ECO401 Midterm Past Papers 1

ECO-401 · 2009 & 2010 · MID TERM PAPERS · 17 Papers Solved · PAPER # 1

Q1. Microeconomics is the branch of economics that deals with which of the following topics? (1 marks)

1. The behavior of individual consumers.
2. Unemployment and interest rates.
3. The behavior of individual firms and investors.
4. The behavior of individual consumers and behavior of individual firms and investors.

Correct answer: The behavior of individual consumers and behavior of individual firms and investors.

Microeconomics is the branch of economics that deals with which of the following topics The behavior of individual consumers The behavior of individual firms and investors

Q2. If pen and ink are complements, then an increase in the price of pen will cause: (1 marks)

1. An increase in the price of ink.
2. Less ink to be demanded at each price.
3. A decrease in the demand for pen.
4. A rightward shift in the demand curve for ink.

Correct answer: Less ink to be demanded at each price.

Q3. When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in: (1 marks)

1. A decrease in equilibrium price and an increase in quantity of meal.
2. An increase in equilibrium price and quantity of meal.
3. A decrease in equilibrium price and quantity of meal.
4. An increase in equilibrium price and a decrease in quantity of meal.

Correct answer: A decrease in equilibrium price and quantity of meal.

When college students leave town for the summer, the demand for meals at the local restaurants declines. This results in a decrease in equilibrium price and quantity. The demand curve shifts to the left because the town population declines, resulting in lower prices and quantity.

Q4. An increase in supply is shown by: (1 marks)

1. Shifting the supply curve to the left.
2. Shifting the supply curve to the right.
3. Upward movement along the supply curve.
4. Downward movement along the supply curve

Correct answer: Shifting the supply curve to the right.

Q5. Assume that the government sets a ceiling on the interest rate that banks charge on loans. If the ceiling is set below the market equilibrium interest rate, the result will be: (1 marks)

1. A surplus of credit.
2. A shortage of credit.
3. Greater profits for banks issuing credit.
4. A perfectly inelastic supply of credit in the market place.

Correct answer: A shortage of credit.

If a price ceiling is placed below the market-clearing price, at the ceiling price, buyers want to buy more than sellers will make available .let buyers would like to buy amount 50Q at price 10 but sellers will sell only 30. Shortage 50-30 =20 Similarly Customer demand more for loan than bank will make available. Result will be the shortage of credit.

Q6. If a 12% price reduction causes quantity demanded to rise by 12% then: (1 marks)

1. Demand is inelastic.
2. Demand is elastic.
3. Demand is perfectly elastic.
4. Total revenue will remain constant.

Correct answer: Total revenue will remain constant.

PЄd = Percentage change in Quantity Demanded/Percentage change in Price PЄd =12/12 = 1

Increase in Price

•  If the demand for the good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case the two effects off-set each other
•  If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the price effect is weaker than the quantity effect.
•  If demand for a good is inelastic (the price elasticity of demand is less than 1), an increase in price increases total revenue. In this case, the price effect is stronger than the quantity effect.

Decrease in Price

•  When demand is unit-elastic, the effects exactly balance; so a decrease in the price has no effect on total revenue.
•  When demand is elastic, the quantity effect dominates the price effect; so a decrease in the price increases total revenue
•  When demand is inelastic, the price effect dominates the quantity effect; so a decrease in the price reduces total revenue

Q7. Which of the following will be TRUE if demand is inelastic? (1 marks)

1. The coefficient of elasticity is greater than one.
2. The percentage change in quantity demanded is same as the percentage change in the price.
3. An increase in price will increase total revenue.
4. None of the given options.

Correct answer: An increase in price will increase total revenue.

If demand for a good is inelastic (the price elasticity of demand is less than 1), an increase in price increases total revenue. In this case, the price effect is stronger than the quantity effect.