Tutorial 3
UBEA 1013: ECONOMICS
TUTORIAL 3:
MARKET EFFICIENCY & ELASTICITY
Objective Questions:
1. How does price rationing allocates products/services to consumer?
a. Through price adjustment.
b. Through both price adjustment and licensing.
c. Through quota.
d. Through price ceiling.
e. None of the above.
2. Which of the following illustrated the invisible hand driven market failure?
i. Lemon market.
ii. Retail market.
iii. Pollution to the environment due to production waste.
iv. Pirated software, music and VCD.
a.
b.
c.
d.
e.
i, ii & iii only.
i, iii & iv only.
i & ii only.
iii & iv only.
All of the above.
3. A public university knows that demand from potential students is elastic. If the
university wants to increase tuition revenue, it should:
a. Raise its tuition rate.
b. Increase its financial aid.
c. Lower its tuition rate.
d. Increase its enrollments.
e. Hire more academic staffs.
4. Which of the following do not explain the concept of elasticity?
a. Price elasticity of demand measure how responsive consumers are to
changes in the price of a product thus is defined to be the percentage
change in quantity divided by the percentage change in price.
b. Income elasticity of demand measures the responsiveness of demand to
changes in income. For a normal product, its value is positive.
c. Cross-price elasticity of demand is a measure of the response of the
quantity of one good demanded to a change in the price of another good.
So, it can use to determine the relationship of two products.
d. At middle point of the demand curve, the price elasticity of demand is
equal to 1, or unitary elasticity. The demand is price inelastic for quantity
level that below the unitary elasticity quantity level.
e. Revenue of selling personal computer will increase when its price drop if
demand for personal computer is elastic.
5. In what conditions below causes the deadweight loss?
i. Under production.
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Tutorial 3
ii. Over production.
iii. Waiting-in-line rationing system.
iv. Price rationing system.
a.
b.
c.
d.
e.
6.
None of the above.
iii only.
iv only.
i & ii only.
i, ii & iii only.
Price ceilings are primarily targeted to help _______, while price floors
generally benefit _________.
a. increase tax revenue for governments; producers
b. increase tax revenue for governments; consumers
c. producers; consumers
d. consumers; producers
7.
Price
Per Pair
Quantity
Demanded
Quantity
Supplied
RM 2
RM 4
RM 6
RM 8
RM10
18
14
10
6
2
3
4
5
6
8
In the supply and demand for socks (in unit) schedules in table above, if a price
floor of RM10 is imposed by the government, the quantity of socks actually
purchased will be
a. 6 units
b. 10 units
c. 2 units
d. 8 units
e. 3 units
8.
An economically efficient situation is one in which
a. everyone has everything they need.
b. everyone has above-average income.
c. total surplus is maximized.
d. all producers are operating at the lowest possible marginal cost.
e. All producers are operating at loss.
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Structure Questions:
1. A sporting goods store has estimated the
demand curve for Brand A running
shoes as a function of price. Use the
following diagram to answer the
question as follow.
a. Calculate demand elasticity using the
midpoint formula between points A
and B, between points B and C and
between points C and D.
b. If the store currently charges a price
of $50, then increase this price to
$60, what happen to total revenue
from shoe sales (calculate P X Q
before and after the price change)?
What happen to total revenue if price
is increased from $30 to $40?
c. Explain why the answer to (a) can be used to predict the answer to (b). Will
the revenue increase or decrease if the price is increased from $10 to $30?
[Case & Fair 2004: 98 & 99]
2. When Frank's income rises from RM29,000 to RM34,000 per year, he increases
his purchases of tomatoes from 20 pounds to 28 pounds per year. What is Frank's
income elasticity of demand for tomatoes? According to Frank, are tomatoes an
inferior or normal good?
3. If Q = 12 – 2P, what price and quantity will maximize total revenue? [Hint: Total
revenue will be maximized at unitary elasticity. Elasticity, ε = (p/q)*(∆q/∆p). Refer
to Equation 3.2 & 3.3 as in the lecture.]
4. The cross-price elasticity between natural gas and heating oil is estimated to be
2.3. The cross-price elasticity between natural gas and electricity is estimated to
be -0.8. What is the relationship between natural gas and heating oil? What is the
relationship between natural gas and electricity? Explain.
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