1. Consider the following demand and supply functions: Demand: Qd = 600 - 30P and
Supply: Qs = -300 + 120P. What is the equilibrium price and output?
1. P = R2 and Q = 540.
2. P = R10 and Q = 300.
3. P = R6 and Q = 420.
4. P = R3.33 and O = 500.
I. Option 3 is correct.
First set the demand function equal to the supply function (Qd = Qs). Then isolate the price
("P" term) on one side of the equation and solve the equation to get the equilibrium price.
600-30 =-300+120P
900 = ISOP
Pe = 6
Now, substitute the price (V term) found in step 2 into either the supply or demand function.
Solve for equilibrium quantity.
Qe = 600-30 (6)
Qe=420
2. Which of the following conditions are NOT required for the supply and demand model to apply?
1. A significant number of buyers.
2. A sig n ifi cant number of sellers.
3. Both buyers and sellers must trade an identical item.
4. The traded item mu st be a prod uct
2. Option 4 is correct.
Condition 4 is not required. The item traded could be labour, which is used in many
examples in the chapter. It could also be something different, such as a currency, or shares
in a large company.
3. Which of the following effects will be illustrated on the demand and supply graph where a market is
in equilibrium and demand increases?
1. An excess demand at the initial equilibrium price.
2. An excess demand at the new equilibrium price.
3. An excess supply at the initial equilibrium price.
4. An excess supply at the new equilibrium price.
3. Option 1 is correct.
Statement 1 shows what 'would be shown on a graph. Statement 2 is incorrect because
there will be no excess demand, or indeed an excess supply, at the new equilibrium price.
Statements 3 and 4 are incorrect because there will be no excess supply.
,4. If the supply equation is given as Os = -200 +10P, the price elasticity of supply between R40 and
R50, calculated using the arc elasticity of demand, is ...
1. 0.6.
2. 10
3. 0.56.
4. 2.0.
Step 2:
Price elasticity of supply = (% change in Q)/ (% change in P)
5. A decrease in the price of a product from R50,00 to R40,00 causes the quantity demanded to
increase from 2 500 to 3 000 units. Using the arc elasticity of demand, the price elasticity of
demand is...
1. 0.78.
2. -orat
3. -0.82.
4. -1.22
5. Option 3 is correct.
Price elasticity of demand = (% change in Q)/ (% change in P)
2
9
_9
11
- 082
, 6. Which of the following factors would NOT explain a price elasticity of demand of -0.12 for a
consumer product?
1. The availability of a limited amount of substitutes.
2. The available substitutes will have higher prices.
3. The product constitutes a small percentage of consumer expenditure.
4. The product is a normal good.
6. Option 4 is correct.
Factor 4 would not help to explain this. A normal good is one where demand decreases if
incomes increase, but this says nothing about the price elasticity of demand.
7. The income elasticity of an inferior good is ...
1. negative because as people get richer they increase their purchases of the good by smaller
and smaller amounts.
2. ' because the increased income offsets the desire to consume less of the good because it is
inferior.
3. greater than 1 because the richer you get, the less you consume of the good.
4. negative because higher income leads to a reduction in the amount consumed of the
product.
7. Option 4 is correct.
Option 4 is correct in accordance to the definition of an inferior good, people will consume
less as their incomes increase.
8. If food is on the vertical axis and housing is on the horizontal axis, a set of indifference curves that
are quite steep with respect to the horizontal axis ...
1. reflect a preference pattern that generally values housing high, relative to food.
2. imply that food has a higher relative value compared to housing for the consumer.
3. say nothing relating to how the consumer feels about the two goods until a budget line is
introduced.
4. mean that the two goods are perfect substitutes.
8. Option 1 is correct.
The axis toward which the slope is steepest will be the most valued good.
9. Which of the following factors does NOT help to explain why most indifference curves between
consumer products slope down to the right and are curved rather than straight?
1. The principle of diminishing marginal utility.
2. The fact that both products are regarded as desirable.
3. The fact that most pairs of products are not perfect substitutes.
4. The fact that the further an indifference curve is from the origin, the more total utility it
represents.
9. Option 4 is correct.
Factor 4 does not help to explain the shape of indifference curves. Admittedly, this factor
arises from factor 2, which does help to explain it: because if one product was considered
undesirable, the curves would not slope down to the right at all.
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