Question

1)Which of the following would cause a change in supply, as opposed to a change in quantity supplied, in the market for purchasing new homes? *

A) A decrease in the price of rental housing.

B) A decrease in the price of new homes

C) An increase in the incomes of home buyers.

D) An increase in the number of buyers in the market for used homes.

2)As the price of socks increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of shoes? (Socks and shoes are complements.) *

A) Equilibrium price would increase and equilibrium quantity would decrease.

B) Equilibrium price and quantity would both decrease.

C) Equilibrium price would decrease and equilibrium quantity would increase.

D) Equilibrium price and quantity would both increase.

3)An increase in price will result in no change in total revenue if: *

A) the percentage change in price is large enough to cause quantity demanded to fall to zero.

B) the coefficient of elasticity is equal to zero.

C) the percentage change in quantity demanded is equal to the percentage change in price (in absolute values).

D) the demand function is perfectly elastic.

4)Assume the demand for a good is price inelastic, i.e., ed < 1 (in absolute value). This means that if price decreases by 50 percent, quantity demanded will: *

A) increase by more than 50 percent.

B) decrease by more than 50 percent.

C) increase by less than 50 percent.

D) decrease by less than 50 percent.

5)The price elasticity of demand is calculated as: *

A) the change in price divided by the change in quantity demanded.

B) the change in quantity demanded divided by the change in price.

C) the percentage change in price divided by the percentage change in quantity demanded.

6)Suppose the demand for good X is given by Q_x^d = 300 – 15Px + 20Py - 60I , where Px is the price of good X. Py is the price of some other good Y, and I is income. Assume that Px is currently $50, Py is currently $100, and I is currently $1200 *

A) Goods X and Y are complement goods

B) The supply is elastic

C) Good Y is a normal good

D) Good X is an inferior good

Answer 1

Question 1

Option A is correct - A decrease in the price of the rental housing

Change in quantity supplied is due to the change in price of the good in the market as there is movement along the same supply curve when there is change in quantity supplied.

Change in supply is when there is change in factors other than price. These factors are other than the price of the good that leads to change in the supply and shift the whole supply curve up or down.

Thus, change in the price of rental housing will change the supply of new homes and shift the whole supply curve up or down.

Question 2

Option B is correct - Equilibrium price and quantity both would decrease

Complementary goods are the ones that are consumed together. So that, if the price of one increases, demand of other will decrease. Due to an increase in the price of socks, demand for shoes will decrease which will shift the demand curve of shoes to the left. When this happens, the new equilibrium will be at the point where the equilibrium price and quantity demanded both will decrease.

Question 3

Option C is correct - the percentage change in quantity demanded is equal to the percentage change in price

When the price elasticity of demand is equal to 1 or when the demand is unitary elastic, then an increase or decrease in price will have no effect on the total revenue.

Elasticity of demand is the responsiveness if change in quantity demanded due to change in price of the good. It is given by the following formula:

Elasticity of demand = % change in quantity demanded / % change in price of the good

So, when the demand is unitary elastic, its value is equal to 1. When elasticity of demand = 1, % change in quantity demanded = % change in price of the good.

Question 4

Option C is correct - increase by less than 50 percent

The price elasticity of demand is the responsiveness of change in quantity demanded due to a change in prices of the goods. This means that if the demand is more responsive to the change in prices, then the demand is more elastic. If the demand is less responsive to the change in prices, the demand is less elastic. It is given by the following formula:

Price elasticity of demand = % change in quantity demanded / % change in price

If the value of price elasticity of demand is more than 1 then it would be called elastic demand.

If the value of price elasticity of demand is less than 1 then it would be called inelastic demand.

If the value of price elasticity of demand is equal to 1 then it would be called unitary elastic demand.

This means that when the demand is inelastic, a large change in price will have a small effect in the chnage in quantity demaded.

Thus in this case, if the price decreases by 50%, the quantity demanded will increase by less than 50%.

*(According to the law of demand, there is a negative relationship between price and quantity demanded of the good).