Question

In each of the following cases only one answer is correct. Write the letter that represents the correct answer, next to each number. E.g. 1.11 a 1.1 Which one of the following statements is false? a) Choice is necessary because of limited wants. b) The means available to satisfy wants are limited. c) The wants of human beings are unlimited. d) The opportunity cost of producing a given commodity is the value of the best forgone alternative which could have been produced with the factors of production used in its production. 1.2 If we were to say that two variables are positively related, this means that: a) The relationship between the two would graph as a line sloping downward. b) The relationship between the two would graph as a horizontal line. c) The relationship between the two would graph as a line sloping upward. d) The relationship between the two cannot be depicted graphically in any simple way. 1.3 If there is an increase in the price of red meat, a substitute in production for milk, then: a) The supply of milk will increase. b) The demand for milk will decrease. c) The supply of milk will decrease. d) There will be a movement along the supply curve for milk. 1.4 In the market for air travel, which of the following variables would decrease demand, ceteris paribus? a) An increase in rental rates for hired cars, a substitute. b) A rise in income of tourists. c) A rise in the price of air travel. d) A rise in the price of hotel accommodation, a complement. 1.5 If the cross elasticity of demand between tablets and smart phones is 2,0, this implies that these goods are: a) Luxuries. b) Complements. c) Necessities. d) Substitutes. 1.6 Nonjabulo thinks that McDonald’s hamburgers are the best – much better than Steers’ – while Anne cannot tell the difference: a) Anne’s demand for McDonald’s hamburgers is likely to be more price elastic than Nonjabulo’s. b) Nonjabulo’s demand for McDonald’s hamburgers is likely to be more price elastic than Anne’s. c) Anne’s demand for all hamburgers is less price elastic than Nonjabulo’s. d) Nonjabulo’s demand for all hamburgers is more price elastic than Anne’s

Answer 1

1.1 - : - a) Choice is necessary because of limited wants.

Only (a) is false. Wants are unlimited, while means are limited, and that is why choice is necessary. (d) is actually the standard definition of opportunity cost.

1.2 - : - c) The relationship between the two would graph as a line sloping upward.

If two variables are positively related, that means that they are related in a manner that increase in one variable will be matched by increase in another variable. (a) suggests the negatively related, while (b) suggests that one variable is constant, irrelelvant of however the other variable is increased.

1.3 - : - c) The supply of milk will decrease.

Red meat as a substitute of milk production implies that there are inputs which are used to produce either milk, or red meat. Increase in price of red meat means that suppliers are more inclined to produce red meat, than milk. (a) wont's happen as inputs are used to produced more red meat. (b) The demand for milk, if not increase, would definitely not decrease as red meat can be considered as a substitute to milk. (d) also is not certain, as movement along supply curve means change in demand curve, which is not certain.

1.4 - : - d) A rise in the price of hotel accommodation, a complement.

All the other option actually increase in the demand for air travel. A rise in hotel accomodation means decrease in demand for it, and as a compliment, decrease in demand for air travel.

1.5 - : - d) Substitutes.

If cross price elasticity between tablets and smart phones is 2, this means than for a unit percentage increase in samrt phone's price would result to quantity demanded of tablets increase by 2%, ie as price of smart phone increase, and hence quantity demanded of smart phone decrease, which lead to increase in demand for tablets, suggesting they are substitute goods.

1.6 - : - a) Anne’s demand for McDonald’s hamburgers is likely to be more price elastic than Nonjabulo’s.

Higher price elasticity suggests that the responsiveness of the quantity demanded due to change in price is more. As A is indifferent between the two and N is more inclined/biased towards McD, it can be asserted that for a particular change in price of McD, N's quantity demanded of it will change much less than that of A. This suggests that N's demand of McD is more price inelastic than A, or A's demand is more price elastic than N. Option (b) says the opposite, while other options are uncertain.