1) When demand is elastic, an increase in price leads to:

A) an increase in total expenditures.

B) a decrease in total expenditures.

C) no change in total expenditures.

D) an undetermined change in expenditures.

Answer:  B

2) When demand is inelastic, an increase in price causes the seller's total revenues to:

A) increase.

B) decrease.

C) remain the same.

D) fall to zero.

Answer:  A

Figure 2

3) Refer to Figure 2 above.  The elasticity of the demand for the curve in the figure can be described as:

A) elastic in the upper portions of the curve and inelastic in the lower portions.

B) unit elastic.

C) elastic throughout the curve.

D) inelastic throughout the curve.

Answer:  B 

4) The demand for telephone wire can be expressed as: Q = 6000 - 1,500P,

where Q represents units, in pounds per day, and P represents price, in dollars per pound. Determine the price elasticity of demand at  per pound.

Answer:  We use the point price elasticity concept.  First, we calculate Q at

Q = 6000 - 1,500(2) = 3,000 pounds per day.

 =  ·  = (-1500) = -1

5) The domestic demand for wheat is QDD = 1000 – 25P, and the export demand is QDE = 500 – 25P.  Find and graph the total demand curve for wheat.

Answer:

QD  = #1(1)5(0)0(0)0(0)  5(2)0(5)P(P)

if P ≥ 20

if P < 20

6) Suppose that the demand for artichokes (Qa) is given as: Qa = 120 - 4P

a.    What is the point price elasticity of demand if the price of artichokes is $10?

b.    Suppose that the price of artichokes increases to $12. What will happen to the number of artichokes sold and the total expenditure by consumers on artichokes?

c.    At what price if any is the demand for artichokes infinitely elastic?

Answer:

a.  The inverse of the slope of the demand curve,

Therefore, the point price elasticity of demand is:

EP = (-4)(10)/(80) = -.5

b.  The demand is inelastic.  Thus, if the price of artichokes increases to $12, the total expenditure

 on artichokes will increase from  to  even though the total number of artichokes sold has fallen.

c.  Demand is infinitely elastic at the price where the demand curve intersects the vertical axis.  This occurs at 

7) The aggregate demand for good X is Q = 20 - P, and the market price is P = $8.  What is the maximum amount that consumers are willing to pay for the quantity demanded at this price?

A) $72

B) $96

C) $144

D) $168

Answer:  D

8) Other things being equal, the lower the value of elasticity:

A) the less likely the profitability of a price increase.

B) the more likely the profitability of a price increase.

C) the greater the responsiveness in quantity demanded to a price change.

D) the lower the corresponding increase in firm revenue.

Answer:  B

9) Sally Henin has an arc price elasticity of demand for gasoline of -0.8.  Her arc income elasticity for gasoline is 0.5.  Sally's current income is $40,000 per year.  Sally currently spends $800 per year on    gasoline.  The price of gasoline is currently $1.00 per gallon.

a.    A contemplated excise tax on gasoline will cause the price of gasoline to rise to $1.40.  What impact will the tax have on Sally's consumption of gasoline?

b.    Since the purpose of the tax is only to discourage gasoline consumption, Congress is considering a $200 income tax rebate to lessen the burden of the gasoline tax.  What impact will the rebates have on  Sally's consumption of gasoline?

c.    Assume that both the tax and rebate are implemented.  Will Sally be worse off or better off (compared to her initial situation before the tax and rebate)?

Answer:

a.

Arc

·

·

-0.80      - 640 = 6      - 4800

6.80      = 4160

= 611.79 or 612 gallons

Her consumption will fall to 612 gallons.

At a price of $1.40 per gallon, she will spend $856.80 for gasoline.

.

For part b use 612 as Q1.  Arc income formula is:

=                 ·

0.50 =                            ·

0.50 =                  ·

0.50                  =                   401

0.50      + 306 = 401      - 245,412

= 613.53

The tax rebate will have very little impact on Sally's consumption of gasoline.

.

On the final indifference curve, she spends

on gasoline.

614 × $1.40 = $859.60

With an income of 40,200 (after the rebate), she has $40,200 – $859.60 = $39,340.40 left to spend on other goods.

Before the tax and rebate, if she were to consume 614 gallons of gasoline she would have spent 614 × $1.00 = $614 and had $40,000 – $614 = $39,386 left for other goods.  She could have chosen her current amount    of gasoline and had more of the other goods.  Therefore she was better off before the tax and rebate.

10) A production function assumes a given:

A) technology.

B) set of input prices.

C) ratio of input prices.

D) amount of capital and labor.

E) amount of output.

Answer:  A

11) The short run is:

A) less than a year.

B) three years.

C) however long it takes to produce the planned output.

D) a time period in which at least one input is fixed.

E) a time period in which at least one set of outputs has been decided upon.

Answer:  D

12) Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function?

A) F(K,L) = 3KL

B) F(K,L) = 3K

C) F(K,L) = K + L - 1

D) F(K,L) = 10(KL)0.5

Answer:  C

13) The slope of the total product curve is the:

A) average product.

B) slope of a line from the origin to the point.

C) marginal product.

D) marginal rate of technical substitution.

Answer:  C

14) When the average product is decreasing, marginal product:

A) equals average product.

B) is increasing.

C) exceeds average product.

D) is decreasing.

E) is less than average product.

Answer:  E

15) In a certain textile firm, labor is the only short term variable input.  The manager notices that the marginal product of labor is the same for each unit of labor, which implies that:

A) the average product of labor is always greater that the marginal product of labor.

B) the average product of labor is always equal to the marginal product of labor.

C) the average product of labor is always less than the marginal product of labor.

D) as more labor is used, the average product of labor falls.

E) there is no unambiguous relationship between labor's marginal and average products.

Answer:  B

16) Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen,

A) marginal product is rising.

B) marginal product is falling.

C) average product is rising.

D) average product is falling.

Answer:  C

17) For consideration of such issues as labor's productivity growth nationwide, the relevant measure is the:

A) marginal product of labor.

B) average product of labor.

C) total product of labor.

D) wage.

E) cost of capital.

Answer:  B

18) Which would not increase the productivity of labor?

A) An increase in the size of the labor force

B) An increase in the quality of capital

C) An increase in the quantity of capital

D) An increase in technology

E) An increase in the efficiency of energy

Answer:  A

19) Consider the following statements when answering this question:

I.    Whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve.

II.   If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands.

A) I is true, and II is false.

B) I is false, and II is true.

C) Both I and II are true.

D) Both I and II are false.

Answer:  B

20) Complete the following table:

Answer: