ECON90015 Managerial Economics

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ECON90015 Managerial Economics
Practice Mid-Semester Test

Choose the response a, b, c, d, or e that best answers the question or completes the statement.
Time allowed: 1 hour.
The use of calculators is permitted.

1. Computer hardware and software are complements in consumption. Both goods are traded in perfectly competitive markets. Suppose there is a reduction in the costs of making microchips for computer hardware. This change will lead to:

a) an increase in the equilibrium price of hardware, and a decrease in the equilibrium quantity of software traded.

b) a decrease in the equilibrium price of hardware, and an increase in the equilibrium price of software.

c) an increase in the equilibrium quantity of hardware traded, and a decrease in the equilibrium quantity of software traded.

d) a decrease in the equilibrium quantity of hardware traded, and a decrease in the equilibrium quantity of software traded.

e) a decrease in the equilibrium price of hardware, and a decrease in the equilibrium quantity of software traded.

2. Suppose beer is an inferior good, wine is a normal good, and both goods are traded in perfectly competitive markets. Assume that these two goods are neither substitutes nor complements in consumption. If there is a decrease in consumer income, then there will be:

a) a decrease in the equilibrium price of beer, and an increase in the equilibrium price of wine.

b) an increase in the equilibrium price of beer, and an increase in the equilibrium quantity traded of wine.

c) no change in both the equilibrium price and quantity traded of either good since the decrease in income will have an equal effect on the supply and demand of both goods.

d) an increase in the equilibrium price of beer, and a decrease in the equilibrium quantity traded of wine.

e) a decrease in demand for both beer and wine.

3. Assume that the demand for a product is QD = 10 – P and the supply for the product is QS = P + 4, where P is the per-unit price of the product. The market for 12 the product is perfectly competitive. Suppose the government imposes a $1 per unit tax on the sale of the product (which is levied on the consumers). After the tax is imposed,

a) the new equilibrium price that producers receive will be higher, and the price that consumers pay will be lower than before the tax is imposed.

b) both the new equilibrium price that producers receive and the price that consumers pay will be higher than before the tax is imposed.

c) both the new equilibrium price that producers receive and the price that consumers pay will be $3.50.

d) both the new equilibrium price that producers receive and the price that consumers pay will be $2.50.

e) the new equilibrium price that producers receive will be $2.50, and the price that consumers pay will be $3.50.

4. Consider the following perfectly competitive market for a good: QS = 3P QD = 200 – 2P where QS = quantity supplied; QD = quantity demanded; and P = price.
Which of the following statements is correct?

a) At P = 50, there will be an excess demand for the good.

b) Only at prices below P = 30 will there be an excess demand for good.

c) At prices below P = 40, there will be an excess demand for the good, and the quantity traded will be greater than 120.

d) It is not possible to find an equilibrium price and quantity traded for the good.

e) At prices below P = 40, there will be an excess demand for the good, and the quantity traded will be less than 120.

5. Sunscreen lotion and sunhats can be considered as substitutes in consumption for the protection from UV rays. A new type of fabric used for making sunhats is discovered, which is cheaper to manufacture than existing fabrics that provide UV protection. Markets for sunscreen lotion and sunhats are assumed to be perfectly competitive. Which of the following statements is correct?

a) The equilibrium quantity traded of sunhats will increase, and the equilibrium quantity traded of sunscreen lotion will decrease.

b) The equilibrium price of sunhats will increase, and the equilibrium price of sunscreen lotion will decrease.

c) The equilibrium price of sunhats will decrease, and the equilibrium quantity traded of sunscreen lotion will increase. 3

d) The equilibrium quantity traded of sunhats will increase, and the equilibrium price of sunscreen lotion will increase.

e) None of the above.

6. The markets for meals at Italian restaurants and Chinese restaurants are perfectly competitive. Assume that meals at both types of restaurants are substitutes. What would happen in the market for meals at Italian restaurants if: (i) the price of flour, which is an important ingredient in making pizzas and pasta, increases; and (ii) the price of meals in Chinese restaurants increases?

a) The equilibrium price of meals at Italian restaurants would increase, but the impact on the equilibrium quantity traded would be uncertain.

b) The equilibrium price of meals at Italian restaurants would decrease, but the impact on the equilibrium quantity traded would be uncertain.

c) Both the equilibrium price and quantity traded of meals at Italian restaurants would

increase.

d) The equilibrium quantity traded of meals at Italian restaurants would increase, but the impact on the equilibrium price would be uncertain.

e) The equilibrium quantity traded of meals at Italian restaurants would decrease, but the impact on the equilibrium price would be uncertain.

7. Assume that the market for medical care is perfectly competitive. Suppose the market demand for medical care is QD = 60 – 2p and the market supply is QS = 40 + 3p, where p is the per-unit price of medical care. What is the equilibrium price and quantity traded in this market?

a) P* = 6 and Q* = 64 units.

b) P* = 3 and Q* = 18 units.

c) P* = 12 and Q* = 100 units.

d) P* = 4 and Q* = 52 units.

e) None of the above answers are correct.

8. Assume that the market for smartphones is perfectly competitive. Suppose that the number of buyers in the smartphone market increases, and there is a technological advance in the production process for smartphones. What would be the likely consequences of these changes on the market for smartphones?

a) The equilibrium price would increase, but the impact on the equilibrium quantity traded would be uncertain.

b) The equilibrium price would decrease, but the impact on the equilibrium quantity  traded would be uncertain.

c) Both the equilibrium price and quantity traded would increase.

d) The equilibrium quantity traded would increase, but the impact on the equilibrium

price would be uncertain.

e) The equilibrium quantity traded would decrease, but the impact on the equilibrium price would be uncertain.

9. Assume the market for peaches is perfectly competitive. The demand and supply schedules for the market for peaches are given in the table below.

Price ($)
 Quantity Demanded(kilos)
 Quantity Supplied (kilos)
0
 60 0
1 50 10
2 40 20
3 30 30
4 20 40
5 10 50
6 0 60

Given the demand and supply schedules in the table above, which of the following statements is correct?

a) If the price is equal to $4, then there is an excess demand, and the quantity traded is equal to 20.

b) If the price is equal to $2, then there is an excess demand, and the quantity traded is equal to 20

c) Only at prices below $3 will there be an excess supply

d) It is not possible to find an equilibrium price from the information given in the table above.

e) When the price equals to $0, then the amount of excess supply is the same as when the price equals to $6.

10.Assume the market for apples is perfectly competitive. The demand and supply schedules for the market for apples are given in the table below.

Price ($)
Quantity Demanded
(kilos)
Quantity Supplied
(kilos)
0 60 0
1 50 10
2 40 20
3 30 30
4 20 40
5 10 50
6 0 60

Suppose the quantity demanded at each price increases by 10 kilos, and that quantity supplied at each price decreases by 10 kilos. Which of the following statements is correct?

a) Both the equilibrium price and quantity traded remain unchanged.

b) The equilibrium price decreases to $2, and the equilibrium quantity traded remains unchanged.

c) The equilibrium price remains unchanged, and the equilibrium quantity traded increases to 40.

d) The equilibrium price remains unchanged, and the equilibrium quantity traded decreases to 20.

e) The equilibrium price increases to $4, and the equilibrium quantity traded remains unchanged.

11. The market for apples in Australia is perfectly competitive. The cross-price elasticity of the demand for apples with respect to the price of oranges is 0.3. This means that:

a) a rise in the price of oranges will lead to an increase in the revenue of apple farmers.

b) a rise in the price of oranges will lead to a decrease in the revenue of apple farmers.

c) a rise in the price of oranges will not change the revenue of apple farmers.

d) a rise in the price of oranges will lead to an excess supply of apples in equilibrium.

e) a rise in the price of oranges will lead to an excess demand for apples in equilibrium.

12.The markets for tomatoes and cucumbers are perfectly competitive. Suppose that a 20 per cent increase in the price of tomatoes causes a 10 per cent decrease in the quantity demanded of cucumbers. The cross-price elasticity of the demand for cucumbers with respect to the price of tomatoes is:

a) negative and, therefore, these goods are substitutes.

b) positive and, therefore, these goods are substitutes.

c) negative and, therefore, these goods are complements.

d) positive and, therefore, these goods are complements.

e) less than one in absolute value and, therefore, these goods are substitutes. 6

13. The price of a local cable TV service has increased from $16.20 to $19.80 per month, resulting in a decrease in the number of cable subscribers from 224,000 to 176,000. Within this price range, the average (arc) own-price elasticity of demand is:

a) 0.8.
b) 1.2.
c) 1.6.
d) 8.0.
e) 1.0.
14. The market for rental apartments is perfectly competitive. If the government introduces a new law that imposes a maximum legal rent on rented apartments that is below the current equilibrium rent, we would expect that:

a) the new law will have no economic impact.

b) the new law will create a surplus of rental apartments.

c) renters may find that landlords will start offering to furnish the apartments at no additional cost.

d) the new law will cause a shortage of rental apartments.

e) the impact of the new law cannot be predicted without further information.

15.Consumer surplus is:

a) the cost of producing a unit of a product.

b) the maximum that a consumer is willing to pay for a product.

c) the difference between the price charged for a product and the cost of producing that product.

d) the difference between the maximum that a consumer is willing to pay for a product and the cost of producing that product.

e) the difference between the maximum that a consumer is willing to pay for a product and the price that is paid for that product.

16. The market for cinema tickets is perfectly competitive. Due to an increase in the price of cinema tickets, it is observed that total consumer spending on cinema tickets has fallen. Based on this information, it can be concluded that:

a) the demand for cinema tickets is own-price elastic.
b) the demand for cinema tickets is own-price inelastic. 7
c) consumers see going to the cinema as a normal good.
d) consumers see going to the cinema as an inferior good.

e) the own-price elasticity of demand for cinema tickets is zero.

17. The Bureau of Agricultural Economics calculates that the own-price elasticity of the demand for chicken is 0.6. Other things being equal, this implies that a 20 per cent increase in the price of chicken will cause the quantity of chicken demanded to:

a) increase by approximately 12 per cent.
b) increase by approximately 26 per cent.
c) decrease by approximately 32 per cent.
d) decrease by approximately 26 per cent.

e) decrease by approximately 12 per cent.

18.Suppose the government imposes a binding price ceiling on the price of milk that results in a shortage of milk in the market. The market for milk is perfectly competitive. In which of the following case would the shortage associated with the price ceiling be the largest?

a) The own-price elasticity of both the demand and supply of milk is small.
b) The own-price elasticity of both the demand and supply of milk is large.
c) The own-price elasticity of the supply of milk is large and the own-price elasticity of
the demand for milk is small.
d) The own-price elasticity of the demand for milk is large and the own-price elasticity of  the supply of milk is small.

e) None of the above. The binding price ceiling would result in a surplus and not a shortage.

19. Suppose the government imposes a per-unit tax on the sale of a product that is traded in a perfectly competitive market. Which of the following statements is true?

a) Consumer surplus will increase if demand for the product is own-price inelastic.
b) Producer surplus will increase if supply of the product is own-price elastic.
c) Consumers will bear a greater burden of the tax if the demand for the product is relatively more own-price inelastic than its supply.
d) Producers will bear a greater burden of the tax if the demand for the product is relatively more own-price inelastic than its supply.

e) None of the above.

20. Suppose the production of a good in a competitive market has a negative externality. Which of the following is true?

a) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output.
b) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is at the allocatively efficient output.
c) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output.
d) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output.
e) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output.

2023-10-10