2. Price Determination in a Competitive Market - Year 1

A demand curve is drawn on the assumption that

• quantity demanded always increases as price falls.

• changes in price do not influence supply.

• price elasticity of demand does not vary along the demand curve.

• factors affecting demand, other than price, remain constant.

The cross elasticity of demand between goods X and Y is positive. This implies that they are

• normal goods

• substitute goods.

• goods in composite demand.

• complementary goods.

• an increase in the quantity of frozen peas supplied.

• an increase in the price of frozen peas.

• a change in consumer preference for frozen peas.

• a decrease in the price of a substitute for frozen peas.

An economy in which average incomes have fallen by 5% has also seen the demand for holidays overseas fall by 20%. Assuming that nothing else affecting holidays overseas has changed, it can be concluded that the income elasticity of demand for holidays overseas is

• + 4.0

• − 4.0

• + 0.25

• − 0.25

In a typical demand schedule, quantity demanded

• varies directly with price.

• varies proportionately with price.

• is determined by the elasticity of demand.

• varies inversely with price

All other things being equal, supply curves slope upwards from left to right because

• higher prices lead to higher costs.

• lower prices lead to higher output.

• lower prices lead to higher demand

• higher prices lead to higher profits

A market is defined as being in equilibrium when

• there is maximum output at minimum cost.

• prices are at their lowest possible level.

• there is no tendency for the market price to change.

• consumer satisfaction is maximised.

The price elasticity of demand for a good made by a firm is −0.6. If the firm raises the price of the good, its revenues will

• rise

• stay the same

• fall by more than 6 per cent.

• fall by less than 6 per cent.

A product has a price elasticity of supply of +1.5. If its price falls from £10.00 to £8.00, its supply will

• decrease by 30%

• decrease by 40%.

• increase by 30%.

• increase by 40%.

• the price of substitutes and a rise in raw material costs.

• interest rates and a rise in incomes.

• the wages paid to all workers.

• income tax and value added tax.