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Learning Management System

Tutorial – Lecture 2 and 3

A1. Which of the following causes a rightward shift in the demand for coffee?

(a) A decrease in the price of tea.


(b) An increase in the consumers’ income.
(c) An increase in the price of sugar
(d) A technological improvement in the production of coffee.

A2. Which of the following items would cause a reduction in the demand for motor cars?
1. A fall in the price of petrol
2. A substantial reduction in train fares
3. A large fall in the cost of motor cycle road tax licences

(a) Items 1 and 2


(b) Items 1 and 3
(c) Items 2 and 3
(d) Items 1, 2 and 3

A3. Which of the following causes an increase in the supply of good A?

(a) Industrial disputes


(b) Government increasing subsidies to producers of good A
(c) Breakdown of machinery
(d) Increase in consumers’ incomes

A4. When the price of a product rises, consumers shift their purchases to other products
whose prices are now relatively lower. This statement describes:

(a) an inferior good


(b) the rationing function of prices
(c) the substitution effect
(d) the income effect

A5. If X is a normal good, a rise in money income will shift the:

(a) supply curve for X to the left


(b) supply curve for X to the right
(c) demand curve for X to the left
(d) demand curve for X to the right
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A6. When the price is higher than the equilibrium price,

(a) a shortage will exist


(b) buyers desire to purchase more than is produced
(c) sellers desire to produce and sell more than buyers wish to purchase
(d) quantity demanded equals quantity supplied

A7. If the price of chicken increases, total expenditure on it will decline if

(a) The chicken is a giffen good


(b) The demand for chicken is inelastic
(c) The demand for chicken is elastic
(d) There are few substitutes for chicken

A8. At the current price there is a shortage of a product. We would expect price to

(a) increase, quantity demanded to increase and quantity supplied to decrease


(b) increase, quantity demanded to decrease and quantity supplied to increase
(c) increase, quantity demanded to increase and quantity supplied to increase
(d) decrease, quantity demanded to increase and quantity supplied to decrease

A9. An improvement in production technology will

(a) increase equilibrium price


(b) shift the supply curve to the left
(c) shift the supply curve to the right
(d) shift the demand curve to the left

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A10. In general, elasticity is a measure of

(a) the extent to which advances in technology are adopted by producers.


(b) the extent to which a market is competitive.
(c) how fast the price of a good responds to a shift of the supply curve or demand
curve.
(d) how much buyers and sellers respond to changes in market conditions.

A11. Demand is said to be elastic if

(a) the price of the good responds substantially to changes in demand.


(b) demand shifts substantially when income or the expected future price of the good
changes.
(c) buyers do not respond much to changes in the price of the good.
(d) buyers respond substantially to changes in the price of the good.

A12. For a good that is a necessity,

(a) quantity demanded tends to respond substantially to a change in price.


(b) demand tends to be inelastic.
(c) the law of demand often does not apply.
(d) All of the above are correct.

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A13. Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity
of Twinkies demanded increases from 2,000 to 2,200. Determine the price elasticity of
demand for Twinkies in the given price range is

(a) 2.00.
(b) 1.55.
(c) 1.00.
(d) 0.64.

A14. When the price of a good is $5, the quantity demanded is 100 units per month; when the
price is $7, the quantity demanded is 80 units per month. Determine the price elasticity of
demand is about

(a) 0.22.
(b) 0.67.
(c) 1.33.
(d) 1.50.

A15. The case of perfectly elastic demand is illustrated by a demand curve that is

(a) vertical.
(b) horizontal.
(c) downward-sloping but relatively steep.
(d) downward-sloping but relatively flat.

A16. Holding all other forces constant, if raising the price of a good leads to a fall in total
revenue, then the demand for the good must be

(a) unit elastic.


(b) inelastic.
(c) elastic.
(d) none of the above is correct, since a price increase always leads to an increase in
total revenue

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A17. The price elasticity of supply measures how responsive

(a) sellers are to a change in price.


(b) sellers are to a change in buyers' income.
(c) buyers are to a change in production costs.
(d) equilibrium price is to a change in supply.

A18. If the price elasticity of supply is 1.5 and a price increase led to a 1.8% increase in
quantity supplied, then the price increase amounted to

(a) 0.67%.
(b) 0.83%.
(c) 1.20%.
(d) 2.70%.
A19. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and
another point is (quantity supplied = 250, price = $4.50). Determine the price elasticity of
supply is about

(a) 0.22.
(b) 0.53.
(c) 1.89.
(d) 2.22.

A20. A key determinant of the price elasticity of supply is

(a) the ability of sellers to change the price of the good they produce.
(b) the ability of sellers to change the amount of the good they produce.
(c) how responsive buyers are to changes in sellers' prices.
(d) the slope of the demand curve.

A21. Frequently, in the short run, the quantity supplied of a good is

(a) impossible, or nearly impossible, to measure.


(b) not very responsive to price changes.
(c) determined by the quantity demanded of the good.
(d) determined by psychological forces and other non-economic forces.

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A22. Holding all other factors constant, if a pencil manufacturer increases production by 20
percent when the market price of pencils increases from $0.50 to $0.60, then price
elasticity supply is

(a) inelastic, since the price elasticity of supply is equal to .91.


(b) inelastic, since the price elasticity of supply is equal to 1.1.
(c) elastic, since the price elasticity of supply is equal to 0.91.
(d) elastic, since the price elasticity of supply is equal to 1.1.

A23. Income elasticity of demand measures how

(a) the quantity demanded changes as consumer income changes.


(b) consumer purchasing power is affected by a change in the price of a good.
(c) the price of a good is affected when there is a change in consumer income.
(d) many units of a good a consumer can buy given a certain income level.

A24. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded
of pizza, then the income elasticity of demand for pizza is

(a) negative and therefore pizza is an normal good.


(b) negative and therefore pizza is a inferior good.
(c) positive and therefore pizza is an inferior good.
(d) positive and therefore pizza is a normal good.

A25. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity
demanded of a good. The income elasticity of demand for the good is

(a) negative and therefore the good is an inferior good.


(b) negative and therefore the good is a normal good.
(c) positive and therefore the good is a normal good.
(d) positive and therefore the good is an inferior good.

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A26. If two goods are substitutes, their cross-price elasticity will be

(a) positive.
(b) negative.
(c) zero.
(d) equal to the difference between the income elasticities of demand for the two
goods.

A27. If, for two goods, the cross-price elasticity of demand is 1.25, then

(a) the two goods are luxuries.


(b) the two goods are substitutes.
(c) one of the goods is normal and the other good is inferior.
(d) the demand for one of the goods conforms to the law of demand and the demand
for the other good violates the law of demand.

A28. Cross-price elasticity of demand measures how

(a) the price of one good changes in response to a change in the price of another
good.
(b) the quantity demanded of one good changes in response to a change in the
quantity demanded of another good.
(c) the quantity demanded of one good changes in response to a change in the price
of another good.
(d) strongly normal or inferior a good is.

Short Essay Questions

1. Explain the usefulness of this concept to a producer:


a) Price elasticity of demand
b) Income elasticity of demand
c) Cross elasticity of demand
d) Price elasticity of supply

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