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For business travelers, ∆Q = −100 and ∆P = 50 and hence elasticity is −0.2 and for
vacationers,∆Q = −200 and hence elasticity is −1. Vacationers have a higher elasticity
of demand (higher absolute value) since they are more price sensitive. They may avail
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other cheaper means of transport when airfare increases but business traveller may not
be able to do so because often they have to travel for important and/or urgent meetings
which are time bound.
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PART-B: 20 marks
(Instructions: Answer all the questions. Each question carries 2 marks. Write the correct
answer beneath the question number in capitals. Circled or tick-marked answers will
NOT be graded.)
Question no Questions
1
The quantity supplied of a good is the amount that
A. Buyers are willing and able to purchase
B. Sellers are able to produce
C. Buyers and sellers agree will be brought to the market
D. Sellers are willing and able to sell
2
Which of the following events must cause equilibrium price to rise?
A. demand increases and supply decreases
B. demand and supply both decrease
C. demand decreases and supply increases
D. demand and supply both increase
3 Figure 1
Price
Supply 1 Supply 2
A C
Demand 1 Demand 2
Quantity
Refer to figure 1. Which of the following movements would illustrate the effect in the
market for kitchen cabinets of an increase in the price of wood?
A. Point A to Point B
B. Point C to Point B
C. Point C to Point D
D. Point A to Point D
4 Suppose that the supply of aged cheddar cheese is inelastic, and the supply of bread is
elastic. Both goods are considered to be normal goods by a majority of consumers.
Suppose that a large income tax increase decreases the demand for both goods by 10%.
The price elasticity of supply for aged cheddar cheese could be
A. -1
B. 0
C. 0.5
D. 1.5
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5 If soybean farmers know that the demand for soybeans is price inelastic, in order to
increase their total revenues they should
A. use more fertilizers and weed killers to increase their yields.
B. plant additional acres to increase their output.
C. reduce the number of acres they plant to decrease their output.
D. Both A and B are correct.
6 When Matt has an income of $2,000, he consumes 30 units of good A and 50 units of
good B. After Matt’s income increases to $3,000, he consumes 25 units of good A and
95 units of good B. Which of the following statements is correct?
A. Both goods A and B are normal goods.
B. Both goods A and B are inferior goods.
C. Good A is a normal good, and good B is an inferior good.
D. Good A is an inferior good, and good B is a normal good.
9 If a firm knows that the demand for its product is inelastic, it could generate more
revenue by
A. Lowering the price, because the resulting change in sales would be relatively large
B. Raising the price, because the resulting change in sales would be relatively large
C. Lowering the price, because the resulting change in sales would be relatively small
D. Raising the price, because the resulting change in sales would be relatively small
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