Section One: Multiple Choice

 

            1. 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 (250 words or less)

1.  Define “Elasticity of Demand”.  Give an example.

 

The concept explains how flexible a price of a good or service can change considering the different factors that affect it. In addition, the Elasticity of Demand also explains that a price change in a firm’s product will affect the production and to what degree of effect will it have in the total output that they will release into the market. Many examples can be thought of that depicts this concept, but, it all depends on the situation that the market is in. The elasticity of demand will vary for every product because apparently, every product has a specific demand from the consumers. The necessary products are hardly affected by any price changes because even if it becomes more expensive, people would still have no choice but to purchase them. On the contrary, the luxury products are the ones that will be greatly affected since people would see higher opportunity cost, thus reducing the number of consumers. With this, we can say that products such as clothing, food, and medicines have inelastic demand. On the other hand, appliances, cars, and computers tend to have elasticity of demand (Investopedia, 2010).

 

2.     Define the “Law of diminishing Marginal utility”.  Give an example.