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BB 107 Tutorial 4

Part A: MCQ

1. The law of supply indicates that, other things equal:

A. producers will offer more of a product at high prices than at low

prices.
B. the product supply curve is downsloping.
C. consumers will purchase less of a good at high prices than at low
prices.
D. producers will offer more of a product at low prices than at high
prices.

2. A firm's supply curve is upsloping because:

A. the expansion of production necessitates the use of qualitatively

inferior inputs.

B. mass production economies are associated with larger levels of

output.

C. consumers envision a positive relationship between price and quality.

D. beyond some point the production costs of additional units of output

will rise.

3. A leftward shift of a product supply curve might be caused by:

A. an improvement in the relevant technique of production.

B. a decline in the prices of needed inputs.

C. an increase in consumer incomes.

D. some firms leaving an industry.

4. Because of unseasonably cold weather, the supply of oranges has

substantially decreased. This statement indicates the:

A. demand for oranges will necessarily rise.

B. equilibrium quantity of oranges will rise.

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C. amount of oranges that will be available at various prices has

declined.

D. price of oranges will fall

5. In moving along a supply curve which of the following is not held

constant?

A. the number of firms producing this good

B. expectations about the future price of the product

C. techniques used in producing this product

D. the price of the product for which the supply curve is relevant

6. A government subsidy to the producers of a product:

A. reduces product supply.

B. increases product supply.

C. reduces product demand.

D. increases product demand.

7. If the demand and supply curves for product X are stable, a

government-mandated increase in the price of X will:

A. increase the supply of X and decrease the demand for X.

B. increase the demand for X and decrease the supply of X.

C. increase the quantity supplied and decrease the quantity demanded

of X.

D. decrease the quantity supplied of X and increase the quantity

demanded of X.

8. The price elasticity of demand coefficient measures:

A. buyer responsiveness to price changes.

B. the extent to which a demand curve shifts as incomes change.

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C. the slope of the demand curve.

D. how far business executives can stretch their fixed costs.

9. The demand for a product is inelastic with respect to price if:

A. consumers are largely unresponsive to a per unit price change.

B. the elasticity coefficient is greater than 1.

C. a drop in price is accompanied by a decrease in the quantity

demanded.

D. a drop in price is accompanied by an increase in the quantity

demanded.

10. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity
of Y demanded increases from 110 to 118. Then the price elasticity of
demand is:

A. 4.00.

B. 2.09.

C. 1.37.

D. 3.94.

Part B: Short Answer

1. What do economists mean when they say “price floors and ceilings
stifle the rationing function of prices and distort resource allocation”?
When unrestrained, prices rise and fall to correct imbalances between the
quantity supplied and quantity demanded in a market. If sellers find
themselves at a given price with more output than consumers are willing
to purchase, the price will fall. Likewise, if the market is not offering
enough of a good to satisfy consumer demand, the price will rise. Price
floors and ceilings prevent price movements to correct these imbalances.
When a price is set above equilibrium (i.e. a price floor), sellers will
produce more than the market can support, diverting resources away from
more highly valued uses. Price ceilings result in an underallocation of
resources toward a particular good, where the excess demand (shortage)
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reveals that consumers value the good (and therefore the resources used
to produce it) more than what the market currently offers.

2. Exchange Rates market. Use a separate diagram to show how each of the
following factors affect demand or supply for “US dollar”? (assume price of
US$1 is RM4 ringgit (put Price of USD on y-axis and Quantity of USD on x-
axis):
a. US investors are selling Malaysian stocks
b. U.S. firms buy large quantity of palm oil from Malaysia.
c. More Malaysians travelling to US for studies and holiday.
d. Increased popularity of US made goods in Malaysia.

3. How would the following changes in price affect total revenue? That is,
would total revenue increase, decrease, or remain unchanged?
a. Price falls and demand is inelastic.
revenue decrease
b. Price rises and demand is elastic.
Revenue decrease
4. The price elasticity of demand for beef is about 0.60. Other things equal,
this means that a 20 percent increase in the price of beef will cause the
quantity of beef demanded to____.
0.6= %QD/%P
QD=0.6*20%
=60/100*20/100
=3/25
=12/100
=12%
5. Carlsberg recorded an increase of 33% of net profit for the 1 st quarter of
2016, despite of increasing taxes.” Why? Could you provide a reasonable
explanation using both economic and business knowledge.