BACC ECO111 – Basic Microeconomics (Bobadilla, Cabalsa, Piguerra)

First Semester 2019 – 2020 MIDTREM EXAM

General Instructions:
 Please read and abide by the instructions on the examination paper
 All answer should be written on the test booklet/answer sheet.
 Making any changes, additions, deletions or otherwise erasing or writing on the examination
paper is not allowed unless it was advised by the proctor.
 Use of electronic devices is prohibited, unless it is approved by the subject teacher concerned.

I. CASE ANALYSIS (50 points)

Read the following statement carefully and write a unified and coherent essay that explain your perspective on the questions, issues,
subject, or support your ideas.
There are many studies that researched and determined what the price elasticity of demand for gasoline is.
One such study is a meta-analysis by Molly Espey, published in Energy Journal, which explains the variation in
elasticity estimates of gasoline demand.
In the study, Espey examined 101 different studies and found that in the short-run, the average price-
elasticity of demand for gasoline is -0.26. That is, a 10% hike in the price of gasoline lowers quantity demanded by
2.6%.
In the long-run, the price elasticity of demand is -0.58. Meaning, a 10% hike in gasoline causes quantity
demanded to decline by 5.8% in the long run.

1. The study shows that the demand for gasoline is price elastic or inelastic? Why? (5 pts)
2. Discuss the short-run and long-run price elasticity of demand for gasoline. (5 pts)
3. Based on the study, state some consequences of these changes to the demand for other goods. (5 pts)

When the government imposes price controls, it keeps the price below the level that equates supply and
demand. Suppose the municipal council of a small town of Lucban decides to regulate rents in order to reduce
student living expenses. The rent for a two-bedroom apartment is ₱800 per month and council limits it to ₱700 per
month.

4. What is the effect of this regulation to the demand and supply? (5 pts)
5. Do you think this policy will benefit all students? Why or why not? (5 pts)
6. Draw a supply and demand graph showing the effect of price rent controls for apartments. (5 pts)

An increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is between
0 and 1, it is a necessity good. But if the elasticity of demand is greater than 1, it is a luxury good or normal good.
Suppose Clint Barton earns ₱12,500 a month and spends 36% of this on food and clothing. Due to his
commitment on work, he got a 20% raise so he now earns ₱15,000 per month. Since he can now afford more, he
increases his purchases on food and clothing for about 6% on a 20% increase in income.

7. If Clint Barton thinks that food and clothing are necessity goods, do you think he is correct? Prove it using
the formula of income elasticity of demand. (5 pts)
8. Draw a graph representing the movement of purchases of Clint Barton in response to the changes on his
income. (5 pts)
9. Does income elasticity of demand will always be positive (as income increases, the quantity demanded
increases)? Yes or no? Explain your answer. (5 pts)
10. Discuss the short-run and long-run income elasticity of food and clothing. (5 pts)

– END OF EXAMINATION –

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MIDTERM EXAM – First Semester 2019-2020 BACC ECO111 – Basic Microeconomics • Page 1