Econ 40 – Mid Term Test

Price Quantity demanded Quantity Supplied

2 60 20
4 50 30
6 40 40
8 30 50
10 20 60

1. A. Please refer to the above demand / supply schedule & draw correctly labeled
demand & supply graph

B. State the equilibrium price & quantity

2. What would happen to the revenue when you increase & decrease the price of a
good with
(Price elasticity of demand) PED = - 1.38 (Explain both scenarios - Price Increase &
decrease with examples)

3. What would happen to the revenue of a product when you increase & decrease
the price of a good with (Price elasticity of demand) PED= - 0.68 (Explain both
scenarios – Price Increase & decrease with examples)
4. If the income elasticity of demand for a product is negative what kind of a good is
it? (Explain with an example)

5. Explain Short run & Long run in economics

6. With reference to Long run average cost curve explain with an appropriate
example each for following terms

A. Economies of scale

B. Constant returns to scale

C. Diseconomies of scale

7. Name 2 factors which would influence the demand for a product (State 2 factors &
2 related examples)

(Total 20 Marks)
1. The equilibrium price is $6 and the equilibrium quantity is 40.

2. When the price of a good with a price elasticity of demand (PED) of -1.38 is
increased, the revenue will decrease. This is because the demand for the good is
relatively elastic, meaning that the quantity demanded will decrease significantly as
the price increases. For example, if the price of a cup of coffee is increased by 10%
and the quantity demanded decreases by 13.8%, the revenue will decrease by more
than 10%.
• On the other hand, when the price of the good is decreased, the revenue will
increase. This is because the demand for the good is relatively elastic,
meaning that the quantity demanded will increase significantly as the price
decreases. For example, if the price of a cup of coffee is decreased by 10%
and the quantity demanded increases by 13.8%, the revenue will increase by
more than 10%.

3. When the price of a good with a price elasticity of demand (PED) of -0.68 is
increased, the revenue will increase. This is because the demand for the good is
relatively inelastic, meaning that the quantity demanded will decrease only
slightly as the price increases. For example, if the price of insulin is increased
by 10% and the quantity demanded decreases by only 6.8%, the revenue will
increase by more than 10%.

o On the other hand, when the price of the good is decreased, the
revenue will decrease. This is because the demand for the good is
relatively inelastic, meaning that the quantity demanded will
increase only slightly as the price decreases. For example, if the price
of insulin is decreased by 10% and the quantity demanded increases
by only 6.8%, the revenue will decrease by more than 10%.

4. If the income elasticity of demand for a product is negative, it is an inferior good.

An inferior good is a good for which demand decreases as income increases. An
example of an inferior good is instant noodles. As people's incomes increase, they
are more likely to purchase higher-quality and more nutritious food, so the demand
for instant noodles decreases.
5. In economics, the short run refers to a period of time during which at least one input
is fixed, while the long run refers to a period of time during which all inputs are
variable.
For example, suppose a factory has a fixed number of machines and
workers. In the short run, the number of machines and workers is fixed, so
the factory can only increase output by increasing the use of other inputs,
such as raw materials. In the long run, the factory can increase output by
adding more machines and hiring more workers.

6.
A. Economies of Scale: Economies of scale refer to the cost advantages that
a firm can achieve as it increases its level of production in the long run.
As a result, the long-run average cost curve decreases as the level of
output increases, indicating lower average costs per unit. This can be
illustrated with the example of a car manufacturing company.

o Suppose a car manufacturing company produces 1,000 cars per year

and incurs an average cost of $20,000 per car.
o However, as the company increases its production to 5,000 cars per
year, the average cost per car decreases to $18,000. This decrease in
average cost is due to economies of scale, which can arise from
factors such as increased specialization, improved technology, and
higher bargaining power with suppliers.
o The company benefits from producing at a larger scale, as it can
spread its fixed costs over a larger number of units, resulting in lower
average costs.

B. Constant Returns to Scale: Constant returns to scale occur when the

long-run average cost remains constant as the level of production
changes. This can be illustrated with the example of a software
development company.
 o Suppose a software development company produces 1,000 lines of
code per day and incurs an average cost of $10 per line of code.
o If the company doubles its production to 2,000 lines of code per day,
the average cost per line of code remains unchanged at $10.
o This indicates that the company is experiencing constant returns to
scale, where the average cost per unit of output remains constant
regardless of the level of production.
o Constant returns to scale are often associated with industries where
firms operate at an optimal scale and do not experience significant
cost advantages or disadvantages from changing their level of
production.

C. Diseconomies of Scale: Diseconomies of scale refer to the cost

disadvantages that a firm may experience as it increases its level of
production in the long run. This can be illustrated with the example of a
restaurant chain.

o Suppose a restaurant chain operates 50 restaurants and incurs an

average cost of $1 million per restaurant per year.
o However, as the chain expands to operate 200 restaurants, the
average cost per restaurant increases to $1.2 million.
o This increase in average cost is due to diseconomies of scale, which
can arise from factors such as decreased coordination and
communication, increased bureaucracy, and diminishing returns to
management. The company may face higher costs as it grows larger,
indicating that it is experiencing diseconomies of scale.

7. Factors that influence the demand for a product are:

1. Income: Changes in income can significantly impact the demand for a product.
For example, if there is an increase in disposable income for consumers, it may
lead to higher demand for luxury goods, such as high-end smartphones or
designer clothing. On the other hand, if there is a decrease in income, consumers
 may reduce their spending on discretionary items, leading to lower demand for
such goods.
2. Consumer Preferences: Changes in consumer preferences can also influence the
demand for a product. For example, if there is a growing preference among
consumers for healthy and organic food products, it may lead to higher demand
for organic fruits and vegetables and lower demand for processed foods.
Similarly, changes in fashion trends, technological preferences, and cultural
shifts can also impact consumer demand for products.
These are just a few examples of factors that can influence the demand for a product.
Other factors may include prices of related goods, population demographics,
government policies, and macroeconomic conditions, among others. Understanding
these factors and their impact on demand is crucial for businesses to make informed
decisions about production, pricing, and marketing strategies.