Economics 2 - Macroeconomics
Quiz 3            
Due by noon, Tuesday, September 27, 2005
Mr. Vice
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This quiz covers Chapter 4

___ 1. The law of demand says that the lower the price of a good, other things constant,

a.  the smaller the demand for that good
b. 
the larger the demand for that good
c. 
the smaller the quantity demanded of that good
d. 
the larger the quantity demanded of that good
e. 
the smaller the real income of consumers and the lower the quantity demanded of that good

____ 2. In what way is consumer demand different from consumer wants?

a.  Demand is only for necessities.
b. 
Demand is only for luxuries.
c. 
Demand takes into account the ability to pay.
d. 
Consumer wants are only for luxuries.
e. 
Consumer wants are only for necessities.

____ 3. Which of the following statements about the substitution effect of a price change is true?

a.  It is caused by a change in relative prices.
b. 
It affects the consumer's ability, rather than willingness, to purchase a good.
c. 
It assumes that the consumer substitutes more expensive goods for cheaper ones when income increases.
d. 
It is usually equal to the income effect.
e. 
It may cause the consumer to buy less of the good when its price falls.

____ 4. Suppose there are only two goods, apples and oranges. What happens if the price of each good increases by 15 percent?

a.  The consumer will substitute apples for oranges.
b. 
The consumer will substitute oranges for apples.
c. 
There is no substitution effect because relative prices have remained constant.
d. 
Demand for both goods increases.
e. 
Demand for both goods decreases.

____ 5. For a renter, the income effect of an increase in apartment rents will

a.  have a greater effect than the income effect of an increase in the price of chewing gum
b. 
have no impact on the demand curve for apartments, because everything except price is assumed constant
c. 
have less of an effect than the income effect of an increase in the price of chewing gum
d. 
be almost negligible, because housing is a necessity
e. 
occur only when income increases

____ 6. Which of the following will not shift the demand curve for movie tickets?

a.  a change in the cost of babysitting services
b. 
a change in the price of movie tickets
c. 
a change in the quality of television programs
d. 
a change in the income of movie-goers
e. 
a change in the number of consumers

____ 7. The difference between normal and inferior goods is that

a.  normal goods are of better quality than inferior goods
b. 
an increase in price will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward
c. 
if the price of a normal good increases, individuals who buy it are poorer; for inferior goods, the opposite is true
d. 
an inferior good is something that will not be demanded until quantities of the normal good have been exhausted
e. 
an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward

____ 8. If good B is a complement to good A, then a decrease in the price of B

a.  increases the quantity demanded of A
b. 
decreases the demand for A
c. 
increases the demand for A
d. 
decreases the quantity demanded of A
e. 
will cause the demand for B to increase

____ 9. Jennifer learns that the price of CDs will be going up 10 percent next week. She usually buys three CDs per week. What happens to Jennifer's demand for CDs this week?

a.  It does not change because only quantity demanded changes when price changes.
b. 
It increases because the price will be lower next week.
c. 
It decreases because the price will be higher next week.
d. 
It increases because the price will be higher next week.
e. 
It decreases because the price will be lower next week.

____ 10. A change in the composition of the population will generally

a.  change demand only if there is a change in the size of the population
b. 
change demand only if there is no change in the size of the population
c. 
change demand even if there is no change in the size of the population
d. 
have absolutely no effect on demand
e. 
result in a movement along the demand curve

____ 11. Which of the following events is likely to reduce the demand for on-campus student housing?

a.

a rise in rents for off-campus housing

b.

more students enrolling at the university

c.

it becomes less fashionable to live "on campus"

d.

a rise in dorm fees

e.

a rise in the incomes of students

____ 12. Which of the following is true of an increase in quantity supplied of a given good?

a.

It is represented by a rightward shift in the supply curve.

b.

It could result from a technological improvement.

c.

The price of a key resource used to produce the good may have decreased.

d.

It is caused by an increase in the price of the good.

e.

The price of an alternative good has increased.

____ 13. Producers are willing and able to offer greater quantities for sale at higher prices because

a.

they have the incentive to pay the increasing opportunity cost of resources to attract them from alternative uses

b.

they will decrease their profits by expanding production at higher prices

c.

the government orders them to do so

d.

lower prices attract new firms, which have higher costs of production

e.

they hire superior quality, higher-priced resources as production expands

____ 14. If the supply of a product increases, then

a.

more will be purchased at the same price

b.

the price of the product must have declined

c.

demand for the good must have increased

d.

producers are willing to accept a lower price for each unit sold

e.

producers offer less for sale at each possible price

____ 15. Which of the following would most likely increase the supply of college textbooks?

a.

five major publishers go out of business

b.

paper costs double

c.

the wage rate of printers increases

d.

producers expect the price to rise in the future

e.

technology of book production improves

____ 16. Markets reduce transactions costs

a.

by decreasing the time spent searching for information about goods and services

b.

only when they have a highly structured set of rules like the New York Stock Exchange

c.

because each market uses the same set of rules for buying and selling goods and services

d.

only when the government can coordinate the plans of many buyers and sellers

e.

when prices are set by the sellers and are not determined by negotiation between the buyers and the sellers

____ 17. A surplus of wheat

a.

is impossible if people are hungry

b.

is impossible if the price of wheat is below equilibrium

c.

will result in an increase the price of wheat

d.

is unlikely to result in any change in the price of wheat

e.

indicates that the problem of scarcity of wheat has been solved

____ 18. If people believe that prices are going to be higher in the future than they are today, they will

a.

wait until the future to purchase the things they want

b.

decrease their demand now

c.

increase their demand now

d.

increase their supply now

e.

save more today so they have the income to buy more in the future

____ 19. Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result?

a.

Both price and quantity should increase.

b.

Both price and quantity should decrease.

c.

Price should increase and quantity decrease.

d.

Price should decrease and quantity increase.

e.

Nothing.

____ 20. Many people argue against increasing the minimum wage because they believe the result would be increased unemployment. Which of the following best summarizes this argument? A higher minimum wage would

a.

increase the supply of labor while decreasing the demand for labor

b.

decrease the supply of labor while increasing the demand for labor

c.

increase the quantity supplied of labor while decreasing the quantity demanded of labor

d.

decrease the quantity supplied of labor while increasing the quantity demanded of labor

e.

increase the supply of labor while decreasing the quantity demanded of labor

 

ECON 2  QUIZ 3  Answers

1.  D.  The law of demand states that the lower the price of a good, ceteris paribus, the larger the quantity demanded of that good.  It is important to note that the law of demand does NOT say that the lower the price the greater the demand.  To say that the demand is greater is to say that the demand curve has shifted to the right.  An increase in the quantity demanded results solely from a decrease in the price of the good.  The terms "change in demand" and "change in the quantity demanded" look and sound almost alike, but are actually very different terms with very specific meanings.

2. C.  The demand curve shows what economists call effective demand; that is, the demand curve shows the quantity that the person is willing AND financially able to purchase at each possible price. Just willing is not enough and just able is not enough.  Bill Gates is financially ABLE to own and drive a Ford, but I think he actually drives a Ferrari -- in fact, he has a large garage full of cars -- none of them are Fords.  He is able, but not willing.

3. A.  The substitution effect of a price change results solely from the change in the relative prices of the two goods.  For example, assume that apples cost $1 each and oranges cost $1 each.  If the price of apples increases to $2, there are two effects.  One effect of this price increase is a change in relative prices.  Apples are now twice as expensive as oranges.  The substitution effect would tend to make the person buy fewer apples and more oranges.  The other effect is the income effect.  As a result of the price increase, the person's ability to buy goods is reduced.  If the person's budget was $10, then previously the person could have purchased 5 apples and 5 oranges.  It is no longer possible to purchase that "basket" of goods, so the person's real income or purchasing power has been reduced.  If the two goods are both normal goods, then the person will tend to buy fewer apples AND fewer oranges.

4.  C.  There is no change in the relative prices of the two goods, so there is no substitution effect; however, there would be an income effect.

5.  A.  If you are paying $1,000 per month for rent and your rent increases 10% it is have a much greater effect on your purchasing power than if the price of chewing gum increases 10%.  Hence, the income effect of the rent increase is much greater than the income effect of the chewing gum price increase.

6. B.  A change in the price of the good will never shift the demand curve (i.e., cause a change in demand), but will cause a movement along the demand curve (a change in the quantity demanded).  Any change in the factors listed (other than the price of the good) would cause the demand curve to shift.

7.  E.  Definition.  Normal and inferior goods, as the terms are used by economists do not refer to quality, but to the behavior of people as their income changes.  If John considers apples to be a normal good and oranges to be an inferior good, then as John's income increases he will buy more apples and fewer oranges.

8.  C.  An example of complementary goods would be film and cameras.  Other things equal or not changing, a decrease in the price of cameras would result in an increase in the demand for film.

9.  D.  If you expect the price of a good to increase in the future, then the rational thing to do NOW is to buy BEFORE the price goes up.  When we all try to buy now before the price goes up, we compete with each other and bid the price up today.  Note:  There is a difference between an increase in the price, which causes a movement up along the existing demand curve and the EXPECTATION of an increase in price which will actually cause the demand curve to shift to the right now.

10. C.  A change in the composition of the population could be that the average age of the population increases.  Well, if the average age of the population increases, then there will be an increase in the demand for doctors, prescription drugs, hospitals, etc and a decreased demand for diapers (the baby type), formula, kids clothes, etc.  Even without a change in the total number of people, there would be changes in demand.

11. C.  The factor that has changed in this question is tastes and preferences.  On-campus housing has become less desirable which would be indicated by a leftward shift in the demand for on-campus housing.

12. D.  See #1 above.

More explanations later.

13. A. 

14. D

15. E

16. A

17. B

18. C

19. B

20. C