2 The Price System and the Microeconomy

Why does an individual’s demand curve generally slope downwards to the right?

• The additional satisfaction an individual gets from consuming most goods decreases as consumption increases.

• The additional satisfaction an individual gets from consumption decreases as income rises.

• The individual has finite income which is used to attempt to satisfy many wants.

• For most goods the price charged by producers falls as the quantity purchased increases

What is price elasticity of supply?

• the change in the quantity supplied when a price changes

• the change in the quantity supplied when demand changes

• the comparison of the proportionate change in supply to the proportionate change in demand

• the comparison of the proportionate change in supply to the proportionate change in price

What is necessary for consumer surplus to be zero?

• Demand is perfectly elastic.

• Demand is perfectly inelastic.

• Supply is perfectly elastic.

• Supply is perfectly inelastic.

When will the price mechanism not function as a system for allocating goods?

• when the government bans advertising

• when the government maintains an effective maximum price

• when there is a limited supply of the good

• when there is a powerful company able to set the market price

The price of a product is above the market equilibrium price. Which combination of changes is certain to result as the market adjusts towards equilibrium?

• quantity demanded falls, quantity supplied falls.

• quantity demanded falls, quantity supplied rises.

• quantity demanded rises, quantity supplied falls.

• quantity demanded rises, quantity supplied rises.

What can be concluded about a good with a positive cross-price elasticity of demand?

• Its price will be sensitive to changes in prices of close substitutes.

• Its price will be sensitive to changes in quantity demanded of close substitutes.

• The quantity demanded for this good will be sensitive to changes in prices of close substitutes.

• The quantity demanded for this good will be sensitive to changes in quantity demanded of close substitutes.

India is one of the largest producers of tractors in the world. S1 and D1 are the original supply and demand curves for Indian tractors.

What would cause the supply curve to move to S2?

• a rise in the incomes of Indian farmers

• a rise in the price of electricity paid by Indian tractor manufacturers

• a rise in the price of tractors produced in the US

• a rise in the productivity of workers in Indian tractor factories

The diagram shows the demand curve for a product.

Which statement is correct?

• Consumer expenditure on the product always rises when price falls.

• Demand is less elastic at higher prices than at lower prices.

• Price elasticity of demand differs at every price.

• Price elasticity of demand equals one at every price.

The cross-elasticity of demand between two goods will be higher

• the greater the difference in price between the two goods.

• the greater the income elasticities of demand for the two goods.

• the greater the price elasticities of demand for the two goods.

• the more they are regarded as similar by consumers.

The price elasticity of supply of a good is +2. The quantity supplied originally was 200 units. The price increases by 30%.

What will the quantity supplied be after the price increase?

• 80 units

• 140 units

• 260 units

• 320 units