Question

1. Which of the following will cause a leftward shift (decrease) of the demand curve for houses?
   1. Consumer expectations that the price of houses will increase next year
   2. An increase in consumer income
   3. An increase in mortgage interest rates
2. Assume the a product has the market demand function QD = 20 – P and the market supply function QS = 6 + P. If a price ceiling is set at $8, then you will predict which of the following would result?
   1. There will be a surplus
   2. Nothing will happen
   3. Quantity demanded will be zero
3. Which of the following best described the law of diminishing marginal utility
   1. Rice gives me no satisfaction, so I won’t buy it
   2. The more coke I drink, the more I want to drink
   3. The more I work as an accountant, the more I want to change my career
4. If the price elasticity of demand for a product is -2, this means that, ceteris paribus, quantity demanded will increase by
   1. 2% for each 1% increase in price
   2. 2 units for each $1 decrease in price
   3. 1 unit for each $2 decrease in price

Answer 1

Ans 1. Option c

The increase in mortgage interest rate increases the cost if owning the house. This leads to a decrease in demand for houses shifting the demand curve for houses to the left.

Ans 2. Option b

Equilibrium in the market is where,

Qd = Qs

=> 20 - P = 6+P

=> P = $7

As market clearing price, $7, is less than the price ceiling of $8. So, price ceiling is non-binding and hence, has no impact on the market.

Ans 3. Option C

Law of diminishing marginal utility states taht as more of one good is consumed then the utility from each additional unit decreases.
Ans 4. Option b

Price elasticity of demand = Change in Quantity demanded due to change in price.

So, price elasticity of demand of -2 means that demand increases by 2 unit for 1 units decrease in price level.

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