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368 ? Chapter 5 /Elasticity and Its Application

18. An advance in farm technology that results in an increased market supply is

a. good for farmers because it raises prices for their products but bad for consumers because it raises

prices consumers pay for food.

b. bad for farmers because total revenue will fall but good for consumers because prices for food will

fall.

c. good for farmers because it raises prices for their products and also good for consumers because

more output is available for consumption.

d. bad for farmers because total revenue will fall and bad for consumers because farmers will raise the

price of food to increase their total revenue.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Technology | Supply

19. Farm programs that pay farmers not to plant crops on all their land

a. hurt farmers by lowering their total revenue and hurt consumers by causing shortages of some food

items.

b. help farmers by cutting costs, which helps consumers by lowering food prices.

c. help farmers by increasing total revenue in the market but hurt consumers by raising prices. d. help farmers directly since they receive government payments but have no real effects on

consumers.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Total revenue

20. Which of the following was not a reason OPEC failed to keep the price of oil high?

a. Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil

exploration and by building new extraction capacity.

b. Consumers responded to higher prices with greater conservation. c. Consumers replaced old inefficient cars with newer efficient ones.

d. The agreement OPEC members signed allowed each country to produce as much oil as each

wanted.

ANS: D

NAT: Analytic DIF: 2

LOC: Elasticity REF: 5-3 TOP: OPEC

MSC: Applicative

21. OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to

a. an inelastic demand for oil and a reduction in the amount of oil supplied. b. a reduction in the amount of oil supplied and a world-wide oil embargo. c. a world-wide oil embargo and an elastic demand for oil.

d. a reduction in the amount of oil supplied and an elastic demand for oil.

ANS: A

NAT: Analytic DIF: 2

LOC: Elasticity REF: 5-3 TOP: OPEC

MSC: Applicative

22. In the market for oil in the short run, demand

a. and supply are both elastic. b. and supply are both inelastic. c. is elastic and supply is inelastic. d. is inelastic and supply is elastic.

ANS: B DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply

23. A decrease in supply will cause the largest increase in price when

a. both supply and demand are inelastic. b. both supply and demand are elastic. c. demand is elastic and supply is inelastic. d. demand is inelastic and supply is elastic.

MSC: Interpretive

ANS: A DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply

MSC: Analytical

Chapter 5 /Elasticity and Its Application ? 369

24. A decrease in supply will cause the smallest increase in price when

a. both supply and demand are inelastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. demand is inelastic and supply is elastic.

ANS: C DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply

MSC: Analytical

25. Which of the following statements does not help to explain why government drug interdiction increases

drug-related crime?

a. The demand for illegal drugs is inelastic.

b. Interdiction results in drug addicts having a greater need for quick cash.

c. Interdiction results in an increase in the amount of money needed to buy the same amount of drugs. d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.

ANS: D

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Government | Price elasticity of demand

26. Which of the following statements helps to explain why government drug interdiction increases drug-related

crime?

a. The direct impact is on buyers, not sellers.

b. Successful drug interdiction policies reduce the demand for illegal drugs.

c. Drug addicts will have an even greater need for quick cash to support their habits.

d. In the short run, both equilibrium quantities and prices will fall in the markets for illegal drugs.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Government | Price elasticity of demand

27. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal

drugs into the country?

a. Drug interdiction raises prices and total revenue in the drug market. b. Drug interdiction can increase drug-related crime.

c. Drug interdiction shifts the demand curve for drugs to the left. d. Drug interdiction shifts the supply curve of drugs to the left.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Government | Demand | Supply

28. Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the

United States,

a. supply decreases, demand is unaffected, and price increases. b. demand decreases, supply is unaffected, and price decreases.

c. demand and supply both decrease, leaving price essentially unchanged.

d. supply decreases, demand increases, and price increases substantially as a result.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Government | Demand | Supply

29. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates

of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the a. supply for marijuana is elastic. b. demand for marijuana is elastic. c. supply for marijuana is inelastic. d. demand for marijuana is inelastic.

ANS: D

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Price elasticity of demand | Total revenue

370 ? Chapter 5 /Elasticity and Its Application

30. Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the

quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users? a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right. b. The price elasticity of demand for illegal drugs is 1.3. c. The price elasticity of supply for illegal drugs is 0.8.

d. As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of

illegal drugs sold decreases by 16 percent.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-3

TOP: Price elasticity of demand | Total revenue

Scenario 5-4

Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar.

31. Refer to Scenario 5-4. What would we expect to observe in the caviar market?

a. Equilibrium prices and quantities will increase.

b. Equilibrium prices will increase by more if the demand for caviar is elastic than if demand is

inelastic.

c. Total revenues to caviar firms will increase if the demand for caviar is inelastic. d. All of the above are correct.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity REF: 5-3

TOP: Price elasticity of demand | Total revenue