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Answers to the Midterm Exam Questions

A. Short-answer questions
1. Opportunity Costs: everything you have to give up for making a choice; or any benefit that you would have received had
you chosen one action but you actually dont receive it because you have chosen a different action. Eample: your
decision to spend your productive time studying at university makes you lose income that you would have earned had
you spent your productive time working at a restaurant instead.
!. " market economic system is a system where all the three basic economic problems: what# how and for whom are solved
through market mechanisms# whereas in a centrally planned economic system those three problems are solved by a
central planning body set by the government.
$. %o. " model is a replica or simplification of a real world and captures the most essential parts of the reality and discards
the irrelevant details so that the real world is easier to analysis and understand.
&. 'ecause of the working of substitution effect and income effect. (hile the former refers to the effects of a change )say an
increase* in the price of a product on the +uantity demanded of that product because its consumers decide to consume
more of its substitutes# the latter relates to the decrease in consumers real income due to the increase in the price of that
product resulting in their lower purchasing power and demand for that product.
,. %o. a change in consumer taste shifts the demand curve and a change in price leads to a movement along the demand
-. .es# they are because both are consumed in one package. .ou cant consume one without the other.
/. 0he demand for ' will decrease.
1. 0he supply curve of computer will shift to the left because the production cost of computer increases due to the increase
in the price of the chip processor.
2. " higher consumers come means given the price they are able to buy more units of a certain good. Or they are willing to
buy the same amount of a product at a higher price.
13. " ceiling price policy sets the price below the e+uilibrium price and hence the market is in a dise+uilibrium position
where the +uantity demanded eceeds the +uantity supplied.
'. Essay Questions
1. 0he increase in price can come from either supply side or demand side or both. 4n the case of the world oil price both
demand and supply have increased but the increase in demand outstrips the increase in supply thereby pushing upward the
price. " significant increase in demand particularly comes from China and 4ndia who have undergone a tremendous economic
growth. 0heir thirst for oil keeps increasing and unlikely is satisfied by the current supply of oil.
!. 5uring 6ebaran holidays the government imposes a ceiling price policy on a transport fare to protect consumers from
ecessive fare increase by bus operators. 0his means the fare is set by the government below the e+uilibrium market fare.
Conse+uently the +uantity demanded eceeds the +uantity supplied or there is ecess demand. 4n turn there will be a shortage
of busses in service# people have to wait in along line and some buss operators tend to break the ceiling price by increasing
the fare ecessively.
$. 0he 778 is conve to the origin because of the working of the law of increasing opportunity costs.