Chapter 4 & 5 End 0f Chapter Quiz/Review

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Chapter 4 & 5 End 0f Chapter Quiz/Review

Practice What You Know Suppose that the price of candy bars increases by 100%. As a result of this, you decide to purchase 50% less candy bars. How would you describe your demand for candy bars? Demand is elastic. Demand is unit elastic. Demand is inelastic. Demand is perfectly inelastic. “Clicker Question” Correct answer: C Price is “less important” than quantity. Mathematically, the numerator (%QD change) is less than the denominator (%Price change), so the magnitude is smaller than 1. This is inelastic; relatively insensitive.

Practice What You Know Suppose that Doug receives a pay increase at work, and his income increases by 20%. As a result, Doug decides to buy 12% less ground beef. For Doug, ground beef is a(n) ________. luxury good necessity good normal good inferior good “Clicker Question” Correct answer: D MORE income leads to LESS consumption. This is a characteristic of an inferior good.

Practice What You Know Economists have studied that when the price of chicken increases, people purchase less rice. With these two goods, which of the following is true? (EC = Cross-price elasticity) EC < 0, chicken and rice are complements. EC > 0, chicken and rice are complements. EC < 0, chicken and rice are substitutes. EC > 0, chicken and rice are substitutes. “Clicker Question” Correct answer: A EC < 0 (key words are INCREASE in chicken price, purchase LESS rice).

Practice What You Know In terms of price elasticity of demand, which of the following goods do you think is the least elastic (most inelastic)? new house electricity to power your home a specific brand of breakfast cereal new vehicle “Clicker Question” Correct answer: B Houses and vehicles are elastic since the make up a big portion of your budget. A specific type of cereal is elastic since it has a lot of substitutes. Electricity has no viable substitutes.

Practice What You Know Suppose a firm is selling a product at a price on the inelastic portion of the demand line. This firm could increase revenue by doing what? lowering the price, selling more units lowering the price, selling less units increasing the price, selling more units increasing the price, selling less units “Clicker Question” Correct answer: D Why is (c) not correct? The demand curve is downward-sloping. We can’t increase the price and sell more, or we would be picking a point that isn’t even on the demand line. By increasing the price and selling less units, we are moving toward the unit elastic point in which revenue is maximized.

Practice What You Know What will be the effect of a non-binding price ceiling? A surplus will be created. A shortage will be created. There will be no effect. The effect is unknown. Clicker Question Correct answer: C If the price ceiling is non-binding (above the equilibrium), the equilibrium price is already in the legal range, so nothing will change.

Practice What You Know In the event of a binding price ceiling, what is one function that a black market serves? reduces the shortage caused by the price ceiling decreases the price even further creates a monopoly causes a surplus of the good Clicker Question Correct answer: A More trading may illegally take place at higher prices with a black market.

Practice What You Know What is one unintended consequence of rent control? People in rent-controlled units will relocate more often. Landlords may not maintain rental units. Too many apartments will be built, creating a surplus of units. People will choose not to live in big cities. Clicker Question Correct answer: B With artificially low prices, the landlords may decide it is not worth the time or effort to keep units clean and fixed. The word “slumlord” comes to mind.

Practice What You Know Which of the following is true about labor markets? The minimum wage is a price ceiling. Unemployment is a labor shortage. Firms supply the labor. None of the above. Clicker Question Correct answer: D The minimum wage is a price floor. Unemployment is a labor surplus. Firms demand labor (individuals supply the labor).

Practice What You Know Supply and demand generally become more elastic in the long run. This means that shortages caused by price ceilings _________ in the long run. disappear completely become smaller become larger become infinitely large Clicker Question Correct answer: C Qd and Qs will be more responsive to price changes when demand and supply are more elastic. Thus, shortages are made worse because Qd rises faster and Qs falls faster.