Question

1. Z is a normal good. The equilibrium price and equilibrium quantity of Z in the year 2011 was $25 and 60 units, respectively. It was seen that, in 2014, the equilibrium price of Z had decreased to $15, but the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change? why？

A) Shift of the supply curve of Z to the left.

B) Shift of the supply curve of Z to the right.

C) Shift of the demand curve for Z to the left.

D) Shift of the demand curve for Z to the right.

2. Which of the following statements is true about the price elasticity of demand? why?

A) The price elasticity of demand for a good is generally higher in the long run than in the short run.

B) The demand for a good with a price elasticity of demand of zero is highly responsive to price changes.

C) As the number of substitutes for a product increases, the price elasticity of demand for that good decreases.

D) If the budget share of a particular good in a consumer's bundle increases, the price elasticity of demand

for that good is likely to decrease.

3. Sandra consumes two goods–tea and coffee. Her demand for tea is inelastic while her demand for coffee

is elastic. If there is an increase in the price of both tea and coffee, ________. why?

A) Sandra's revenue on both tea and coffee is likely to decrease

B) Sandra's expenditure on both tea and coffee is likely to increase

C) Sandra's expenditure on tea will increase and her expenditure on coffee will decrease

D) Sandra's expenditure on coffee will increase and her expenditure on tea will decrease

4. Which of the following statements is true? why?

A) A fall in the incomes of all consumers is likely to lead to an increase in the quantity demanded of pens.

B) A decrease in the quantity of land under coffee cultivation will shift the supply curve of coffee to the left.

C) A rise in labor costs due to wage demands by labor unions is likely to lead to a right shift in the supply

curve of cotton.

D) An increase in the cost of production leading to an increase in the price of cars is likely to cause the

demand curve for cars to shift to the left.

1. 5. Which of the following statements is true? why?

A) When the marginal product increases, the marginal cost decreases.

B) The marginal product of an input increases as more and more inputs are used.

C) The marginal cost curve intersects the average fixed cost curve at its minimum.

D) When the marginal cost curve lies above the average cost curve, the marginal cost curve slopes upward,

while the average cost curve slopes downward.

6. Which of the following statements is true of a perfectly competitive market? why?

A) Firms in the long run tend to earn positive economic profits.

B) Firms produce at a point where price is greater than marginal cost.

C) The equilibrium price is determined by a few large firms in the market.

D) The sum of consumer surplus and producer surplus is maximized at the equilibrium.

7. A firm is seeing a $500 loss in the short run. The fixed cost of operation for this firm is $1,000. What is

the best decision for this firm in the short run? why?

A) This firm should shut down production.

B) This firm should not shut down production.

C) There is not enough information provided to answer.

D) This firm should produce more than what it is currently producing.

8. Which of the following statements is true about the perfectly competitive market? why?

A) The entry and exit of firms is mostly dependent on the number of firms in the market.

B) When price is less than the firms' minimum average total cost, prices are likely to fall further.

C) The long-run supply curve of a firm is the portion of its marginal cost curve that lies below its average

total cost curve.

D) Short-run average total cost curves lie above the long-run average cost curves because firms have more

flexibility to change input combinations in the long run.

Answer 1

1. Z is a normal good. The equilibrium price and equilibrium quantity of Z in the year 2011 was $25 and 60 units, respectively. It was seen that, in 2014, the equilibrium price of Z had decreased to $15, but the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change? why？ans D , because the new equilibrium says that price fell and quantity decreased, that is only possible if SUPPLY CURVE SHIFTS TO THE RIGHT. because when demand curve shifts right price increase, when supply shift left price increases, when demand shifts left quantity falls.

2. ans A

In the short run demand is likely to be more inelastic (low = less than 1). If people are used to buying a good, then when the price goes up, they will tend to keep buying it out of habit.

3.

Sandra consumes two goods–tea and coffee. Her demand for tea is inelastic while her demand for coffee

is elastic. If there is an increase in the price of both tea and coffee, ________. why?

ans C , if price of tea increases, its total revenue will increase because its demand is inelastic and thus quantity will not fall, if price of coffee increases, its total revenue will decrease because its demand is elastic and thus quantity will fall more than price decreasing its total revenue,

4. ans B

A decrease in the quantity of land under coffee cultivation will shift the supply curve of coffee to the left. BECAUSE WHEN LAND IS LESS, COFFEE IS GROWN LESS, AND THUS WILL BE SUPPLIED LESS.

5. ans A  

Marginal product is the extra output generated by one additional unit of input, such as an additional worker. Marginal cost and marginal product are inversely related to one another: as one increases, the other will automatically decrease proportionally and vice versa.

6. ANS D

The sum of consumer surplus and producer surplus is maximized at the equilibrium. In competitive markets, only the most efficient producers will be able to produce a product for less than the market price. ... Hence, total surplus is maximized at the market equilibrium price.

7. ANS C

short run a firm will continue to produce as long as total revenue covers total variable costs or price per unit > or equal to average variable cost (AR = AVC). This is called the short-run shutdown price. AVC not given

8. ans D

Short-run average total cost curves lie above the long-run average cost curves because firms have more

flexibility to change input combinations in the long run. The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels.

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