Managerial Economics

First term 2016

Instructor: Subhashish Gupta, Section C

Quiz 1: 1 hour 15 minutes, closed book, answer all questions

Circle the correct answer. (2 points each)

1) Microeconomics is the branch of economics that deals with which of the following topics?
a. The behavior of individual consumers
b. Unemployment and interest rates
c. The behavior of individual firms and investors
d. (b) and (c)
e. (a) and (c)

2) Plastic and steel are substitutes in the production of body panels for certain automobiles. If
the price of plastic increases, with other things remaining the same, we would expect
a. the price of steel to fall.
b. the demand curve for steel to shift to the right.
c. the demand curve for plastic to shift to the left.
d. nothing to happen to steel because it is only a substitute for plastic.
e. the demand curve for steel to shift to the left.

3) The price of good A goes up. As a result the demand for good B shifts to the left. From this
we can infer that:
a. good A is used to produce good B.
b. good B is used to produce good A.
c. goods A and B are substitutes.
d. goods A and B are complements.
e. none of the above.

4) The income elasticity of demand is the

a. absolute change in quantity demanded resulting from a one-unit increase in income.
b. percent change in quantity demanded resulting from the absolute increase in income.
c. percent change in quantity demanded resulting from a one percent increase in income.
d. percent change in income resulting from a one percent increase in quantity demanded.
e. percent change in income resulting from a one percent increase in price.

5) Which of these measures the responsiveness of the quantity of one good demanded to an
increase in the price of another good?
a. price elasticity.
b. income elasticity.
c. cross-price elasticity.
d. cross-substitution elasticity.
6) The demand for small business computers in the U.S. is given by x = 200 10p where x is
annual sales measured in thousands of computers and p is the price measured in thousands of
dollars. Japanese firms supply a big share of these computers. They measure prices in Yen
where 120 Yen equals one Dollar. The price of one computer is $10,000. Let EU be the price
elasticity of demand at this price as calculated by U.S. firms who measure price in dollars
and let EJ be the price elasticity of demand at the same $10,000 price, but measured in Yen
by the Japanese firms. Which of the following are the values of EU and EJ respectively?
a. 1 and 150.
b. 1 and 1.
c. 2 and 2.
d. 2 and 300.
e. 2 and 0.0133.

7) If there is a decrease in demand and an increase in supply, the equilibrium

a. price will increase.
b. Price will fall.
c. Quantity will increase
d. Quantity will decrease

8) Consumer perceptions about the possible ill effects of sugar consumption coupled with failed
monsoons leads to
a. increased prices;
b. decreased prices;
c. decreased quantities with an ambiguous effect on prices;
d. decreased prices with and ambiguous effect on quantities;
e. none of the above.

9) The law of demand states that a higher price will reduce quantity demanded. In 1965,
gasoline sold for $0.19 per gallon and sales were less than current levels with price around
$1.20 per gallon. The best explanation for this observation is:

a. Gasoline is a necessity good and does not follow the law of demand
b. The supply of gasoline has declined drastically since 1965 resulting in higher prices and
greater quantity purchased.
c. A decline in price of fuels which are close substitutes accounts for this observation.
d. The prices and quantities mentioned above are equilibruim points. Demand has risen
relative to supply since 1965 resulting in the difference in equilibrium prices.

10) Which of the following will not decrease the demand for a commodity?

a. The price of a substitute falls.

b. Income falls, and the good is normal.
c. The price of a complement increases.
d. The commoditys price increases.
11) If the price elasticity of demand for a firms output is elastic, then the firms marginal
revenue is

a. positive, and an increase in price will cause total revenue to increase.

b. positive, and an increase in price will cause total revenue to decrease.
c. negative, and an increase in price will cause total revenue to increase.
d. negative, and an increase in price will cause total revenue to decrease.

12) When the price of bananas is 50 cents a pound, the demand is 100 pounds. If the price
elasticity of demand for bananas is 2, what quantity would be demanded if the price rose to
60 cents a pound?

a. 50.
b. 90.
c. 60.
d. 80.
e. 70.

13) Rent control

a. creates a shortage of rental housing

b. leads to a larger shortage in the long run.
c. lowers rents for renters who have apartments.
d. only (a) and (b).
e. all of the above.
Answer the following questions:

1. A study of the demand for gasoline in the Bangalore area service stations reported that the
elasticity with respect to price was 3.3, the elasticity with respect to station fueling capacity
was 0.7, and the elasticity with respect to the average price at nearby stations was 1.2.
a. Explain why the elasticity with respect to the average price at nearby stations is a positive
number.
b. Suppose that, at Josephs station, price is 2% higher and fueling capacity 3% higher than
at Maltis station. What will be the difference in quantity demanded between the two
stations?
c. If Malti raises capacity from six to seven fueling places, by how much could she increase
price without affecting sales?

2. The price of housing is a major issue in Hong Kong. Many blame speculators for wide
swings in housing prices. To cool speculation in the housing market, the Hong Kong
government has prohibited banks from lending more than 70% of the value of new
homes. (10 points)

a) How do the following factors affect the demand for housing: (i) rising incomes, (ii)
population growth and (iii) the trend away from multigenerational households to
single generational households? (4)
b) Is the supply of housing more elastic in the short run or the long run? Explain. (2)
c) How would the governments mortgage restrictions affect the rate of new
construction, housing prices, and the housing stock? Discuss with reference to the
time period. (4)