MIDTERM EXAM

True or False

•1-5. If all prices changed

by same margin, there
would be no substitution
effect.
True or False

•1-5. If all prices changed

by same margin, there
would be no substitution
effect.
Law of Demand
• Demand, wants, and needs 
• Substitution effect
• The change in the relative price (the price of one good relative to the prices of
other goods) causes the substitution effect
• If all prices changed by same margin, there would be no substitution effect

• Income effect
• Money income – the number of pesos you receive per period
• Real income – measure in terms of how many goods and services you can buy
• Diminishing marginal utility
• Marginal utility – additional satisfaction you derive from each item .

5
True or False

•1-5. If all prices changed

by same margin, there
would be no substitution
effect. True
6. A change in one of the
determinants of demand
other than price causes
a shift of a demand
curve.
6. A change in one of the
determinants of demand
other than price causes
a shift of a demand
curve. TRUE
7. A change in price, causes
a movement along the
demand curve, changes the
quantity demanded.
7. A change in price, causes
a movement along the
demand curve, changes the
quantity demanded. TRUE
8. Your willingness to pay
more for time-saving goods
depends on the
opportunity cost of your
time.
8. Your willingness to pay
more for time-saving goods
depends on the
opportunity cost of your
time. TRUE
9. A negative sign denotes
an inferior good.
9. A negative sign denotes
an inferior good. TRUE
10. If demand is price
elastic, increasing price
would reduce TR (%∆Qd >
%∆P).
10. If demand is price
elastic, increasing price
would reduce TR (%∆Qd >
%∆P). TRUE
II. Identification
Demand
_____________________ 1. Indicates how much of a product
consumer are both willing and able to buy at each possible price during
a given period.
Law of demand
_____________________ 2.it says that quantity demanded varies
inversely with price.
Marginal utility
_____________________ 3. additional satisfaction you derive from
each item.
Price elasticity
_____________________ 4. it measures the percentage change in
quantity demanded divided by percentage change in price.
 elasticity
____________ 5. the responsiveness of one variable to
changes in another.
inelastic
____________ 6. if answer is between 0 and -1: the
relationship is ?
____________ 7. Bonus
elastic
____________ 8. if the answer is between -1 and
infinity: the relationship is ?
Income elasticity 9. the responsiveness of demand to
____________
changes in comes.
Normal goods
____________10. a positive sign denotes a ?
III.
• Suppose that Carlos and Dedorah are only consumers of scented
candles in a particular market. The following table table shows their
their annual demand schedule.
Price (pesos per candle) Carlo’s Quantity Deborah’s Quantity
demanded (Candles) demanded (candles)
2 16 32
4 10 24
6 6 16
8 2 8
10 0 4
1. Find the Market Demand schedule
Price (pesos per Carlo’s Quantity Deborah’s Quantity Market Demand
candle) Demanded Demanded
(candles) ( candles)
2 16 32 16+32 = 48
4 10 24 10+24 = 34
6 6 16 6+16 = 22
8 2 8 2+8 = 10
10 0 4 0+4 = 4
 2. Find the individual curve and market
curve.
Carlo’s Curve
12

10

0
0 2 6 10 16

Series 1
Deborah’s
Curve Column1
12

10

0
4 8 16 24 32

Column1
Market Curve
Column1
12

10

0
4 10 22 34 48

Column1
B. Consider the demand curve for motorcycle in the Philippines. For
simplicity, assume that all motorcycle are identical and sell for the same
price. Also, assume that:
1. The current market price of motorcycle is 80,000.00. Average
Househoud income is 100,000.00 per year. Price of a gas is 80.00
per letter. Price of a subway ride is 45.00. Suppose the price of a
motorcycle decrease from 80,000.00 to 75,000.00, this would be
cause a __________
Leftward shift the demand curve.

2. If the increase in average income causes a rightward shift

of the demand curve, the you may conclude that
motorcycle are a ________________
normal good.
3. Suppose that the price of letter of gas rises from 45-40.00 pesos.
Because motorcycle and gasoline are _____________
complement .

4. An increase in the price of a gallon of gas shifts the demand curve for
right
motorcycle to the ______________.
C.
5. Price elasticity of demand measure the responsiveness of the change
in
A. Quantity demanded to a change in price.
B. Price to a change in quantity demanded
C. Slope of the demand curve to a change in quantity demanded
D. Slope of the demand curve to a change in price.
C.
5. Price elasticity of demand measure the responsiveness of the change
in
A. Quantity demanded to a change in price.
B. Price to a change in quantity demanded
C. Slope of the demand curve to a change in quantity demanded
D. Slope of the demand curve to a change in price.
6-7. The absolute value of the price elasticity of demand for a good
increase when
A. The good has fewer substitute
B. The good becomes a necessity
C. Consumers spend greater portion of their budget on the good
D. The price of an input used to produce the good increase
E. The good must be purchased immediately.
6-7. The absolute value of the price elasticity of demand for a good
increase when
A. The good has fewer substitute
B. The good becomes a necessity
C. Consumers spend greater portion of their budget on the good
D. The price of an input used to produce the good increase
E. The good must be purchased immediately.
8. if, when income rise by 5 percent, the quantity of a commodity sold
rised by 10 percent, income elasticity is?
a. -2 b. ½ c. -1/2 d. 2

8. if, when income rise by 5 percent, the quantity of a commodity sold

rised by 10 percent, income elasticity is?
a. -2 b. ½ c. -1/2 d. 2
D.
11. yesterday, the price of envelopes was 3 a box, and Julie was willing
to buy 10 boxes. Today, the price has gone up to 3.75 a box, and Julie is
now willing to buy 8 boxes. Is Julie’s demand for envelopes elastic or
inelastic? What is Julie’s elasticity of demand?
Solution: ∑d=
%∆Qd = Q2-Q1/Q1+Q2/2x100
%∆P = P2-P1/P1+P2/2x100
%∆Qd = 8-10/10+8/2x100 = -2/18/2x100 = -2/9x100 = 22.2222…
%∆Qd = -22.22
%∆P = P2-P1/P1+P2/2x100
%∆P = 3.75 – 3 / 3+3.75/2x100
= .75/6.75/2x100
= .75/3.375x100
= 22.22
Solution: ∑d=
= -22.22/22.22
= -1
= /-1/ absolute value 1
= 1 so, therefore Julie’s elasticity of demand unitary.
 12. If Neil’s elasticity of demand for hot dogs is constantly 0.9 and he buys 4 hot dogs when
the price is 1.50 per hot dog, how many will he buy when the price is 1.00 per hot dog?

%∆Qd = x100%
%∆P = x100%

Elasticity =

Given:
E = 0.9, P1 = 1.0, P2 = 1.5, Q1 = 4
Find: Q2
% ∆P =