Question

1. Let be a linear supply function of the form Q_s = a+bP, which intersects the Price axis at some positive value. Therefore:

(a ) a < 0

(b) a > 0

(c) a = 0

(d) b = 0

2. Wheat is used to produce bread. If, ceteris paribus, the price of wheat rises, then:

(a) The quantity supplied of bread will rise.

(b) The demand for bread will drop.

(c) The supply of bread will increase.

(d) The supply of bread will decrease.

3. The Demand for a good is a straight line that intersects the Price axis at A and the Quantity axis at B. In the middle M of the segment AB the following relationship holds as regards the price elasticity of demand:

(a) |Ed| > 1

(b) 0 < |Ed] < 1

(c) |Ed| = 1

(d) Ed = 0

Answer 1

1. Qs = a+bP

When Q=0, P= -a/b

This means if supply curve intersects the price axis at some positive value , then "a" must be negative because when a<0 , then -a/b > 0 i.e positive. Hence, option(A) is correct.

2. Wheat is used to produce bread. If price of wheat rises ,then the supply of bread will decrease because wheat is an input in bread production. Increase in the price of wheat increases the cost of production of bread, so producers will produce less of bread. Hence, option(D) is correct.

3. On the middle of the demand curve, the elasticity of demand is unit elastic. So, at point M , the price elasticity of demand , |Ed| =1. Hence, option(C) is correct.