Question

1. From 1970 to 1993, the real price of eggs decreased.  Which of the following would cause an unambiguousdecrease in the real price of eggs?

A) A shift to the right in the supply curve for eggs and a shift to the right in the demand curve for eggs.

B) A shift to the right in the supply curve for eggs and a shift to the left in the demand curve for eggs.

C) A shift to the left in the supply curve for eggs and a shift to the right in the demand curve for eggs.

D) A shift to the left in the supply curve for eggs and a shift to the left in the demand curve for eggs.

2. The income elasticity of demand is the

A) absolute change in quantity demanded resulting from a one unit increase in income.

B) percent change in quantity demanded resulting from the absolute increase in income.

C) percent change in quantity demanded resulting from a one percent increase in income.

D) percent change in income resulting from a one percent increase in quantity demanded.

E) percent change in income resulting from a one percent increase in price.

3. The price elasticity of demand for a demand curve that has a zero slope is

A) zero.

B) one.

C) negative but approaches zero as consumption increases.

D) infinity.

4. (bonus question) Over the past year price inflation has been 10%, but the price of a used Ford Escort has fallen from $6,000 to $5,000.  The real price of a Ford Escort has fallen by:

A) 12%.

B) 17%

C) 20%.

D) 24%

E) 32%.

Answer 1

1. Option B i.e. A shift to the right in the supply curve for eggs and a shift to the left in the demand curve for eggs.

Price falls as supply increases but demand decreases

2. Option C. i.e. percent change in quantity demanded resulting from a one percent increase in income.

formula for income elasticity of demand = % change in quantity demand/%age change in income

3. Option D. i.e. infinity

demand curve that has a zero slope is a straight horizontal line and its elasticity is infinity.

4. Option D. i.e. 24%

10 percent increase in inflation means price of ford should increase from 6000 to 6600 but as actual price is 5000, so it has decreased 1600 in one year.  

Total deprciaition in % age = 5000/6600 = 0.7575

Hence it decreased by 1-0.7575 ~ 24%