Question

1. Why does producer surplus decrease as price decreases?

a. Producers sell less of the good and receive less from the lower price.

b.Producers sell more of the good but receive less from the lower price.

c.Consumers buy more of the good at the lower price.

d.Producers sell less of the good while consumers buy even more of the good.

2.When the use of a communally owned resource has no price, then people will

a. not use this resource

b. use too much of this resource

c. use less of the resource than usual

d. use another resource altogether

3. The elasticity of demand for a project is -1.5. This means that a 30 percent increase in the quantity of the good is caused by a

a. 20 percent increase in the price of the good

b. 20 perfect decrease in the price of the good

c. 2 percent increase in the price of the good

d. 15 percent decrease in the price of the good

4.The price elasticity of supply measures how

a. easily labor and capital can be substituted for one another in the production process.

b. responsive the quantity supplied of X is to changes in the price of X.

c. responsive the quantity supplied of Y is to changes in the price of X.

d.responsive quantity supplied is to a change in incomes.

Answer 1

1) Select A. Note that producer surplus is the difference between the price received and the reservation price. If price received falls, quantity supplied falls and so producer surplus decreases

2) Select B. When there is no price, there is no explicit opportunity cost and so over exploitation of the resource is expected

3) Select B. This uses, elasticity = % change in Qd / % change in P. If % change in Qd is +30% then % change in P must be -20% so that elasticity is 30%/-20% = -1.5

4) Select B