Question 1

Suppose the market for electric scooters is initially in equilibrium. A new government subsidy lowers the price of batteries, a key input. What is the most likely effect on the equilibrium price and quantity of electric scooters?

Accepted Answer

Equilibrium price decreases, equilibrium quantity increases.

Question 2

A consumer faces the following budget constraint: $$p_1$$ \cdot $$q_1$$ + $$p_2$$ \cdot $$q_2 = B$. If p_1$ increases while p_2$ and B$ remain constant, what happens to the budget line?

Accepted Answer

The budget line rotates inward around the $$q_2-$$intercept.

Question 3

If the price elasticity of demand for a product is $$\epsilon_D = -2$$, what happens to total revenue if the price increases by 10%?

Accepted Answer

Total revenue decreases.

Question 4

A consumer is deciding between buying apples and oranges. The marginal benefit per dollar for apples is $$\frac{MB_1$}{P_1$} = 4$$ and for oranges is $$\frac{MB_2$}{P_2$} = 2. $$According to the Equal Marginal Principle, what should the consumer do?

Accepted Answer

Buy more apples and fewer oranges.

Question 5

Suppose the demand for public transit increases due to rising gas prices. At the original equilibrium price, what is most likely to occur in the market for public transit?

Accepted Answer

A shortage of public transit services.

Question 6

If the cross-price elasticity of demand between tea and coffee is $$\epsilon_{xy} = 0.8$$, what does this imply about the relationship between tea and coffee?

Accepted Answer

They are substitutes.

Question 7

A consumer's willingness to pay for a concert ticket is $$\120$, but the market price is $$\$$80. $$What is the consumer surplus?

Accepted Answer

$$CS = 120 - 80 = 40$$

Question 8

Suppose the market supply and demand for a product are given by $$Q_s = 2P$$ and $$Q_d = 100 - P. $$What is the equilibrium price?

Accepted Answer

$$P = 33$$

Question 9

If a good has an income elasticity of demand $$\epsilon_I = -0.5$$, what type of good is it?

Accepted Answer

Inferior good

Question 10

A consumer spends all their budget on two goods, $$X$$ and $$Y. If $$the opportunity cost of good $$X is$$ $$OC_x = \frac{P_x}{P_y}$$, what does this represent?

Accepted Answer

The number of units of $$Y$$ forgone to buy one unit of $$X$$

Question 11

If both the supply and demand curves shift right simultaneously, what happens to equilibrium quantity and price?

Accepted Answer

Equilibrium quantity increases, price is indeterminate.

Question 12

A perfectly competitive firm is a price taker. What does this mean?

Accepted Answer

The firm must accept the market price for its product.

Question 13

Suppose a consumer's budget is $$B = 100$$, the price of good $$A is$$ $$p_A = 10$$, and the price of good $$B is$$ $$p_B = 20. $$What is the maximum quantity of $$A$$ the consumer can buy if they buy no $$B$$?

Accepted Answer

$$q_A = \frac{100}{10} = 10$$

Question 14

If the price elasticity of demand for a medication is $$\epsilon_D = 0$$, what does this imply?

Accepted Answer

Demand is perfectly inelastic.

Question 15

A market is experiencing a shortage. Which of the following must be true?

Accepted Answer

$$Q_d \u003e Q_s$$

Question 16

A consumer faces the following prices: $$P_1 = 5$, P_2$ = 10$$, and has a budget $$B = 50. If $$they buy 4 units of good 1 and 3 units of good 2, does this allocation satisfy the budget constraint?

Accepted Answer

$$5 \cdot 4 + 10 \cdot 3 = 20 + 30 = 50$$, so yes.

Question 17

If a good is a luxury, what is true about its income elasticity of demand?

Accepted Answer

Income elasticity is greater than 1.

Question 18

Suppose the price of a good falls from $$P_1 = 20$ to P_2$ = 10$$, and the quantity demanded rises from $$Q_1 = 100$ to Q_2$ = 200. $$Using the arc/midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\epsilon_D = \frac{200-100}{(100+200)/2} \div \frac{10-20}{(20+10)/2} = \frac{100}{150} \div \frac{-10}{15} = \frac{2}{3} \div -\frac{2}{3} = -1$$

Question 19

A seller in a perfectly competitive market wants to maximize profit. Which condition must be met?

Accepted Answer

Marginal cost equals marginal revenue.

Midterm 2 Study Guide: Demand, Supply, Consumers, and Sellers (Chapters 4–6)

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