MID-SEMESTER EXAMINATION REVISION

Q1 What are the fundamental problems of economics?

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Q2 What is the difference between microeconomics and macroeconomics? Provide

examples.
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Q3 What are economic decisions related to scarcity?

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Q4 Define opportunity cost and provide an example.

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Q5 What does thinking at the margin mean?
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Q6 What is a circular flow of income model and what it is used for?

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Q7 What is a production possibilities Frontier?
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Q8 What are the key features of PPF?

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Q9 Explain the law of demand.

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Q 10 What is the factor causing the movement along the demand curve?
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Q 11 What is the factor causing the change in the demand for a product?
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Q 12 Explain the law of supply.
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Q 13 What is the factor causing the movement along the supply curve?
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Q 14 What is the factor causing the change in the supply of a product?

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Q 15 The effects of an in the price of inputs on the market outcomes.
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Q 16 Provide the changes to the market equilibrium price and quantity.

Demand Supply Equilibrium Price Equilibrium Quantity

Increase Unchanged
Decrease Unchanged
Unchanged Increase
Unchanged Decrease
Increase Increase
Decrease Decrease
Increase Decreases
Decrease Increase

Answer Demand Supply Equilibrium Price Equilibrium Quantity

Increase Unchanged
Decrease Unchanged
Unchanged Increase
Unchanged Decrease
Increase Increase
Decrease Decrease
Increase Decreases
Decrease Increase
Q 17 Use the following equations to answer the following questions.

QD = 200 – 5P
QS = 100 + 5P

i) What is the equilibrium price?

ii) What is the equilibrium quantity?
iii) What is the market situation if the product is sold at $15 per unit?
Explain the market reaction and adjustment.
iv) What is the market situation if the product is sold at $5 per unit? Explain
the market reaction and adjustment.
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Q 18 What is the price elasticity of demand?
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Q 19 What is the Cross elasticity of demand (XED)?

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Q 20 What is the income elasticity of demand (YED)?

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Q 21 James bought 5 sandwiches when the price was $5 per sandwich. When the price
of a sandwich fell to $2 per sandwich, he bought 10 sandwiches. Calculate
 James’s PED. Use the mid-point method.
Answer

Q 22
D
7

4
Price

0 D
0 10 20 30 40 50 60 70
Quantity

Refer to the above diagram.

i) At what price and quantity, the price elasticity is equal to one
ii) What is the maximum revenue?
iii) At what price range the demand is elastic?
iv) At what price range the demand is inelastic?
v) At what price and quantity, the PED is infinity?
vi) At what price and quantity, the PED is zero?

Answer
Q 23 7

4
Shirts

0
0 10 20 30 40 50 60 70
Books

The above diagram is Sally’s budget constraint. Suppose Sally’s nominal income
is $60.
Use the above diagram and the given information to answer the following
questions.

i) What is the price of book and shirt?

ii) Give an unaffordable consumption bundle?
iii) Give an affordable consumption bundle where Sally’s income and
expenditure are equal.
iv) Give an affordable consumption bundle where Sally’s expenditure is
less than her income.
v)
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Q 24

Use the diagram above to answer the following question.

i) What is the slope of the budget constraint?
ii) What is the optimal consumption bundle?
iii) What is the maximum utility attained by the consumer?
iv) What is the slope value of the indifference curve for optimal
consumption?
Answer
Q 24

Use the diagram above to answer the following question.

v) What is the slope of the budget constraint?
vi) What is the optimal consumption bundle?
vii) What is the maximum utility attained by the consumer?
viii) What is the slope value of the indifference curve for optimal
consumption?
Answer

Q 24
Suppose a consumer has $20 with him which he wants to spend on two goods
(good X and good Y). The price of each unit of X is $5 and Y is $2.
Q TUX TUY
1 50 24
2 90 46
3 120 66
4 140 84
5 150 100
6 155 114
Use the above information to answer the following questions.

i) Calculate the marginal utility of goods X and Y.

 ii) Calculate the marginal utility per dollar for goods X and Y.
iii) What is the optimal consumption bundle?
iv) What is the maximum utility that can be attained by the consumer?

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Q 25 What are the microeconomic reasons for the government to intervene in the
economy? What are the related microeconomic objectives for the intervention?
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Q 26 What is a price ceiling? Distinguish between binding and not binding price ceiling.
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Q 27 Use the following equations to answer the following questions.

QD = 400 – 5P
QS = 100 + 5P

i) What is the equilibrium price?

ii) What is the equilibrium quantity?
iii) Explain the changes to the market outcomes if the government sets a price
ceiling of $20 per unit.
iv) Explain the changes to the market outcomes if the government sets a price
ceiling of $40 per unit.
Answer

Q 28 Use the following equations to answer the following questions.

QD = 400 – 5P
QS = 100 + 5P

i) What is the equilibrium price?

ii) What is the equilibrium quantity?
iii) Explain the changes to the market outcomes if the government sets a price
floor of $20 per unit.
iv) Explain the changes to the market outcomes if the government sets a price
floor of $40 per unit.

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Q 29 Explain the impact of indirect tax on the market participants and outcomes.
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Q 30 Use the following equations to answer the following questions.

QD = 300 – 5P
QS = 100 + 5P

i) What is the equilibrium price?

ii) What is the equilibrium quantity?
iii) Explain the impact on the market participants and economic efficiency if
the government a $10 per unit on consumers.

Answer

Q 31 Suppose Country A with the given resources and technology can produce food and
cars. Country A production possibilities are given in the table below.

Production Car
Possibilitie Food production productio
s (in tons) n
A 0 25
B 100 23
C 200 20
D 300 15
E 400 8
F 500 0

a) Use the information given in the table to construct the PPF for country A.
 b) Can Country A produce 200 tons of food and 30 cars? Explain
c) Can Country A produce 300 tons of food and 10 cars? Explain
d) Can Country A produce 100 tons of food and 23 cars? Explain
e) Suppose country A is currently producing at production possibility C and it
decides to increase the food production by another 100 tons. Explain the
outcomes of this decision.
f) Describe the shape of the PPF.

Answer
Q 32 The table below provides the production possibilities of countries A and B.
Country Shirts Pants
A 10 or 30
B 50 or 20

a) Calculate Country A’s marginal opportunity cost of producing pants and

shirts.
b) Calculate Country B’s marginal opportunity cost of producing pants and
shirts.
c) Explain the term ‘comparative advantage’.
d) Which country has the comparative advantage of producing pants and
shirts?
e) Provide the trade price range beneficial to both countries.
f) Suppose both countries decide to be self-sufficient and allocate resources
equally for both production. What is the production and consumption
possibility of the two countries?
g) Suppose both countries specialize in producing the good it has a
comparative advantage, how much can they produce?
h) Suppose the terms of trade is 14 shirts for 14 pants. What is the
consumption bundle for both countries after trade? Explain how these
countries gain from trade.

Answer