BMAL-590 MICROECONOMICS
EXAM QUESTIONS WITH
CORRECT DETAILED ANSWERS
Supply Curve Shifters - Answer-the supply curve shows how price affects quantity
supplied, other things being equal.
These "other things" are non-price determinants of supply (i.e., things that determine
sellers' supply of a good, other than the good's price).
Changes in them shift the S curve to the left or to the right.
"Non-price determinants of supply" simply means the things—other than the price of a
good—that determine sellers' supply of the good.
Supply Curve Shifter 1: Input Prices - Answer-Examples of input prices:
wages, raw material prices.
A fall in input prices makes production more profitable at each output price, so firms
supply a larger quantity at each price, and the S curve shifts to the right.
- Input Prices ↓ cause Supply (supplier more profitable) ↑
A rise in input prices makes production less profitable at each output price, so firms
supply a lower quantity at each price, and the S curve shifts to the left.
- Input Prices ↑ cause Supply (supplier less profitable) ↓
Supply Curve Shifter 2: Technology - Answer-Technology determines how much inputs
are required to produce a unit of output.
A cost-saving technological improvement has the same effect as a fall in input prices,
shifts S curve to the right.
Technology (Advances/Improvement) ↑ causes Input Prices (efficiency gains) to go up
which causes Supply ↓
Supply Curve Shifter 3: Number of Sellers - Answer-Increase (↑) in the number of
sellers increases quantity demanded at each price, shifts S curve to the right.
Decrease (↓) in the number of sellers decreases quantity demanded at each price, shifts
S curve to the left.
Supply Curve Shifter 4: Expectations - Answer-Example:
,Events in the Middle East lead to expectations of higher oil prices.
In response, owners of Texas oilfields reduce supply now, save some inventory to sell
later at the higher price. S curve shifts left.
In general, sellers may adjust supply* when their expectations of future prices change.
(*If good not perishable)
If people expect prices to rise in the future, their demand may increase now. The
opposite case applies as well.
Expectations (future prices ↑) causes today's Supply to ↓ (reduce supply today to
capture increased profits in the future)
Expectations (future prices ↓) causes today's Supply to ↑ (to capture more supplier
profits today)
A handy rule of thumb to remember whether the curve shifts: - Answer-If the variable
causing demand to change is measured on one of the axis, you move along the curve.
If the variable that's causing demand to change is NOT measured on either axis, then
the curve shifts.
change in supply - Answer-a shift of the supply curve, which changes the quantity
supplied at any given price
Draw a supply curve for tax return preparation software. What happens to it in each of
the following scenarios? - Answer-Retailers cut the price of the software.
A technological advance allows the software to be produced at lower cost.
Professional tax return preparers raise the price of the services they provide.
Fall in price of tax return software - Answer-S curve does not shift.
Move down along the curve to a lower P and lower Q.
Fall in cost of producing the software - Answer-S shifts to the right:
at each price, Q increases.
Professional preparers raise their price - Answer-This shifts the demand curve for tax
preparation software, not the supply curve.
For any good or service, we can represent the quantity demanded under various prices
by - Answer-a demand curve
Potatoes are used in the production of potato chips. Suppose the price of potatoes falls.
Then, - Answer-it is likely an outward shift in the supply curve of potato chips
, Given that digital music players are used to play music downloaded from the Internet, a
fall in the price of digital music players will lead to - Answer-an increase in the demand
for downloaded songs
Which of the following would necessarily cause a decrease in the price of a product? -
Answer-A decrease in the price of a substitute product and an improvement in
production technology.
Suppose the price of hamburgers rises, and you observe that as a result, the demand
for hotdogs rises. This makes hotdogs and hamburgers - Answer-substitutes
Elasticity - Answer-a numerical measure of the responsiveness of quantity demanded
(QD) or quantity supplied (QS) to one of its determinants.
One type of elasticity measures how much demand for your websites will fall if you raise
your price.
Price elasticity of demand (PEoD) - Answer-measures how much QD responds to a
change in P.
Loosely speaking, it measures the price-sensitivity of buyers' demand.
Along a D curve, P and Qmove in opposite directions, which would make price elasticity
negative.
We will drop the minus sign and report all price elasticities as non-negative numbers.
Calculating Percentage Changes - Answer-𝑛𝑒𝑤−𝑜𝑙𝑑/𝑜𝑙𝑑×100%
Going from A to B, the % change in P equals
ex: ($250-$200) / $200 = 25%
midpoint method: - Answer-The midpoint is the number halfway between the start and
end values, that is the average of those values.
It doesn't matter which value you use as the start and which as the end—you get the
same answer either way!
𝑒𝑛𝑑 𝑣𝑎𝑙𝑢𝑒−𝑠𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒/𝑚𝑖𝑑𝑝𝑜𝑖𝑛𝑡×100%
Using the midpoint method, the % change in P equals
$250−$200$225×100%=22.2%
The % change in Q equals
12−810×100%=40.0%
EXAM QUESTIONS WITH
CORRECT DETAILED ANSWERS
Supply Curve Shifters - Answer-the supply curve shows how price affects quantity
supplied, other things being equal.
These "other things" are non-price determinants of supply (i.e., things that determine
sellers' supply of a good, other than the good's price).
Changes in them shift the S curve to the left or to the right.
"Non-price determinants of supply" simply means the things—other than the price of a
good—that determine sellers' supply of the good.
Supply Curve Shifter 1: Input Prices - Answer-Examples of input prices:
wages, raw material prices.
A fall in input prices makes production more profitable at each output price, so firms
supply a larger quantity at each price, and the S curve shifts to the right.
- Input Prices ↓ cause Supply (supplier more profitable) ↑
A rise in input prices makes production less profitable at each output price, so firms
supply a lower quantity at each price, and the S curve shifts to the left.
- Input Prices ↑ cause Supply (supplier less profitable) ↓
Supply Curve Shifter 2: Technology - Answer-Technology determines how much inputs
are required to produce a unit of output.
A cost-saving technological improvement has the same effect as a fall in input prices,
shifts S curve to the right.
Technology (Advances/Improvement) ↑ causes Input Prices (efficiency gains) to go up
which causes Supply ↓
Supply Curve Shifter 3: Number of Sellers - Answer-Increase (↑) in the number of
sellers increases quantity demanded at each price, shifts S curve to the right.
Decrease (↓) in the number of sellers decreases quantity demanded at each price, shifts
S curve to the left.
Supply Curve Shifter 4: Expectations - Answer-Example:
,Events in the Middle East lead to expectations of higher oil prices.
In response, owners of Texas oilfields reduce supply now, save some inventory to sell
later at the higher price. S curve shifts left.
In general, sellers may adjust supply* when their expectations of future prices change.
(*If good not perishable)
If people expect prices to rise in the future, their demand may increase now. The
opposite case applies as well.
Expectations (future prices ↑) causes today's Supply to ↓ (reduce supply today to
capture increased profits in the future)
Expectations (future prices ↓) causes today's Supply to ↑ (to capture more supplier
profits today)
A handy rule of thumb to remember whether the curve shifts: - Answer-If the variable
causing demand to change is measured on one of the axis, you move along the curve.
If the variable that's causing demand to change is NOT measured on either axis, then
the curve shifts.
change in supply - Answer-a shift of the supply curve, which changes the quantity
supplied at any given price
Draw a supply curve for tax return preparation software. What happens to it in each of
the following scenarios? - Answer-Retailers cut the price of the software.
A technological advance allows the software to be produced at lower cost.
Professional tax return preparers raise the price of the services they provide.
Fall in price of tax return software - Answer-S curve does not shift.
Move down along the curve to a lower P and lower Q.
Fall in cost of producing the software - Answer-S shifts to the right:
at each price, Q increases.
Professional preparers raise their price - Answer-This shifts the demand curve for tax
preparation software, not the supply curve.
For any good or service, we can represent the quantity demanded under various prices
by - Answer-a demand curve
Potatoes are used in the production of potato chips. Suppose the price of potatoes falls.
Then, - Answer-it is likely an outward shift in the supply curve of potato chips
, Given that digital music players are used to play music downloaded from the Internet, a
fall in the price of digital music players will lead to - Answer-an increase in the demand
for downloaded songs
Which of the following would necessarily cause a decrease in the price of a product? -
Answer-A decrease in the price of a substitute product and an improvement in
production technology.
Suppose the price of hamburgers rises, and you observe that as a result, the demand
for hotdogs rises. This makes hotdogs and hamburgers - Answer-substitutes
Elasticity - Answer-a numerical measure of the responsiveness of quantity demanded
(QD) or quantity supplied (QS) to one of its determinants.
One type of elasticity measures how much demand for your websites will fall if you raise
your price.
Price elasticity of demand (PEoD) - Answer-measures how much QD responds to a
change in P.
Loosely speaking, it measures the price-sensitivity of buyers' demand.
Along a D curve, P and Qmove in opposite directions, which would make price elasticity
negative.
We will drop the minus sign and report all price elasticities as non-negative numbers.
Calculating Percentage Changes - Answer-𝑛𝑒𝑤−𝑜𝑙𝑑/𝑜𝑙𝑑×100%
Going from A to B, the % change in P equals
ex: ($250-$200) / $200 = 25%
midpoint method: - Answer-The midpoint is the number halfway between the start and
end values, that is the average of those values.
It doesn't matter which value you use as the start and which as the end—you get the
same answer either way!
𝑒𝑛𝑑 𝑣𝑎𝑙𝑢𝑒−𝑠𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒/𝑚𝑖𝑑𝑝𝑜𝑖𝑛𝑡×100%
Using the midpoint method, the % change in P equals
$250−$200$225×100%=22.2%
The % change in Q equals
12−810×100%=40.0%
