ECS2601 Summary

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, This paper consists of questions 1 to 50 which are multiple choice questions (MCQ)




1. Use the diagram below to answer the question that follows;




At equilibrium, the price elasticity of supply is
given by;
[1] 2.
[2] 1.
[3] 2.5.
[4] 3.
Explanations:
Point elasticity is the price elasticity of demand at a specific point on the demand curve instead of
over a range of it.By using the point elasticity formula we can get 2 ; 𝑃𝐸𝑆 = 𝛥𝑄𝑠/𝛥 ×p/qs


2. The following table shows the demand elasticities for fish and chips. Use the information in
the table to answer the question below. Remember: CPED is the cross-price elasticity of
demand; YED is the income elasticity of demand, and PED is the price elasticity of demand.

, Elasticity Elasticity
CPED of chips with respect to fish - 0,8

YED Chips 0.3
YED fish 1.4
PED fish 1.7
PED Chips 0.1

From the table above, we can conclude that:

[1] Chips and fish are complements.
[2] Chips is an inferior good.
[3] The price elasticity of demand for fish is inelastic.
[4] The price elasticity of demand for chips is elastic.


Explanation; A complementary good or service is an item used in conjunction with another good or
service. Usually, the complementary good has little to no value when consumed alone, but when
combined with another good or service, it adds to the overall value of the offering.


3. Which of the following is correct regarding tax incidence?


[1] Sellers pay the full tax incidence when demand is perfectly elastic.
[2] Buyers pay the full tax incidence when demand is perfectly inelastic.
[3] Buyers pay the full tax incidence when supply is perfectly inelastic.
[4] Sellers pay the full tax incidence when supply is relatively elastic,



Explanation

The tax incidence depends on the relative price elasticity of supply and demand. When supply is
more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than
supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the
demand and supply are.



4. The market demand curve is given by = 𝑎 − 𝑏𝑄𝑑 . Which of the followings is correct with
regard to total revenue?

, [1] Total revenue is maximized at output, 𝑄∗ = 𝑎.
[2] Total revenue is maximized at output, 𝑄∗ = 𝑏.

[3] [Total revenue is maximized at output, 𝑄∗ = 𝑎.


2𝑏

[4] Total revenue is maximized at output, 𝑄∗ = 𝑎.
𝑏

Explanaion

Total revenue is maximized at the price where demand has unit elasticity Our first step is to find the
elasticity of demand function E ( E = − p q ⋅ dq dp ). To do this we need to replace dp dq with the
derivative of the demand function q from above. We will also need to replace q with the demand
function. The next part of the question asks us to find where total revenue is maximized. Total
revenue will be maximized at a price p where the elasticity of demand function is equal to 1. Thus
we need to set E equal to 1 and solve for p



5. Suppose that a consumer’s utility condition is given by 𝑀𝑈 𝑏𝑢𝑟𝑔𝑒𝑟 > 𝑀𝑈𝑗𝑢𝑖𝑐𝑒 . To
maximize utility the
𝑃𝑏𝑢𝑟𝑔𝑒𝑟 𝑃𝑗𝑢𝑖𝑐𝑒

consumer must;

[1] Consume less burger and more juice.
[2] Consume more burger and more juice.
[3] Consumer more burger and less juice.
[4] Consume less burger and less juice.



6. Rubina consumes bread and milk. Her income increases now from R3 600 to R5 000 per week,
as well as the price of milk decreases from R24 to R20. Which of the following changes will
occur with Rubina’s budget line? (Assume that the quantity of milk cartons lies on the x-axis).

[1] Her budget line will shift upwards and become flatter.

[2] Her budget line will shift downwards only.

[3] Her budget line will shift downwards and become flatter.

[4] Her budget line will shift upwards and become steeper.