ECO 212 Week 2 Supply and Demand and Price Elasticity Quiz
ECO 212 Week 2 Supply and Demand and Price Elasticity Quiz
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ECO/212 Principles of Economics Week Two Sample Quiz SUPPLY & DEMAND AND PRICE ELASTICITY Student Name: ____________________________ Date: _______________________________ 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? Popcorn & Pepsi Automobiles & Bicycles Boats & Fishing Tackle 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 upwardsloping 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 upwardsloping 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. Page 1 eco212r2 ECO/212 Principles of Economics 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). Define the “Law of diminishing Marginal utility”. Give an example. As stated in the Law of Diminishing Marginal Utility, a person consuming a good has his own level of satisfaction per good that he/she consumes and by adding more units of consumption his level of satisfaction is reduced, which has been named in economics as the Marginal Utility. Like, the elasticity of demand concept, the situation of the example will dictate how this law in economics will apply. A typical buffet scenario can best illustrate this concept. Take for instance when you get your first plate in the buffet, and you immediately find the food delicious, so naturally, you would rate is as 10 (highest score). However, after the first plate, the appetite is already different because of you are no longer as hungry, so on the second plate, the highest possible score that you can give to the food is 7. And if the eating goes on, the food would start to become unsatisfactory because you are too full. There is a possibility for you to rate it as 3. However, in a more realistic approach, people know when to stop consuming a certain commodity, even before they utility for the commodity complete drops off (Investopedia, 2010). Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new Hybrid automobiles when the following occurs. Using graphs as we did in the notes we worked with in Week 1, describe the change in the equilibrium price and quantity, and explain your answer. Is the equilibrium price higher, lower, or is the change indeterminate? Is the equilibrium quantity higher, lower, or is the change indeterminate? Incomes increase Interest rates decrease The price of batteries used in the production of these vehicles decreases. The price of gasoline decreases Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. Page 2 eco212r2 ECO/212 Principles of Economics Box of cereal sold in a grocery store INELASTIC Gasoline as a commodity ELASTIC Gasoline sold at a local gasoline station INELASTIC Fast food sold at a restaurant INELASTIC Hotel rooms for people planning a vacation ELASTIC Hotel rooms for people on business to meet an important client ELASTIC Clothes sold in a discount retailer INELASTIC Name three types of market systems and give an example of each. First, I shall define the concept of market systems. This economic concept is defined to be all existing products, commodities, and services that are presently being distributed and consumed in the market and each of their behaviors affect each other, in short, their interaction. Perfect competition is a market structure with a lot of competing organizations and at the same time also have a lot of buyers. This usually involves highly similar products, which would only slightly vary with name and quality. This kind of market structure exists because the products require lesser investment, or are relatively easy to product like agricultural crops. Monopoly refers to a sole supplier of a certain commodity, and thus this supplier has a great control over their pricing. This is also a market structure that makes it almost impossible for any investor to compete with. Perfect example is the electrical companies. Oligopoly – there are very few suppliers for a certain product because of the expensiveness of such investment. It also projects huge barriers for new businesses to enter the market. The products of these selected sellers are also very similar, and the only variation would be the brand name and advertising strategies. An example would be the airline business. Define the “Law of Demand” and the “Law of Supply”. Give an example for each. In the Law of Demand concept, if the pricing behavior experiences a downward curve, the buyers of the product will be able to consume more or buy more of this product and if the prices would increase, then, buyers will be able to buy less of the product. An example is butter, which can be substituted for margarine when the price of butter increases. The law of supply states that it is the willingness of the producer to sell this certain volume of his product at a certain price level. This has a directly proportional relationship wherein a high price would dictate that sellers would be willing to sell more of their produce. When we put this in simple terms, as prices of a product increases, the overall demand for this commodity will experience a decrease, and vice versa. An example is the fall in house pricestoo many for sale so the price drops until there are few available, then the prices rise References: Investopedia. (2010). Demand Elasticity. Retrieved June, 22, 2010, from http://www.investopedia.com/terms/d/demandelasticity.asp Investopedia. (2010). Law of Diminishing Marginal Utility. Retrieved June, 22, 2010, from http://www.investopedia.com/terms/l/lawofdiminishingutility.asp Page 3 eco212r2
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