Question

For each of the following, write either True or False, and justify your answer.

•Immigration causes wages to go down.

•When there is a surplus, quantity supplied exceeds quantity demanded. This causes supply to go down, until equilibrium is reached.

•The Ontario government recently slashed tuition fees by 10%. Suppose that, as a result, university enrollments rose by 10%. The elasticity of demand is therefore equal to−1.

•The elasticity of supply of cars is greater than the elasticity of supply of bicycles.

•You own a bar, and would like to increase your revenue. Your bartender thinks that you should raise prices on drinks, while your bouncer tells you to reduce prices on drinks. Thus, your bartender believes that demand for drinks is elastic, while your bouncer thinks that it is inelastic.

Answer 1

1) The statement is true. This is because immigration increases the supply of labor. As a result labors are ready to work at lower wages.

2) The statement is false. This is because surplus means quantity supplied is more than quantity demanded. As a result, price falls and demand increases until equilibrium is reached.

3) The statement is true. Elasticity of demand = Percentage change in quantity/Percentage change in price = -10%/10% = -1

4) The statement is true. This is because there is higher change in supply of cars than bicycles with change in their respective prices.

5) The statement is false. If the bartender asks to increase the price of drinks ,this suggests, that he assumes the demand for drinks to be inelastic. This means with rise in price there is not much change in demand for drinks. Thus, with increase in price, demand remaining same, revenue increases. Whereas, the bartender asks to decrease the price of drinks, which suggests , that he assumes the demand for drinks to be elastic. This means with fall in price demand rises. As a result revenue rises.