Section Multiple choice questions (15 marks The economic behavior of individual decision makers and the determination of price and output in specific markets are both studied in a) microeconomics 2. All economic questions arise from b) scarcity 3. Because the resources are scarce, we must give up some of one good in order to acquire more of another. This is the concept of : a) opportunity costs 4. The demand curve for video players shifts to the right. This could be caused by: b) an increase in the price of DVDs 5. The demand curve for motor vehicles will shift to the right if: c) advertising expenditure on motor vehicles increases. 6. If the price of coffee increases which of the following is most likely to happen? d) an increase in the demand for substitutes such as tea 7. Which of the following would shift the supply curve for a product to the right? d) an improvement in the technology for producing the good 8. Assuming fruit juice and soft drinks are substitutes, a decrease in the price of fruit juice, other things being equal, results in b) a leftward shift in the demand curve for soft drink 9. Which of the following is not a determinant of supply: b) income 10. The equilibrium price is d) the price where quantity demanded equal quantity supplied 11. If the demand for a product is inelastic, a 2.0 percent increase in the price of product will: d) decrease the quantity demanded by less than 2.0 percent 12. Suppose that the price of a product increases from $5.00 to $5.50 and as result the quantity supplied increases from 162 to 192. Based upon this information we would conclude that the supply for this product in this price range is: c) elastic 13. If demand for a commodity is price elastic, then the price elasticity of demand is: b) greater than 1 and the producer should lower the price to increase the revenue 14. If an increase in train fares in Sydney raises total revenue of the operators, this is evidence that demand is: b) price inelastic 15. For which of the following is demand most likely to be price inelastic? c) veal Section 2 Question 1a) Everyone expects the price of a mobile phone to fall next month b) The price of a call made from a mobile phone falls c) The price of a call made from a land-line phone increases Explain the effect of each event on the demand for mobile phones. Use graphs to show the effects of each event. Does any event (or events) illustrate the law of demand? Explain. a) If everyone expects the price of a particular mobile phone to fall next month then no one will be willing to buy the mobile phone this month. Thus, for the present price, there is zero quantity demanded. If any sales are to be made this month, the price has to be reduced for every quantity. Thus, this expectation causes a downward shift in demand. b) Using a mobile phone becomes less expensive. This is likely to cause an increase in demand. Quantity demanded will increase for every price and thus, the demand curve for the mobile phone will shift rightward.c) If using landlines becomes more expensive then the demand for its substitutes, namely the mobile phone will increase. The effect will be identical to the previous case. The law of demand states that for a rise (fall) in price, ceteris paribus, the quantity demanded of a good will fall (rise). The instances we saw were changes in factors that determine the quantity demanded at each price, or the demand. Changes in these factors causes changes in demand, while changes in price causes changes in quantity demanded. A change in quantity demanded for every given price constitutes a change in demand. Thus the instances discussed above are not about exhibitions of the law of demand. Rather, they exhibit the effects that changes in factors that influence demands have on quantity demanded at every price. Question 2 (30 marks) Show the effects of each of the following changes on the equilibrium price and quantity of cars in Australia. The use of the graph (s) is essential a. An increase in average household income b. A steep rise in petrol price c. An increase in the price of cars THIS QUESTION DOES NOT MAKE SENSE. IS IT A RISE IN THE PRICE OF RIVAL CARS? OR CARS MANUFACTURED IN OTHER COUNTRIES? AN INCREASE IN THE PRICE OF CARS IN THE FRAMEWORK CONSIDERED IMPLIES AN INCREASE IN THE PRICE OF CARS IN EQUILIBRIUM AND THAT IS TYPICALLY ASSOCIATED WITH AN INCREASE IN DEMANDS OR A FALL IN SUPPLY CAUSED BY SOME UNDERLYING CHANGES IN FACTORS THAT AFFECT THESE LIKE INCOMES OR PRICE OF INPUTS ETC.d. A closure of two big car manufacturing plants in South Australia The effects are unclear until we know how these manufacturing plants were related to the Australian cars. If they produced substitutes for markets where the Australian car makers also compete, then the demand for Australian cars will increase. The effect will be similar to case a) shown above. If however these are unrelated, then there will be no effects at all and the equilibrium point will remain unchanged. e. introduction of the robotics line for assembling the cars in most of the car manufacturing plants There are two potential effects on the supply. First, introduction of robotics may lead to increase in costs per unit. However, the labour that the robots replace will lead to savings on labour costs. Secondly, there will be an increase in efficiency that will lead to a reduction in costs. Thus on the net it is likely that the per unit costs of production will go down. In that case for every price a higher amount of supply becomes profitable and feasible for the firm. Thus, there will be a rightward shift of the supply curve. As shown in the diagram, this implies a rise in equilibrium quantity and a fall in equilibrium price. 3. a) Draw a diagram to show the change in the coffee market that has resulted in higher prices for coffee. b) Draw a diagram to show the change in the tea market that has resulted in higher prices for tea. c) Explain the non-price determinants involved in the change in each market. The rise in coffee bean prices which is the single most important input for producing the final product of a cup of coffee has resulted in the costs of producing each cup of coffee more expensive. Thus, for every cup of coffee it can be brought to the market only if a higher price is offered.In case of the tea market, the rise in tea prices has been caused by a shift in preferences of consumers for tea over coffee because of the recent discoveries of tea being healthier.d) Why would the writer suggest coffee drinkers might be thinking of switching to tea. Since tea is the closest substitute to coffee, a rise in coffee prices is likely to increase the demand for tea.