EC101 Tutorial 1 (A review of basic economics)

TRUE/FALSE

1. Scarcity means that society has less to offer than people wish to have.

ANS: T

2. Economics is the study of the circulation of money between banks, taxpayers and the government.

ANS: F

3. Economists study how individuals make decisions, how they interact with each other and the factors
that affect the economy as a whole.

ANS: T

4. The opportunity cost of something refers to the price you pay to get it.

ANS: F

5. The opportunity cost of consuming a unit of good X is the amount of resources that must be devoted to
its production.

ANS: F

6. The law of demand states that, other things being equal, when the price of a good rises, the quantity
demanded of the good falls.

ANS: T

7. Demand curves are often upward sloping when prices are very high.

ANS: F

8. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a
particular price.

ANS: T

9. If the price of a good changes, its demand curve shifts.

ANS: F

10. An increase in the number of buyers in the market will cause a rightward shift in the demand curve if
the good is a normal good.

ANS: T
 11. If mad cow disease causes a beef-scare in Europe, demand for wild meat like deer or kangaroo is
likely to shift to the right in that market.

ANS: T

12. Jack usually eats a lot of noodles. He reads an article saying that rice has twice the health
benefits of noodles. His demand curve for noodles is likely to shift right.

ANS: F

13. A reduction in the price of a product and an increase in the number of buyers in the market
affect the demand curve in the same general way.

ANS: F

14. A demand schedule shows how much will be demanded of a good in the future.

ANS: F

15. If crocodile leather handbags are a normal good, then consumers will buy less of them as their
incomes rise.

ANS: F

16. The Latin phrase ceteris paribus means ‘other things changing’.

ANS: F

17. The quantity supplied of a good or service is the amount that sellers are willing and able to sell
at a particular price.

ANS: T

18. In addition to price, the determinants of individual supply include input prices, technology and
expectations.

ANS: T

19. The supply curve has a negative slope.

ANS: F

MULTIPLE CHOICE
1. The study of economics is concerned with:
A. keeping private businesses from losing money
B. demonstrating that capitalist economies are superior to socialist economies
C. how society manages its scarce resources
D. determining the most equitable distribution of society's output

ANS: C
 2. For society, a good is not scarce if:
A. all members of society can have all they want of it
B. at least one individual in society can obtain all he or she wants of the good
C. firms are producing at full capacity
D. those who have enough income can buy all they want of the good

ANS: A

3. Daniel decides to spend an hour playing cricket rather than working at $16 per hour. His trade-off is:
A. nothing, because he enjoys playing cricket more than working
B. the increase in skill he obtains from playing cricket for that hour
C. the $16 he could have earned
D. nothing, because he spent $16 for admission into the sports complex to play cricket

ANS: C

Short Answers

1. For each of the following situations in the wheat market, determine whether the quantity demanded
changes, or the demand curve shifts and determine the direction of the change.

a. consumer income increases

b. the price of wheat increases
c. scientists determine that eating wheat causes high blood pressure
d. the price of oats increases
e. in June, insects destroy part of the country’s wheat crop

ANS:

a. An increase in consumer income will cause a rightward shift in the demand curve, assuming that
wheat is a normal good.
b. An increase in the price of wheat will cause a decrease in the quantity demanded.
c. Consumers’ tastes will shift away from wheat, causing the demand curve to shift to the left.
d. Since oats and wheat are substitute goods, an increase in the price of oats will cause a rightward
shift in the demand for wheat.
e. Destruction of part of the growing wheat crop will cause consumers to expect higher prices in the
future. They will demand more wheat now and the demand curve will shift to the right.

2. The following table shows the demand and supply of backpacks made by a Melbourne designer whose
products sell exclusively to a youth market. Graph both the demand and supply curves and label the
equilibrium price and quantity. Now assume that a famous celebrity starts wearing the backpack
everywhere, making it very popular with young people. Young people are now willing to purchase 300
more backpacks per year at every price. Show this change on your graph and explain what has happened
to equilibrium price and quantity as a result.

Price of Backpack ($) Quantity demanded per year Quantity supplied per year
210 800 5100
180 2000 4300
130 3000 3000
100 5000 1200
70 6000 800
 50 8000 500

ANS:
The equilibrium price would originally be $130 and the equilibrium quantity would be 3000. When
demand increases by 300 due to popularity of the product, the demand curve will shift by 300 at each
price. The new price and equilibrium quantity will be where the new demand curve intersects with the
existing supply curve. Ans: equilibrium price has increased and equilibrium quantity increased.
See attached doc for graph

3. Other things being equal, explain the effect each of the following situations will have on either the
demand or supply of corn. Explain also what the effect will be on equilibrium price and quantity.
a. corn is now considered by doctors to be the most healthy vegetable
b. there is a decline in the amount of land used to grow corn
c. producers expect the price of corn to fall in the future
d. the price of peas, a substitute for corn, goes up
e. corn is a normal good and incomes fall
f. the price of fertiliser rises

ANS:
1. demand increases; equilibrium price increases; equilibrium quantity increases
2. supply decreases; equilibrium price increases; equilibrium quantity decreases
3. supply increases; equilibrium price decreases; equilibrium quantity increases
4. demand increases; equilibrium price increases; equilibrium quantity increases
5. demand decreases; equilibrium price decreases; equilibrium quantity decreases
6. supply decreases; equilibrium price increases; equilibrium quantity decreases

THE END