This practice exam consists of 50 multiple choice questions of the same style and dificulty as found on the actual Prelim 1. You should try the first 25 questions in 90 minutes and then do the next 25 questions in another 90 minutes. This approach most closely simulates the amount of time you will have on the actual prelim. Choose the best possible answer. The answer key gives an explanation of why each answer is either correct, wrong, or not the best answer.
1. The basic economic problem is
A. inflation.
B. unemployment.
C. scarcity.
D. poverty.
E. lack of money.
2. Consider the demand for corn shown in the table above. The price elasticity of demand at the price of $6 per bushel is
A. -0.5.
B. -1.0.
C. -2.0.
D. -2.6.
E. -3.5.
3. A model that relates price to the quantity of a product supplied to the market is called
A. the law of firms.
B. the law of households.
C. the law of demand.
D. demand and supply.
E. the law of supply.
4. Suppose that you have an income of $100 and that you can buy only two goods, apples (A) and bananas (B). Prices are $10 for apples and $5 for bananas. Find the maximum amount that you can consume of each good and the slope of the budget constraint.
A. Apples = 10, bananas = 20 and slope = 2.
B. Apples = 25, bananas = 10 and slope = -0.5.
C. Apples = 10, bananas = 20 and slope = 1.
D. Apples = 10, bananas = 20 and slope = -2.
E. Apples = 25, bananas = 20 and slope = -5.
5. Consider Naomi?s preferences for race horses (R) and show horses (S) represented by the indifference curves in the figure above. If Naomi has an income of $24 million and the price of race horses is PR = $1 million, what are the quantities of show horses demanded at the prices PS = $2 million, $4 million, and $8 million, respectively, to the nearest whole number?
A. 7, 5, 2
B. 2, 3, 7
C. 5, 6, 4
D. 7, 3, 2
E. 7, 6, 5
6. Ahmet buys shirts and shoes according to the indifference curve and budget constraint shown in the graph above. Why is point A, an allocation of shirts and shoes, not the optimal bundle of these two goods, given the budget constraint and indifference curve in the graph?
A. Ahmet could afford to buy more shirts and more shoes.
B. The indifference curve exhibits diminishing marginal utility.
C. Ahmet would be better off with some bundles that include more shoes and fewer shirts.
D. MUshoes/MUshirts < Pshoes/Pshirts.
E. Because point B is the optimal bundle.
7. A director of a big bus company said, "For each 1 percent fare hike, we lose 0.2 percent of our riders." We can conclude that
A. a fare increase will increase total revenue.
B. demand for bus service will go up as fares increase.
C. demand is price elastic.
D. a 10 percent fare hike will produce a 20 percent reduction in riders.
E. the price elasticity is -5.
8. If price is above equilibrium,
A. quantity supplied exceeds quantity demanded and a surplus exists.
B. the income and substitution effects will cause the price to rise.
C. quantity demanded exceeds quantity supplied and a shortage exits.
D. demand will increase.
E. quantity supplied is too low for equilibrium.
9. The budget constraint
A. is the total amount of money an individual can spend on goods and services per
period of time.
B. is the total amount of utility an individual can receive from goods and services per
period of time.
C. is the combined price of all goods and services an individual can consume.
D. is the maximum amount of money an individual can gain without earning it.
E. applies only to society as a whole, not to individuals.
10. Improvements in technology have reduced the cost of producing personal computers of equal quality. You predict that in the market for personal computers, there will be
A. an increase in the quantity supplied of personal computers, an increase in the
price, and an increase in demand.
B. an increase in the supply of personal computers, a decrease in the price, and an
increase in the quantity demanded.
C. an increase in the supply of personal computers, a decrease in the price, and an
increase in demand.
D. a decrease in the supply of personal computers, an increase in the price, and a
decrease in the demand.
E. an increase in the supply of personal computers, an increase in the price, and a
decrease in the quantity demanded.
11. In the figure above, between 1990 and 1994
A. the price of oil rose continuously.
B. the price of oil rose then fell
C. the price of oil fell constantly
D. the price of oil fell then rose
E. none of the above.
12. Consider the regulated market shown in the table above. The government has imposed a mandatory price floor of $4/q. The result is
A. a surplus of 3 units.
B. a shortage of 5.5 units.
C. a surplus of 5.5 units.
D. a shortage of 3 units.
E. equilibrium, no shortage or surplus exists.
13. Which of the following statements is false?
A. The supply and demand model serves to illustrate market behavior.
B. Market equilibrium is not an important element of the supply and demand model.
C. Supply illustrates the behavior of firms in a market.
D. Demand illustrates the behavior of consumers in a market.
E. Supply and demand must be combined in order for either to be useful in explaining and
predicting market behavior.
14. Suppose MUx/Px < MUy/Py, where MUx (MUy) is the marginal utility of good x (good y) and Px (Py) is the price of good x (good y). This implies that
A. spending less on y and spending more on x increases utility.
B. spending less on x and spending more on y increases utility.
C. x is more expensive than y.
D. y is more expensive than x.
E. none of the above.
15. Suppose that Cornell University decided to reduce the size of introductory chemistry classes. Which of the following outcomes is not possible without increasing tuition?
A. There would be fewer chemistry electives.
B. There would be fewer classics electives.
C. There would be larger class sizes in the chemistry electives.
D. There would be larger class sizes in the required economics courses.
E. There would be more chemistry professors with no changes in other departments or
colleges.
16. When there is an increase in quantity supplied,
A. consumers are unlikely to buy the additional product.
B. technology must have improved.
C. producers are displaying a decreased willingness to produce since price has risen.
D. producers are forced to do so by government edict.
E. there must have been an increase in output price, all other things equal.
17. Using the figure above, when the price is P2, consumers surplus is the following numbered area(s):
A. 1.
B. 2 + 3 + 4.
C. 1 + 2 + 3 + 4.
D. 1 + 6
E. 2 + 3 + 4 + 5.
18. In the figure above the movement from point A to point B represents
A. the substitution effect associated with an increase in the price of books.
B. the income effect associated with an increase in the price of books.
C. the substitution effect associated with a decrease in the price of books.
D. the substitution effect associated with an increase in the price of movies.
E. the substitution effect associated with a decrease in the price of movies.
19. A change in a given commodity's price, all other things equal, has the following effect(s):
A. a change in demand for the commodity.
B. a change in the quantity demanded of that commodity.
C. a change in the demand for substitutes for that commodity.
D. A and B together.
E. B and C together.
20. Consider the market for traditional printed textbooks. If students could buy reference material on CD-ROMs and if paper costs increased dramatically, which of the following is the best prediction in the new market equilibrium?
A. The price of textbooks would rise and the quantity would fall.
B. The price of textbooks would rise but the quantity could rise or fall.
C. The price of textbooks could rise or fall but the quantity would fall.
D. The price of textbooks would fall and the quantity would rise.
E. The facts are insufficient to permit an answer.
21. Consider the preferences represented by the indifference curves in the figure above. If the consumer has income of $10 and faces the prices PA = $1 and PB = $2, then the optimal quantity of A to consume is
A. 2
B. 3
C. 4
D. 6
E. Cannot be determined from the problem data.
22. Suppose that the quantity demanded for chicken increased from 9 to 11 pounds per month when the price fell from $3.00 per pound to $2.00 per pound. The price elasticity of demand for chickens, using the midpoint formula is:
A. -0.67
B. -2.0
C. -1.5.
D. -0.5
E. not defined
23. When a price increase produces a decline in the total amount spent on a commodity, demand is said to be:
A. perfectly elastic.
B. income inelastic.
C. unit elastic.
D. price inelastic.
E. price elastic.
24. The government wants to reduce the consumption of electricity by 5 percent. If the price elasticity of demand for electricity is -0.4, then the government should
A. raise the price of electricity by 0.125 percent.
B. raise the price of electricity by 2 percent.
C. raise the price of electricity by 0.08 percent.
D. raise the price of electricity by 12.5 percent.
E. lower the price of electricity by 0.4 percent.
25. The price of movie theater tickets goes up by 10 percent, causing the quantity demanded for video rentals to go up by 3 percent. Which one of the following is true?
A. Movies and videos are complements.
B. The own-price elasticity of movie tickets is -0.3.
C. The cross-price elasticity of video rentals is positive.
D. The cross-price elasticity of video rentals is zero.
E. None of the above.
26. When doing economics, observations, models, measurements, tests and reports are used
A. to improve the mathematical elegance of the theories.
B. to dismiss the state of existing knowledge.
C. to develop a better explanation for some phenomenon than existing models.
D. to demonstrate that the model is always correct.
E. to find the mistakes that markets make.
27. Last year Mohammed purchased 30 pounds of beef when his income was $30,000. This year his income is $40,000 and he purchased 40 pounds of beef. Which of the following statements is true?
A. Mohammed's demand for beef is price inelastic.
B. Mohammed's demand for beef is price elastic.
C. Beef and income are demand substitutes.
D. Beef is a normal good.
E. None of the above.
28. Suppose that the demand equation is Q = 50 -2P and the supply equation is Q = 20 + 4P. What are the market price and quantity?
A. P = 5, Q = 40
B. P = 5, Q = 120
C. P = 40, Q = 5
D. P = 5/4, Q = 25
E. None of the above.
29. Consider the apartment rental market illustrated above. If the town council passes a new rent control law limiting monthly rent to a maximum of $300, which of the following is likely to occur?
A. The quantity rented on the market after price controls will be 3,000.
B. There will be a surplus of 1,200 housing units on the market.
C. The rent charged in occupied units will be $500.
D. There will be a shortage of 1,200 housing units on the market.
E. The market will try to make the price fall if the law is not enforced.
30. A consumer has to decide among the following bundles of goods X and Y (X,Y): (15,10), (10,5), (10, 10), (15, 20) and (10,15). The only information that you possess is that the price ratio (Px/Py) is equal to 2/3. The consumer's best choice among these five is:
A. (15,10)
B. (10,5)
C. (10,10)
D. (15,20)
E. (10,15)
31. Economists use elasticity more often than slope to summarize supply and demand conditions because:
A. elasticity is easier to compute.
B. the slope tells us about relative changes whereas the elasticity tells us about
absolute changes.
C. the midpoint elasticity formula is a good summary of the shape of the supply and demand
curves.
D. the slope is only useful for straight line demand and supply curves.
E. the elasticity does not depend upon the units of measurement.
32. The price index for heart surgery increased from 100 to 110 between 1994 and 1995. At the same time the Consumer Price Index rose from 100 to 105. What is the change in the real (relative) price index of heart surgery over this period?
A. Zero
B. 0.05
C. 0.10
D. 0.15
E. 0.20
33. Suppose Jorge is willing to pay $5 for his first ice cream sundae, $4 for his second ice cream sundae, $2 for a third ice cream sundae and $0.50 for his fourth ice cream sundae. If Jorge has to pay $2 for ice cream sundaes, how much consumer surplus does he get?
A. $1
B. $5
C. $5.50
D. $11
E. $11.50
34. When the price of a good increases, the substitution effect
A. tends to result in a decrease in the quantity of other goods demanded.
B. is caused by an individual substituting the relatively high-priced good for other
goods.
C. results in an individual substituting other relatively less expensive goods for the
higher-priced good.
D. rarely has any effect on the quantity of a good demanded.
E. is the only effect that tends to reduce the quantity demanded of the good whose price
increased.
35. Economists assume that people
A. cannot compare the values of goods.
B. act so as to maximize utility.
C. prefer less to more.
D. experience diminishing marginal utility of income.
E. act so as to increase utility.
36. The fare on the New York subway is regulated and the metropolitan transit authorities deliver as much capacity as the riders demand. If the daily demand for subway rides is expressed in log-log form as Ln(P) = 14 - 10Ln(Q), by how much will subway rides fall (rise) if fares are increased by 10 percent?
A. rise by 10 percent
B. rise by 4 percent
C. no change
D. fall by 1 percent
E. fall by 10 percent
37. Which of the following will result in an increase in quantity demanded with no shift in the demand curve?
A. An increase in income.
B. A change in preferences.
C. An increase in the price of a substitute.
D. An increase in the price of a complement.
E. A shift in the supply curve to the right.
38. The income elasticity of the demand for supersonic flights across the Atlantic (flights on the British/French Concorde) is high because
A. there is only one type of jet that can do this and therefore very few substitutes.
B. relatively wealthy people increase their spending on high speed transport by a greater
percent than the percentage increase in their income.
C. high speed transit does not take a large share of the average consumer's budget.
D. British/French aircraft are inferior to the newer, more spacious Boeing jets.
E. the costs of inputs into supersonic transport is high.
39. At a price of $10 the same amount of income was spent on pre-recorded cassette tapes as when the price of these tapes was $13. Therefore, the demand for cassette tapes is
A. perfectly price inelastic
B. price inelastic
C. unit price elastic
D. price elastic
E. perfectly price elastic
40. The U.S. government simultaneously sponsors drug education programs in grade schools and spends billions of dollars on international drug traffic reduction. The net effect of these policies, according to economic analysis, should be:
A. to raise the price of illicit drugs and reduce the quantity consumed.
B. to reduce the quantity consumed but to have an ambiguous effect on the price (could go
up or down).
C. to raise the price of illicit drugs but to have an ambiguous effect on the quantity
consumed.
D. to raise both the price and the quantity consumed of illicit drugs.
E. to reduce the price and consumption of legal drugs.
41. For which of the following goods would you expect the price elasticity of demand to be the largest?
A. Gasoline
B. Mobil-brand regular gasoline
C. Unleaded gasoline
D. Petroleum products
E. Transportation services
42. The term utility maximization means that
A. individuals maximize their usefulness to society.
B. individuals consume the maximum amount of a good that the budget constraint makes
possible.
C. individuals consume so as to gain as much utility as possible, given the limits of the
budget constraint.
D. total utility will not change with a change in income.
E. once utility is at its maximum, leftover income can be saved.
43. When the price of a good increases, the income effect
A. generally results in less of the good being consumed.
B. makes it possible for the consumer to buy more goods and services.
C. results from the increase in real income.
D. applies only to some goods depending on one's preferences.
E. applies only to inferior goods.
44. Melissa currently consumes only good A and good B. Her levels of consumption are shown in the table above. According to the information given above, she should
A. spend more on A and less on B.
B. spend more on B and less on A.
C. spend more on both.
D. spend less on both.
E. stay put, she is currently maximizing her satisfaction from the two goods.
45. Over the last 30 years, since the beginning of Medicare, there has been a large increase in the percentage of the American population covered by government-paid health care insurance. At the same time, the training requirements for physicians have increased by several years, on average. According to economic theory, the net effect of these two conditions out to be
A. an increase in the quantity and price of medical care.
B. an increase in the quantity of medical care but no predictable effect on the price.
C. an increase in the price of medical care but no predictable effect on the quantity.
D. a decrease in the quantity and price of medical care.
E. a decrease in the price of medical care but no predictable effect on the quantity.
46. Using the figure above, in which panel does the movement from point A to point B represent the substitution effect of an increase in the price of candy.
A. A
B. B
C. C
D. D
E. none of the above.
47. The State of Urgence (a fictitious state) increased its cigarette excise tax rate from $0.15/pack in 1994 to $0.33/pack in 1995. Tax receipts from cigarette sales rose from $600 in 1994 to $1,188 in 1995. The price of cigarettes exclusive of the state excise tax was $2.00 in both years. Cigarette consumption in neighboring states with stable tax rates did not change. Using the symmetric midpoint formula, which of the following is the best estimate of the own price elasticity of cigarette demand in Urgence?
A. elasticity = -0.76
B. elasticity = -1.31
C. elasticity = -0.14
D. elasticity = 0.88
E. elasticity = -0.88
48. Suppose Cameron is willing to pay $100 for her first mask, $35 for her second mask, $20 for her third mask, $10 for her fourth mask and $1 for her fifth mask. If Cameron has to pay $15 per mask, how much consumer surplus does she get?
A. $45
B. $91
C. $110
D. $155
E. $166
49. Consider the soy bean market illustrated above. If the U.S. government passes a price support holding the price of soy beans at $6.00/bushel, which of the following is true?
A. The quantity of soy beans purchased by consumers on the market after the imposition
of the price supports will be 2,600 million bushels.
B. There will be a surplus of 1,200 million bushels of soy beans on the market.
C. The price per bushel for soy beans will be $4.00 .
D. There will be a shortage of 1,200 million bushels on the market.
E. The market will try to make the price rise if the price support is not enforced.
50. Heinz has the following demand curve for bratwurst (a kind of sausage): Q = 10-2P. Inga's bratwurst demand curve is Q = 6-3P and Johann's demand for bratwurst is Q = 14-P. If Heinz, Inga and Johann are the only consumers, what is the market demand curve for bratwurst for prices between 0 and 2?
A. Q = 30-6P
B. Q = 10-2P
C. P = 5-0.5Q
D. Q = 30-2P
E. Q = 10-6P
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