Chapter 5

APPLICATIONS OF MICROECONOMICS THEORY AS A BASIC FOR

UNDERSTANDING THE KEY ECONOMIC VARIABLES AFFECTING THE
BUSINESS

1. Which of the following will move the demand curve for pencil to the right?
a. An increase in the price of ballpen
b. An increase in the number of consumers
c. A reduction in the price of pencil
d. An expectation that the price of the pencil will decrease in the future
2. Which of the following provides an example of substitute goods?
a. Pepsi and Coca-cola
b. Coffee and sugar
c. French fries and catsup
d. Bread and butter
3. If shop-repair services are inferior then:
a. If price of shoe repair falls, people want less of it.
b. If people's incomes go up, they spend less for shoe repair.
c. People do not base their decisions to buy shoe repairs on cost-benefit reasoning.
d. People will only want shoe repair services if they are deceived by advertising.
4. Coffee and sugar are complementary products. The demand curve for sugar would shift to
the left if
a. The price of coffee increases
b. The price of coffee decreases
c. The price of sugar increases
d. The price of sugar decreases
5. Which of the following will lead to an increase in the current supply of rice?
a. Subsidy from the government
b. Higher consumer income
c. Lesser number of producers
d. All of the above
6. A horizontal demand curve is
a. Perfectly inelastic
b. Relatively inelastic
c. Relatively elastic
d. Perfectly elastic
7. The demand for white sugar decreased by 25% after the massive layoff of many

companies. Based on the statement, white sugar is a(n)

a. Inferior goods
b. Normal goods
c. Superior goods
d. Substitute goods
8. The price at which there is neither surplus nor shortage is called:
a. The adjustment price.
b. The fair price.
c. The equal price.
d. The market-clearing price.
9. Which of the following statements are true?
I. If the quantity supplied to the market by producers exceeds the quantity demanded by
buyers, price will decline until surplus is eliminated.
II. If the quantity demanded to the market by consumers exceeds the quantity supplied
by buyers, price will rise until shortage is eliminated.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
10. Law of diminishing marginal returns
a. Applies only in the short run.
b. States that as one input variable is increased, there is a point at which
the marginal increase in output begins to decrease, holding all other inputs constant.
c. Assumes that there is no change in the technique of production.
d. Is defined by all of the above
11. What is the economic tool that measures the extent of which a firm would supply more of
their good as their price goes up?
a. Price elasticity of supply
b. Production function
c. Demand schedule
d. Supply curve
12. The shape of Total Fixed Cost (TFC) curve is
a. vertical line
b. horizontal line
c. 45 degree line
d. None of the above

13. Law of demand states that

a. as the price increases, quantity demanded also increases.
b. as the price increases, quantity demanded decreases.
c. as the price increases, quantity demanded also increases, all else being equal.
d. as the price increases, quantity demanded decreases, all else being equal.
14. An increase in demand will cause
a. price to fall
b. quantity demanded to expand
c. quantity supplied to increase
d. none of the above

15. Production Functions Shows

a. Prices of input and output
b. Relationship between output and input
c. Various combinations of inputs
d. All of the above

Answers:
1) c. A reduction in the price of pencil
A demand curve moves when the factor changes is price only. And, it moves to the right
when there is an increase in the demand of the product. As price has an inverse relationship
with the demand, a decrease in the price will lead to an increase in demand and cause the
movement of the demand curve to the right. The changes in the two factors in the choices,
being demand variables other than price, will not cause the movement of the demand curve
but instead, will cause the shifting of the demand curve.
2) a. Pepsi and Coca-cola
A substitute is something used instead of a particular good or service, while complementary
goods are used in conjunction to each other. In the choices, the coffee and sugar, French fries
and catsup, and bread and butter complement each other. On the other, Pepsi and Coca-cola
are both drinks. Pepsi can be an alternative if the price for Coca- cola increases or vice versa.
3) b. If people's income will go up, they spend less for shoe repair.
In factors affecting the demand for a product, the consumer income (wealth) affects two
types of product. These are normal goods and inferior goods. Inferior goods are of lower
quality and standard, making them cheaper. Consumers buy more inferior good when they
are short of money. Thus, an increase in income will bring lesser demand for shoe repair
services.
4) a. The price of coffee increases
A demand curve shifts when demand variables other than price change. In that case, the
choices involving changes in price will not make the demand curve shift. A demand curve
shift to the left if the demand for the product decreases. Price of complementary goods has an
inverse relationship to the demand for the product. Therefore, an increase in the price of
coffee will reduce the demand for the sugar and can cause the demand curve for sugar to shift
to the left.
5) a. Subsidy from the government
Higher consumer income is a factor affecting the demand for a product and will not affect the
current supply of rice. The number of producers has a direct relationship with the supply for a
product. So if there is a lesser number of producers, there will also be a lesser supply of rice.
Subsidies reduces the production cost of goods and giving them a bigger capital to produce
more goods. In effect, subsidies can increase the supply of rice.
6) d. Perfectly Elastic
Elasticity indicates the degree of consumer response to variation in price. The horizontal
demand curve shows that the consumers will buy all goods at the market price, but none will
be sold above the market price.
7) b. Normal goods

Consumer income is a demand variable that affects two types of products, namely normal
goods and inferior goods. A massive layoff has an effect of increasing the number of
unemployed and underemployed. Thus, consumer income decreases in general. A decrease in
consumer income will result to a decrease in demand for normal goods and an increase in
demand for inferior goods. If the demand for white sugar decreases after the layoff, the
product could be identified as normal good.
8) d. The market-clearing price
A market-clearing price is the price of a good or service at which quantity supplied is equal
to quantity demanded, also called the equilibrium price.
9) c. Both I and II
Market equilibrium is the state wherein the quantity demanded equals to quantity supplied. If
the quantity supplied to the market by producers exceeds the quantity demanded by buyers,
price will decline until surplus is eliminated. Conversely, if the quantity demanded to the
market by consumers exceeds the quantity supplied by buyers, price will rise until shortage is
eliminated.
10) d. Is defined by all of the above
Law of diminishing marginal returns state that in a given state of technology when the units
of variable factors of production are increased with the units of other fixed factor, the
marginal productivity decreases. It is also applicable in the short-run only because all inputs
arevariable in the long-run.
11) a. Price elasticity of supply
Price elasticity of supply measures the sensitivity between goods supplied, and their price. In
other words; the extent of which a firm would supply more of their good as their price goes
up.
12) b. Horizontal line
Given that total fixed costs (TFC) are constant as output increases, the curve is a horizontal
line on the cost graph.
13) d. as the price increases, quantity demanded decreases, all else being equal.
Law of demand states that, holding other things constant, as the price increases, the quantity
demanded for the product decreases.
14) c. quantity supplied to increase
An increase (decrease) in demand will cause price to rise (fall) and quantity supplied to
increase (decrease).
15) b. Relationship between output and input
Production function shows a level of output associated with inputs.