Multiple-Choice Questions
1. Jim has estimated elasticity of demand for gasoline to be -0.7 in the short run and -1.8 in the long run. A decrease in taxes on gasoline would
a. Lower tax revenue in both the short and long run.
b. Raise tax revenue in both the short and long run.
c. Raise tax revenue in the short run but lower tax revenue in the long run.
d. Lower tax revenue in the short run but raise tax revenue in the long run.

2. Which one of the following is true?
a. Nike has a less elastic demand curve than shoes.
b. The demand curve for gas is more elastic in the short-run than in the long run.
c. Cigarettes have a more elastic demand than televisions.
d. Salt has a less elastic demand than ice cream.

3. Jim recently graduated from college. His income increased tremendously from $5,000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that
a. Houses are normal goods for Jim.
b. Houses are inferior goods for Jim.
c. Renting and owning are complementary for Jim.
d. Need information on the price of houses

4. Which of the following goods has a negative income elasticity of demand?
a. Cars
b. Items from Dollar stores
c. Shoes
d. Bread

5. An economist estimated the cross-price elasticity for peanut butter and jelly to be 1.5.
Based on this information, we know the goods are
a. Inferior goods.
b. Complements.
c. Inelastic.
d. Substitutes.

6. Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if
a. The marginal value she gets from the sixth banana is lower than its price.
b. The marginal benefit of the sixth banana exceeds the price.
c. The average value of the sixth banana exceeds the price.
d. The total personal value of six bananas exceeds the total expenditure to purchase six bananas.

7. Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market?
a. Demand would rise, and Budweiser would reduce price.
b. Demand would fall, and Budweiser would reduce price.
c. Demand would fall, and Budweiser would increase price.
d. Demand would rise, and Budweiser would increase supply.

8. Which of the following is the reason for the existence of consumer surplus?
a. Consumers can purchase goods that they "want" in addition to what they "need."
b. Consumers can occasionally purchase products for less than their production cost.
c. Some consumers receive temporary discounts that result in below-market prices.
d. Some consumers are willing to pay more than the price.

9. A bakery currently sells chocolate chip cookies at a price of $16 per dozen.
The marginal cost per dozen is $8. The cookies are becoming more popular with customers, and so the bakery owner is considering raising the price to $20/dozen.
What percentage of customers must be retained to ensure that the price increase is profitable?
a. 28.0%
b. 33.3%
c. 66.6%
d. 72.0%

10. Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand is -3, how should you adjust price if you want to sell all of your output?
a. 5% lower.
b. 0.5% lower.
c. 15% higher.
d. 15% lower.