Practice Test

EC 102 Principles of Microeconomics

Fall 1997 Bernasek

Multiple Choice:

1. The best example of a normative statement is

(a) if the price of good increases the quantity demanded of the good will decrease.

(b) if average household income in the U.S. increases then the demand for cars will increase.

(d) if the government institutes a national health care system the supply of doctors will fall.

2. Consider the market for mountain bikes in Fort Collins. If an increase in the demand for mountain bikes is observed, then which of the following could have been responsible?

(a) a fall in the price of a mountain bike.

(b) a technological improvement in the process of making mountain bikes.

(d) an increase in the number of people moving to Fort Collins.

3. When the price that prevails in the market is a disequilibrium price, and there is no government intervention, then the quantity exchanged will always be equal to,

(a) the quantity demanded.

(b) the quantity supplied.

(d) the greater of the quantity demanded and quantity supplied.

4. If the percentage change in the Qd of a good is 0.5 and the percentage change in the price of the good is 1, then we know that the demand for the good is

(a) price elastic.

(b) price inelastic.

(d) perfectly elastic.

5. If a firm lowers its price and its total revenue increases then we know that the demand for the good is

(a) price elastic.

(b) price inelastic.

(d) perfectly inelastic.

6. If the cross price elasticity between two goods is found to be negative then the two goods are

(a) substitutes.

(b) complements.

(d) inferior.

7. Markets in which consumers are the buyers and firms are the sellers are

(a) factor markets.

(b) goods markets.

(d) both (a) and (b).

8. Consider the market for cross-country skis in Colorado. Suppose the demand for skis falls and the supply of skis increases. Then we know that there will be

(a) a decrease in the equilibrium price and no change in the equilibrium quantity.

(b) a decrease in the equilibrium price and an increase in the equilibrium quantity.

(d) a decrease in the equilibrium price and the effect on equilibrium quantity is ambiguous.

9.Increasing opportunity cost is indicated on the PPF by

(a) the negative slope.

(b) the bowed out shape.

(d) a straight line.

For the following indicate whether the statement is True or False.

10. Changes in demand, all other things constant, change Pe and Qe in the same direction.

(a) True

(b) False

11. A good with few substitutes will tend to be more price inelastic than a good with many substitutes.

(a) True

(b) False

12. The short run supply curve will tend to be more inelastic than the long run supply curve of a good.

(a) True

(b) False

13. If there is excess demand in a market then the market price must be above the equilibrium price.

(a) True

(b) False

14. An increase in the price of a good will increase the demand for the good.

(a) True

(b) False

Definitions (Write down the term that corresponds to the definition given)

1. The study of the allocation of scarce resources among competing human wants.

___________________________

2. Measures the responsiveness of changes in Qs to changes in P.

___________________________

3. A factor of production that includes land, minerals, water, etc.

___________________________

4. The relationship between the quantity demanded of a good and price of the good, all other things constant.

___________________________

5. An economic system that coordinates economic activity primarily through a central plan that is devised by the central government.

___________________________

Essay (Answer all parts of the question)

From you reading of the Dollars and Sense article "Worthy Work, Worthless Wages" answer the following:

(a) What is the author's purpose in writing this article?

(b) Why does the author argue that the wages of child care workers are so low?

(d) Critically evaluate that proposal - state whether you agree of disagree with the proposal and explain why. Use economic reasoning to support your answer.

Answers

Multiple choice:

1 (c), 2 (d), 3 (c), 4 (b), 5 (a), 6 (b), 7 (b), 8 (d), 9 (b), 10 (a) , 11 (a), 12 (a), 13 (b), 14 (b).

Definitions:

1. Neoclassical economics.

2. Price elasticity of supply.

3. Natural resources.

4. Demand.

5. Command economic system.

Essay:

The essay is worth 20 points -- with four parts that generally means about 5 points per part. Make sure that you say enough to get 5 points. In most cases it is not necessary to write a lot -- just enough to answer the question.

(a) A good answer would briefly describe what the author is writing about -- the market for child care, why the wages of child care workers as so low, how the low wages and high turnover of child care workers results in low quality child care, the problems of low quality child care, asking the question "is the market the best way to provide child care or do we need some form of government intervention to improve the provision of child care.

(b) A good answer would get straight to the point -- people can't afford to spend much on child care even though they need it, that affordability problem means that the demand curve is such that the market price of child care is low and hence child care workers receive low wages. (Perhaps a graph here to illustrate why the price of child care is so low). She also argues that there is a problem with people's attitudes - they don't understand the value of caring for children and they associate that kind of work with the work that women have typically done without being paid.

(c) A good answer would again get straight to the point -- The author proposes an alternative to the current system that would require government intervention in the market for child care. Specifically she mentions several government funded programs such as one in the military, a program in Wisconsin, a program in North Carolina. In addition she mentions a grassroots initiative that seeks to inform the community about the value of high quality child care in order to shape the attitudes that underlie the low wages of child care workers and its association with women's work.

(d) A good answer mentions the positive aspects of the proposal AND the negative aspects, then it states what you think about the proposal on balance and why -- Government intervention: Pros include: more funding for child care, ability to pay higher wages to child care providers, better quality child care; fewer social problems down the road, the children are better off. Cons include: requires taxpayers to agree to pay for child care. On balance I would support the proposal because I think the benefits far outweigh the costs -- particularly in terms of the long term effects of higher quality care on the children. The market doesn't take into account these benefits but well cared for children will probably do better as adults than children who are not well cared for. There is also a precedent in the government taking this responsibility which is public education K-12. The government did not always fund education and yet public funding for education has been extremely valuable and not something that would be well left to the market where only those who can afford to pay get the commodity.