Economics: Price Elasticity, Supply and Demand, Pricing

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1) If the demand for farm products is price inelastic, a good harvest will cause farm revenues to:

D.decrease
This paradoxical problem is the reason why the government subsidizes many crops.

2) A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the:
A.
more inelastic the demand for the product.

Inelastic demand curves are more steeply sloping and so are more responsive to changes

3) The advent of DVDs has virtually demolished the market for videocassettes. This is an example of:

C.

creative destruction.

When progress causes products to become obsolete, it is created destruction caused by advancement rather than destrucction without a purpose.

4) Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity purchased have both increased. Based on this information we can conclude that:

D.
Demand for clothing has grown faster than the supply of clothing.

5) Camille's Creations and Julia's Jewels both sell beads in a competitive market. If at the market price of $5, both are running out of beads to sell (they can't keep up with the quantity demanded at that price), then we would expect both Camille's and Julia's to:

D.
raise their price and increase their quantity supplied.

Notice that the supply curve slopes upward, so that greater quantities result in higher prices.

6) Which of the following statements is true about productive and allocative efficiency?

D.
Realizing allocative efficiency implies that productive efficiency has been realized.

7) If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

B.
will also be $5.

P = MR in perfect competition

8) If a profit-seeking competitive firm is producing its profit-maximizing output and its total fixed costs fall by 25 percent, the firm should:
A.
increase its output.
B.
not change its output.
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