Question

Assume that using the midpoint method, we calculated the price elasticity of demand for good A is 2. Hence which of the following is true if the price of good A increases by 0.1 percent?

a.

The quantity demanded of good A declines by 20 percent.

b.

The quantity demanded of good A declines from 200 to 100.

c.

The quantity demanded of good A declines by 0.05 percent.

d.

The quantity demanded of good A declines by 0.2 percent.

Which of the following best describes inelastic demand?

	a.	the price of the good responds only slightly to changes in demand.
	b.	the quantity demanded changes only slightly when the price of the good changes.
	c.	demand shifts only slightly when the price of the good changes.
	d.	buyers respond substantially to changes in the price of the good.

Suppose two goods A and B are substitutes. If the price of good B increases, which of the following is correct?

	a.	Demand for good A increases.
	b.	Demand for good A decreases.
	c.	Quantity demanded of good A decreases.
	d.	Quantity demanded of good A increases.

If a tax has been raised by 20 percent, how will the deadweight loss change?

	a.	It will increase by more than 20 percent.
	b.	It will increase but by less than 20 percent.
	c.	It will decrease by 20 percent.
	d.	It will increase by 20 percent.

If the price elasticity of demand for a good is 2, then a 6 percent increase in price results in a

	a.	3 percent decrease in the quantity demanded.
	b.	12 percent increase in the quantity demanded.
	c.	12 percent decrease in the quantity demanded.
	d.	3 percent increase in the quantity demanded.

A tax imposed on the sellers of good X will have which of the following effects.

	a.	It will increase the size of good X market.
	b.	It may increase, decrease, or generate no effect on the size of good X market.
	c.	It will decrease the size of good X market.
	d.	It will generate no effect on the size of good X market.

hich of the following would shift the demand curve for gasoline to the right?

	a.	a decrease in the expected future price of gasoline
	b.	an increase in the price of cars, a complement for gasoline
	c.	a decrease in the price of gasoline
	d.	an increase in consumer income, assuming gasoline is a normal good

Which of the following will result in the increase of equilibrium quantity for sure?

	a.	Both demand and supply increase.
	b.	Both demand and supply decrease.
	c.	Demand decreases and supply increases.
	d.	Demand increases and supply decreases.

John chooses to work 5 hours instead of going to a party. His hourly wage is $14. Find John's opportunity cost of working.

	a.	the utility he would have received had he attended the party.
	b.	$70 minus the utility he would have received from attending the party.
	c.	nothing, because he preferred working more than going to the party.
	d.	$70 from working.

Assume that using the midpoint method, we calculated the price elasticity of demand for good A is 0.75. Hence which of the following is true if the quantity demanded of good A decreases by 10 percent?

	a.	There is an increase in the price of good A from $7.50 to $10.
	b.	The price of good A will increase by 13.33 percent.
	c.	The price of good A will increase by 0.075 percent.
	d.	The price of good A will increase by 7.5 percent.

Assume that production possibilities frontier is bowed outward, and further assume that two goods are good A and good B, then how does the opportunity cost of producing more of good A change?

	a.	It may increase, decrease, or keep the same as more of good A is produced.
	b.	It will decrease as more of good A is produced.
	c.	It will increase as more of good A is produced.
	d.	It will not change as more of good A is produced.

Minimum wage would be one example of

	a.	wage subsidy.
	b.	price floor.
	c.	tax.
	d.	price ceiling.

When the price of good A is $50, the quantity demanded of good A is 600 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is

	a.	1.20, and an increase in price will result in an increase in total revenue for good A.
	b.	0.83, and an increase in price will result in an increase in total revenue for good A.
	c.	0.83, and an increase in price will result in a decrease in total revenue for good A.
	d.	1.20, and an increase in price will result in a decrease in total revenue for good A.

A movement downward and to the right along a demand curve is called a(n)

	a.	increase in quantity demanded.
	b.	decrease in demand.
	c.	decrease in quantity demanded.
	d.	increase in demand.

Answer 1

1.

Answer is choice d

PED=% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

PED is 2 ( given).

% change in price (given) = ((New price-old price)/old price)) x 100 = 0.1

Let percentage increase in quantity be X.

Substituting in formula,

(X/0.1%)=2

X= 0.1% x 2=0.2 %

2 b

The percentage change in quantity demanded is less than the percentage change in price.

3 d. It is a shift in the demand curve for good A. The demand for good A will increasae.

Choice A is wrong because it is not a movement along the demand curve. A movement along the demand curve is due to changes in price, other conditions are same.

Choice B is wrong because it is a movement along the demand curve. This is a shift of the demand curve.

Choice C is wrong as the quantity demanded of good A will increase.

3. a) more than 20% due to loss of consumer and producer surplus.

4.

PED=% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

PED is 2 ( given).

% change in price (given) = ((New price-old price)/old price)) x 100 = 6

Let percentage increase in quantity be X.

Substituting in formula,

(X/6%)=2

X= 2% x 6=12%

Answer is c.