1 The Commerce Ministry of a country conducts regular survey

1. The Commerce Ministry of a country conducts regular surveys on goods and services sold within the country. Researchers at the Ministry study consumer behavior through the choices the consumers make while deciding what to buy. Their report on the industry for beverages last year indicated that the price elasticity of demand for fruit juices in the country was -0.8, while the price elasticity of demand for a particular brand called Fruit Drops was -1.2. According to the report, an average consumer spends about 1 percent of his monthly income on fruit juices. A student of economics, Julio, however feels that the current price elasticity of demand for Fruit Drops is actually higher than -1.2, based on his own experience in purchasing fruit juices.
Which of the following conclusions can most reasonably be drawn from the information given in the question?
A. The price elasticity of demand for juices is unlikely to change in the near future.
B. A one percent increase in the price of fruit juice will cause a 0.8 percent increase in the demand for it.
C. Every single consumer of fruit juices spends precisely 1 percent of his or her income in buying juices.
D. Fruit Drops is not the only supplier of fruit juices to this market.
E. Julio thinks that Fruit Drops has the best juices among all its competitors.

2. A firm sells 3,000 headphones at a price of $3 per unit. Even though this price is slightly higher than competing brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity. Rachel, the firm\'s marketing head, feels confident that a price increase by 25 cents will increase revenue. Industry analysts are of the opinion that even though the revenue is likely to increase, the firm must be careful of rivals who are actively competing for higher market share.

Which of the following, if true, would indicate that any increase in price from $3 would reduce the firm\'s total revenue? (Assume the demand curve is linear.)
A. The average price level in the economy is rising.
B. The music industry is going through a downturn lately.
C. The total revenue curve is upward sloping at 3,000 units of output.
D. At $3, the demand for this particular brand of headphones is unit elastic.
E. When price is increased from $3 to $3.25, quantity demanded decreases by 6 percent.

3. Income elasticity of demand is

A. the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
B. the percentage change in quantity demanded divided by the percentage change in price.
C. the percentage change in quantity supplied divided by the percentage change in price.
D. the percentage change in income divided by the percentage change in prices.
E. the percentage change in quantity demanded divided by the percentage change in income.

4. Suppose that after hurricane Irene, the average income in Cape Charles, Virginia decreased by 12 percent. In response to this change in income, suppose the quantity of steak demanded in Cape Charles (holding the price of steak constant) decreased by 6 percent. What is the income elasticity of demand for steak in Cape Charles?

The income elasticity of demand for steak in Cape Charles is ___. (Enter your response rounded to two decimal places.)

5. Which of the following describes the extent of international trade in the U.S. economy?
A. Since 1950, U.S. imports have increased from less than 5 percent of GDP to about 30 percent in 2008.
B. Since 1950, U.S. exports have decreased from about 11 percent of GDP to about 4 percent in 2008.
C. Each year, the U.S. exports less than 10 percent of many agricultural crops such as rice.
D. About 66 percent of U.S. manufacturing industries depend on exports for at least 10 percent of jobs.
E. Since 1950, U.S. exports have increased and U.S. imports have decreased.

6. While running for president, Barack Obama made the following statement:
\"Well, look, people don\'t want a cheaper T-shirt if they\'re losing a job in the process.\"
What did Obama mean by the phrase \"losing a job in the process\"?
Source: James Pethokoukis, \"Democratic Debate Spawns Weird Economics,\" U.S. News & World
Report,
August 8, 2007.
Obama was suggesting that a job would be lost if the T-shirt were cheaper because
A. the firm producing the shirt would go out of business.
B. there would be no international trade.
C. firms making dress shirts would go out of business.
D. it would be produced in another country.
E. it would require the U.S. government to impose tariffs.

7. Alzuria and Narnia are two open economies that produce goods A and B. The productivity of workers in industry B in Narnia is higher than the productivity of the Alzurian workers producing B. This led industry experts to claim that Narnia should specialize in the production of B and export it to Alzuria in exchange for good A.
Which of the following, if true, would strengthen the argument that Narnia should specialize in the production of B and export it?
A. Industry A in Narnia employs more people than it really needs.
B. The demand for B in Narnia is very high.
C. The size of the labor force in Narnia is increasing and a majority of the new workers are better-suited to the production of good A.
D. The income elasticity of demand for B is very low in both countries.
E. The opportunity cost of producing B in Alzuria is very low.

Solution

Ans:

1) Option D

Fruit Drops is not the only supplier of fruit juices to this market.

From the given information we can understand that fruit Drops is a particular brand in the beverages industry and its is not the only supplier of fruit juices to this market.

2) Option D

At $3, the demand for this particular brand of headphones is unit elastic.

when the demand is unit elastic, the change in quantity demanded is perfectly responsive to changes in price. any increase in price from $3 would reduce the firm\'s total revenue.

3) Option E

the percentage change in quantity demanded divided by the percentage change in income.

formula for income elasticity of demand = percentage change in quantity demanded / percentage change in income.