Multiple Choice Questions

1.	A change in the price of a good or service leads to a ________
which leads to a _______.
	(a) change in demand; movement along the demand curve
	(b) change in quantity demanded; movement along the demand curve
	(c) change in demand; shift in the demand curve
	(d) change in quantity demanded; shift in the demand curve
	 
  2.	The market for tires is unregulated and is presently characterized
by excess supply. You accurately predict that
	(a) price will increase, the quantity demanded will fall, and the
            quantity supplied will rise.
	(b) price will increase, the quantity demanded will rise, and the
            quantity supplied will fall.
	(c) price will decrease, the quantity demanded will rise, and the
            quantity supplied will fall.
	(d) price will decrease, the quantity demanded will fall, and the
            quantity supplied will rise.
	 
  3.	Which of the following will unambiguously occur when there is a
simultaneous increase in demand and a decrease in supply? 
	(a) an increase in equilibrium price 
	(b) a decrease in equilibrium price 
	(c) an increase in equilibrium quantity 
	(d) a decrease in equilibrium quantity 
	 
	
SITUATION 1: Lettuce and spinach are substitutes. Lettuce and tomatoes are
complements. Lettuce is a normal good. During the winter of 1993, about
20% of the lettuce crop was destroyed by flooding in Arizona. 
	 
  4.	Refer to Situation 1 above. The floods that destroyed part of the
lettuce crop would have caused the equilibrium price of spinach to
______ and the equilibrium quantity of spinach to _______. 
	(a) decrease; decrease 
	(b) decrease; increase 
	(c) increase; increase 
	(d) increase; decrease 

5.	It is necessary to ration a good whenever __________ exists.
	(a) excess demand
	(b) excess supply
	(c) a surplus
	(d) a perfectly inelastic demand
	 
 6.	The price elasticity of demand is the
	(a) ratio of the change in price to the change in quantity
            demanded.
	(b) ratio of the change in quantity demanded to the change in
            price.
	(c) ratio of the percentage change in price to the percentage
            change in quantity demanded.
	(d) ratio of the percentage change in quantity demanded to the
            percentage change in price.
	 
  7.	The price of a newspaper increases by 10% and quantity demanded of
newspapers falls by 10%. The demand for newspapers is
	(a) perfectly elastic.
	(b) unitarily elastic.
	(c) elastic.
	(d) inelastic.
	 
  8.	The ABC Computer Company wants to increase the quantity of
computers it sells by 5%. If the price elasticity of demand is -2.5 the
company must
	(a) increase price by 2.0%.
	(b) decrease price by 2.0%.
	(c) decrease price by .5%.
	(d) decrease price by .5%.
	 
  9.	As you move down a straight-line-downward-sloping demand curve,
the price elasticity of demand
	(a) becomes more elastic.
	(b) becomes more inelastic.
	(c) remains constant because the slope is constant.
	(d) may become more or less elastic depending on the slope of the
            demand curve.
	 
 10.	A new fertilizer has led to an increase in the number of tomatoes
harvested and a decrease in the income of tomato growers. Therefore, the
demand for tomatoes must be
	(a) elastic. 
	(b) inelastic. 
	(c) unitarily elastic. 
	(d) perfectly inelastic. 

1) Scientific reports have convinced people that it is better for their
health to eat less beef and more chicken. Illustrate this situation with
supply and demand curves (draw diagrams for both the market for beef and
the market for chicken.) Explain what has happened to the equilibrium
price and quantity in each of these markets.

2) After Hurricane Andrew inflicted millions of dollars of damage on
Southern Florida, the prices of construction materials (such as plywood)
doubled in price. In an effort to protect consumers, the government
considered imposing price regulations that would require construction
materials to be sold at the same prices that prevailed prior to the
hurricane. Do you think this would have been a sound economic idea? Why or
why not? 

3) At an urban college where most students commute to classes, there are
8,000 parking spaces for students. All students pay $20 a quarter for a
pass that allows them to park in any one of those 8,000 spaces. Between 8
AM and 1 PM there are always students waiting in parking lots for spaces
to open up. Students attending classes during this time are always
complaining about how difficult it is to find a place to park. Between 5
PM and 9 PM there are always a large number of empty spaces in the parking
lots. Students who attend classes at night never have a problem parking.
Illustrate the parking situation for these two different times of day
using supply and demand curves. Draw separate graphs for the day and night
students. Are these markets in equilibrium? Explain. The Director of
Parking Services has asked you to help him solve this problem. What would
you suggest? 

4) One of the ideas expounded by the Reagan Administration was that if
taxes on people's wages and salaries were reduced, tax revenues would
increase. Use the concept of elasticity of supply to explain how this
could happen.

5) The university you attend needs to increase total revenue. The
president suggests that by raising tuition by 5%, total revenue will
increase. However, after the tuition increase, total revenue actually
fell. What can you infer about the price elasticity of demand for an
education at your university? Why is this likely to be true? What did your
university president assume to be true about the price elasticity of
demand for an education at your university?