Economics 11 THD

Reviewer

1) Suppose there is a fixed supply of beef. A fall in the price of pork will lead to:
a. a shift of the demand curve for beef to the right
b. a shift of the demand curve for pork to the left
c. a shift of the demand curve for pork to the right
d. a fall in the price of beef
e. a rise in the price of beef

2) Suppose the market demand curve shifts sharply to the left as the market supply curve
moves to the right. We expect that
a. quantity may or may not change
b. price and quantity to fall
c. quantity will fall while price may or may not change
d. the same price to prevail

3) The graph below describes the world market for oil.

(2 pts)

S
Price of oil (dollars per barrel)

Quantity (billion dollars per year)

a. Suppose recession hits the world economy. What happens to the demand for oil?
A recession reduces global demand for oil, reflected by a leftward
shift of the demand curve.

b. Given the situation in a, what happens to the equilibrium price of oil?

Equilibrium price of oil is expected to fall.

c. Suppose Saudi Arabia restricts oil production after the recession. What happens
to the equilibrium price of oil? Considering both events, what can we say about
the equilibrium quantity?
Since Saudi Arabia is a major oil producer, its decision to restrict oil
production will shift the global supply of oil to the left, resulting in an
increase in price. Both events will result in a fall in the equilibrium
quantity of oil.
 4) Consider the following demand curve and answer the following questions:
(3 pts)

Price
11 A

B
9

7 C

D
5

E
3

2 4 6 8 10
Quantity

a. Moving from A to B, the price elasticity of demand is __________. Revenue

goes from _____ to _______.
b. Moving from B to C, the price elasticity of demand is __________. Revenue
goes from _____ to _______.
c. Using this information, what can we say about the relationship between revenue
and elasticity?

Answer:
Point Price (Php) Quantity Elasticity Total Revenue
(Php)
A 11 2 - 22
B 9 4 3.33 36
C 7 6 1.6 42
D 5 8 0.86 40
E 3 10 0.44 30

For c, as demand becomes more inelastic (ie. going from B to C), consumers
become less responsive to a price fall. This results in a lower additional revenue.
To illustrate, going from A to B (where elasticity is 3.33) is associated with an Php
8.00 increase in revenue, which is larger than the P6.00 increase as you go from B
to C (where elasticity is 1.6).
Modified true or false. Consider the following statements and determine whether they are
true or false. If false, explain what makes the statement incorrect. Write your answers on the
space provided.
(1.5 pts each)

5) When effective, a government imposed minimum price on a commodity will result in a

fall in quantity bought and sold, while a maximum price will cause the quantity bought
and sold to rise.
False. If effective, both a minimum price and a maximum price will lead to a
fall in equilibrium quantity.

6) There is little room for government intervention when the price system works so that
there are no shortages or surpluses in the economy.
False. Even if the market works efficiently, outcomes may not be equitable,
which creates a rationale for government intervention.

7) Everything else held constant, the shortage arising from imposing a minimum price is
larger if the demand curve is more elastic.
True.

8) You have a windfall of Php30,000 which you plan to spend on either a new laptop or a
vacation trip to Taipei. If you choose to go on a vacation to Taipei, the opportunity cost
is:
a) Having a new laptop
b) Both Php30,000 and having a new laptop
c) Php30,000
d) Php0

9) Modified true or false. Consider the following statements and determine whether
they are true or false. If false, explain what makes the statement incorrect. Write your
answers on the space provided. (1.5 point each)

a. “Japan and China can achieve gains from trade even if one of them has an absolute
advantage in the production of all goods.”

True.

b. “We can find gifted people who have a comparative advantage in everything they do.”

False. Comparative advantage is a relative concept. It reflects the opportunity

cost of one good or activity in terms of another. If you have a comparative
advantage in one thing, you must have a comparative disadvantage in another
thing.

c. “If a certain trade is good for one person, it can’t be good for the other one.”

False. Trade can result in mutual gains. Not a zero-sum game.

10) Fill in the blanks. (1pt each)

 The production possibility frontier (PPF) illustrates the menu of _goods and services
available in society.

The rate at which the commodity on one axis of the PPF is sacrificed to obtain more of
the other is given by _the slope of the boundary line_.

The way an economy can attain a point outside the PPF is through economic
growth/improvement in technology/increase in available resources.

11) Modified True or False. If an economy operates inside its production possibilities
frontier, any additional output produced has zero opportunity cost.

False. There is still an opportunity cost in cases of Pareto improvement or

increasing the production of one good, say Good X, without decreasing the
production of the other good, say Good Y. The opportunity cost here lies in
the use of the limited resources available in producing the Good X instead of
using these to produce Good Y. In other words, the opportunity cost is not
zero but will be in terms of the other good.

12) Multiple Choice. If the prices of heating oil and natural gas rise sharply, what occurs
in the market for woodburning stoves?
a) Equilibrium price rises, but quantity changes are indeterminate.
b) Equilibrium quantity rises, but price changes are indeterminate.
c) Equilibrium price and quantity will increase.
d) Equilibrium price will rise and quantity will fall.
e) None of the above

13) A tax on a good tends to cause:

a) less of the good to be produced and purchased.
b) the price received by the seller to fall.
c) buyers to pay higher prices for the good
d) b and c
e) All of the above.

14) Which of the following is true?

a) The war against drugs will lower the price of domestically produced marijuana.
b) “Protecting” American textile manufacturers from Chinese clothing imports will lower
clothing prices in the U.S.
c) The rapid increase in college tuitions will lower the demand for college.
d) All of the above.
e) None of the above.

15) True or False. The price-elasticity of demand is constant along a demand curve with a
constant nonzero slope.
False.
16) Which of the following can cause a shift in the demand curve for taxis in Metro Manila?
a) An abundance of crazy discounts during Christmas season
b) The suspension of Uber, Grab and other ridesharing service providers
c) An increase in the number of people living in Metro Manila by 10 percent
d) The complete and utter breakdown of MRT
e) All of the above

17) True or False. The demand curve and the supply curve cannot shift at the same time.
False.

18) An inefficient use of resources may be illustrated with a production possibility frontier
(PPF) as:
a) an inward shift of the PPF
b) an outward shift of the PPF
c) a point inside the PPF
d) a point outside the PPF

19) If technology advances rapidly in the record industry, what happens in the market for
phonograph records?
a) Equilibrium price falls, but quantity changes are indeterminate.
b) Equilibrium price and quantity will fall.
c) Equilibrium price will fall and quantity will rise.
d) Equilibrium quantity rises, but price changes are indeterminate.

20) The market price of video recorders will rise if:

a) Reading becomes more popular.
b) Supply increases.
c) Technology advances.
d) Imports are prohibited.
e) Consumers substitute towards cable TV.