Income growth will result in the decrease in demand for inferior goods.

11. In which of the following situations the tax imposed on producers will have biggest impact on equilibrium quantity?

A) Supply is perfectly inelastic demand elasticity is -1

B) Demand is perfectly inelastic supply elasticity is 1

C) Demand elasticity is -1 and supply elasticity is 1

D) Demand is perfectly elastic and supply is perfectly inelastic

E) Supply is perfectly inelastic and demand is perfectly elastic

If either demand or supply is perfectly inelastic (corresponding curve is vertical) then imposition of a per-unit tax will have no effect on the equilibrium quantity.

12. If price elasticity of demand at some level of income and prices is -2 and its income elasticity is 3 then 15% price increase and 10% increase in income will result in

A) Decrease in the demand for its complements

B) No change in the quantity demanded

C) 45% increase in the quantity demanded for any given price

D) 30% decrease in the quantity demanded for any given income

E) All of the above

15% Price increase results in 30% decrease in the quantity demanded, while the 10% increase in income results in 30% increase in the quantity demanded. Thus these two effects compensate each other.

13. In which of the following situations setting minimum price will have no effect on the equilibrium quantity?

A) Supply is perfectly inelastic

B) Supply is perfectly elastic

C) Demand is perfectly inelastic

D) Demand is perfectly elastic

E) Both (A) and (C)

If an effective minimum price is imposed then the quantity sold is restricted by the quantity demanded at that price. If the demand curve is vertical then increase in price will not cause any changes in the quantity demanded.

14. Vasya Pupkin makes two statements:

I. Demand is more elastic in the long run that in the short run.

II. Supply is more elastic in the long run than in the short run.

A) Both statements are correct.

B) Statement I is correct, but statement II is incorrect.

C) Statement I is incorrect, but statement II is correct.

D) Both statements are incorrect.

Demand is more elastic in the long run because consumers can shift to substitutes which are not available in the short run thus price increase in the short run has smaller impact on the quantity demanded than in the long run.

Supply is more elastic in the long run because of two reasons: 1) in the long run all factors of production are variable which gives more opportunities to decrease costs 2) in the long run the number of firms can change

15. If a price of a certain good increased from $1.5 to $2.0, and the quantity demanded decreased from 1000 to 900 units, the arc income elasticity of demand is equal to:

A) -3

B) -2.71

C) -0.37

D) -1.5

E) Not enough information is provided.

The information given allows us to judge about the price elasticity, but not about the income elasticity

16. A 5% increase in the quantity of shoes demanded is caused by a 10 % drop in price. We can conclude that the demand for shoes is _______ and the elasticity is _______

A) inelastic; -2

B) inelastic; -0.5

C) elastic; -2

D) inelastic (inelastic); -0.5

E) Unit elastic.

; Absolute value of elasticity is less than 1 so the demand is inelastic

{Answer D was accepted in those groups where students were not asked to correct answer D to “inelastic; –0.5” }

17. Vasya Pupkin makes two statements:

I. A cross price elasticity of demand for cars with respect to gasoline is likely to be positive, because these goods are complements.

II. A cross price elasticity of demand for Volvo with respect to Saab is likely to be negative, because these goods are substitutes.

A) Both statements are correct.

B) Statement I is correct, but statement II is incorrect.

C) Statement I is incorrect, but statement II is correct.

D) Both statements are incorrect.

Cross price elasticity of complements is negative (price increase for one good leads to the decrease in the quantity demanded for another good), so the statement I is incorrect. Vice-a-versa cross price elasticity of substitutes in positive

18. Setting a non-binding price ceiling would for sure

A) Increase consumers’ surplus

B) Decrease producers’ surplus

C) Increase social welfare

D) Decrease equilibrium price and equilibrium quantity

E) None of the above

Non-binding price ceiling will not affect market price, so will have no effect on social welfare

19. If a person’s income increases by 10 %, and he spends 25 % of his income on housing before and after of the income change, his income elasticity of demand for housing is:

A) Greater than unity.

B) equal to 1.

C) smaller than 1.

D) equal to 0.

E) Cannot be calculated.