Question

1. Use the following information to calculate the price elasticity of demand for school fees:

If P=30; Q^d =6000

If P=50; Q^d =4000

1. The elasticity is 0.5
2. The elasticity is 0.8
3. The elasticity is 1.8
4. The elasticity is 1.2

2. Which one of the following is a normative statement?

1. Price rise when the government increase the quantity of money
2. When more people find jobs, unemployment rates drop
3. The government should invest more money in research
4. When the price of a good increase, the quantity demanded goes down

3. The biggest reason people face trade-off is because

1. People tend to disagree with each other
2. Resources are scarce
3. People’s incomes increase and decrease with business cycles
4. There are too many goods and services to choose from

4. “Society should allocate more money for research” this is an example of a positive economic statement

TREU / FALSE

5. The cross-price elasticity of beef and chicken is 2, which indicates that beef and chicken are substitutes

TRUE / FALSE  

6. The opportunity cost of any item is whatever must be given up to obtain it.

TRUE / FALSE

7. In the markets for factors of production in the circular- flow diagram, households are buyers, and firms are sellers.

TRUE / FALSE

8. Regarding elasticities, the flatter the curve, the bigger the elasticity, and the smaller the elasticity. This is true:

1. Only for seller
2. Only for buyers
3. For both buyers and sellers
4. All answers are incorrect

Answer 1

Sol 1)

(A) the elasticity is 0.5

Ed = (-) (P/Q) * (change in demand / change in price)

Ed = (-) (30/6000) * (-2000/20)

Ed = (-) (1/200) * (-100)

Ed = 0.5

Sol 2)

(C) The govt should invest more money in research.

This statement is based on value judgement .It is a "should " statement which is according to norms.

Other statements are not based on value judgement .They are not advicing or suggesting statements.

Sol 3)

(D) There are too many goods and services to choose from.

Trade off is opportunity cost involving a sacrifice that must be made to get a certain product or service.Since,people are having so many choices they have to foregone an opportunity to get another one.This causes trade off.

Sol 4) TRUE

Reason: This is a value judgement based statement.It is suggesting thet what should be done on the basis of norms.

Sol 5) TRUE

Reason: The value of cross price elasticity is positive i.e. 2 . It means when price of chicken increases, qty demanded for chicken will also increase.

Sol 6) TRUE

Reason: opportunity cost is the cost of next best alternative or the good foregone to gain another good.

Sol 7) FALSE

Reason: Households are sellers also. They provide factor services for firms.Household provides labour,land,capital etc to firms for production process.

Sol 8) ONLY FOR BUYERS

Reason: Demand curve shows qty demanded by buyers at different price.flatter the demand curve, higher the elasticity means an elastic demand curve shows that small % change in price causes greater % change in qty demanded.

But same will not hold true in case of sellers that is supply curve.The elasticity of supply curve can be checked by finding out whether the curve is starting from origin or not.if supply curve is starting from Y axis,having higher elasticity and from X axis having lesser elasticity.