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d. cannot be represented by a demand curve in the usual way. 7. The demand for Neapolitan ice cream is likely quite elastic because (d)

a. ice cream must be eaten quickly.

b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers. c. the market is broadly defined.

d. other flavors of ice cream are good substitutes for this particular flavor.

8. Which of the following is not a determinant of the price elasticity of demand for a good? (b)

a. the time horizon

b. the steepness or flatness of the supply curve for the good c. the definition of the market for the good d. the availability of substitutes for the good

13. When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand (b)

a. first becomes smaller, then larger. b. always becomes larger. c. always becomes smaller.

d. first becomes larger, then smaller.

14. The difference between slope and elasticity is that (a)

a. slope is a ratio of two changes, and elasticity is a ratio of two percentage changes. b. slope is a ratio of two percentage changes, and elasticity is a ratio of two changes. c. slope measures changes in quantity demanded more accurately than elasticity. d. none of the above; there is no difference between slope and elasticity.

Figure 5-1

15. Refer to Figure 5-1. The demand curve representing the demand for a luxury good with several close substitutes is (c)

a. A. b. B. c. C. d. D.

16. Refer to Figure 5-1. Atog says he would buy one cup of coffee per day regardless of the price. If this is true, then Atog's demand for coffee is represented by demand curve (a)

a. A. b. B. c. C. d. D.

17. Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, (b)

a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers’ total expenditure on the good is unchanged.

18. The case of perfectly elastic demand is illustrated by a demand curve that is (b)

a. vertical. b. horizontal.

c. downward-sloping but relatively steep. d. downward-sloping but relatively flat. 19. For a vertical demand curve, (a)

a. slope is undefined, and price elasticity of demand is equal to 0. b. slope is equal to 0, and price elasticity of demand is undefined. c. slope and price elasticity of demand both are undefined. d. slope and price elasticity of demand both are equal to 0.

20. Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method, (A)

a. the price elasticity of demand is about 1.43, and an increase in the airfare will cause

airlines' total revenue to decrease.

b. the price elasticity of demand is about 1.43, and an increase in the airfare will cause

airlines' total revenue to increase.

c. the price elasticity of demand is about 0.70, and an increase in the airfare will cause

airlines' total revenue to decrease.

d. the price elasticity of demand is about 0.70, and an increase in the airfare will cause

airlines' total revenue to increase.

21. Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is (b)

a. 0.567. b. 0.700. c. 1.429. d. 2.200.

22. 156. When demand is inelastic, a decrease in price will cause (b)

a. an increase in total revenue. b. a decrease in total revenue.

c. no change in total revenue, but an increase in quantity demanded. d. no change in total revenue, but a decrease in quantity demanded.

23. Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue? (a)

a. 0.2 b. 1 c. 1.5

d. All of the above could be correct.

24. Necessities such as food and clothing tend to have (d)

a. high price elasticities of demand and high income elasticities of demand. b. high price elasticities of demand and low income elasticities of demand. c. low price elasticities of demand and high income elasticities of demand. d. low price elasticities of demand and low income elasticities of demand.

25. For Susie, a 7 percent increase in income results in a 12 percent increase in the quantity demanded of pizza. For Susie, the income elasticity of demand for pizza is (d)

a. negative, and pizza is an normal good. b. negative, and pizza is a inferior good. c. positive, and pizza is an inferior good. d. positive, and pizza is a normal good.

26. Suppose good X has a negative income elasticity of demand. This implies that good X is (c)

a. a normal good. b. a necessity. c. an inferior good. d. a luxury.

27. Food and clothing tend to have (a)

a. small income elasticities because consumers, regardless of their incomes, choose to buy

relatively constant quantities of these goods.

b. small income elasticities because consumers buy proportionately more of both goods at

higher income levels than they buy at low income levels. c. large income elasticities because they are necessities.

d. large income elasticities because they are relatively inexpensive.

28. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be (a)

a. positive. b. negative.

c. either positive or negative. It depends whether A and B are normal goods or inferior

goods.

d. either positive or negative. It depends whether the current price level is on the elastic

or inelastic portion of the demand curve.

29. Which of the following could be the cross-price elasticity of demand for two goods that are complements? (a)

a. -1.3 b. 0 c. 0.2 d. 1.4

30. Determinants of the price elasticity of supply is the (d)

a. number of close substitutes for the good in question.

b. the ability of sellers to change the amount of the good they produce. c. length of the time period. d. Both b and c

31. In the long run, the quantity supplied of most goods (d)

a. will increase in almost all cases, regardless of what happens to price. b. cannot respond at all to a change in price.

c. can respond to a change in price, but the change is almost always inconsequential. d. can respond substantially to a change in price. 32. When a supply curve is relatively flat, (c)

a. sellers are not at all responsive to a change in price.

b. the equilibrium price changes substantially when the demand for the good changes. c. the supply is relatively elastic. d. the supply is relatively inelastic.

33. A linear, upward-sloping supply curve has (a)

a. a constant slope and a changing elasticity of supply. b. a changing slope and a constant elasticity of supply. c. both a constant slope and a constant elasticity of supply. d. both a changing slope and a changing elasticity of supply.

34. If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity supplied, then the price increase amounted to (c)

a. 0.67%. b. 0.83%. c. 1.20%. d. 2.70%.

35. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about (d)

a. 0.22. b. 0.53. c. 1.00.

d. 1.89.

36. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production from 40 to 50 boxes when price increases by 20 percent, then supply is (d)

a. inelastic, since the price elasticity of supply is equal to .91. b. inelastic, since the price elasticity of supply is equal to 1.1. c. elastic, since the price elasticity of supply is equal to 0.91. d. elastic, since the price elasticity of supply is equal to 1.1. 37. If the price elasticity of supply for a good is equal to infinity, then (b)

a. the supply curve is vertical. b. the supply curve is horizontal.

c. the supply curve also has a slope equal to infinity.

d. the quantity supplied is constant regardless of the price.

38. Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to (b)

a. increase the total revenue of wheat farmers. b. decrease the total revenue of wheat farmers. c. decrease the demand for wheat. d. decrease the supply of wheat.

39. Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then (c)

a. consumers of wheat would buy more wheat.

b. wheat farmers would suffer a reduction in their total revenue. c. wheat farmers would experience an increase in their total revenue. d. the demand for wheat would decrease. 40. n the market for oil in the short run, demand (b)

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.

41. Which of the following statements helps to explain why government drug interdiction increases drug-related crime? (c)

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.

Chapter 6 Supply, Demand, and Government policies

TRUE OR FALSE

1. Economic policies often have effects that their architects did not intend or anticipate. (T) 2. Rent-control laws dictate a minimum rent that landlords may charge tenants. (F) 3. Minimum-wage laws dictate the lowest wage that firms may pay workers. (T) 4. Price controls can generate inequities. (T)

5. If a good or service is sold in a competitive market free of government regulation, then the price of the good or service adjusts to balance supply and demand. (T)

6. A price ceiling is a legal minimum on the price at which a good or service can be sold. (F) 7. A price ceiling set above the equilibrium price is not binding. (T)

8. A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied. (T)

9. Long lines and discrimination are examples of rationing methods that may naturally develop in response to a binding price ceiling. (T)

10. Price ceilings are typically imposed to benefit buyers. (T)

11. When the government imposes a binding price ceiling on a competitive market, a surplus of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. (F) 12. When free markets ration goods with prices, it is both efficient and impersonal. (T)

13. The effects of rent control in the long run include lower rents and lower-quality housing. (T) 14. A price floor is a legal minimum on the price at which a good or service can be sold. (T) 15. A price floor set above the equilibrium price is not binding. (F)

16. A price floor set above the equilibrium price causes a surplus in the market. (T) 17. Price floors are typically imposed to benefit buyers. (F) 18. Not all sellers benefit from a binding price floor. (T)

19. If the equilibrium price of an airline ticket is $500 and the government imposes a price floor of $400 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. (F) 20. The goal of the minimum wage is to ensure workers a minimally adequate standard of living. (T) 21. In an unregulated labor market, the wage adjusts to balance labor supply and labor demand. (T) 22. A binding minimum wage causes the quantity of labor demanded to exceed the quantity of labor supplied. (F)

23. Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them. (F)

24. A tax on sellers shifts the supply curve to the left, but not the demand curve. (T)

25. The term tax incidence refers to how the burden of a tax is distributed among the various people who make up the economy. (T)

26. If a tax is imposed on the sellers of a product, then the tax burden will fall entirely on the sellers. (F)

27. A tax on buyers shifts the demand curve to the right. (F)

28. A tax of $1 on buyers shifts the demand curve downward by exactly $1. (T)

29. A tax on buyers usually causes buyers to pay more the good and sellers to receive less for the good than they did before the tax was levied. (T)

30. Whether a tax is levied on sellers or buyers, taxes discourage market activity. (T)

31. Whether a tax is levied on sellers or buyers, buyers and sellers usually share the equivalent burden of taxes. (T)

32. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. (T)

33. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot legislate the true burden of a tax. (T)

34. If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. (T)

35. A tax burden falls more heavily on the side of the market that is less elastic. (T) Short Answer

1. Using a supply and demand diagram, show a labor market with a binding minimum wage. Use the diagram to show those who are helped by the minimum wage and those who are hurt by the minimum wage.