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Tutorial Week 5 (Chapter 5)

1. For a particular good, a 10 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The market for the good is broadly defined. c. The good is a necessity. d. The relevant time horizon is long. 2. Danita rescues dogs from her local animal shelter. When Danita’s income rises by 7 percent, her quantity demanded of dog biscuits increases by 12 percent. For Danita, the income elasticity of demand for dog biscuits is a. negative, and dog biscuits are a normal good. b. negative, and dog biscuits are an inferior good. c. positive, and dog biscuits are an inferior good. d. positive, and dog biscuits are a normal good. Price

A B C D

D C B A

Quantity

3. Refer to above Figure. Mark says he would buy one Mt. Dew per day regardless of the price. If this is true, then Mark's demand for Mt. Dew is represented by demand curve a. A. b. B. c. C. d. D.

4. The case of perfectly elastic demand is illustrated by a demand curve that is a. vertical. b. horizontal. c. downward-sloping but relatively steep. d. downward-sloping but relatively flat. 5. For a good that is a necessity, demand a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way. 6. If a price ceiling is a binding constraint on a market, then a. the equilibrium price must be below the price ceiling. b. the quantity supplied must exceed the quantity demanded. c. sellers cannot sell all they want to sell at the price ceiling. d. buyers cannot buy all they want to buy at the price ceiling. 7. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music compact discs, and music lovers experience an increase in income? a. Price will fall, and the effect on quantity is ambiguous. b. Price will rise, and the effect on quantity is ambiguous. c. Quantity will fall, and the effect on price is ambiguous. d. Quantity will rise, and the effect on price is ambiguous.

8. There are over 6 billion chickens in the United States. It is a huge industry. Assume that the chicken producers in the country can easily expand their chicken operations at a low cost, and that there are no close substitutes for chicken, and that chicken is a necessity. i. Is the price elasticity of demand inelastic or elastic? ii. The price elasticity of supply inelastic or elastic? iii. Draw the demand and supply curve for the chicken industry reflecting your answers above for i and ii. (just make it steep or flat depending on elasticity). Make the equilibrium price = $10 per kg, and the equilibrium quantity = 100 million kg. Make sure to label your graph. This information will be used in question b and c, so you will draw this graph again twice in the upcoming questions. iv. What is the total revenue? Draw the relevant area representing total revenue on your graph....