Question

1. Here is a function that is either a demand function or a supply function (but not both):

Q=6+5P

A change occurs so that the following function now represents the situation:

Q=2+5P

We can conclude that (circle the appropriate conclusion on the answer sheet).

a. demand has increased

b. demand has decreased

c. supply has increased

d. supply has decreased

e. quantity supplied has decreased

f. quantity demanded has decreased

g. quantity demanded has increased

h. quantity supplied has increased

2. If the elasticity of supply for crude oil is 2.5, how much will production have to decrease to match a 10% price decrease? Choose one of the following: 2.5% 8% 10% 15% 25% 40%

3. Demand for X decreases from 100 to 50 when the price of Y increases from $5 to $6. The cross-price elasticity of demand is: (Choose one of the following) -3.67 -1.22 1.22 1.44 3.67 4.33

Answer 1

1) It is a supply function and from 6 + 5Q it is now 2 + 5Q implying that the intercept has reduced. this shows that the supply has decreased. Option D.

2) Price elasticity = % change in Qs / % change in price

2.5 = % change in Qs / -10%

% change in Qs = -10%*2.5 = -25%. Select 25%

3) Mid point elasticity is found to be -3.67. Use Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

Q1	Q2	P1	P2	Q2-Q1	(Q2+Q1)/2	%Q	P2-P1	(P1+P2)/2	%P	Ed
100.00	50.00	5.00	6.00	-50.00	75.00	-66.67	1.00	5.50	18.18	-3.67