Question

4. Assume the income elasticity of demand for a particular good is -1.5, which of the following is correct?

A. This is a normal good.

B. This is an inferior good.

C. A 10% fall in income would imply a15% increase in purchases.

D. Both B and D are correct.

5. The law of demand states that, holding everything else constant, an increase in the price of a good will

a. cause a surplus.

b. cause a shortage.

c. decrease the demand for the good.

d. increase the supply of the good.

e. result in fewer purchases of the good.

6. Suppose the following things happen simultaneously: a medical study indicates olive oil is good for heart health, and a drought makes olive farming difficult throughout California, Italy, Greece, Spain (and other olive growing areas). What will happen in the olive oil market?

a. the price and sales of olive oil will decline.

b. the price of olive oil will increase and sales will decrease.

c. the price of olive oil will decrease and sales will increase.

d. the price of oil will increase, and sales is indeterminate.

e. the sales of oil will fall, and price may not change.

7. A local movie theater decides to lower its ticket prices from $20 to $15 and notices that ticket sales increase by 50%. Which of the following is correct?

A. This is an inelastic response to a price change.

B. This is a unit elastic response to a price change.

C. The implied price elasticity is -(½) standard approach.

D. The implied price elasticity is (-2) standard approach.

Answer 1

6. Now as the medical study indicates that olive oil is good for heart, the demand for olive oil will increase and the demand curve will shift rightward from D1 to D2. Now on the other hand, as a drought makes olive farming difficult throughout California,Italy, Greece, Spain, the supply of olive oil will decline and the supply curve will shift leftward from S1 to S2.

h men 11 Assming the income elasticity of demand for a ponticulas good is -lis. income elasticity Hace as vake of Em ls which is negative, hence. This is an inbnior good. Which thad a 10% fall in income would in wease the purchase by (108115% or 15% . Hace answn is? e Both B and D are eorrect. 5) Now, holding evnything else construit, an increase In the price of a good will result in an downwand upward movement along the demand care and hence quartily demanded of the good will fall . Hince the answn is ? cs Scaresultiten tewa pmclasis of the good. l CamScanne

Now when the rightward shift of the demand curve is equal to the leftward shift of the supply curve, then as the economy moves from point A to point B, the equilibrium price of olive oil will increase from P1 to P2 and the sales of olive oil will remain unchanged at Q. ( panel A)

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Now when the rightward shift of the demand curve is greater than the leftward shift of the supply curve, then as the economy moves from point A to point B, the equilibrium price of olive oil increases from P1 to P2 and the sales of olive oil will increase from Q1 to Q2. ( panel B)

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When the leftward shift of the supply curve is greater than the rightward shift of the demand curve, then as the economy moves from point A to point B, the equilibrium price of olive oil will increase from P1 to P2 and the sales of olive oil will decline from Q1 to Q2. ( panel C)

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Hence the Answer is:

d. The price of oil will increase, and sales is indeterminate.

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