PERRY REAL ESTATE COLLEGE -
NATIONAL PRACTICE TESTS 6-10
QUESTIONS & ELABORATED
COMPLETE ANSWERS
NATIONAL TEST 6: Economics; Appraisal - Correct Answer ✔✔
6.1 If the price of an item is increasing, one can usually assume that
a. demand for the item is decreasing in relation to supply of the item.
b. demand for the item is increasing in relation to supply of the item.
c. supply of the item is increasing.
d. demand for the item and supply of the item are increasing. - Correct Answer ✔✔ 6.1
(b) demand for the item is increasing in relation to supply of the item.
In a market economy, the primary interactions between supply, demand and price are: if
supply increases relative to demand, price decreases; if supply decreases relative to
demand, price increases; if demand increases relative to supply, price increases; and if
demand decreases relative to supply, price decreases.
6.2 When the market for an item has achieved market equilibrium, which of the following
statements is true?
a. New suppliers will enter the market and drive the price down.
b. Demand will slowly taper off, driving the price down.
c. Unmet demand for the item is directed toward demand for some other item.
d. Supply and demand are equal, and price and value are equal. - Correct Answer ✔✔
6.2 (d) Supply and demand are equal, and price and value are equal.
A market tends toward a state of equilibrium in which supply equals demand, and price,
cost, and value are identical. According to this principle, market demand moves to meet
supply, and supply moves to meet demand. If there is an extreme shortage of an item
for which there is normally a strong demand, suppliers will rush to increase production
to close the gap. If inventories of an item are very high, suppliers will stop production
until the oversupply has been depleted.
6.3 As an economic product, real estate is distinguished by
a. its homogeneity.
b. its variety.
c. the uniqueness of every parcel.
,d. its ability to appreciate in value. - Correct Answer ✔✔ 6.3 (c) the uniqueness of every
parcel.
In comparison with other economic products and services, real estate has certain
unique traits. Traits of real estate include: inherent product value; uniqueness of every
property; demand must come to the supply; illiquidity; slow to respond to changes; and
a decentralized local market.
6.4 The city of Stevensville has declared a moratorium on new construction. If demand
is increasing, what will be the likely effect on real estate prices in the area?
a. Prices level off.
b. Prices continue to follow the trend that preceded the moratorium.
c. Prices fall.
d. Prices rise. - Correct Answer ✔✔ 6.4 (d) Prices rise.
If demand is increasing and a moratorium slows supply, demand will begin to outpace
supply, forcing prices to rise as the product becomes scarcer in relation to demand.
6.5 If Okapi, Inc., a company that markets its sports clothing worldwide, moves into
Stevensville and hires 100 employees, it is reasonable to expect that the town will
experience
a. an immediate rise in the demand for industrial real estate, but no other changes in the
real estate market.
b. an increase in demand for all types of real estate.
c. a housing boom, but no other changes in the real estate market.
d. an immediate increase in the prices for industrial and office real estate, but no impact
on the
residential market. - Correct Answer ✔✔ 6.5 (b) an increase in demand for all types of
real estate.
New businesses will arise to support the new company. They will hire new employees,
some from out of town. The new employees will need housing. Hence the demand for
residential real estate, as well as for commercial and industrial, will intensify, and it will
also stimulate new construction.
6.6 What is "absorption?"
a. The amount of new space that is added to available space over a period of time.
b. The number of houses that are built over a period of time.
c. The amount of space that is occupied at any given time.
d. The number of available units that become occupied over a period of time. - Correct
Answer ✔✔ 6.6 (d) The number of available units that become occupied over a period
of time.
,Absorption is the amount of available property that becomes occupied over a period of
time.
6.7 When vacancies are declining in a real estate market, it is common for the market to
experience
a. rising prices.
b. falling prices.
c. falling construction activity.
d. falling absorption. - Correct Answer ✔✔ 6.7 (a) rising prices.
Within the business cycle of real estate, declining vacancy indicates a combination of
increasing demand which "fills up" supply which in turn decreases. As space becomes
scarcer, rents for available space increase.
6.8 The price for any product is a function of four fundamental determinants of value.
These are
a. durability, feasibility, mobility, and location.
b. desire, utility, scarcity, and purchasing power.
c. popularity, recognizability, promotion, and rebate.
d. fungibility, costs, convenience, and uniqueness. - Correct Answer ✔✔ 6.8 (b) desire,
utility, scarcity, and purchasing power.
The value of something is based on the answers to four questions: how much do I
desire it; how useful is it; how scarce is it; and am I able to pay for it.
6.9 A town is rapidly growing, but all the buildable vacant lots in the most desirable area
have already been occupied. In this case, it is likely that the price of existing homes in
that area
a. will stabilize, since the population must stabilize.
b. will increase.
c. will decline, since no further building can take place.
d. will not show any predictable movement. - Correct Answer ✔✔ 6.9 (b) will increase.
If there is no longer a supply to meet the increasing demand of a growing population,
prices for existing supply will rise.
6.10 If there is a significant undersupply of homes in a market, construction will tend to
increase. This is an example of
a. supply outstripping demand.
b. demand outstripping value.
c. consumer optimism.
, d. the market tending toward equilibrium. - Correct Answer ✔✔ 6.10 (d) the market
tending toward equilibrium.
A market tends toward a state of equilibrium in which supply equals demand, and price,
cost, and value are identical. Thus if supply is scarce, construction will increase to
stabilize the imbalance.
6.11 If commercial real estate rental prices are falling in a market, it is likely that
a. demand has outstripped supply of space.
b. the market is in equilibrium.
c. the market is over-supplied.
d. employment is increasing. - Correct Answer ✔✔ 6.11 (c) the market is over-supplied.
Falling prices indicate an oversupply of commercial properties in relation to demand. In
this case, construction of new supply will also slow down.
6.12 A construction boom in a market is an indication that prices
a. have been increasing.
b. have been declining.
c. have been in equilibrium.
d. have exceeded supply. - Correct Answer ✔✔ 6.12 (a) have been increasing.
A rise in prices is a market signal that there is an undersupply of product in relation to
demand. As the market moves toward equilibrium, builders construct more buildings to
meet the unmet demand.
6.13 Why is real estate traditionally considered a relatively illiquid economic product?
a. Its physical form is fixed.
b. Real estate is defined as land, not water.
c. It is often difficult to convert to cash.
d. It cannot be moved. - Correct Answer ✔✔ 6.13 (c) It is often difficult to convert to
cash.
Since real estate is often a large, long-term investment that has no exact duplicate, the
process of a buyer's evaluating and choosing the right property is long and complex;
hence, finding a buyer at a desired price can take a long time.
6.14 What does "base employment" refer to in the context of real estate demand?
a. The lowest category of employment in terms of wages and desirability
b. The number of persons employed in base industries in an area
c. The number of persons employed on military bases in an area
NATIONAL PRACTICE TESTS 6-10
QUESTIONS & ELABORATED
COMPLETE ANSWERS
NATIONAL TEST 6: Economics; Appraisal - Correct Answer ✔✔
6.1 If the price of an item is increasing, one can usually assume that
a. demand for the item is decreasing in relation to supply of the item.
b. demand for the item is increasing in relation to supply of the item.
c. supply of the item is increasing.
d. demand for the item and supply of the item are increasing. - Correct Answer ✔✔ 6.1
(b) demand for the item is increasing in relation to supply of the item.
In a market economy, the primary interactions between supply, demand and price are: if
supply increases relative to demand, price decreases; if supply decreases relative to
demand, price increases; if demand increases relative to supply, price increases; and if
demand decreases relative to supply, price decreases.
6.2 When the market for an item has achieved market equilibrium, which of the following
statements is true?
a. New suppliers will enter the market and drive the price down.
b. Demand will slowly taper off, driving the price down.
c. Unmet demand for the item is directed toward demand for some other item.
d. Supply and demand are equal, and price and value are equal. - Correct Answer ✔✔
6.2 (d) Supply and demand are equal, and price and value are equal.
A market tends toward a state of equilibrium in which supply equals demand, and price,
cost, and value are identical. According to this principle, market demand moves to meet
supply, and supply moves to meet demand. If there is an extreme shortage of an item
for which there is normally a strong demand, suppliers will rush to increase production
to close the gap. If inventories of an item are very high, suppliers will stop production
until the oversupply has been depleted.
6.3 As an economic product, real estate is distinguished by
a. its homogeneity.
b. its variety.
c. the uniqueness of every parcel.
,d. its ability to appreciate in value. - Correct Answer ✔✔ 6.3 (c) the uniqueness of every
parcel.
In comparison with other economic products and services, real estate has certain
unique traits. Traits of real estate include: inherent product value; uniqueness of every
property; demand must come to the supply; illiquidity; slow to respond to changes; and
a decentralized local market.
6.4 The city of Stevensville has declared a moratorium on new construction. If demand
is increasing, what will be the likely effect on real estate prices in the area?
a. Prices level off.
b. Prices continue to follow the trend that preceded the moratorium.
c. Prices fall.
d. Prices rise. - Correct Answer ✔✔ 6.4 (d) Prices rise.
If demand is increasing and a moratorium slows supply, demand will begin to outpace
supply, forcing prices to rise as the product becomes scarcer in relation to demand.
6.5 If Okapi, Inc., a company that markets its sports clothing worldwide, moves into
Stevensville and hires 100 employees, it is reasonable to expect that the town will
experience
a. an immediate rise in the demand for industrial real estate, but no other changes in the
real estate market.
b. an increase in demand for all types of real estate.
c. a housing boom, but no other changes in the real estate market.
d. an immediate increase in the prices for industrial and office real estate, but no impact
on the
residential market. - Correct Answer ✔✔ 6.5 (b) an increase in demand for all types of
real estate.
New businesses will arise to support the new company. They will hire new employees,
some from out of town. The new employees will need housing. Hence the demand for
residential real estate, as well as for commercial and industrial, will intensify, and it will
also stimulate new construction.
6.6 What is "absorption?"
a. The amount of new space that is added to available space over a period of time.
b. The number of houses that are built over a period of time.
c. The amount of space that is occupied at any given time.
d. The number of available units that become occupied over a period of time. - Correct
Answer ✔✔ 6.6 (d) The number of available units that become occupied over a period
of time.
,Absorption is the amount of available property that becomes occupied over a period of
time.
6.7 When vacancies are declining in a real estate market, it is common for the market to
experience
a. rising prices.
b. falling prices.
c. falling construction activity.
d. falling absorption. - Correct Answer ✔✔ 6.7 (a) rising prices.
Within the business cycle of real estate, declining vacancy indicates a combination of
increasing demand which "fills up" supply which in turn decreases. As space becomes
scarcer, rents for available space increase.
6.8 The price for any product is a function of four fundamental determinants of value.
These are
a. durability, feasibility, mobility, and location.
b. desire, utility, scarcity, and purchasing power.
c. popularity, recognizability, promotion, and rebate.
d. fungibility, costs, convenience, and uniqueness. - Correct Answer ✔✔ 6.8 (b) desire,
utility, scarcity, and purchasing power.
The value of something is based on the answers to four questions: how much do I
desire it; how useful is it; how scarce is it; and am I able to pay for it.
6.9 A town is rapidly growing, but all the buildable vacant lots in the most desirable area
have already been occupied. In this case, it is likely that the price of existing homes in
that area
a. will stabilize, since the population must stabilize.
b. will increase.
c. will decline, since no further building can take place.
d. will not show any predictable movement. - Correct Answer ✔✔ 6.9 (b) will increase.
If there is no longer a supply to meet the increasing demand of a growing population,
prices for existing supply will rise.
6.10 If there is a significant undersupply of homes in a market, construction will tend to
increase. This is an example of
a. supply outstripping demand.
b. demand outstripping value.
c. consumer optimism.
, d. the market tending toward equilibrium. - Correct Answer ✔✔ 6.10 (d) the market
tending toward equilibrium.
A market tends toward a state of equilibrium in which supply equals demand, and price,
cost, and value are identical. Thus if supply is scarce, construction will increase to
stabilize the imbalance.
6.11 If commercial real estate rental prices are falling in a market, it is likely that
a. demand has outstripped supply of space.
b. the market is in equilibrium.
c. the market is over-supplied.
d. employment is increasing. - Correct Answer ✔✔ 6.11 (c) the market is over-supplied.
Falling prices indicate an oversupply of commercial properties in relation to demand. In
this case, construction of new supply will also slow down.
6.12 A construction boom in a market is an indication that prices
a. have been increasing.
b. have been declining.
c. have been in equilibrium.
d. have exceeded supply. - Correct Answer ✔✔ 6.12 (a) have been increasing.
A rise in prices is a market signal that there is an undersupply of product in relation to
demand. As the market moves toward equilibrium, builders construct more buildings to
meet the unmet demand.
6.13 Why is real estate traditionally considered a relatively illiquid economic product?
a. Its physical form is fixed.
b. Real estate is defined as land, not water.
c. It is often difficult to convert to cash.
d. It cannot be moved. - Correct Answer ✔✔ 6.13 (c) It is often difficult to convert to
cash.
Since real estate is often a large, long-term investment that has no exact duplicate, the
process of a buyer's evaluating and choosing the right property is long and complex;
hence, finding a buyer at a desired price can take a long time.
6.14 What does "base employment" refer to in the context of real estate demand?
a. The lowest category of employment in terms of wages and desirability
b. The number of persons employed in base industries in an area
c. The number of persons employed on military bases in an area
