Econ 172 Quiz 2 Name:

Spring 2006

1. The adjoining figure shows the market for crude oil. If a consumer group convinces the government to set a maximum price of $2 per barrel, then

a. 300 barrels of crude oil will be sold at $2. That is the price and quantity iin equilibrium, not at a government enforced price of $2.

b. zero barrels of crude oil will be sold. At $2, people will want to buy 300 barrels but firms will be willing to supply zero. That’s because the supply curve is horizontal at $3. Below a price of $3 there is zero quantity supplied.

c. zero barrels of crude oil will be demanded.

d. None of the above.

2. Using the same graph, if oil exploration firms convince the government to set a minimum price of $4 per barrel, then

a. 100 barrels of crude oil will be sold at $4. At $4, the quantity demanded is 100. That is how many will be sold. Suppliers are willing to supply as much as can be purchased at $3, so they would also be willing to supply 100 at $4.

b. zero barrels of crude oil will be sold. Based on the supply curve, firms will always be willing to produce at any price at or above $3

c. zero barrels of crude oil will be demanded. Only at a price above $5 will zero be demanded.

d. None of the above.

3. If the demand curve for a good always has unitary price elasticity, what does this imply about consumer behavior?

a. Consumers do not react to a price change. That would be the case if the price elasticity is zero, not unitary (1).

b. Consumers will spend a constant total amount on the good. If the price goes up 10% and quantity demanded falls by 10%, the two balance and total spending is the same.

c. Consumers are irrational.

d. Consumers do not obey the Law of Demand.

4. If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is

Note that the first thing you should do for a question like this is to write the formula for elasticity of demand:

Ε= (%ChQd)/(%ChP) So 8%/10% is some number less than 1, so the price elasticity is inelastic. The answer is d.

a. 1.25.

b. elastic.

c. Both a and b above.

d. Neither a nor b above.

5. Suppose the price elasticity of demand for cars is 2. If the price of a car falls from $10,000 to $9,500 we can expect the quantity demanded of cars to increase by

Again, write the formula: E = (%ChQd)/(%ChP) 2 = %Ch Qd/ % Ch P. A price decline from $10,000 to $9500 is what percent? An easy way to figure this out without a calculator is to note that a price decline from $10,000 to $9,000 is a 10% decline. So a decline to $9500 is a 5% fall. 2 = %ChQd / 5 and therefore 2 x 5 = % ch Qd so the percent change in quantity demand is 10%

a. 2%

b. 5%

c. 10%

d. 1,000 cars