase in household income would lead to consumers having more disposable income to spend on coffee, including at Starbucks. The other choices would likely decrease demand for coffee at Starbucks as they involve increased costs for consumers or a decrease in potential customers.

Question 9

If the price of a normal good is measured along the vertical axis and its quantity along the horizontal axis, an increase in the price of the good will lead to:
A)a downward movement along the demand curve.
B)an upward movement along the demand curve.
C)a rightward shift of the demand curve.
D)a leftward shift of the demand curve.

Accepted Answer

An increase in the price of a normal good leads to an upward movement along the demand curve, indicating a decrease in quantity demanded.

Question 10

Refer to Figure 2.1 below. At a price of $70, the producer surplus equals: 
A)$6,000,000.
B)$8,000,000.
C)$15,000,000.
D)$30,000,000.

Accepted Answer

The answer of Refer to Figure 2.1 below. At a...

Question 11

The value of price elasticity of demand for a normal commodity is negative because it indicates:
A)the inverse relationship between the price and the quantity demanded for the commodity.
B)that the value of the consumer surplus is negative for a normal good.
C)that the changes in quantity demanded are much less compared to the changes in price for a normal good.
D)the direct relationship between price and consumer surplus from the commodity.

Accepted Answer

The negative value of price elasticity of demand indicates the inverse relationship between the price and quantity demanded for a normal commodity. This means that as the price of the commodity increases, the quantity demanded decreases, and vice versa.

Question 12

To maximize profit a perfectly competitive firm supplies a good up to the point at which:
A)the marginal revenue is higher than the marginal cost.
B)the marginal cost of producing the good is zero.
C)the price of the good equals marginal cost.
D)the average revenue equals average cost.

Accepted Answer

In a perfectly competitive market, price is determined by the market and the firm is a price taker. Therefore, the firm's marginal revenue is equal to the market price. To maximize profit, the firm will produce up to the point at which marginal cost equals the market price (P=MC). At this point, the firm is producing at the minimum average total cost, ensuring maximum profitability. Therefore, as per given options, answer C is correct.

Question 13

Everything else remaining unchanged, when the price of a normal good increases, consumers:
A)purchase more of the good.
B)purchase less of the good.
C)purchase the same amount of the good.
D)do not purchase any amount of the good.

Accepted Answer

When the price of a normal good increases, consumers tend to reduce their purchasing of the good due to the law of demand. This is because as prices increase, the quantity demanded typically decreases, assuming that other factors such as income and preferences remain constant.

Question 14

If an individual consumes more of good X when his/her income doubles, we can infer that
A)the individual is highly sensitive to changes in the price of good X.
B)good X is a normal good.
C)good X is an inferior good.
D)the demand for good X is perfectly inelastic.

Accepted Answer

If the individual is consuming more of good X when his/her income doubles, it means that good X is a normal good, i.e. the demand for it increases as income increases. Option A cannot be inferred as we do not have any information about changes in the price of good X. Option C can be ruled out as with an increase in income, an individual will generally switch to better quality goods, and not to inferior goods. Option D can be ruled out as the demand for good X is responsive to changes in income.

Question 15

If a 1% increase in the price of DVD players leads to a 3% reduction in its sales, we can conclude that:
A)the supply of DVD players is perfectly inelastic.
B)DVD players are inferior goods.
C)the demand for DVD players is relatively elastic.
D)the demand for DVD's is relatively inelastic.

Accepted Answer

The fact that a 1% increase in price leads to a 3% reduction in sales indicates that the demand for DVD players is relatively elastic. This means that consumers are sensitive to changes in price and will decrease their demand significantly when prices rise. If the demand were relatively inelastic, a price increase would lead to only a small decrease in sales.

Question 16

Which of the following is true of consumer surplus?
A)It is graphically represented as the area under the equilibrium price and above the supply curve of a good.
B)It is the net gain in economic well-being associated with producing and selling the equilibrium quantity of a good.
C)It is used to measure the impact of a change in price on the economic well-being of the producers.
D)It is the difference between the value that one places on a good and the price paid for the good.

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the market price they actually pay. Therefore, option D, which says that it is the difference between the value that one places on a good and the price paid for the good, is true. Options A, B, and C are incorrect as they do not accurately describe consumer surplus.

Question 17

Harry used work in a launderette and earned $30 a day. After work, he normally had a chicken burger worth $5 at McDonalds. However, his pay was lowered to $20 some days later. Then after work he used to have a vegetable burger worth $3. Here the vegetable burger is an example of a(n):
A)inferior good.
B)normal good.
C)complement good.
D)luxury good.

Accepted Answer

The vegetable burger is an example of an inferior good because as Harry's income decreased (due to the lower pay), he shifted from buying the more expensive chicken burger to the cheaper vegetable burger.

Question 18

Refer to Figure 2.1 below. At a price of $70, the consumer surplus equals: 
A)$6,000,000.
B)$8,000,000.
C)$5,000,000.
D)$10,000,000.

Accepted Answer

The answer of Refer to Figure 2.1 below. At a...

Question 19

Suppose the domestic supply (Q^S) and demand (Q^D) for skateboards in the United States are given by the following set of equations: $$\begin{array} { l } Q ^ { S } = - 60 + 3 P \ Q ^ { D } = 390 - 2 P \end{array}$$ In the absence of international trade in skateboards, what will be the equilibrium price of skateboards in the United States? A)$66 B)$90 C)$45 D)$150

Accepted Answer

The answer of Suppose the domestic supply (Q^S) and demand...

Question 20

Suppose country A and country B are the only two countries in the world. Country A imports good X from country B and exports good Y. In the absence of any transportation cost, at the world price of good X:
A)country B's export supply curve is perfectly inelastic.
B)both country A's import demand curve and country B's export supply curve are positively sloped.
C)country A's import demand curve will be perfectly inelastic.
D)country A's import demand curve will intersect country B's export supply curve.

Accepted Answer

If country A's import demand curve intersects country B's export supply curve, then there will be a price at which they will trade. This price will be the world price of good X. Therefore, in the absence of any transportation cost, country B's export supply curve will be perfectly elastic at the world price. However, both country A's import demand curve and country B's export supply curve will be positively sloped because as the price of X increases, country A will demand less of X and country B will supply more of X.

Quiz 2: The Basic Theory Using Demand and Supply

Suppose good X is a substitute of good Y. Everything else remaining unchanged, an increase in price of good Y will lead to:

Which of the following groups is most likely to be benefitted when a country engages in free trade?

Which of the following events would lead to a decrease in demand for air travel?

Which of the following is a "unit-free" measure?

An increase in the imports of clothing into the United States from India will benefit the _ and hurt the _.

Which of the following will cause a rightward shift of the market supply curve?

Which of the following is an example of arbitrage?

Which of the following factors can lead to an increase in demand for coffee at Starbucks?

If the price of a normal good is measured along the vertical axis and its quantity along the horizontal axis, an increase in the price of the good will lead to:

Refer to Figure 2.1 below. At a price of $70, the producer surplus equals:

The value of price elasticity of demand for a normal commodity is negative because it indicates:

To maximize profit a perfectly competitive firm supplies a good up to the point at which:

Everything else remaining unchanged, when the price of a normal good increases, consumers:

If an individual consumes more of good X when his/her income doubles, we can infer that

If a 1% increase in the price of DVD players leads to a 3% reduction in its sales, we can conclude that:

Which of the following is true of consumer surplus?

Harry used work in a launderette and earned $30 a day. After work, he normally had a chicken burger worth $5 at McDonalds. However, his pay was lowered to $20 some days later. Then after work he used to have a vegetable burger worth $3. Here the vegetable burger is an example of a(n) :

Refer to Figure 2.1 below. At a price of $70, the consumer surplus equals:

Suppose country A and country B are the only two countries in the world. Country A imports good X from country B and exports good Y. In the absence of any transportation cost, at the world price of good X: