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Review Questions

1. Explain the idea of scarcity, choice and opportunity cost using the production possibility curve.

2. Cheese and Peanut Butter are two substitutes. If the price of Peanut Butter falls what is the likely effect
on the demand for Cheese. You answer must be support with a model.

3. The price of a good is $3.40 per unit and annual demand is 1,000,000 units. Market research suggest that
an increase in price of 10 cents per unit will result in a fall of demand of 240,000 units. What is the price
elasticity of demand and comment on your answer?

4. What are two factors that influences the PED of a good?

5. If there is a significant reduction in income tax what is likely to happen to demand for luxury sports

6. In Country X, a recent fall in the price of DVDs has seen demand for DVDs increase significantly.
However, cinema operators have reported a decline in customer numbers, which they believe is due to
people preferring to buy DVDs to watch rather than going to the cinema.

What effect is the fall in the price of DVDs likely to have on the demand curves for
(a) DVD players?
(b) Cinema tickets?

7. A demand curve is drawn on all except which of the following assumptions?
(a) Incomes do not change
(b) Prices of substitutes are fixed
(c) Price of the good is constant
(d) There are no changes in tastes and preferences

8. What is an inferior good?

9. An increase in the price of hot dogs from $1.50 to $2.10 per pound increased the average number of beef
burgers demanded per week from 300 to 360. Assuming all other economic variables were held
constant, the cross price elasticity of demand between hot dogs and beef burgers is ___________ which
indicates that the two goods are _____________.

10. Define supply.