Question

15) Suppose that the supply of avocado increases due to an improvement in the technology for growing avocado with less watering costs. Which of the following describes the mechanism of price and quantity adjustment assuming that there is no change in the demand curve?

a. There is a downward pressure on prices and an increase in the equilibrium quantity.

b. There is an upward pressure on prices and an increase equilibrium quantity.

c. There is no change in equilibrium price and quantity. d. There is a downward pressure on prices and a decrease

equilibrium quantity. e. None of the above.

in the in the

16) In answering the following question, it may be helpful to draw a supply and demand diagram. What is the effect on equilibrium price and quantity of an decrease in both supply and demand?

1. There is an increase in equilibrium price and an increase in equilibrium quantity.

2. There is no change in equilibrium price but a decrease in equilibrium quantity.

3. There is a decrease in equilibrium price and an increase in equilibrium quantity.

4. There is no change in equilibrium price or quantity.

5. There is an ambiguous effect on equilibrium price and a decrease in

   equilibrium quantity.

17) Suppose we know that the price elasticity of demand for organic apples is -1.2. If a grocer increases the price of organic apples by 15%, what would we expect to happen to the quantity of organic apples purchased?

a) Decrease b) Decrease c) Decrease d) Decrease e) Decrease

by 1.2% by 12% by 1.8% by 18% by 2.4 %

18) Suppose we know that the price elasticity of demand for sandals is -1.5. A shoe stores normally sells 100 pairs of sandals each month. If it decides to raise the price of its sandals by 30%, how many sandals would it then sell per month?

a) 115

4

b) 85 c) 70 d) 60 e) 55

19) If a increase in the price of apples from $1 to $2 per pair leads to an decrease in the quantity of apples demanded from 150 million to 100 million kg, then applying the midpoint formula, the price elasticity of demand equals:

a) -4/10 b) -6/10 c) -2/3 d) -3/2 e) -4/3

20) Suppose we observe that the revenue a music store receives from CD sales increases when the price of CDs is decreased. What can we conclude?

a) The price elasticity of demand for CDs is zero.
b) The demand for CDs is perfectly inelastic.
c) The price elasticity of demand for CDs is -1.
d) The price elasticity of demand for CDs is greater than -1 .

e) The price elasticity of demand for CDs is less than -1.

Answer 1

Q15) The answer is (a)

An increase in supply without a change in demand, will lead to a surplus at the existing price and thus the prices will fall and the equilibrium quantity will increase. thus, (a) is right and all other options are incorrect

Q16) The answer is (e) There is an ambiguous effect on equilibrium price and a decrease in equilibrium quantity

As the demand and supply both decrease, the equilibrium quantity will fall decrease for sure. The effect on equilibrium prices depends on the magnitude of decrease in demand vs supply and thus the effect in prices is ambiguous. Thus, (e) is correct and all other options are incorrect

Q17) elasticity = % change in quantity / % change in price

Putting value form the question we get,

-1.2 = % change in quantity / 15

=> % change in quantity = 15*-1.2 = -18%

Thus, the answer is (d) decrease by 18%

Q18) elasticity = % change in quantity / % change in price

=> -1.5 = % change in quantity / 30

=> % change in quantity = 30*-1.5 = -45%

Thus, new quantity sold = (1-0.45)*100 = 55

Thus, the answer is (e) 55