If a 20% decrease in the price of long distance phone calls leads to a 35% increase in the quantity of
calls demanded, we can conclude that the demand for phone calls is: a. elastic. b. inelastic. c. unit
elastic. d. stretchy elastic.
2. Which of the following pairs are examples of substitutes? a. Popcorn & Pepsi b. Automobiles &
Bicycles c. Boats & Fishing Tackle d. Wine & Cheese
3. When we say that a price in a competitive market is "too high to clear the market" we usually mean
that (given upward-sloping supply curves). a. no producer can cover the costs of production at that
price b. quantity supplied exceeds quantity demanded at that price c. producers are leaving the
industry d. consumers are willing to buy all the units produced at that price
4. Which of the following statements is incorrect? Assume upward-sloping supply curves. a. If the
supply curve shifts left and the demand remains constant, equilibrium price will rise. b. If the demand
curve shifts left and the supply increase, equilibrium price will rise. c. If the supply curve shifts right
and the demand curve shifts left, equilibrium price will fall. d. If the demand curve shifts right and the
supply curve shifts left, price will rise.
Section Two: Short Answer (200 words or less) 1. Define "Elasticity of Demand". Give an example.
Definition: Responsiveness of the demand for a good or service to the increase or
decrease in its price.
Price elasticity in demand is how the product
is demanded influences the changes in price. If a product is elastic, a
noticeable change in price takes place when demands increase or decrease.
If a product is inelastic, it is most likely a necessity, and the price does not
change due to demands. The company I work for would be considered
inelastic. I work for a pathology laboratory in a hospital. We receive
specimens from surgeries to diagnose. If it is a necessity for that person to
have surgery, then we automatically receive the business. Our business has
reduced quite a bit since the economy has slumped. People are not having
the elective surgeries as much. However, there will always be a need for what
I do, and if people continue to have surgery then we will continue to have
business.
2. Define the "Law of diminishing Marginal utility". Give an example.
The law of diminishing returns, or also called the principle of
diminishing marginal productivity, is an economic law stating that if one
input in the production of a commodity is increased while all other inputs are
held fixed, a point will eventually be reached at which additions of the input
yield progressively smaller, or diminishing, increases in output (Britannica,
2009). Starting with average productivity, marginally increasing the input of
a commodity (while all other inputs are held fixed) will yield a higher output
of productivity, but over time the additional input will yield progressively
smaller additional outputs.
In the short run, technology has the ability to unbind the law
of diminishing returns as firms are constantly analyzing and making
marginal changes to increase output, with technology being the
superhighway that leads them to their desired outcome. In the long run,
technology can fail, leaving firms with diminishing returns when new forms
of input are no longer available to change the output.
A country with a large population can have serious problems due to these
aspects. The law of diminishing returns makes firms limit the amount
of input they are willing to use. The input are jobs, which means that there
are less jobs available when a certain product maximizes profit at a lower
level of input. This leads to rises in unemployment, social welfare problems
and a socially decreased standard of living.
diminishing returns. ( 2009). In Encyclopedia Britannica. Retrieved May
24, 2009, from Encyclopedia Britannica
Online:http://www.search.eb.com.ezproxy.apollolibrary.com/eb/article9030471
3. Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity
of new Hybrid automobiles when the following occurs. Tell me which curve shifts. Is the equilibrium
price higher, lower, or is the change indeterminate? Is the equilibrium quantity higher, lower, or is the
change indeterminate? a. Incomes increase b. Interest rates decrease c. The price of batteries used in
the production of these vehicles decreases. d. The price of gasoline decreases
a. An increase in income will cause the demand curve to shift to the right. Both price and quantity of the
new equilibrium will be higher than the old one.
b. A decrease in interest rate will cause an increase in investment and the supply will shift to the right.
The new equilibrium price will be lower but the quantity will increase.
c. It will cause the production cost to be lower and the marginal cost or the supply curve will shift to the
right The effect will be the same as b.
d. It will shift the demand curve to the right. The effect will be the same as a.
Note Jerry W gives me a great comment concerning the answer d. He means that it's a Hybrid, it's not
sensitive to gas price. I do agree in part. In this case, the demand won't shift to the right. For more
information, the Hybrid has to use 2.5L of gas so far. It's not electric car. So it could be that the demand
will shift to the right. And my answer is possible still.
Moreover, Hybrid is expensive. A decrease in gas price might cause consumers to come back to normal
automobile The supply of the Hybrid will then shift to the left. That cause both price and quantity to
increase.
4. Determine if the demand for the following products is price elastic or price inelastic, and explain
your answer. a. Box of cereal sold in a grocery store b. Gasoline as a commodity c. Gasoline sold at a
local gasoline station d. Fast food sold at a restaurant e. Hotel rooms for people planning a vacation f.
Hotel rooms for people on business to meet an important client g. Clothes sold in a discount retailer
a. Box of cereal sold in a grocery store
Inelastic because the people would not increase the consumption of cereals considerable if the prices
are decreased.
b. Gasoline as a commodity
Inelastic because the people still buy gasoline when there is increasing trend of prices
c. Gasoline sold at a local gasoline station
Inelastic because people can't change to substitutes in the short run.
d. Fast food sold at a restaurant
Elastic because it’s not a necessity and if the prices are high people will switch to basic commodity to
fulfill their hunger.
e. Hotel rooms for people planning a vacation
Elastic because
An increase in price will cause the tourists to shy away.
f. Hotel rooms for people on business to meet an important client.
Inelastic because
A meeting with an important client needs a specific place whatever the price is.
g. Clothes sold in a discount retailer
elastic, the product can be substituted.
5. Name three types of market systems and give an example of each.
1. monopoly-example of a monopoly would be an electrical company. A monopoly does not
offer an close substitutes, and there are lots of control over the goods price.
2. perfect competition- example are farm and agricultural products. There are many buyers
and sellers of a particular product and the product looks similar.
3. oligopoly- example is airlines. This type of marketing system is dominated by a few sellers.
6. Define the "Law of Demand" and the "Law of Supply". Give an example for each.
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less
people will demand that good. In other words, the higher the price, the lower the quantity demanded.
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain
price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the
higher the price, the higher the quantity supplied.
Source(s)
http://www.investopedia.com/university/economics/economics3.asp