PRINCIPLES OF MICROECONOMICS

Sample Mid-Term Exam

Q1. THIS QUESTION IS WORTH 8 MARKS. EACH PART (A TO D) IS
WORTH 3 MARKS, 1 POINT FOR THE CORRECT RESPONSE (T OR F)
AND 2 POINTS FOR THE CORRECT EXPLANATION.
(A) A decrease in supply will cause the equilibrium price and quantity of a good to fall,
ceteris paribus.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(B): Two goods are complements if an increase in the price of one good leads to an increase in
demand for the other.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(C): If the price elasticity of demand for avocados is 3 then a 10% increase in the price will
result in an increase in total revenue.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(D): If the price elasticity of demand is less than 1, then a 6% increase in the price will result in
an increase in total revenue.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(E): If the price of apples increases by 10% and quantity demanded falls by 20%, then the price
elasticity of demand for apples is 0.5.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ANSWER THE FOLLOWING QUESTIONS: SHORT ANSWER/GRAPH
EXPLANATION
Which is likely to be more elastic: the demand for orange juice or the demand for a particular
brand of orange juice? Explain.
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Draw a graph to illustrate the effect of higher gasoline prices on the demand for large SUVs.
What is the relationship between gasoline and SUVs?
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3) Draw a graph to illustrate the following scenario: Bananas and apples are substitutes. When
the price of bananas rises, and a technological advance in apple production occurs at the same
time.
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Suppose that a new study is released stating that consumption of orange juice (a substitute for
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apple juice) reduces the risk of cancer, and a major freeze destroys half of the country's apple
crop. What happens to the price and quantity of apple juice?
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The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large
portion of the tobacco crop. What will happen in the market for tobacco? Will the equilibrium
price and quantity change? If so, how? What will happen to the total revenue earned by tobacco
farmers?
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The cross elasticity between natural gas and heating oil is estimated to be 2.3. The cross
elasticity between natural gas and electricity is estimated to be -0.8. What is the relationship
between natural gas and heating oil? What is the relationship between natural gas and electricity?
Explain.
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